Annual Financial Report

The Biotech Growth Trust PLC Annual Financial Report for the year ended 31 March 2009 CONTINUATION VOTE The next continuation vote of the Company shall be held at the Annual General Meeting in 2010, and further opportunities to vote on the continuation of the Company shall be given to shareholders every five years thereafter. GEARING The Company has a Â£10 million committed multicurrency revolving credit facility with Allied Irish Banks p.l.c.. As at the date of this report no funds had been drawn down from this facility. ANNUAL GENERAL MEETING The Annual General Meeting of the Company will be held at the Barber-Surgeons' Hall, Monkwell Square, Wood Street, London EC2Y 5BL on Thursday, 23 July 2009 at 12 noon. COMPANY SUMMARY KEY STATISTICS 31 March 31 March % change 2009 2008 Shareholders' funds (Â£'000) 70,208 64,497 8.9 Net asset value per share 136.9p 103.4p 32.4 Share price 130.5p 96.8p 34.8 Discount of share price to net asset value per 4.7% 6.4% N/A share NASDAQ Biotechnology Index (sterling adjusted) 477.5 393.1 21.5 Total expense ratio * 1.6% 1.5% N/A *Based on the average amount of shareholders' funds during the year - excludes performance fee accrued/written back. INVESTMENT OBJECTIVE AND POLICY The Biotech Growth Trust PLC seeks capital appreciation through investment in the worldwide biotechnology industry, principally by investing in emerging biotechnology companies. Performance is measured against the NASDAQ Biotechnology Index (sterling adjusted). The majority of the emerging biotechnology companies that the Company will invest in are likely to be companies with a market capitalisation of less than U.S.$3 billion that have undergone an IPO (Initial Public Offering) but as yet are unprofitable. They will typically be focused on drug research and development, with their valuations driven by profitable developments, clinical trial results and partnerships. At the Annual General Meeting held in July 2008 the Company obtained permission from shareholders to invest or commit for investment a maximum of U.S.$ 15 million, after the deduction of proceeds of disposal and other returns of capital, in private equity funds managed by OrbiMed Capital, LLC the Company's Investment Manager, or an affiliate thereof. Further details of the Company's investment policy are set out in the Report of the Directors. CAPITAL STRUCTURE As at 31 March 2009, the Company had 51,296,413 shares in issue. During the year, 11,089,550 shares were bought back for cancellation. Subsequent to the year end, to 8 June 2009, a further 799,500 shares were bought back for cancellation. As at 8 June 2009, the Company has 50,496,913 shares in issue. DIVIDEND No dividend is recommended in respect of the year ended 31 March 2009 (2008: Nil). YEAR ENDED 31 MARCH FIVE YEAR PERFORMANCE RECORD 2004 2005 2006 2007 2008 2009 Net asset value per 111.7p 101.2p* 131.8p 117.1p 103.4p 136.9p share Share price 92.0p 91.3p 135.5p 109.8p 96.8p 130.5p Discount/(premium) of 17.6% 9.8% (2.8)% 6.2% 6.4% 4.7% share price to net asset value per share NASDAQ Biotechnology Index (sterling 423.4 344.3 483.7 394.7 393.1 477.5 adjusted) * Restated to reflect policy changes arising out of the adoption of IFRS. CHAIRMAN'S STATEMENT PERFORMANCE Following the strong performance reported at the interim stage, I am delighted to report that, despite an extremely challenging period for financial markets, the Company continued to deliver strong returns during the second half of its financial year. During the year ended 31 March 2009, the Company's net asset value per share rose by 32.4% compared to a rise of 21.5% in the Company's benchmark during the same period. This compares to a fall in the MSCI World index over the same period of 22.2% in sterling terms. The Company's share price also outperformed the benchmark, rising by 34.8%, as the discount of share price to net asset value per share narrowed slightly from 6.4% at 31 March 2008 to 4.7% at the year end. This outperformance was achieved, in part, from continued high levels of merger and acquisition activity in the biotechnology sector as larger pharmaceutical companies sought to enhance their internal research through additional products obtained through acquisitions. The Company's total return was also aided by the significant weakening of sterling during the year. We are delighted that, during the calendar year to 31 December 2008, the Company's share price performance, measured on a total return basis, was ranked third out of approximately 250 UK listed investment companies (source: Winterflood Securities Limited). In addition, the Company won the Specialist Category at the 2008 Investment Week, Investment Trust of the Year Awards and OrbiMed Capital LLC, the Company's Investment Manager, won the techMARK Technology Fund Manager of the Year Award for its management of the Company's portfolio. RETURN PER SHARE AND DIVIDEND The total return per share amounted to 32.0p for the year (2008: loss of 13.8p), comprising a revenue deficit of 0.7p per share (2008: deficit of 0.4p) and a capital gain of 32.7p (2008: loss of 13.4p). No dividend is recommended in respect of the year ended 31 March 2009 (2008: Nil). DISCOUNT MANAGEMENT POLICY AND BUY-BACK AUTHORITY The Board continued to implement its policy of active discount management and to buy back shares in the event of the market price being at a discount greater than 6% to the net asset value per share. During the year, a total of 11,089,550 shares was bought back for cancellation, at an average discount to net asset value per share of 8.4%, costing Â£12,265,000 (including expenses). The execution and timing of any share buy-back will continue to be at the absolute discretion of the Board. Shareholder approval to renew the authority to buy back shares will be sought at the Annual General Meeting. OUTLOOK The economic outlook remains uncertain and stock market conditions will continue to be volatile and difficult. But we expect that healthcare companies will be well positioned to maintain their growth rates in the medium term as their products are non-discretionary and often funded by government expenditure. In the light of the difficult market conditions our Investment Manager has continued to adopt a cautious stance with regard to the make-up of the portfolio, the majority of which is invested in liquid stocks. Merger and acquisition activity will again be a key driver for the sector and we believe that in this regard the Company is well positioned as a number of our holdings are in small to mid-sized companies with products that are expected to be attractive to larger strategic buyers. Against this background, our outlook remains in line with that expressed at the interim stage. We are cautiously optimistic in the medium term but are nervous of continued volatility in the short term. ANNUAL GENERAL MEETING The Annual General Meeting of the Company will be held at the Barber-Surgeons'Hall, Monkwell Square, Wood Street, London EC2Y 5BL on Thursday, 23 July 2009 at 12 noon, and we hope as many shareholders as possible will attend. This will be an opportunity to meet the Board and to receive a presentation from our Investment Manager. JOHN SCLATER CVO CHAIRMAN 8 JUNE 2009 THE BOARD JOHN SCLATER CVO (CHAIRMAN) John Sclater, aged 68, has served on the Board as Chairman since the launch of the Company in June 1997; he is also Chairman of the Nominations Committee. He was formerly a Trustee of The Grosvenor Estate, Chairman of Hill Samuel Bank Limited, Chairman of Foreign & Colonial Investment Trust PLC, Chairman of Graphite Enterprise Trust PLC, First Church Estates Commissioner, President of The Equitable Life Assurance Society and a Director of other public companies. He remains a self-employed farmer and Chairman of Argent Group (Europe) Ltd and of Burner, Nicol & Co. Limited. SVEN BORHO Sven Borho, aged 42, joined the Board in March 2006. He is a founding General Partner of OrbiMed Capital LLC, the Company's Investment Manager, where he acts as a portfolio manager for OrbiMed's public equity funds and heads the firm's trading activities. He started his career in 1991 when he joined Mehta and Isaly as a Senior Analyst covering European pharmaceutical firms and biotechnology companies worldwide. Sven studied business administration at Bayreuth University in Germany and received an M.Sc (Econ.) from The London School of Economics. PAUL GAUNT Paul Gaunt, aged 60, joined the Board in June 1997. Paul is self-employed and has over 30 years'experience in the investment industry. He was formerly Senior Investment Manager and an Assistant General Manager of The Equitable Life Assurance Society and a Director of Brit Insurance Holdings PLC and of Oasis Healthcare plc. Paul is a Director of RCM Technology Trust PLC and also of Finsbury Worldwide Pharmaceutical Trust PLC; OrbiMed Capital LLC, the Company's Investment Manager, also acts as investment Manager for Finsbury Worldwide Pharmaceutical Trust PLC. PETER KEEN Peter Keen, aged 51, has served on the Board as a Director since the launch of the Company in June 1997 and is Chairman of the Audit and Management Engagement Committee. A chartered accountant, he has over 25 years' experience in the management and financing of biotechnology businesses and is Corporate Development and Finance Director of the privately held biopharmaceutical company Serentis Limited. He has served as a Director of a number of biotechnology businesses and is currently a Director of Ark Therapeutics Group plc and the Senior Independent Director of Abcam plc; he was previously UK Managing Director of, and consultant to, Merlin Biosciences Limited. THE RT HON LORD WALDEGRAVE OF NORTH HILL Lord Waldegrave of North Hill, aged 62, joined the Board in June 1998. He is Provost of Eton College and acts as a consultant to investment bank UBS, where he was formerly Vice-Chairman of their Investment Banking Department. He is a Director of Fleming Family Partners and was previously Chairman of the Global Financial Institutions Group at Dresdner Kleinwort Wasserstein. From 1979 to 1997, he was MP for Bristol West holding a number of Cabinet posts including Secretary of State for Health. Lord Waldegrave of North Hill is Chairman of the National Museum of Science and Technology. DR JOHN GORDON Dr John Gordon, aged 64, joined the Board in June 1997 and has been designated as the Senior Independent Director; he is also Chairman of the Remuneration Committee. Dr Gordon is Chairman of, and employed by, Quercus Management Limited and has previously acted as Director of several biotechnology companies, as well as working at Beecham Research Laboratories, Cambridge University and the Medical Research Council. All of the Directors are members of the Audit and Management Engagement, Nominations and Remuneration Committees. All members of the Board are non-executive. None of the Directors has any other connections with the Investment Manager and is not employed by any of the companies in which the Company holds an investment. ORBIMED CAPITAL LLC OrbiMed Capital LLC, based in New York, is an investment manager focused exclusively on the healthcare sector, with approximately U.S.$4 billion in assets under management as at 31 March 2009 across a range of funds, including investment trusts, hedge funds and private equity funds. OrbiMed's investment management activities were founded in 1989 by Samuel D Isaly. INVESTMENT STRATEGY The Biotech Growth Trust's objective is to seek capital appreciation through investment in the worldwide biotechnology industry principally by investing in emerging biotechnology companies. Consistent with this mandate, OrbiMed has invested the majority of the Company's assets in emerging biotechnology companies with the remainder invested in major biotechnology companies. The portfolio comprised 29 holdings as at 31 March 2009. OrbiMed makes investments worldwide - in North America, Europe, and the Far East. Geographic allocation is in line with the geographic distribution of investment opportunities, with a majority of the Company's investments in companies based in North America. OrbiMed takes a bottom-up approach to stock selection based on intensive proprietary research. Stock selection is based on rigorous financial analysis, exhaustive scientific review, frequent meetings with company management and consultations with physicians and other industry experts. OrbiMed seeks to invest in emerging biotechnology companies with strong management teams, innovative products in development, and sufficient financial resources to develop those products. For major biotechnology companies, OrbiMed looks for strong management teams, healthy organic growth from current products and deep pipelines to fuel future growth. The attainment of profitability frequently acts as a significant catalyst for biotech share price appreciation. As a result, OrbiMed believes superior returns can be achieved by investing in emerging biotechnology companies 2 to 3 years prior to sustainable profitability. Companies that become profitable benefit from greater analyst research coverage, a wider institutional investor base and reduced clinical development risk (since profitability typically coincides with a product approval and launch). OrbiMed generally seeks to exit its investments when the wider investor community starts to value the newly profitable biotechnology company in excess of its anticipated future growth. Risk management is conducted via position size limits, geographic diversification and an appropriate weighting between major and emerging biotechnology. OrbiMed maintains adequate portfolio liquidity by limiting the Company's ownership to 15% of an individual company's equity (at the time of investment) and by strictly limiting the Company's exposure to direct unquoted companies to 10% of the portfolio at the time of acquisition. THE ORBIMED TEAM OrbiMed's investment professionals possess a combination of extensive scientific, medical, and financial expertise. The following five individuals represent the portfolio management team for the Company: Samuel D Isaly, is a founder and the Managing Partner of OrbiMed. Sam has been active in global healthcare investing and analysis since 1968 when he joined Chase Manhattan Bank in New York. During his career, Sam has been a pharmaceutical analyst with Merrill Lynch, Legg Mason and SocGen Swiss International. Sam created OrbiMed's asset management business in 1989 through OrbiMed's predecessor organisation, Mehta and Isaly. Sam has a BA in Economics from Princeton University and a M.Sc. (Econ.) from The London School of Economics. Sven H Borho, CFA, is a founding General Partner of OrbiMed. Sven is a portfolio manager for OrbiMed's public equity funds and he heads the firm's trading team. He started his career in 1991 when he joined Mehta and Isaly as a Senior Analyst covering European pharmaceutical firms and biotechnology companies worldwide. Sven studied business administration at Bayreuth University in Germany and received a M.Sc. (Econ.) from The London School of Economics; he is a citizen of both Germany and Sweden. Carl L Gordon, Ph.D, CFA, is a founding General Partner of OrbiMed and co-Head of Private Equity. Carl is active in both private equity and small-capitalisation public equity investments. He was a senior biotechnology analyst at Mehta and Isaly from 1995 to 1997. He was a Fellow at The Rockefeller University from 1993 to 1995. Carl received a Ph.D. in Molecular Biology from the Massachusetts Institute of Technology. His doctoral work involved studies of protein folding and assembly. He received a Bachelors