Half-year Report
LONDON STOCK EXCHANGE ANNOUNCEMENT
The Biotech Growth Trust PLC
Unaudited Half Year Results For The Six Months Ended
30 September 2017
This Announcement is not the Company’s Half Year Report & Accounts. It is an abridged version of the Company’s full Half Year Report & Accounts for the six months ended 30 September 2017. The full Half Year Report & Accounts, together with a copy of this announcement, will shortly be available on the Company’s website at www.biotechgt.com where up to date information on the Company, including daily NAV, share prices and fact sheets, can also be found.
The Company's Half Year Report & Accounts for the six months ended 30 September 2017 has been submitted to the UK Listing Authority, and will shortly be available for inspection on the National Storage Mechanism (NSM): www.hemscott.com/nsm.do
For further information please contact: Mark Pope, Frostrow Capital LLP 020 3008 4913
Company Performance
Key Statistics
| As at | As at | ||
| 30 September | 31 March | % | |
| 2017 | 2017 | Change | |
| Net asset value per share | 887.7p | 800.8p | +10.9 |
| Share price | 825.0p | 748.0p | +10.3 |
| Discount of share price to net asset value per share | 7.1% | 6.6% | – |
| Benchmark (NASDAQ Biotechnology Index (sterling adjusted)) | 2,607.70 | 2,447.25 | +6.6 |
| Gearing* | 9.2% | 3.2% | – |
| Ongoing charges* | 1.1% | 1.1% | – |
* See glossary
Chairman’s Statement
Performance
I am pleased to report that the strong performance achieved last year continued into the first half of the current financial year. Following a 27.5% rise in the net asset value per share last year, there was a further rise of 10.9% in the first half of the current financial year. The share price rose by 10.3% during the six-month period under review. This compares to a rise of 6.6% in the Company’s Benchmark, a material outperformance. I mentioned at the year-end that sterling’s decline against other major currencies, in particular the U.S. dollar, the currency in which the majority of the Company’s holdings are denominated, had helped the Company’s performance in absolute terms. The first six months of the current financial year saw something of a recovery in sterling’s fortunes, sterling having appreciated over 7.0% against the U.S. dollar during the period. With almost all of the Company’s assets in U.S. dollars, this relative dollar weakness detracted from the Company’s absolute performance.
It is pleasing to note the substantial outperformance against the Benchmark during the period as this follows last year’s slight underperformance. This outperformance reflects stock selection, most notably Vertex Pharmaceuticals, which was the Company’s largest overweight position relative to the Benchmark. It should also be noted that the level of gearing employed increased over the period, rising from 3.2% at 31 March 2017 to 9.2% as at 30 September 2017. Further information regarding this and also the Company’s investments can be found in the Portfolio Manager’s Review.
The discount of the Company’s share price to the net asset value per share widened slightly during the period. As at 30 September 2017 it was 7.1%, having been 6.6% at the beginning of the period. Since the half year-end the level of discount has narrowed and as at 8 November 2017 stood at 0.8%.
Capital Structure
Shareholders will be aware that the Board has a discount control mechanism in place intended to establish a target level of no more than a 6% discount of share price to the net asset value per share. Shareholders should note, however, that it remains possible for the share price discount to net asset value per share to be greater than 6% on any one day 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 volatility of the net asset value per share in an asset class such as biotechnology is another factor over which the Board has no control. No shares were repurchased by the Company during the period under review and to 8 November 2017.
Chairman’s Statement
Revenue and Dividends
The revenue profit for the period was £146,000 (six months ended 30 September 2016: profit of £590,000) and no interim dividend is declared (six months ended 30 September 2016: nil).
Half Year Report & Accounts
As I mentioned last year, in the interests of cost control we will not be providing a hard copy of this year’s Half Year Report & Accounts. This document is, and will continue to be available on the Company’s website at www.biotechgt.com.The Company’s Annual Report & Accounts will continue to be available in hard copy, and also on the Company’s website.
Outlook
Despite some volatility, the biotechnology sector has performed strongly during the first half of the Company’s financial year. Since the 30 September, however, there has been a fall in share prices, triggered mainly by an announcement from Celgene about current progress on certain drugs together with a lowering of its mid-term revenue projections. Our Portfolio Manager remains strongly of the view that the biotechnology sector remains undervalued, particularly bearing in mind high growth rates compared to the overall market. Although the U.S. drug pricing issue will remain in the headlines, it appears that investors have become more comfortable with this ongoing debate and are focusing more on the fundamentals of the sector. Our Portfolio Manager believes that areas such as strong drug sales, continued high levels of innovation, a more benign approval environment at the U.S. Food and Drug Administration (‘FDA’) and further merger and acquisition activity will prove to be key drivers. In addition, anticipated U.S. tax reforms and cash repatriation are also expected to be positive for larger companies in the sector.
The Board reiterates its belief that the long-term investor in the sector will be well rewarded.