degree from Harvard College. Richard D Klemm, Ph.D, CFA, joined OrbiMed in 2000 as a public biotechnology company analyst. He completed a Ph.D. from the Massachusetts Institute of Technology in Molecular Biology in 2000. Richard has published scientific articles in the fields of DNA replication and transcription. He received a BA from the University of California, Berkeley in 1994 with majors in molecular and cell biology and economics. Geoffrey C Hsu, CFA, joined OrbiMed in 2002 as a public biotechnology analyst. Prior to joining OrbiMed, he worked as a financial analyst in the healthcare investment banking group at Lehman Brothers. Geoffrey received his AB degree summa cum laude from Harvard University and holds an MBA from Harvard Business School. Prior to business school, he spent two years studying medicine at Harvard Medical School. REVIEW OF INVESTMENTS We present with pleasure our annual review of investments for The Biotech Growth Trust PLC, which was launched June 1997, and for which OrbiMed became the Investment Manager in May 2005. PERFORMANCE REVIEW The Company's net asset value per share increased by 32.4% during the year. We were pleased to deliver this performance during a very challenging market environment as evidenced by the 32.2% decline in the FTSE All-Share index during the year. The Company also outperformed our benchmark index, the NASDAQ Biotechnology Index (measured on a sterling adjusted basis), which rose 21.5% during this period. According to Winterflood Securities, the Company's broker, the Company's share price performance, measured on a total return basis, was ranked third out of approximately 250 UK listed investment companies during the calendar year to 31 December 2008. The top contributors to performance in the portfolio were ImClone Systems, Tepnel Life Sciences, Amgen, Genentech, and Kosan Biosciences. Four of these companies were targets of announced acquisitions. As we have discussed in a number of the Company's published fact sheets, acquisition activity in the biotechnology sector has been strong as larger pharmaceutical companies seek to bolster their internal research efforts with additional products obtained through acquisitions. As these transactions often occur at a substantial premium to the current share price, investors have an opportunity to earn handsome returns by investing in companies which are subsequently acquired. Among our top winners, ImClone Systems was acquired at a 50% premium by Eli Lilly for $6.5 billion, Tepnel Life Sciences was acquired at a 125% premium by Gen-Probe for approximately $100 million, Roche acquired the remainder of Genentech it did not already own at a 20% premium for $47 billion and Kosan Biosciences was acquired at a 233% premium by Bristol-Myers Squibb for $190 million. The biggest losses were from positions in BioMarin, Life Technologies, formerly known as Invitrogen and Xoma. Xoma has lost value because the psoriasis product Raptiva, upon which it receives royalties, was withdrawn from the market in the U.S. and EU due to a rare side effect. BioMarin has declined because they issued long-term earnings guidance that was below consensus expectations. HEALTHCARE IN THE EYE OF THE FINANCIAL MARKET STORM Amidst the worst financial market collapse in over a generation, the healthcare sector validated its reputation as a defensive sector, providing something of a safe haven and largely preserving investor capital. Underpinning the strong relative performance of the sector has been a combination of reasonably stable earnings for the larger companies, resurgent mergers and acquisition ("M&A") activity and a rotation of investor capital into the healthcare sector away from more cyclical and consumer-discretionary related sectors. This rotation into healthcare stocks is reminiscent of the 1990/1991 economic slowdown, a period with many parallels to today's declining housing markets, financial markets stresses, rising corporate and individual default rates and poor economic growth. The biotechnology sector posted extraordinary gains during this period, with the Amex Biotechnology Index increasing 46% in 1990 and over 190% in 1991. Looking forward over the next five years, the global economy will clearly have to contend with the ramifications of the deleveraging of the U.S. consumer. As of last year, the U.S. economy represented approximately a quarter of the global economy, and of this figure nearly 70% was accounted for by consumer spending, compared to 50% to 60% for many European countries. At its nadir last year, the U.S. savings rate actually turned negative, meaning U.S. consumers spent more than 100% of their disposable income. As the U.S. retrenches from this consumer-driven growth bubble, many sectors of the global economy which are tied to discretionary spending (and the U.S. consumer in particular) will face significant headwinds over the coming years. We expect healthcare companies will be well-positioned to maintain their growth rates during this period, as their products are largely non-discretionary and often funded by government expenditures. We believe investors should maintain a larger-than-normal allocation to healthcare investments, such as the Company, over the coming years. HEALTHCARE MEETS OBAMANOMICS In February, President Obama unveiled his plans for healthcare reform as part of the release of his $3.6 trillion 2010 budget proposal. The broad outline of the plan called for a combination of tax increases and spending cuts to free up $630 billion over the next ten years to expand dramatically healthcare coverage. Obama appears determined to deliver on his campaign promise to expand access to the U.S. healthcare system for the nearly 50 million uninsured Americans without implementing a UK style single payor system. The healthcare sector experienced a dramatic sell-off in the days following publication of this plan as investors began to fear implementation of a radical healthcare overhaul dominated by the federal government. During March, however, the sell-off abated and investor sentiment turned more neutral as investors began to examine the proposals and recognise that there were no incremental negative industry implications in the budget plans. Looking ahead, the broad push to reform the U.S. healthcare system will drive changes and growth that we expect to be largely beneficial to the generic pharmaceutical, hospital and healthcare technology sectors, while creating headwinds for traditional large pharmaceutical companies, managed care providers and selected large biotechnology companies at risk of generic competition. An additional $6 billion of proposed funding to the National Institutes of Health ("NIH") will stimulate new basic research, particularly in oncology, while an additional $1 billion of funding for the U.S. Food and Drug Administration ("FDA") will help to expedite decision-making and hopefully improve efficiency and morale after a period of lacklustre effectiveness by the agency. President Obama's pick to run the FDA, Dr. Margaret Hamburg, is viewed as a reasonable, pragmatic leader for the agency, able to draw on her past experience as the former Health Commissioner of New York City and previous work at the NIH. REVIEW OF INVESTMENTS (continued) MERGERS AND ACQUISITIONS As mentioned earlier in this report our investment theme focused on M&A targets which yielded strong results during the year. The recent surge in acquisitions coupled with high premiums paid for the acquired companies demonstrate continued strong demand from large pharmaceutical companies as they look to smaller discovery companies to offset their generally low research productivity. As shown in the table below, the past year has seen over a score of acquisitions of smaller discovery companies. Fortunately for the investors in these acquired companies, the premium paid for these companies has averaged upwards of 50%. BIOTECHNOLOGY ACQUISITION ANNOUNCEMENTS Announcement Target Acquiror Deal Size Premium Date Paid 12/03/09 CV Therapeutics Gilead Sciences $1.4 billion 25% 27/02/09 Arana Cephalon $210 million 69% Therapeutics 30/01/09 Tepnel Life Gen-Probe $132 million 126% Sciences 12/01/09 Targanta Medicines Co. $50 million 72% 05/01/09 Indevus Endo $370 million 45% Pharmaceuticals 24/11/08 Omrix Johnson & Johnson $465 million 18% 30/10/08 Genelabs GlaxoSmithKline $57 million 430% 06/10/08 Imclone Systems Eli Lilly $6.5 billion 51% 25/07/08 Acambis Sanofi Aventis Â£275 million 65% 15/07/08 Lev ViroPharma $443 million 49% Pharmaceuticals 10/07/08 Speedel Novartis $880 million 94% 08/07/08 SGX Eli Lilly $64 million 119% Pharmaceuticals 03/07/08 Jerini Shire $521 million 73% 23/06/08 Barrier Stiefel Labs $148 million 136% Therapeutics 09/06/08 Third Wave Tech. Hologic $580 million 7% 05/06/08 Tercica Ipsen $665 million 104% 29/05/08 Kosan Biosciences Bristol-Myers $190 million 233% Squibb 12/05/08 Iomai Intercell $189 million 128% 22/04/08 Sirtris GlaxoSmithKline $720 million 84% 11/04/08 Millennium Takeda $8.8 billion 53% In addition to these smaller deals, there have been several blockbuster announcements over the past year, such as Pfizer's $68 billion bid for Wyeth, Merck's $41 billion bid for Schering-Plough, and Roche's $44 billion bid for the balance of Genentech. We have been adept at positioning the Company advantageously to profit from M&A activity, as a number of our holdings are invested in small and mid-sized companies with products that would be attractive to numerous larger strategic buyers. A PROMISING START TO FISCAL 2010 Fiscal 2010 has begun on an auspicious note with the announcement, in April, by the biotechnology company Dendreon that their prostate cancer treatment Provenge had meaningfully extended survival for patients in a phase 3 clinical trial. Dendreon's stock price increased over 130% on the day of that news. Provenge comes from a very advanced class of therapies known as "immunotherapies", which essentially are vaccines against cancer. We typically have a bias against these treatments as they have historically failed to demonstrate efficacy. However our research on Provenge, including many conversations with clinical investigators and biostatisticians, provided evidence that Provenge was showing meaningful efficacy, and given the significant market pessimism surrounding this trial the stock presented a compelling risk/reward profile. Dendreon is a fine example of our belief that the coming years promise to be an exciting time for investors in the healthcare sector thanks to a continued flurry of M&A activity, the successful development of several "blockbuster" new products such as Provenge, improved regulatory efficiency particularly in the U.S., and a broad push towards expanded healthcare coverage for consumers in many large markets such as the U.S. and China. We are intensely focused on finding investment opportunities that will benefit from these trends. At the Annual General Meeting held on 23 July 2008, shareholders granted approval to invest up to $15 million in private equity funds managed by OrbiMed. The Company has committed to a $5 million investment in Caduceus Asia Partners L.P., a fund dedicated to making private investments in Asian healthcare companies. We believe that this fund is well positioned to capitalise on the rapid growth in emerging markets and pressures to lower pharmaceutical development costs through outsourcing. The fund has made its first investment in a life science tools company with significant operations in mainland China. As always, we appreciate and thank you for your support. SVEN BORHO ORBIMED CAPITAL LLC INVESTMENT MANAGER 8 JUNE 2009 PORTFOLIO AS AT 31 MARCH 2009 Security Country Fair Value % of Â£'000 Investments Gilead Sciences United States 10,082 14.1 Celgene United States 6,962 9.8 Amgen United States 6,575 9.2 Genzyme United States 5,673 8.0 Tepnel Life Sciencesâ€ United Kingdom 5,106 7.1 Curis * United States 4,176 5.9 Vertex Pharmaceuticals United States 3,267 4.6 Allos Therapeutics United States 3,147 4.4 Biogen Idec United States 3,103 4.4 Alexion Pharmaceuticals United States 2,965 4.2 Top 10 Investments 51,056 71.7 United Therapeutics United States 2,856 4.0 Onyx Pharmaceuticals United States 2,298 3.2 BioMarin Pharmaceutical United States 2,140 3.0 Shire United Kingdom 2,107 3.0 Life Technologies United States 1,844 2.6 OSI Pharmaceuticals United States 1,788 2.5 Medivir Sweden 1,364 1.9 Cephalon United States 1,130 1.6 Intermune Inc United States 912 1.3 Gen-Probe United States 811 1.1 Top 20 Investments 68,306 95.9 Cytokinetics United States 787 1.1 Dendreon United States 516 0.7 Caduceus Asia Partners L.P. (Unquoted) United States 419 0.6 Xoma United States 384 0.5 PDL Biopharma United States 344 0.5 Biowisdom (Unquoted) United Kingdom 300 0.4 Reneuron Group Plc United Kingdom 87 0.1 Pharmasset Inc United States 69 0.1 Ligand Pharmaceuticals Inc Wts 10/13/ United States 44 0.1 11 * Total Investments 71,256 100.0 All of the above investments are equities unless otherwise stated. â€ Valued at price of acquisition by Gen-Probe which was settled post year end. * Includes warrants. PORTFOLIO BREAKDOWN Fair Value % of Investments Â£'000 Investments Equities 70,952 99.6 Warrants 304 0.4 Total Investments 71,256 100.0 REPORT OF THE DIRECTORS INCORPORATING THE BUSINESS REVIEW The Directors present their report and the audited financial statements for the year ended 31 March 2009. STATUS OF THE COMPANY During the year under review the Company has continued to conduct its affairs so as to qualify as an investment company, as defined under Section 833 of the Companies Act 2006, and an investment trust within the meaning of Section 842 of the Income and Corporation Taxes Act 1988. HM Revenue & Customs approval of the Company's status as an investment trust has been received for all years up to and including the year ended 31 March 2008. This is however subject to review should there be any enquiry under Corporation Tax Self Assessment. The Directors are of the opinion that the Company has subsequently directed its affairs so as to enable it to continue to obtain HM Revenue & Customs approval as an investment trust. The close company provisions of the Income and Corporation Taxes Act 1988 do not apply to the Company. The Company's shares are eligible for inclusion in the stocks and shares component of an Individual Savings Account. CONTINUATION OF THE COMPANY In accordance with the Company's Articles of Association, shareholders will have an opportunity to vote on the continuation of the Company at the Annual General Meeting in 2010 and every five years thereafter. INVESTMENT OBJECTIVE AND BENCHMARK The Company seeks capital appreciation through investment in the worldwide biotechnology industry, principally by investing in emerging biotechnology companies. Performance is measured against the NASDAQ Biotechnology Index (sterling adjusted). INVESTMENT POLICY In order to achieve its investment objective, the Company invests in a diversified portfolio of biotechnology (including emerging biotechnology companies) and related securities on a worldwide basis. Investment Limitations and Guidelines The Board seeks to manage the Company's risk by imposing various investment limits and restrictions: * The Company will not invest more than 15% of its gross assets in other UK listed investment companies * The Company will not invest more than 15% of the portfolio in any one individual stock at the time of acquisition * The largest 30 quoted stocks will normally represent at least 50% of the quoted portfolio * The Company will not invest more than 10% of the portfolio in direct unquoted investments at the time of acquisition * Shareholder approval was obtained at the Annual General Meeting held in July 2008 for the Company to invest or commit for investment a maximum of U.S.$15 million, after the deduction of proceeds of disposal and other returns of capital, in private equity funds managed by OrbiMed Capital LLC, the Company's Investment Manager, or an affiliate thereof * The Company's gearing policy is to borrow up to a maximum of Â£15 million which can be used, inter alia, to finance any short term borrowing requirements. The Company currently has a Â£10 million committed multicurrency revolving credit facility provided by Allied Irish Banks p.l.c.. This facility can be drawn down at the discretion of the Investment Manager Compliance with the Board's investment limitations and guidelines is monitored continuously by Frostrow Capital LLP ("Frostrow" or the "Manager") and OrbiMed Capital LLC ("OrbiMed" or the "Investment Manager") and is reported to the Board on a monthly basis. DIVIDENDS The Company invests with the objective of achieving capital growth and it is expected that dividends, if any, are likely to be small. The Board intends only to pay dividends on the Company's shares to the extent required in order to maintain the Company's investment trust status. PERFORMANCE In the year to 31 March 2009, the Company's net asset value per share increased by 32.4% compared to a rise of 21.5% in the NASDAQ Biotechnology Index (sterling adjusted). The Company's share price rose by 34.8% in the same period. The Review of Investments on pages 6 and 7 includes a review of the principal developments during the year, together with information on investment activity within the Company's portfolio. TOP AND BOTTOM FIVE CONTRIBUTORS TO NET ASSET VALUE PERFORMANCE FOR THE YEAR TO 31 MARCH 2009 Contribution Contribution for the year to per share 31 March 2009 Â£'000 (pence)* Top Five Contributors Imclone Systems 3,668 6.5 Tepnel Life Sciences 3,297 5.9 Amgen 3,251 5.8 Genentech 1,931 3.4 Kosan Biosciences 1,714 3.1 24.7 Bottom Five Contributors BioMarin (1,689) (3.0) Life Technologies (formerly known as (795) (1.4) Invitrogen) Xoma (662) (1.2) Celgene (619) (1.1) Medivir (598) (1.1) (7.8) * based on 56,1 96,626 ordinary shares being the weighted average number of shares in issue for the year ended 31 March 2009. Source: Frostrow Capital LLP RESULTS AND DIVIDENDS No dividend is proposed in respect of the year ended 31 March 2009 (2008: nil). KEY PERFORMANCE INDICATORS ("KPIs") The Board assesses its performance in meeting the Company's objective against the following Key Performance Indicators: * Net asset value return * Share price return * Stock contribution analysis * Share price premium/discount to net asset value per share * Total expense ratio * Benchmark and peer group performance * Repurchase of own shares As indicated, the management of the portfolio has been delegated to the Investment Manager and management, administration, company secretarial and marketing services have been delegated to the Manager. Each provider is responsible to the Board which is ultimately responsible to the shareholders for performing against, inter alia, the above KPIs within the terms of their respective agreements by utilising the capabilities of the experienced professionals within each firm. PRINCIPAL RISKS AND THEIR MITIGATION The Company's assets consist principally of listed equities; its main area of risk is therefore market-related. The specific key risks faced by the Company, together with the Board's mitigation approach, are as follows: i. Objective and Strategy - The Company becomes unattractive to investors. The Board reviews regularly the Company's investment objective and investment guidelines in the light of investor sentiment monitoring closely whether the Company should continue in its present form. The Board also considers the size of the Company to ensure that it has sufficient critical mass. The Board, through the Manager and the Investment Manager, hold regular discussions with major shareholders. A continuation vote is to be held at the Annual General Meeting in 2010 and every five years thereafter. Each month the Board receives a report which monitors the investments held in the portfolio compared against the Benchmark Index and the investment guidelines. Additional reports and presentations are regularly presented to investors by the Company's Manager, Investment Manager and Corporate Stockbroker. ii. Level of discount/premium - The level of discount/premium can fluctuate. The Board undertakes a regular review of the level of discount/premium and consideration is given to ways in which share price performance may be enhanced, including the effectiveness of marketing and share buy-backs, if considered appropriate. The Board has implemented an active discount management policy, buying back the Company's shares for cancellation or to be held as treasury shares if the market price is at a discount greater than 6% to the net asset value per share. Shareholders should note that it remains possible for the share price discount to net asset value per share to be greater than 6% on any one day and is due to the fact that the share price continues to be influenced by overall supply and demand for the Company's shares in the secondary market. The average month end share price discount during the year was 7.9%, a level that has been broadly maintained since the year end. The making and timing of any share buy-backs is at the absolute discretion of the Board. iii. Portfolio Performance - Investment performance may not be meeting shareholder requirements. The Board reviews regularly investment performance against the Benchmark and against the Company's peer group. The Board also receives regular reports that show an analysis of performance compared to other relevant indices. The Investment Manager provides an explanation of significant stock selection decisions and an overall rationale for the make-up of the portfolio. The Investment Manager discusses current and potential investment holdings with the Board on a regular basis. iv. Operational and Regulatory - A breach of Section 842 of the Income and Corporation Taxes Act 1988 could lead to the Company being subject to capital gains tax on the sale of its investments, whilst serious breach of other regulatory rules may lead to suspension from the Stock Exchange or to a qualified Audit Report. Other control failures, either by the Manager, the Investment Manager or any other of the Company's service providers, may result in operational and/or reputational problems, erroneous disclosures or loss of assets through fraud, as well as breaches of regulations. All transactions and income and expenditure forecasts are reported to the Board. The Board considers regularly all major risks, the measures in place to control them and the possibility of any other risks that could arise. The Board also ensures that satisfactory assurances are received from service providers. The Compliance Officer of the Manager and Investment Manager produce regular reports for review at the Company's Audit and Management Engagement Committee meetings and are available to attend such meetings in person if required. v. Market Price Risks - Uncertainty about future prices of financial instruments held. The Board meets on a quarterly basis during the year and on an ad hoc basis if necessary. At each meeting the Directors consider the asset allocation of the portfolio in order to minimise the risk associated with particular countries or instruments. The Investment Manager has responsibility for selecting investments in accordance with the Company's investment objective and seeks to ensure that investment in individual stocks falls within acceptable risk levels. vi. Liquidity Risk - Ability to meet funding requirements when they arise. The Investment Manager has constructed the portfolio so that funds can be raised at short notice if required. vii. Shareholder Profile - Activist shareholders whose interests are not consistent with the long-term objectives of the Company may be attracted onto the shareholder register. The Manager provides a shareholder analysis to every Board Meeting for Board consideration of action required in addition to regular reporting by the Company's stockbroker. The Board has implemented an active discount management policy as mentioned in (ii) above. viii. Currency Risk - Movements in exchange rates could adversely affect the performance of the portfolio. A significant proportion of the Company's assets is, and will continue to be, invested in securities denominated in foreign currencies, in particular U.S. dollars. As the Company's shares are denominated and trade in sterling, the return to shareholders will be affected by changes in the value of sterling relative to those foreign currencies. The Board has made clear the Company's position with regard to currency fluctuations which is that it does not currently hedge against currency exposure. ix) Loan Facility - The provider of the Company's loan facility may no longer be prepared to lend to the Company. Copies of the monthly loan covenant compliance certificates, provided for the lender, are circulated to the Board. Both the Board and the Investment Manager are kept fully informed of any likelihood of the withdrawal of the loan facility so that repayment can be effected in an orderly fashion. SHARE CAPITAL As part of the package of measures adopted in 2005 by the Board to improve the attraction of the Company's shares to new investors and also to provide the prospect of a sustained improvement in the rating of the Company's shares, an active discount management policy was implemented to buy back shares if the market price is at a discount greater than 6% to net asset value per share. The making and timing of any share buy-back remain at the absolute discretion of the Board. Authority to buy back up to 14.99% of the Company's issued share capital is sought at each Annual General Meeting and, as at 23 July 2008, authority was obtained to buy back up to 8,568,129 shares. During the year a total of 11,089,550 shares was bought back for cancellation representing 17.8% of the issued share capital at the beginning of the year. Of this figure a total of 5,227,000 shares was bought back under the authority granted by shareholders at the Annual General Meeting held on 25 July 2007 and 5,862,550 shares were bought back under the authority granted on 23 July 2008. The purchases were made at prices ranging between Â£0.9606 and Â£1.3499 per share at a cost of Â£12,265,000 (including expenses) and at an average discount of 8.4% to net asset value per share. Subsequent to the year end, to 8 June 2009, a further 799,500 shares were bought back for cancellation at an average discount of 8.0% to the net asset value per share, at a cost of Â£981,000 (including expenses). PROSPECTS Looking forward over the next five years, the global economy will clearly have to contend with the ramifications of the deleveraging of the U.S. consumer. During 2009 the U.S. economy represented approximately a quarter of the global economy, and of this figure nearly 70% was accounted for by consumer spending, compared to 50% to 60% for many European countries. At its nadir last year, the U.S. savings rate actually turned negative, meaning U.S. consumers spent more than 100% of their disposable income. As the U.S. retrenches from this consumer-driven growth bubble, many sectors of the global economy which are tied to discretionary spending will face significant headwinds. However, the Investment Manager expects that healthcare companies will be well-positioned to maintain their growth rates during this period, as their products are largely non-discretionary and often funded by government expenditures. Further information can be found in the Review of Investments, provided by the Company's Investment Manager, that begins on page 6. MANAGEMENT Management, Administrative and Secretarial Services Agreement: Management, Administrative, Secretarial and other services are provided to the Company by the Manager. The Manager is authorised and regulated by the Financial Services Authority. Frostrow Capital LLP, as the Manager, receives a periodic fee equal to 0.30% per annum of the Company's market capitalisation, plus a fixed amount equal to Â£50,000 per annum. The notice period on the Management, Administration and Company Secretarial Agreement with the Manager is not less than 12 months. Termination can be at the instigation of either party. The Manager, under the terms of the Agreement provides, inter alia, the following services: * marketing and shareholder services; * administrative services; * advice and guidance in respect of corporate governance requirements; * maintaining adequate accounting records in respect of Company dealing, investments, transactions, dividends and other income, the income account, balance sheet and cash books and statements; * preparation and despatch of the audited annual, and the unaudited interim, report and financial statements and interim management statements; and * attending to general tax affairs where necessary. Investment Management Agreement: Investment Management Services are provided by the Investment Manager. The Investment Manager is authorised and regulated by the U.S. Securities and Exchange Commission. The Investment Manager receives a periodic fee equal to 0.65% p.a. of the Company's net asset value. The Investment Management Agreement may be terminated by either party giving notice of not less than 12 months. The Investment Manager under the terms of the Agreement provides, inter alia, the following services: * seeking out and evaluating investment opportunities; * recommending the manner by which monies should be invested, disinvested, retained or realised; * advising on how rights conferred by the investments should be exercised; * analysing the performance of investments made; and * advising the Company in relation to trends, market movements and other matters which may affect the investment policy of the Company. The proportion of the Company's assets committed for investment in Caduceus Asia Partners L.P., a limited partnership managed by OrbiMed Asia G.P., L.P., an affiliate of the Company's Investment Manager, is excluded from the Investment Management fee calculation as described above. Performance Fee: Dependent on the level of performance achieved, the Manager and Investment Manager are also entitled to the payment of a performance fee. The performance fee is calculated by reference to the amount by which the Company's portfolio has outperformed the benchmark index. The fee is calculated quarterly by comparing the cumulative performance of the Company's portfolio with the cumulative performance of the benchmark index since 30 June 2005. The performance fee amounts to 16.5% of any outperformance of the net asset value over the benchmark index, the Investment Manager receiving 15% and the Manager receiving 1.5% of the outperformance. At each quarterly calculation date any performance fee payable is based on the lower of: i. the cumulative outperformance of the portfolio over the benchmark index as at the quarter end date; and ii. the cumulative outperformance of the portfolio over the benchmark as at the corresponding quarter end date in the previous year. As at each quarterly calculation date, and on a daily basis, provision is made within the Company's net asset value for all performance fees that could crystallise over the ensuing four performance fee calculation dates, assuming that any outperformance arising is