Andrew Joy
Chairman
9 November 2017
Portfolio Manager’s Review
Performance
The Company’s net asset value per share increased by 10.9% and the share price by 10.3% during the six-month period ended 30 September. The Company’s Benchmark increased by 6.6% during the same period. The increased deployment of gearing into rising markets contributed to the Company’s outperformance. The level of gearing increased from 3.2% at 31 March 2017 to end the period at 9.2%. Currency, however, again played an important part in the level of absolute performance during the period as sterling recovered some of the ground that it lost against other major currencies during the Company’s last financial year; it appreciated over 7.0% against the U.S. dollar during the half-year causing a headwind to absolute performance.
The biotechnology sector outperformed the general market during the review period. We attribute this strength to multiple factors, including an improved political environment and positive clinical development progress from a number of biotechnology companies. We expect that biotechnology stocks will continue to have strong performance during the second half of the Company’s financial year with support from a favourable macro environment and positive tailwinds from U.S Food and Drug Administration (‘FDA’) approval of innovative therapies.
Compared with the same period last year, sentiment in the sector has improved significantly as concerns about the possibility of new regulation of drug prices have lessened. The Trump administration failed in its effort to repeal and replace the Affordable Care Act (or ‘Obamacare’) due to objections from a small number of Republicans and universal opposition from the Democrats. Although President Trump has recently signed an executive order which will weaken Obamacare, we believe without legislative action there will not be significant changes that would adversely impact the biotechnology industry.
With the failure to pass meaningful healthcare reform, the Trump administration has changed its priority to tax reform. The most recent proposal reduces the corporate tax rate to 20% from 35%, with companies paying little or no tax to the U.S. on foreign profits. Some biotechnology companies with high tax rates will benefit directly from these changes. In addition, a one-time reduced repatriation tax has been proposed, which will allow U.S. companies to bring their overseas cash back into the U.S. at a reduced tax rate. Because many major pharmaceutical and biotechnology companies have significant offshore cash balances, a repatriation of that cash could catalyse merger and acquisition (‘M&A’) activity by making it easier to acquire U.S. biotechnology targets. Although the tax proposals still need to be refined and debated in Congress, we expect tax reform to eventually be enacted.
Innovation continues
As highlighted in the Annual Report, 2017 is poised to become a landmark year for innovative modalities of drug treatment. The FDA recently approved two groundbreaking CAR-T therapies, which use genetically modified immune cells that are re-programmed to fight cancer. Novartis’ CAR-T therapy was approved for the treatment of advanced leukemia, and Kite Pharma’s CAR-T therapy was approved for lymphoma. The Company’s investments in the CAR-T space include Juno Therapeutics, which will have pivotal data available next year for its lymphoma therapy, and Bluebird Bio, which has presented highly encouraging early data for its CAR-T therapy for multiple myeloma. There has also been significant progress in the gene therapy space this year. Portfolio company Spark Therapeutics recently received a unanimous vote from an FDA advisory committee supporting approval of its gene therapy to treat a rare inherited disease that causes vision loss. If the therapy is approved as expected, it will be the first gene therapy approved in the U.S. Also this year, we have seen encouraging proof-of-concept data for gene therapies to treat haemophilia from Spark Therapeutics and BioMarin Pharmaceutical.
In terms of recent clinical developments, we would highlight two potentially transformative clinical trial outcomes for new drugs to treat previously unaddressable patient populations. The new three-drug regimens by Vertex Pharmaceuticals, a portfolio company and a significant contributor to performance, recently showed dramatic benefit in patients with cystic fibrosis. These regimens should enable the company to treat the majority of cystic fibrosis patients, and their ability to slow or halt disease progression with chronic administration may provide a “functional cure†that will restore patients to normal life spans. Similarly, portfolio company Alnylam Pharmaceuticals reported impressive phase III data of their drug patisiran for the treatment of hereditary transthyretin-mediated amyloidosis. This is the first successful pivotal trial of an RNAi drug, which is a new therapeutic class that can selectively block gene expression and address diseases not easily treated by conventional approaches. We believe advancements that we are now seeing with new therapeutic platforms such as RNAi, CAR-T, and gene therapy are the beginning of a new wave of productivity for the sector, as biotechnology companies apply these approaches to generate therapeutic candidates against previously intractable diseases. We expect more M&A activity in these innovative areas. Gilead Sciences’ recent U.S. $12 billion acquisition of Kite Pharma highlights the interest in novel technology platforms by larger players in the traditional drug industry. Other M&A candidates in the portfolio include Juno Therapeutics, Bluebird Bio, Spark Therapeutics, and Alnylam Pharmaceuticals.
The principal detractor from performance during the period was Incyte. This was due, in part, to the unexpected failure to obtain FDA approval for baricitinib, a treatment for rheumatoid arthritis being developed with partner Eli Lilly.
Outlook
After the review period, the biotechnology sector suffered a correction in October, largely due to some disappointing earnings and long-term guidance from Celgene, one of the bellwether stocks in the sector. Given the compelling valuations among large capitalisation biotechnology, we believe this correction will be transient.
We believe the biotechnology industry is now at another inflection point, where new innovative technologies are set to transform clinical practice. When combined with the increasingly friendly macro and regulatory environment, we see the potential for continued strong returns for investors in the sector.