maintained in full for a twelve month period from the quarterly calculation date. In the event that outperformance is not maintained then the provision is adjusted accordingly within the Company's net asset value. In accordance with this arrangement, a performance fee of Â£224,000 has been accrued as at 31 March 2009. No performance fee was paid during the year (2008: Â£169,000). The proportion of the Company's assets committed for investment in Caduceus Asia Partners L.P., a limited partnership managed byOrbiMed Asia G.P., L.P., an affiliate of the Company's Investment Manager, is excluded from the Investment Manager's share of the performance fee calculation. MANAGER AND INVESTMENT MANAGER EVALUATION AND RE-APPOINTMENT The review of the performance of the Manager and the Investment Manager is a continuous process carried out by the Audit and Management Engagement Committee with a formal evaluation being undertaken each year. As part of this process, the Committee monitors the services provided by the Manager and the Investment Manager and receives regular reports and views from them.The Committee also receives comprehensive performance measurement reports to enable it to determine whether or not the performance objectives set by the Board have been met. In addition the Committee reviewed the appropriateness of the appointment of the Manager and the Investment Manager in May 2009 with a recommendation being made to the full Board. The Board believes the continuing appointment of the Manager and the Investment Manager, under the terms described above, is in the interests of shareholders as a whole. In coming to this decision, it also took into consideration the following additional reasons: * the quality and depth of experience of the management, administrative, company secretarial and marketing team that the Manager allocates to the management of the Company; and * the quality and depth of experience allocated by the Investment Manager to the management of the portfolio and the level of performance of the portfolio in absolute terms and also by reference to the benchmark index. GOING CONCERN The Directors believe that it is appropriate to adopt the going concern basis in preparing the accounts as the assets of the Company consist mainly of securities that are readily realisable and, accordingly, the Company has adequate financial resources to continue in operational existence for the foreseeable future. CREDITORS PAYMENT POLICY Terms of payment are negotiated with suppliers when agreeing settlement details for transactions. While the Company does not follow a formal code, it is the Company's continuing policy to pay amounts due to creditors as and when they become due. There were no creditors in respect of goods or services supplied at the year end (2008: nil). SOCIAL, ENVIRONMENTAL AND ETHICAL POLICY The Company's primary objective is to achieve long term capital growth through investing in emerging biotechnology companies. The Board, however, recognises that this should be done in an environmentally responsible way. The Directors believe, however, that the Company would be in breach of its fiduciary duties to shareholders if investment decisions were based solely on social, ethical or environmental considerations and as such has no policies in these areas. CHARITABLE AND POLITICAL DONATIONS The Company has not in the past and does not intend in the future to make any charitable or political donations. DIRECTORS Directors of the Company, all of whom served throughout the year, are as follows: John Sclater CVO (Chairman) Sven Borho Paul Gaunt Dr John Gordon Peter Keen Lord Waldegrave of North Hill DIRECTORS' INTERESTS The beneficial interests of the Directors and their families in the Company were as set out below: Directors' Interests The beneficial interests of the Directors and their families in the Company were as set out below: Shares of 25 p each 31 March 31 March 2009 2008 John Sclater 9,410 9,410 Sven Borho 221,218 221,218 Paul Gaunt - - Dr John Gordon 50,000 50,000 Peter Keen 32,585 32,585 Lord Waldegrave of North Hill 51,066 51,066 As at 8 June 2009, there had been no changes in the above details. None of the Directors was granted or exercised rights over shares during the year. Sven Borho is a partner at OrbiMed, the Company's Investment Manager, which is party to the Investment Management Agreement with the Company. A number of the partners at OrbiMed have a minority financial interest amounting in total to 20% in Frostrow, the Company's Manager. . DIRECTORS' & OFFICERS' LIABILITY INSURANCE COVER Directors'& officers'liability insurance cover was maintained by the Board during the year ended 31 March 2009. It is intended that this policy will continue for the year ended 31 March 2010 and subsequent years. SUBSTANTIAL SHAREHOLDINGS As at 20 May 2009 the Company was aware of the following interests in the shares of the Company, which exceeded 3% of the issued share capital. Shareholder Registered holder No. of % of shares Issued share capital East Riding of Yorkshire Nortrust Nominees 7,500,000 14.85 Council JP Morgan Asset Chase Nominees/Bank of New York 6,176,829 12.23 Management Nominees M&G Investment Various Nominees 4,738,415 9.38 Management Reliance Mutual HSBC Global Custody Nominee (UK) 4,070,732 8.06 Insurance Society Baillie Gifford & Co. BNY (OCS) Nominees 3,273,781 6.48 Hansa Capital Mellon Nominees (UK)/State 2,806,098 5.56 Street Nominees Insight Investment Nortrust Nominees 2,248,415 4.45 Premier Peninsular Barfield Nominees 2,000,000 3.96 AUDITORS Grant Thornton UKLLP have indicated their willingness to continue to act as Auditors to the Company and a resolution for their re-appointment will be proposed at the forthcoming Annual General Meeting. DIRECTORS' INDEMNITIES As at the date of this report, indemnities are in force between the Company and each of its Directors under which the Company has agreed to indemnify each Director, to the extent permitted by law, in respect of certain liabilities incurred as a result of carrying out his role as a Director of the Company. The Directors are also indemnified against the costs of defending any criminal or civil proceedings or any claim by the Company or a regulator as they are incurred provided that where the defence is unsuccessful the Director must repay those defence costs to the Company. The indemnities are qualifying third party indemnity provisions for the purposes of the Companies Act 2006. A copy of each deed of indemnity is available for inspection at the Company's registered office during normal business hours and will be available for inspection at the Annual General Meeting. AWARENESS OF RELEVANT AUDIT INFORMATION So far as the Directors are aware, there is no relevant audit information of which the Auditors are unaware. The Directors have taken all steps they ought to have to make themselves aware of any relevant audit information and to establish that the Auditors are aware of that information. BENEFICIAL OWNERS OF SHARES - INFORMATION RIGHTS Beneficial owners of shares who have been nominated by the registered holder of those shares to receive information rights under section 146 of the Companies Act 2006 are required to direct all communications to the registered holder of their shares rather than to the Company's registrar, Capita Registrars, or to the Company directly. ARTICLES OF ASSOCIATION Due to a technical irregularity in the manner in which notice of the special resolution proposing the adoption of new Articles of Association was given at last year's Annual General Meeting, the resolution was ineffective and therefore the proposed new Articles of Association were not adopted by the Company. It is therefore proposed that in order to reflect certain of the provisions of the Companies Act 2006 which have or will come into force, that a number of alterations be made to the Company's Articles of Association. Shareholders should be mindful that the 2006 Act is being implemented over a period of time, with the final stage taking effect in October 2009. NOTICE PERIOD FOR GENERAL MEETINGS The proposed amendments to the Company's Articles of Association include a provision allowing General Meetings of the Company to be called on the minimum notice period provided for in the Companies Act 2006. For meetings other than Annual General Meetings this is currently a period of 14 clear days. The provisions in the Companies Act 2006 relating to meetings are due to be amended with effect from 3 August 2009 as a result of the implementation of the EU Shareholder Rights Directive (2007/36/EC) (the `Directive') in the UK. The government has still to finalise the detail of the amendments that are to be made and is not expected to publish the final draft of the amendments until later in the year. One of the amendments to be made will, in accordance with the Directive, be to increase the minimum notice period for listed company General Meetings to 21 clear days, but with an ability for companies to reduce this period back to 14 clear days (other than for Annual General Meetings), provided that two conditions are met: i. that the Company offers facilities for shareholders to vote by electronic means. It is not yet clear what this will require and the details will be set out in the final regulations when published; and ii. that there is an annual resolution of shareholders approving the reduction in the minimum period for notice of General Meetings (other than Annual General Meetings) from 21 clear days to 14 clear days. Although the final form of the regulations is unlikely to be known before the publication of this annual report, the Board believes that it should ensure that the minimum period for notice of General Meetings of the Company (other than Annual General Meetings) remains at 14 clear days after August 2009. The Board is therefore proposing Resolution 14 as a special resolution to approve 14 clear days as the minimum period of notice for all General Meetings of the Company other than Annual General Meetings. The notice period for Annual General Meetings will remain 21 clear days. ELECTRONIC COMMUNICATION AND VOTING Shareholders now have the option to receive their communications electronically. Electronic communications has a number of benefits to the Company and to shareholders by reducing costs and increasing the speed of communication. Further details can be obtained from the Company's registrars whose details can be found on page 46. ANNUAL GENERAL MEETING Resolutions relating to the following items of special business will be proposed at the forthcoming Annual General Meeting: a. Authority to allot shares Resolution 10 gives the Directors authority to allot new shares, otherwise than by a pro rata issue to existing shareholders, up to an aggregate nominal amount of Â£1,262,422 such amount being equivalent to 10% of the issued share capital at 8 June 2009 and representing 5,049,691 shares of 25p each. Such issues would only be made at prices greater than the prevailing net asset value per share ("NAV") thereby increasing the assets underlying each share and spread administrative expenses, other than those charged as a percentage of assets, over a greater number of shares. b. Disapplication of pre-emption rights Resolution 11 seeks shareholder approval for the disapplication of pre-emption rights in respect of a) the allotment of shares or the sale by the Company of shares held by it in treasury ("treasury shares"), pursuant to a rights issue or a sale equivalent to a rights issue, and b) the allotment (other than as part of a rights issue) of shares or the sale of treasury shares for cash up to an aggregate nominal value of Â£1,262,422. No such allotment will be made at less than the prevailing NAV per share (as determined in the absolute discretion of the Directors). Shares held in treasury may also be resold by the Company at a price greater than the net asset value per share prevailing at the time of sale. (c) Authority to repurchase shares Resolution 12 seeks shareholder approval for the Company to have the power to repurchase its own shares. The Board believes that the ability of the Company to purchase its own shares in the market will potentially benefit all shareholders of the Company. The repurchase of shares at a discount to the underlying NAV would enhance the NAV of the remaining shares. At the Annual General Meeting the Company will seek shareholder approval to repurchase up to 7,569,487 shares, representing approximately 14.99% of the Company's issued share capital (the maximum permitted under the Listing Rules) at a price that is not less than 25p a share (the nominal value of each share) and not more than the higher of (a) 105% of the average of the middle market quotations for the five business days preceding the day of purchase; and (b) the higher of the price of the last independent trade in shares and the highest then current independent bid for shares on the London Stock Exchange. The decision as to whether to repurchase any shares will be at the absolute discretion of the Board. Shares repurchased under this authority may either be held by the Company in treasury for resale up a maximum of 10% of the issued share capital or cancelled. d. Adoption of new Articles of Association Resolution 13 seeks shareholder approval that new Articles of Association be adopted in substitution for, and to the exclusion of, the existing Articles of Association. e. General meetings Resolution 14 seeks Shareholder approval to hold General Meetings (other than Annual General Meetings) at 14 clear days' notice. The authorities being sought under resolutions 11, 12, 13 and 14 will last until the conclusion of the next Annual General Meeting or, if less, a period of 15 months. BY ORDER OF THE BOARD FROSTROW CAPITAL LLP COMPANY SECRETARY 8 JUNE 2009 STATEMENT OF DIRECTORS' RESPONSIBILITIES Company law in the United Kingdom requires the Directors to prepare financial statements for each financial year. The Directors are responsible for preparing the financial statements in accordance with applicable law and regulations. In preparing these financial statements, the Directors have: * selected suitable accounting policies and applied them consistently; * made judgements and estimates that are reasonable and prudent; * followed applicable international accounting standards; and * prepared the financial statements on a going concern basis. The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 1985 and the Companies Act 2006 as in force from time to time. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for ensuring that the Report of the Directors and other information included in the Annual Report is prepared in accordance with company law in the United Kingdom. They are also responsible for ensuring that the Annual Report includes information required by the Listing Rules of the Financial Services Authority. The financial statements are published on the Company's website (website address: www.biotechgt.com) and on the Manager's website (website address: www.frostrow.com). The maintenance and integrity of these websites, so far as it relates to the Company, is the responsibility of the Manager. The work carried out by the Auditors does not involve consideration of the maintenance and integrity of these websites and, accordingly, the Auditors accept no responsibility for any changes that have occurred to the financial statements since they were initially presented on these websites. Visitors to the websites need to be aware that legislation in the United Kingdom governing the preparation and dissemination of the financial statements may differ from legislation in their jurisdiction. The Directors confirm that to the best of their knowledge the financial statements, within the Annual Report, have been prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and the return for the year ended 31 March 2009, and that the Chairman's Statement, Investment Manager's Review and the Report of the Directors include a fair review of the information required by 4.1 .8R to 4.2.11 R of the FSA's Disclosure and Transparency Rules. ON BEHALF OF THE BOARD JOHN SCLATER CVO CHAIRMAN 8 JUNE 2009 CORPORATE GOVERNANCE COMPLIANCE The Board has considered the principles and recommendations of the AIC Code of Corporate Governance ("AIC Code") by reference to the AIC Corporate Governance Guide for Investment Companies ("AIC Guide"). The AIC Code, as explained by the AIC Guide, addresses all the principles set out in Section 1 of the Combined Code, as well as setting out additional principles and recommendations on issues that are of specific relevance to The Biotech Growth Trust PLC. The Board considers that reporting against the principles and recommendations of the AIC Code, and by reference to the AIC Guide (which incorporates the Combined Code), will provide better information to shareholders. The Company has complied with the recommendations of the AIC Code and the relevant provisions of Section 1 of the Combined Code throughout the year ended 31 March 2009 and up to the date of this report, except with regard to the composition of its committees and as set out below. The Combined Code includes provisions relating to: * The role of the chief executive; * Executive directors' remuneration; and * The need for an internal audit function. For the reasons set out in the AIC Guide, and in the preamble to the AIC Code, the Board considers these provisions are not relevant to the position of The Biotech Growth Trust PLC, being an externally managed investment company. The Company has therefore not reported further in respect of these provisions. BOARD INDEPENDENCE, COMPOSITION AND TENURE The Board, chaired by John Sclater CVO, currently consists of six non-executive Directors. The Directors' biographical details, set out on page 4, demonstrate a breadth of investment, commercial and professional experience. Dr John Gordon has been designated as the Senior Independent Director. The Directors review their independence annually. The Directors retire by rotation at every third Annual General Meeting and any Directors appointed to the Board since the previous Annual General Meeting also retire and stand for election. Any Director who has served on the Board for more than nine years is subject to annual re-election. Paul Gaunt is a Director of Finsbury Worldwide Pharmaceutical Trust PLC for which OrbiMed also acts as Investment Manager; he has also served on the Board for over nine years, he is therefore not considered by the Board to be an Independent Director. Sven Borho is a Founding General Partner of OrbiMed, the Company's Investment Manager, and is also not considered to be an Independent Director. Mr Sclater, Dr Gordon, Lord Waldegrave of North Hill and Mr Keen have all served on the Board for over nine years. The Board, however, considers them to be independent in character and judgement and, in accordance with the AIC Code, does not believe that the criterion of length of service should preclude them from being considered independent; they have no other links to the Investment Manager and have a wide range of other interests. The Board has considered the position of Mr Sclater, Dr Gordon, Lord Waldegrave of North Hill and Messrs Borho, Gaunt and Keen as part of the evaluation process, and believes that it would be in the Company's best interests to propose them for re-election at the forthcoming Annual General Meeting. None of the Directors has a service contract with the Company. New Directors are appointed with the expectation that they will serve for a minimum period of three years. Any Director may resign in writing to the Board at any time. The terms of their appointment are detailed in a letter sent to them when they join the Board. These letters are available for inspection at the offices of the Company's Manager and will be available at the Annual General Meeting. When a new Director is appointed to the Board, they are provided with all relevant information regarding the Company and their duties and responsibilities as a Director. In addition, a new Director will also spend time with representatives of the Manager and Investment Manager in order to learn more about their processes and procedures. The Board also receives regular briefings from, amongst others, the Auditors and the Company Secretary regarding any proposed developments or changes in laws or regulations that could affect the Company and/or the Directors. THE BOARD'S RESPONSIBILITIES The Board is responsible for efficient and effective leadership of the Company and has reviewed the schedule of matters reserved for its decision. The Board meets at least on a quarterly basis and at other times as necessary. The Board is responsible for all aspects of the Company's affairs, including the setting of parameters for and the monitoring of the investment strategy, the review of investment performance and investment policy. It also has responsibility for all corporate strategy issues, dividend policy, share buy-back policy, gearing, share price and discount/premium monitoring and corporate governance matters. To enable them to discharge their responsibilities, prior to each meeting the Directors are provided, in a timely manner, with a comprehensive set of papers giving detailed information on the Company's transactions, financial position and performance. Representatives of the Manager and Investment Manager attend each Board meeting, enabling the Directors to seek clarification on specific issues or to probe further on matters of concern; a full written report is also received from the Investment Manager at each quarterly meeting. In light of these reports, the Board gives direction to the Investment Manager with regard to the Company's investment objectives and guidelines. Within these established guidelines, the Investment Manager takes decisions as to the purchase and sale of individual investments. There is an agreed procedure for Directors, in the furtherance of their duties, to take independent professional advice if necessary at the Company's expense. The Directors have access to the advice and services of the Company Secretary, through its appointed representative, who is responsible to the Board for ensuring that Board procedures are followed. PERFORMANCE EVALUATION The Board has carried out an evaluation process for the year ended 31 March 2009, independently managed by Dr Gordon, the Senior Independent Director. This took the form of a questionnaire followed by discussions to identify how the effectiveness of its activities, including its committees, policies and processes might be improved. The results of the evaluation process were presented to and discussed by the Board and, as a result, it was agreed that the current Directors contributed effectively and that all have the skills and experience which are relevant to the leadership and direction of the Company. COMMITTEES OF THE BOARD During the year the Board delegated certain responsibilities and functions to committees. Copies of the full terms of reference, which clearly define the responsibilities of each committee, can be obtained from the Company Secretary, will be available for inspection at the Annual General Meeting and can be found at the Company's website at www.biotechgt.com. Following a review by the Board in 2007, it was agreed, that, due to the Board's size, the membership of the Remuneration and Nominations Committees should comprise the whole Board (provided that a majority of the Directors present are independent). The Remuneration Committee is chaired by Dr John Gordon and the Nominations Committee is chaired by the Chairman of the Company, John Sclater CVO. The Audit and Management Engagement Committee, under the chairmanship of Peter Keen, also comprises the whole Board (provided that a majority of the Directors present are independent). This decision was taken to utilise fully the broad experience of the Board whilst ensuring that a majority of independent Directors formed the quorum for its meetings. Details of the membership of the committees as at 31 March 2009 are shown with the Directors' biographies on page 4. The table below details the number of Board and Committee meetings attended by each Director. During the year there were six Board meetings, two Audit and Management Engagement Committee meetings, two meetings of the Nominations Committee and one meeting of the Remuneration Committee. Type and number of Board Audit and Nominations meetings Management Remuneration Engagement Committee Committee held in 2008/9: (6) (2) (2) (1) John Sclater 6 2 2 1 Sven Borho 4 1 2 1 Paul Gaunt 4 1 1 1 Dr John Gordon 6 2 2 1 Peter Keen 6 2 2 1 Lord Waldegrave of North 6 2 2 1 Hill All of the Directors attended the Annual General Meeting held on 23 July 2008. NOMINATIONS COMMITTEE The Nominations Committee is responsible for the Board appraisal process and for making recommendations to the Board on the appointment of new Directors. Where appropriate, each Director is invited to submit nominations and external advisers may be used to identify potential candidates. REMUNERATION COMMITTEE The level of Directors'fees is reviewed on a regular basis relative to other comparable investment companies and in the light of Directors' responsibilities. AUDIT AND MANAGEMENT ENGAGEMENT COMMITTEE The Audit and Management Engagement Committee meets at least twice a year and is responsible for the review of the interim and annual financial statements, the nature and scope of the external audit and the findings therefrom and the terms of appointment of the Auditors, including their remuneration and the provision of any non-audit services by them. In addition, the Committee is responsible for the review of the Company's financial controls and of the Management and Investment Management agreements and of the services provided by the Manager and the Investment Manager. The Audit and Management Engagement Committee meets representatives of the Manager and Investment Manager and their Compliance Officers who report as to the proper conduct of business in accordance with the regulatory environment in which the Company, Manager and Investment Manager operate. The Company's external Auditors also attend meetings of this Committee at its request and report on their work procedures and their findings in relation to the Company's statutory audit. They also have the opportunity to meet with the Committee without representatives of the Manager or the Investment Manager being present. The Audit and Management Engagement Committee reviews the need for non-audit services and authorises such fees on a case by case basis, having consideration to the cost effectiveness of the services and the independence and objectivity of the Auditors. Non audit fees of Â£3,000 were paid to Grant Thornton UK LLP for their review of the Company's interim accounts and review of the performance fee calculation as at 30 September 2008. In addition, the sum of Â£ 2,000 was paid to Grant Thornton UK LLP in respect of their review of the tax implications for the Company in investing in Caduceus Asia Partners L.P. (see note 4 on page 33). The Board has concluded, on the recommendation of the Audit and Management Engagement Committee, that the Auditors continue to be independent and that their reappointment be proposed at the Annual General Meeting. INTERNAL CONTROLS The Combined Code requires the Directors, at least annually, to review the effectiveness of the Company's system of internal control and to report to shareholders that they have done so. This encompasses a review of all controls, which the Board has identified as including business, financial, operational, compliance and risk management. This accords with the FRC's Internal Control Guidance for Directors. The Directors are responsible for the Company's system of internal control which is designed to safeguard the Company's assets, maintain proper accounting records and ensure that financial information used within the business, or published, is reliable. Such a system, however, is designed to manage rather than eliminate the risks of failure to achieve the Company's business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. Unlike the boards of most other listed companies, the boards of investment trust companies obtain the majority of their evidence as to whether internal controls are operating effectively from third party suppliers to whom investment management, custody, administration, accounting and secretarial matters have been delegated. This means that an understanding of the internal controls for an investment trust company requires Directors to consider information from a number of independent sources, rather than from a consolidated single source covering a typical listed company's system of internal control. The Company does not have an internal audit function. The Audit and Management Engagement Committee considers annually whether there is any need for an internal audit function. As most of the Company's functions are delegated to third parties, it has been agreed that it is inappropriate for the Company to have its own internal audit function. The Directors, through the procedures outlined below, have kept the effectiveness of the Company's internal controls under review throughout the period covered by these financial statements and up to the date of their approval. The Manager and the Investment Manager have established an internal control framework to provide reasonable assurance on the effectiveness of the internal controls operated on behalf of their clients. Their compliance monitoring programmes assess the effectiveness of and provide the Board with regular reports on all aspects of internal control (including financial, operational and compliance control, risk management and relationships with external service providers including the Company's custodian). Business risks have been analysed and recorded in a Risk Register, which is reviewed at each meeting of the Audit and Management Engagement Committee and at other times as necessary. RELATIONS WITH SHAREHOLDERS The Board reviews the shareholder register at each Board meeting. The Company has regular contact with its institutional shareholders particularly through the Manager. The Board supports the principle that the Annual General Meeting be used to communicate with private investors. The full Board attends the Annual General Meeting under the Chairmanship of the Chairman of the Board. Details of proxy votes received in respect of each resolution are made available to shareholders at the meeting and are also published on the Company's website at www.biotechgt.com. Representatives from the Investment Manager attend the Annual General Meeting and give a presentation on investment matters to those present. The Company has adopted a nominee share code which is set out below. The Board receives marketing and public relations reports from the Manager to whom the marketing function has been delegated. The Board reviews and considers the marketing plans of the Manager on a regular basis. The annual and interim financial reports, the interim management statements and a monthly fact sheet are available to all shareholders. The Board considers the format of the annual and interim financial reports so as to ensure they are useful to all shareholders and others taking an interest in the Company. In accordance with best practice, the annual report, including the Notice of the Annual General Meeting, is sent to shareholders at least 20 working days before the Meeting. Separate resolutions are proposed for substantive issues. EXERCISE OF VOTING POWERS The Board has delegated authority to the Investment Manager to vote the shares held by the Company through its nominee, The Bank of New York (Nominees) Limited, which accords with current best practice whilst maintaining a primary focus on financial returns. The Investment Manager may refer to the Board on any matters of a contentious nature. ACCOUNTABILITY AND AUDIT The Board has delegated contractually to external agencies, including the Manager and the Investment Manager, the management of the portfolio, custodial services (which includes the safeguarding of the Company's assets), the day to day marketing, accounting administration, company secretarial requirements and registration services. Each of these contracts was entered into after full and proper consideration by the Board of the quality and cost of the services offered, including the control systems in operation in so far as they relate to the affairs of the Company. The Board receives and considers regular reports from the Manager and ad hoc reports and information are supplied to the Board as required. NOMINEE SHARE CODE Where shares are held in a nominee company name and where the beneficial owner of the shares is unable to vote in person, the Company nevertheless undertakes: * to provide the nominee company with multiple copies of shareholder communications, so long as an indication of quantities has been provided in advance; * to allow investors holding shares through a nominee company to attend General Meetings, provided the correct authority from the nominee company is available; and * that investors in the Alliance Trust Savings Scheme or ISA are automatically sent shareholder communications, including details of General Meetings, together with a form of direction to facilitate voting and to seek authority to attend. Nominee companies are encouraged to provide the necessary authority to underlying shareholders to attend the Company's General Meetings. DIRECTORS' REMUNERATION REPORT FOR THE YEAR ENDED 31 MARCH 2009 The Board has prepared this report in accordance with the requirements of Schedule 7A to the Companies Act 1985. An ordinary resolution for the approval of this report will be put to the members at the forthcoming Annual General Meeting. The law requires your Company's Auditors to audit certain of the disclosures provided. Where disclosures have been audited, they are indicated as such. REMUNERATION COMMITTEE The Company has six non-executive Directors. The Board as a whole fulfils the function of a Remuneration Committee. The Board has appointed Dr John Gordon as Chairman, and the Board may utilise the services of the Company Secretary, Frostrow Capital LLP, or external advisers when they consider the level of Directors' fees. POLICY ON DIRECTORS' FEES The Board's policy is that the remuneration of Directors should reflect the responsibilities and experience of the Board as a whole. Regard will be given to fees paid by other investment trusts that are similar in size, have a similar capital structure, and have a similar investment objective. It is intended that this policy will continue for the year ending 31 March 2010 and subsequent years. The fees for the Directors are determined within the limits set out in the Company's Articles of Association, the maximum aggregate amount currently being Â£150,000. At a Remuneration Committee meeting held on 24 February 2009, the following changes to the level of fees paid to Directors were agreed as set out below. For the year ended With 31 March effect from 2009 1 April 2009 John Sclater (Chairman) Â£25,000 Â£29,000 p.a. p.a. Sven Borho Â£18,000 Â£20,000 p.a. p.a. Dr John Gordon* Â£20,000 Â£22,000 p.a. p.a. Peter Keen** Â£20,000 Â£22,000 p.a. p.a. Paul Gaunt Â£18,000 Â£20,000 p.a. p.a. Lord Waldegrave of North Hill Â£18,000 Â£20,000 p.a. p.a. * Senior Independent Director. ** Chairman of the Audit and Management Engagement Committee. DIRECTORS' SERVICE CONTRACTS It is the Board's policy that none of the Directors has a service contract. The terms of their appointment provide that Directors shall retire and be subject to election at the first Annual General Meeting after their appointment and to re-election at least every three years thereafter. The terms also provide that a Director may resign by giving one month's notice in writing to the Board at any time and may be removed without notice and that compensation will not be due on leaving office. The Company's policy is for the Directors to be remunerated in the form of fees payable quarterly in arrears. YOUR COMPANY'S PERFORMANCE The law requires a line graph be included in the Directors'Remuneration Report comparing, for a period of five years, on a cumulative basis, the total return (assuming all dividends are reinvested) to shareholders and the total shareholder return on a notional investment made up of shares of the same kind and number as those by reference to which the NASDAQ Biotechnology Index (sterling adjusted) is calculated. DIRECTORS' REMUNERATION REPORT (continued) FOR THE YEAR ENDED 31 MARCH 2009 DIRECTORS' EMOLUMENTS FOR THE YEAR (AUDITED) The Directors who served in the year (unless where stated) received the following emoluments in the form of fees: Fees 2009 Fees 2008 Â£'000 Â£'000 John Sclater (Chairman of the Board) 25 25 Sven Borho 18 - Paul Gaunt 18 18 Dr John Gordon (Senior Independent Director) 20 20 Peter Keen (Chairman of the Audit and Management 20 20 Engagement Committee) Anthony Townsendâ€ - 11 Lord Waldegrave of North Hill 18 18 119 112 â€ Anthony Townsend retired from the Board on 8 November 2007. APPROVAL The Directors' Remuneration Report was approved by the Board of Directors on 8 June 2009 and signed on its behalf by John Sclater CVO, Chairman. REPORT OF THE INDEPENDENT AUDITOR TO THE MEMBERS OF THE BIOTECH GROWTH TRUST PLC We have audited the financial statements of The Biotech Growth Trust PLC for the year ended 31 March 2009 which comprise the Income Statement, the Statement of Changes in Equity, the Balance Sheet, the Cash Flow Statement, and notes 1 to 17. These financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors' Remuneration Report that is described as having been audited. This report is made solely to the Company's members, as a body, in accordance with Section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an Auditor's Report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS The Directors' responsibilities for preparing the Annual Report, the Directors' Remuneration Report and the financial statements in accordance with United Kingdom law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the Statement of Directors' Responsibilities. Our responsibility is to audit the financial statements and the part of the Directors' Remuneration Report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the part of the Directors' Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985. We also report to you whether in our opinion the information given in the Report of the Directors is consistent with the financial statements. The information given in the Report of the Directors includes that specific information presented in the Review of Investments that is cross referred from the Business Review section of the Report of the Directors. In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors' remuneration and other transactions is not disclosed. We review whether the Corporate Governance Statement reflects the Company's compliance with the nine provisions of the 2006 Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board's statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Company's corporate governance procedures or its risk and control procedures. We read other information contained in the Annual Report and consider whether it is consistent with the financial statements. The other information comprises only the Company Summary, the Performance Summary, the Chairman's Statement, the Review of Investments, the Portfolio, the Report of the Directors incorporating the Business Review, the Statement of Directors' Responsibilities, the Corporate Governance Statement and the unaudited part of the Directors' Remuneration Report. BASIS OF AUDIT OPINION We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the Directors' Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgments made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements and the part of the Directors' Remuneration Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements and the part of the Directors' Remuneration Report to be audited. REPORT OF THE INDEPENDENT AUDITOR (continued) TO THE MEMBERS OF THE BIOTECH GROWTH TRUST PLC OPINION In our opinion: * the financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union as applied in accordance with the provisions of the Companies Act 1985, of the state of the Company's affairs as at 31 March 2009 and its profit for the year then ended; * the financial statements and the part of the Directors' Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985; and * the information given in the Report of the Directors is consistent with the financial statements. GRANT THORNTON UK LLP REGISTERED AUDITOR & CHARTERED ACCOUNTANTS LONDON 8 JUNE 2009 INCOME STATEMENT 2009 2008 Revenue Capital Total Revenue Capital Total Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Investment income Investment income ( 39 - 39 116 - 116 note 2) Other income ( note 2) - - - 6 - 6 Total income 39 - 39 122 - 122 Gains and losses on investments Gains/losses on - 19,774 19,774 - (9,156) (9,156) investments held at fair value through profit or loss Exchange losses on - (469) (469) - (4) (4) currency balances Expenses Investment management, - (871) (871) - 514 514 management and performance fees ( note 3) Other expenses (408) (7) (415) (366) - (366) Profit/(loss) before (369) (18,427) (18,058) (244) (8,646) (8,890) finance costs and taxation Finance costs (7) (75) (82) (26) (12) (38) Profit/(loss) before (376) 18,352 17,976 (270) (8,658) (8,928) taxation Taxation - - - - - - Profit/(loss) for the (376) 18,352 17,976 (270) (8,658) (8,928) year Earnings/(loss) per (0.7)p 32.7p 32.0p (0.4)p (13.4)p (13.8)p share ( note 4) The "Total" column of this statement represents the Company's Income Statement, prepared in accordance with International Financial Reporting Standards (IFRS). The "Revenue" and "Capital" columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies. All items in the above statement derive from continuing operations. STATEMENT OF CHANGES IN EQUITY For the year ended 31 March 2009 Share Special Capital Capital Retained Total capital redemption earnings Â£000 reserve reserve Â£000 Â£000 Â£000 reserve Â£000 Â£000 At 31 March 2008 15,596 46,065 1,535 3,574 (2,273) 64,497 Net profit/ (loss) - - - 18,352 (376) 17,976 for the year Buy back of shares (2,772) (12,265) 2,772 - - (12,265) At 31 March 2009 12,824 33,800 4,307 21,926 (2,649) 70,208 For the year ended 31 March 2008 Share Special Capital Capital Retained Total capital reserve redemption reserve earnings Â£000 Â£000 reserve Â£000 Â£000 Â£000 Â£000 At 31 March 2007 16,394 49,443 737 12,232 (2,003) 76,803 Net loss for the year - - - (8,658) (270) (8,928) Buy back of shares (798) (3,378) 798 - - (3,378) At 31 March 2008 15,596 46,065 1,535 3,574 (2,273) 64,497 Balance Sheet As at 31 March 2009 2008 Â£'000 Â£'000 Non current assets Investments held at fair 71,256 64,806 value through profit or loss Current assets Other receivables 1,066 850 Cash and cash equivalents 2,161 811 3,227 1,661 Total assets 74,483 66,467 Current liabilities Other payables 1,136 1,970 Bank loan 3,139 - 4,275 1,970 Net assets 70,208 64,497 Equity attributable to equity holders Ordinary share capital 12,824 15,596 Special reserve 33,800 46,065 Capital redemption reserve 4,307 1,535 Capital reserve 21,926 3,574 Retained earnings (2,649) (2,273) Total equity 70,208 64,497 Net asset value per share 136.9p 103.4p ( note 5) The financial statements were approved by the Board on 8 June 2009 and were signed on its behalf by: JOHN SCLATER CVO CHAIRMAN Cash Flow Statement For the year ended 31 March 2009 2008 Â£'000 Â£'000 Operating activities Profit/(loss) before tax 17,976 (8,928) Add back interest paid 82 38 Less: gain/(loss) on (19,774) 9,156 investments held at fair value through profit or loss Less exchange losses on 469 4 currency balances Purchases of investments (55,870) (79,383) held at fair value through profit or loss Sales of investments held 67,658 85,477 at fair value through profit or loss Increase in other (9) (21) receivables Increase/(decrease) in 229 (1,359) other payables Net cash inflow from 10,761 4,984 operating activities before interest and taxation Interest paid (82) (38) Net cash inflow from 10,679 4,946 operating activities Financing activities Buy back of shares (11,999) (3,038) Draw down of bank loan 3,139 - Net cash outflow from (8,860) (3,038) financing Increase in cash and cash 1,819 1,908 equivalents Cash and cash equivalents 811 (1,093) at start of year Effect of foreign exchange (469) (4) rate changes Cash and cash equivalents 2,161 811 at end of year NOTES TO THE FINANCIAL STATEMENTS 1. ACCOUNTING POLICIES The financial statements of the Company have been prepared in accordance with International Financial Reporting Standards ("IFRS"). These comprise standards and interpretations approved by the International Accounting Standards Board ("IASB"), together with interpretations of the International Accounting Standards and Standing Interpretations Committee approved by the International Accounting Standards Committee ("IASC") that remain in effect, to the extent that IFRS have been adopted by the European Union. a. Accounting Convention The financial statements have been prepared under the historical cost convention, except for the measurement at fair value of investments. Where presentational guidance set out in the revised Statement of Recommended Practice ("the SORP") for Investment Trust Companies produced by the Association of Investment Companies ("AIC") dated January 2009 is consistent with the requirements of IFRS, the Directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SORP. b. Investments Investments are recognised and de-recognised on the trade date. As the entity's business is investing in financial assets with a view to profiting from their total return in the form of interest, dividends or increases in fair value, investments are designated as fair value through profit or loss and are initially recognised at fair value. The entity manages and evaluates the performance of these investments on a fair value basis in accordance with its investment strategy, and information about the investments is provided internally on this basis to the Board. Investments designated as at fair value through profit or loss, which are quoted investments, are measured at subsequent reporting dates at fair value, which is either the bid or the last trade price, depending on the convention of the exchange on which it is quoted. In respect of unquoted investments, or where the market for a financial instrument is not active, fair value is established by using valuation techniques, which may include using recent arm's length market transactions between knowledgeable, willing parties, if available, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models. Where there is a valuation technique commonly used by market participants to price the instrument and that technique has been demonstrated to provide reliable estimates of prices obtained in actual market transactions, that technique is utilised. Gains and losses on disposal are also recognised in the Income Statement. The total transaction costs for the year were Â£239,000 (31 March 2008: Â£ 350,000) broken down as follows: purchase transaction costs for the year to 31 March 2009 were Â£112,000, (31 March 2008: Â£170,000), sale transaction costs were Â£127,000 (31 March 2008: Â£180,000). These costs consist mainly of commission. c. Presentation of Income Statement In order to reflect better the activities of an investment trust company, and in accordance with guidance issued by the AIC, supplementary information which analyses the Income Statement between items of a revenue and capital nature has been presented alongside the Income Statement. In accordance with the Company's status as a UK investment company under section 833 of the Companies Act 2006, the capital reserves may not be distributed by way of dividend, although may be utilised for the purposes of share buy backs. Additionally, the net revenue is the measure the Directors believe appropriate in assessing the Company's compliance with certain requirements set out in section 842 of the Income and Corporation Taxes Act 1988. d. Income Dividends receivable on equity shares are recognised on the ex-dividend date. Where no ex-dividend date is quoted, dividends are recognised when the Company's right to receive payment is established. Dividends and interest on investments in unquoted shares and securities are recognised when they become receivable. (e) Expenses and Finance Costs All expenses are accounted for on an accruals basis. Expenses are charged through the Income Statement except as follows: * expenses which are incidental to the acquisition or disposal of an investment are charged to the capital column of the Income Statement; * expenses are charged to the capital column of the Income Statement where a connection with the maintenance or enhancement of the value of the investment can be demonstrated, and accordingly; * investment management and management fees and related irrecoverable VAT are charged to the capital column of the Income Statement as the Directors expect that in the long term virtually all of the Company's returns will come from capital, and * loan interest is charged to the Income Statement and allocated to capital as the Directors expect that in the long term virtually all of the Company's returns will come from capital. f. Taxation In line with the recommendations of the SORP, the allocation method used to calculate tax relief on expenses presented against capital returns in the supplementary information in the income statement is the "marginal basis". Under this basis, if taxable income is capable of being offset entirely by expenses presented in the revenue column of the Income Statement, then no tax relief is transferred to the capital column. Investment trusts which have approval under Section 842 Income and Corporation Taxes Act 1988 are not liable for taxation on capital gains. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the Balance Sheet liability method. Deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the Income Statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. g. Foreign Currencies The currency of the primary economic environment in which the Company operates (the functional currency) is pounds sterling ("sterling"), which is also the presentational currency of the Company. Transactions involving currencies other than sterling are recorded at the exchange rate ruling on the transaction date. At each Balance Sheet date, monetary items and non-monetary assets and liabilities that are fair valued, which are denominated in foreign currencies, are retranslated at the closing rates of exchange. Exchange differences arising on settlements of monetary items and from retranslating at the Balance Sheet date including investments and other financial instruments measured as fair value through profit or loss and other monetary items are included in the Income Statement and allocated as capital if they are of a capital nature, or as revenue if they are of a revenue nature. (h) Reserves Capital reserves The following are credited or charged to the capital column of the Income Statement and then transferred to the Capital Reserve: * gains or losses on disposal of investments * exchange differences of a capital nature * expenses allocated to this reserve in accordance with the above referred policies * increases and decreases in the valuation of investments held at year end. Capital Redemption Reserve * a transfer will be made to this reserve on cancellation of the Company's own shares purchased. Special Reserve During the financial year ended 31 March 2004 a Special Reserve was created, following the cancellation of the Share Premium account, in order to provide an increased distributable reserve out of which to purchase the Company's own shares. 2 Income 2009 2008 Â£'000 Â£'000 Income from listed investments 20 70 Money market dividend 17 - Overseas income 2 46 Unfranked interest 39 116 Other operating income - 6 Interest receivable Total Income 39 122 3 Investment Management, Management and Performance Fees Revenue Capital Total Revenue Capital Total 2009 2009 2009 2008 2008 2008 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Investment - 449 449 - 471 471 Management Periodic fee Management fee - 198 198 - 218 218 Performance fee - - - - 169 169 paid Performance fee 224 224 - - - accrued Performance fee - - - - (1,351) (1,351) accrual written back Irrecoverable VAT - - - - (21) (21) thereon - 871 871 - (514) (514) During the year ended 31 March 2008 a performance fee of Â£169,000 crystallised and became payable and also during that year the Â£1,351,000 accrual that had been made as at 31 March 2007 was reversed in accordance with the performance fee arrangements in force at the time. In addition, a fee of Â£224,000 was accrued as at 31 March 2009. 4. OTHER EXPENSES Revenue Capital Total Revenue Capital Total 2009 2009 2009 2008 2008 2008 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Directors' emoluments 119 - 119 112 - 112 Administration fee 50 - 50 50 - 50 Auditors' remuneration for 22 - 22 22 - 22 the audit of the Company's financial statements Auditors' remuneration for 3 - 3 3 - 3 review of the interim accounts and performance fee calculation Auditors' remuneration - - 2 2 - - - taxation* Broker retainer 25 - 25 25 - 25 Other including 189 5 194 154 - 154 irrecoverable VAT 408 7 415 366 - 366 * During the year a fee of Â£2,000 was paid to the Company's Auditors in relation to taxation advice in respect of the investment in the Caduceus Asia Partners L.P. Fund. 5. FINANCE COSTS Revenue Capital Total Revenue Capital Total 2009 2009 2009 2008 2008 2008 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Bank overdraft 7 - 7 26 - 26 Bank loan interest - 67 67 - 12 12 Loan arrangement fee - 8 8 - - - 7 75 82 26 12 38 6. TAXATION (a) Factors affecting current tax charge for year Approved investment trusts are exempt from tax on capital gains made within the Company. The tax assessed for the year is lower than the standard rate of corporation tax in the UK of 28% (2008: 30%). The differences are explained below: 2009 2008 Â£'000 Â£'000 Profit/(loss) on ordinary activities before tax 17,976 (8,928) Corporation tax at 28% (2008: 30%) 5,033 (2,678) Effects of: Non taxable (gains)/losses on investments held at fair value through profit or loss (5,405) 2,748 Excess expenses unused 373 (79) Disallowed expenses (1) 9 Current tax charge - - (b) Provision for deferred tax No provision for deferred taxation has been made in the current or prior year. The Company has not recognised a deferred tax asset of Â£3,626,000 (2008: Â£ 3,484,000) arising as a result of excess management expenses. These excess management expenses will only be utilised if the Company generates sufficient taxable income in the future. 7. EARNINGS/(LOSS) PER SHARE Total gain per share of 32.0p (2008: loss 13.8p) is based on the total gain attributable to equity shareholders of Â£17,976,000 (2008: loss Â£8,928,000). The revenue loss per share of 0.7p (2008:0.4p) is based on the revenue loss attributable to equity shareholders of Â£376,000 (2008: Â£270,000). The capital gain per share of 32.7p (2008: loss 13.4p) is based on the capital gain attributable to equity shareholders of Â£18,352,000 (2008: loss Â£ 8,658,000). Total gain, revenue loss and capital gain/(loss) per share are based upon the weighted average number of shares in issue during the year of 56,196,626 (2008: 64,473,752). 8. INVESTMENTS HELD AT FAIR VALUE AIM Unquoted Total 2008 THROUGH PROFIT AND LOSS Total Listed Â£ Equity Non-equity Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Cost at 1 April 2008 66,914 - 711 3,809 71,434 78,161 Investment holding (4,211) - 189 (2,606) (6,628) (73) (losses)/gains at 1 April 2008 Valuation at 1 April 62,703 - 900 1,203 64,806 78,088 2008 Movement in the year *Reclassification of 3,072 - - (3,072) - - investments Purchases at cost 52,283 1,284 617 357 54,541 79,737 Sales - proceeds (66,579) (1,286) - - (67,865) (83,863) - gains /(losses) on 5,672 2 - - 5,674 (2,601) disposal Net movement in 7,976 - 3,589 2,535 14,100 (6,555) Investment holding gains Valuation at 31 March 65,127 - 5,106 1,023 71,256 64,806 2009 Closing book cost at 31 61,362 - 1,328 1,094 63,784 71,434 March 2009 Investment holding 3,765 - 3,778 (71) 7,472 (6,628) gains at 31 March 2009 Valuation at 31 March 65,127 - 5,106 1,023 71,256 64,806 2009 2009 2008 Â£'000 Â£'000 Gains/(losses) on investments: Gains/(losses) on disposal based on historical 5,674 (2,601) cost Amounts recognised as investment holding gains 4,275 (464) /(loss) in previous year Gains/(losses) on disposal based on carrying 9,949 (3,065) value at previous balance sheet date Net movement in investment holding gains in 9,825 (6,091) the year Gains/(losses) on investments 19,774 (9,156) * During the year the Jersey Limited Partnership, Merlin Fund L.P., was terminated in accordance with the partnership agreement and 2,168,917 shares in ReNeuron were received as part of the final distribution. 9. OTHER RECEIVABLES 2009 2008 Â£'000 Â£'000 Future settlements - sales 1,023 816 Other debtors 14 9 Prepayments and accrued income 29 25 1,066 850 10. OTHER PAYABLES 2009 2008 Â£'000 Â£'000 Future settlements - purchases 16 1,345 Future settlements - purchase of own shares 608 342 Other creditors and accruals 512 283 1,136 1,970 11. SHARE CAPITAL 2009 2008 Â£'000 Â£'000 Allotted, called up, issued and fully paid: 51,296,413 shares of 25p 12,824 15,596 (2008: 62,385,963) Authorised: 100,000,000 shares of 25p each 25,000 25,000 At the date of this report the Company had 50,496,913 shares of 25p in issue. During the year 11,089,550 shares were repurchased for cancellation at a cost of Â£12,265,000 (including expenses). Subsequent to the year end, to 8 June 2009, a further 799,500 shares were bought back for cancellation at a cost of Â£ 981,000 (including expenses). 12. NET ASSET VALUE PER SHARE 2009 2008 Â£'000 Â£'000 Net asset value per share 136.9p 103.4p The net asset value per share is based on the net assets attributable to equity shareholders of Â£70,208,000 (2008: Â£64,497,000) and on 51,296,413 (2008: 62,385,963) shares in issue at 31 March 2009. 13. RISK MANAGEMENT POLICIES AND PROCEDURES As an investment trust, the Company invests in equities and other investments for the long term so as to secure its investment objective. In pursuing its investment objective, the Company is exposed to a variety of risks that could result in either a reduction in the Company's net assets or a reduction in the profits available. The Company's financial instruments comprise securities and other investments, cash balances and debtors and creditors that arise directly from its operations (for example, in respect of sales and purchases awaiting settlement). The main risks the Company faces from its financial instruments are (i) market price risk (comprising currency risk, interest rate risk and other price risk (i.e. changes in market prices other than those arising from interest rate or currency risk)), (ii) liquidity risk and (iii) credit risk. The Board reviews regularly and agrees policies for managing each of these risks. 1. Market Price risk: The fair value or future cash flows of a financial instrument held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - currency risk, interest rate risk and other price risk. The Company's portfolio is exposed to market price fluctuations which are monitored by the Investment Manager in pursuance of the investment objective. No derivatives or hedging instruments are utilised to specifically manage market price risk. (a) Currency risk: A significant proportion of the Company's portfolio is denominated in currencies other than sterling (the Company's functional currency, and in which it reports its results). As a result, movements in exchange rates can significantly affect the sterling value of those items. Management of risk The Investment Manager and Manager monitor the Company's exposure to foreign currencies on a continuous basis and report to the Board regularly. The Investment Manager does not hedge against foreign currency movements, but takes account of the risk when making investment decisions. Income denominated in foreign currencies is converted into sterling on receipt. The Company does not use financial instruments to mitigate the currency exposure in the period between the time that the income is included in the financial statements and its receipt. Foreign currency exposure At the Balance Sheet date the Company held Â£64,399,000 (2008: Â£61,028,000) of investments denominated in U.S. dollars and Â£6,857,000 (2008: Â£3,778,000) in other currencies. Currency sensitivity The following table details the sensitivity of the Company's profit or loss after taxation for the year to a 30% increase and decrease in sterling against U.S. dollars (2008: 5% increase and decrease). The above percentages have been determined based on market volatility in exchange rates over the previous twelve months. The analysis is based on the Company's foreign currency financial instruments held at each balance sheet date, after adjusting for an increase/decrease in management fees. If sterling had weakened against U.S. dollars as stated below, this would have had the following effect: 2009 USD 2008 USD Â£'000 Â£'000 Impact on revenue return Impact on capital return - - 27,420 3,191 Total return after tax/effect on shareholders' funds 27,420 3,191 If sterling had strengthened against U.S. dollars as stated below, this would have had the following effect: 2009 USD 2008 USD Â£'000 Â£'000 Impact on revenue return Impact on capital return - - (14,765) (2,887) Total return after tax/effect on shareholders' funds (14,765) (2,887) b. Interest rate risk: Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Management of the risk The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment decisions. The Company, generally, does not hold significant cash balances, with short term borrowing being used when required and therefore deems this risk to be immaterial. Interest rate exposure The Company has a Â£1 0m committed multicurrency revolving credit facility provided by Allied Irish Banks p.l.c.. At the year end Â£3,139,000 of the facility was utilised (2008: not utilised). At the year end the Company held Â£ 2,161,000 (2008: Â£81 1,000) cash at Bank of New York Mellon. Interest payable on borrowings under the committed multicurrency revolving credit facility was charged at an average rate of 3.1% over the year. At the date of writing, the loan has been repaid in full. c. Other price risk Other price risk may affect the value of the quoted investments. If market prices at the Balance Sheet date had been 20% higher or lower (2008: 10% higher or lower) while all other variables had remained constant, the return and net assets attributable to shareholders for the year ended 31 March 2009 would have increased/decreased by Â£14,159,000 (2008: Â£6,438,000), after adjusting for an increase or decrease in management fees. The calculations are based on the portfolio valuations as at the respective Balance Sheet dates. 2. Liquidity risk: This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. Management of the risk Liquidity risk is not significant as the majority of the Company's assets are investments in quoted equities and other quoted securities that are readily realisable. The Company has a Â£1 0m committed multicurrency revolving credit facility with Allied Irish Banks p.l.c.. The Board gives guidance to the Investment Manager as to the maximum amount of the Company's resources that should be invested in any one company. Liquidity exposure Contractual maturities of the financial liabilities as at 31 March 2009, based on the earliest date on which payment can be required, are as follows: Amounts due to brokers and accruals Â£1,136,000 (2008: Â£1,970,000). 3. Credit risk: The failure of the counterparty to a transaction to discharge its obligations under that transaction could result in the Company suffering a loss. Management of the risk The risk is not significant and is managed as follows: * by only dealing with brokers which have been approved by OrbiMed Capital LLC and banks with high credit ratings; and * by setting limits to the maximum exposure to any one counterparty at any time. At the reporting date, the Company's financial assets exposed to credit risk amounted to Â£2,161,000 cash at bank and on deposit (2008: Â£81 1,000) and Â£ 1,066,000 other receivables, such as amounts due from brokers, dividends and interest receivable (2008: Â£850,000). Fair value of financial assets and financial liabilities: Financial assets and financial liabilities are either carried in the Balance Sheet at their fair value or at a reasonable approximation of fair value. Capital management policies and procedures The Company's capital management objectives are: * to ensure that it will be able to continue as a going concern; and * to maximise the income and capital return to its equity shareholders through an appropriate balance of equity capital and debt. The Company's capital is disclosed in the Balance Sheet on page 29 and is managed on a basis consistent with its investment objectives and policies as discussed in the Report of the Directors on page 9. The Company currently has a Â£1 0m committed multicurrency revolving credit facility, provided by Allied Irish Banks p.l.c., which can be used to finance any short term borrowing requirements. The Board, with the assistance of the Manager and the Investment Manager, monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review includes: * the planned level of gearing, which takes into account the Investment Manager's view of the market; * the need to buy back equity shares, either for cancellation or to hold in treasury, which takes account of the difference between the net asset value per share and the share price (i.e. the level of share price discount or premium); * the possible need for new issues of equity shares; and * the extent to which revenue in excess of that which is required to be distributed should be retained. The Company's objectives, policies and processes for managing capital are unchanged from the preceding accounting period. The Company is also subject to several externally imposed capital requirements: * borrowings under the committed multicurrency revolving credit facility are not to exceed 20% of the portfolio; * as a public company, the Company has a minimum share capital of Â£50,000; and * in order to be able to pay dividends out of profits available for distribution, the Company has to be able to meet one of the two capital restriction tests imposed on investment companies by company law. These requirements are unchanged since last year and the Company has complied with them at all times. 14. RELATED PARTIES Details of the relationship between the Company, Frostrow Capital LLP and OrbiMed Capital LLC are disclosed in the Report of Directors on pages 12 and 13. Sven Borho is a Director of the Company, as well as a Partner of the Company's Investment Manager, OrbiMed Capital LLC. During the year ended 31 March 2009, OrbiMed Capital LLC received Â£449,000 in respect of Investment Management fees, of which Â£111,000 was outstanding at the year end. 15. SUBSTANTIAL INTERESTS The Company holds interests in 3.0% or more of any class of capital in the following companies: % of issued Fair value Company Shares held share Â£'000 capital Curis 4,127,311 6.5% 3,916 This investment is not considered significant in the context of these financial statements. 16. CAPITAL RESERVE Capital reserve - Investment Holdings gains/ (losses) Capital reserve - other Â£'000 Total Â£'000 Â£'000 At 31 March 2008 10,202 (6,628) 3,574 Transfer on disposal of (4,275) 4,275 - investments Net gains on investments 9,949 9,825 19,774 Exchange losses (469) - (469) Expenses charged to capital (953) - (953) At 31 March 2009 14,454 7,472 21,926 The Institute of Chartered Accountants in England and Wales has issued guidance (TECH 01/08) stating that profits arising out of a change in fair value of assets, recognised in accordance with Accounting Standards, may be distributed provided the relevant assets can be readily convertible into cash. Securities listed on a recognised stock exchange are generally regarded as being readily convertible into cash. However, under the terms of the Company's Articles of Association, sums with "Other capital reserves" are available for distribution only by way of redemption or purchase of any of the Company's own shares. In addition, in order to maintain investment trust status, the Company may only distribute by way of dividend accumulated revenue profits. 17. CONTINGENT ASSETS On 5 November 2007, the European Court of Justice ruled that management fees should be exempt from VAT. HMRC has announced its intention not to appeal against this case to the UKVAT Tribunal. The Company's previous Investment Manager is in the process of quantifying the potential repayment that should be due and, as the time scale for receipt is uncertain, the Company has made no provision in these financial statements for any such receipt. EXPLANATORY NOTES OF PRINCIPAL CHANGES TO THE COMPANY'S ARTICLES OF ASSOCIATION 1. GENERAL As described in the Report of the Directors on page 15 of this Annual Report, it is proposed that a number of alterations be made to the Company's Articles of Association. The principal changes are set out below. As announced on 28 July 2008 the resolution proposed at the Annual General Meeting held on 23 July 2008, to adopt new Articles of Association was ineffective. As then indicated, a resolution is being proposed at this year's Annual General Meeting to adopt new Articles of Association (the "New Articles") in substantially the same form as was proposed to be adopted last year. Most of the changes proposed to be made compared to the current Articles of Association of the Company (the "Current Articles") are being proposed to reflect changes made by the Companies Act 2006, and to clarify that certain provisions of the New Articles apply subject to any relevant provisions of the Companies Act 2006. Additional changes have been made to bring the New Articles into line with changes being made to English company law pursuant to the EU Shareholder Rights Directive. 2. DEFINITIONS Certain definitions and terms used in the Current Articles are being amended to align them with definitions used in the Companies Act 2006. 3. SHARE TRANSFERS Under the Companies Act 2006, a company is now required, if it refuses to register a transfer of shares, to give the transferee notice of such refusal together with reasons for the refusal. It is proposed that the New Articles be amended to reflect this change. 4. REFERENCES TO EXTRAORDINARY RESOLUTIONS AND MEETINGS The Current Articles contain references to extraordinary resolutions and meetings. These provisions are being removed as the concept of extraordinary resolutions and meetings has not been retained under the Companies Act 2006. Instead, meetings are either Annual General Meetings or General Meetings. The Current Articles enable members to act by written resolution. Under the Companies Act 2006, public companies can no longer pass written resolutions. It is proposed that these provisions be removed in the New Articles. 5. CONVENING GENERAL MEETINGS The provisions in the Current Articles dealing with the convening of General Meetings and the length of notice required to convene General Meetings are being amended to conform to new provisions in the Companies Act 2006. A General Meeting to consider a special resolution can now be convened on 14 days' notice whereas previously 21 days' notice was required. Notice of an Annual General Meeting, however, still requires 21 days' notice. 6. VOTES OF MEMBERS Under the Companies Act 2006 proxies are entitled to vote on a show of hands whereas under the Current Articles proxies are only entitled to vote on a poll. Multiple proxies may be appointed provided that each proxy is appointed to exercise the rights attached to a different share held by the shareholder. The New Articles reflect these provisions. 7. CASTING VOTE The Chairman's casting vote at General Meetings has been abolished by the Companies Act 2006. The relevant provision of the New Articles has been removed to reflect this. 8. AGE OF DIRECTORS The Current Articles include provisions relating to Directors attaining the age of 70 or more. These include a requirement that a Director's age is disclosed if he has attained the age of 70 years or more in the notice convening a meeting at which the Director is proposed to be elected or re-elected. These provisions have been removed in the Current Articles to reflect the fact that there is no longer a maximum age limit for Directors. EXPLANATORY NOTES OF PRINCIPAL CHANGES TO THE COMPANY'S ARTICLES OF ASSOCIATION (continued) 9. CONFLICTS OF INTEREST The Companies Act 2006 sets out Directors'general duties which largely codify the existing law but with some changes. Under the Companies Act 2006, a Director must avoid a situation where he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict with the company's interests. The requirement is very broad and could apply, for example, if a Director becomes a Director of another company or a trustee of another organisation. The Companies Act 2006 allows Directors of public companies to authorise conflicts and potential conflicts, where appropriate, where the Articles of Association contain a provision to this effect. The Companies Act 2006 also allows the Articles of Association to contain other provisions for dealing with Directors' conflicts of interest to avoid a breach of duty. The New Articles give the Directors authority to approve such situations and to include other provisions to allow conflicts of interest to be dealt with in a similar way to the current position. There are safeguards which will apply when Directors decide whether to authorise a conflict or potential conflict. First, only Directors who have no interest in the matter being considered will be able to take the relevant decision, and secondly, in taking the decision the Directors must act in a way they consider, in good faith, will be most likely to promote the Company's success. The Directors will be able to impose limits or conditions when giving authorisation if they think this is appropriate. It is also proposed that the New Articles should contain provisions relating to confidential information, attendance at Board meetings and availability of Board papers to protect a director being in breach of duty if a conflict of interest or potential conflict of interest arises. These provisions will only apply where the position giving rise to the potential conflict has previously been authorised by the Directors. It is the Board's intention to report annually on the Company's procedures for ensuring that the Board's powers to authorise conflicts are operated effectively. 10. RECORDS TO BE KEPT The provision in the Current Articles requiring the Board to keep accounting records has been removed as this requirement is contained in the Companies Act 2006. 11. DIRECTORS' FEES The New Articles fix the aggregate of fees that may be payable to the Directors for their services at Â£200,000. This limit is in line with market practice and provides flexibility for the future. 12. NOTICES This section has been amended in order to enable the Company to provide notices, documents and other communications in electronic form in accordance with the Companies Act 2006 and amendments being made pursuant to the EU Shareholder Rights Directive. GLOSSARY OF TERMS INVESTMENT TRUST TERMS Discount or Premium A description of the situation when the share price is lower or higher than the net asset value ("NAV") per share. The size of the discount or premium is calculated by subtracting the share price from the NAV per share and is usually expressed as a percentage (%) of the NAV per share. If the share price is higher than the NAV per share, this situation is called a premium. Gearing Also known as leverage, particularly in the USA. The form used to describe the process of borrowing money for investment purposes in the expectation that the returns on the investments purchased using the borrowings exceed the costs of these borrowings. Initial Public Offering (IPO) The initial offer by a company of shares to be quoted on a stock exchange. Often known as a flotation. Net Asset Value (NAV) The value of the Company's assets, principally investments made in other companies and cash being held, minus any liabilities for which the Company is responsible, e.g. money owed to other people. The NAV is also described as `shareholders'funds'. The NAV is often expressed in pence per share after being divided by the number of shares which have been issued. The NAV per share is unlikely to be the same as the share price which is the price at which the Company's shares can be bought or sold by an investor. The share price is determined by the relationship between the demand and supply for the shares. Total Assets Total assets less current liabilities before deducting prior charges. Prior charges includes all loans for investment purposes. Total Expense Ratio The total expense ratio is calculated by taking the Company's expenses, excluding performance fees and exceptional items, and dividing by the average net asset value of the Company over the year. Treasury Shares Shares previously issued by a company that has been bought back from shareholders to be held by the company for potential sale or cancellation at a later date. A copy of the Company's Annual Financial Report can be found on the Company's website at www.biotechgt.com By Order of the Board Frostrow Capital LLP Company Secretary 30 July 2009

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