Sven Borho
OrbiMed Capital LLC
Portfolio Manager
9 November 2017
Investment Portfolio
Investments held as at 30 September 2017
| Country | Fair value | % of | |
| Security | /Region | £’000 | investments |
| Biogen | United States | 67,081 | 12.4 |
| Celgene | United States | 66,851 | 12.3 |
| Vertex Pharmaceuticals | United States | 47,521 | 8.8 |
| Regeneron Pharmaceuticals | United States | 34,243 | 6.3 |
| Alexion Pharmaceuticals | United States | 32,883 | 6.1 |
| Amgen | United States | 29,650 | 5.5 |
| Gilead Sciences | United States | 22,012 | 4.1 |
| Incyte | United States | 21,655 | 4.0 |
| Illumina | United States | 20,738 | 3.8 |
| Puma Biotechnology | United States | 19,644 | 3.6 |
| Ten largest investments | 362,278 | 66.9 | |
| DBV Technologies | France | 16,198 | 3.0 |
| Clovis Oncology | United States | 15,753 | 2.9 |
| Alnylam Pharmaceuticals | United States | 13,759 | 2.5 |
| Vanda Pharmaceuticals | United States | 12,877 | 2.4 |
| Bluebird Bio | United States | 11,871 | 2.2 |
| Dermira | United States | 10,072 | 1.9 |
| Array Biopharma | United States | 10,040 | 1.8 |
| BeiGene | Cayman Islands | 8,453 | 1.6 |
| Aurinia Pharmaceuticals | Canada | 8,400 | 1.6 |
| GW Pharmaceuticals | United Kingdom | 8,254 | 1.5 |
| Twenty largest investments | 477,955 | 88.3 | |
| Juno Therapeutics | United States | 7,623 | 1.4 |
| BioMarin Pharmaceutical | United States | 6,976 | 1.3 |
| Ironwood Pharmaceuticals | United States | 6,655 | 1.2 |
| Jazz Pharmaceuticals | Ireland | 6,432 | 1.2 |
| Aerie Pharmaceuticals | United States | 6,177 | 1.1 |
| Alkermes | Ireland | 5,495 | 1.0 |
| Achillion | United States | 4,755 | 0.9 |
| Glycomimetics | United States | 3,518 | 0.7 |
| Deciphera Pharmaceuticals | United States | 3,462 | 0.6 |
| OrbiMed Asia Partners L.P (unquoted)* | Far East | 3,347 | 0.6 |
| Thirty largest investments | 532,395 | 98.3 | |
| Insys Therapeutics | United States | 2,873 | 0.5 |
| Seres Therapeutics | United States | 2,624 | 0.5 |
| Spark Therapeutics | United States | 1,343 | 0.3 |
| Fluidigm | United States | 1,294 | 0.2 |
| Idorsia | Switzerland | 497 | 0.1 |
| Infinity Pharmaceuticals | United States | 430 | 0.1 |
| Total investments | 541,456 | 100.0 |
All of the above investments are equities unless otherwise stated.
* Partnership interest
Portfolio Breakdown
| Fair value | % of | |
| Investments | £’000 | investments |
| Equities | 538,109 | 99.4 |
| Partnership interest (Unquoted) | 3,347 | 0.6 |
| Total investments | 541,456 | 100.0 |
Principal Contributors to and Detractors from Net Asset Value Performance
For the Six Months ended 30 September 2017
Top Five Contributors
| Contribution | ||
| for the | ||
| Six months to | Contribution per | |
| 30 September 2017 | share | |
| £’000 | (pence)* | |
| Puma Biotechnology | 14,786 | 26.5p |
| Vertex Pharmaceuticals | 10,849 | 19.4p |
| Alnylam Pharmaceuticals | 6,133 | 11.0p |
| Celgene | 5,633 | 10.1p |
| BeiGene | 4,573 | 8.2p |
| 41,974 | 75.2p |
Top Five Detractors
| Contribution | |||
| for the | |||
| Six months to | Contribution per share |
||
| 30 September 2017 | |||
| £’000 | (pence)* | ||
| Incyte | (7,784 | ) | (13.9)p |
| Dermira | (3,108 | ) | (5.6)p |
| GW Pharmaceuticals | (2,308 | ) | (4.1)p |
| Aurinia Pharmaceuticals | (2,136 | ) | (3.8)p |
| Alkermes | (1,288 | ) | (2.3)p |
| (16,624 | ) | (29.7)p |
* based on 55,839,913 ordinary shares being the weighted average number of shares in issue for the six months ended 30 September 2017
Source: Frostrow Capital LLP
Condensed Income Statement
for the six months ended 30 September 2017
| (Unaudited) Six months ended 30 September 2017 |
(Unaudited) Six months ended 30 September 2016 |
(Audited) Year ended 31 March 2017 |
|||||||||||||||||
| Revenue | Capital | Total | Revenue | Capital | Total | Revenue | Capital | Total | |||||||||||
| Note | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | ||||||||||
| Investment income | |||||||||||||||||||
| Investment income | 2 | 624 | – | 624 | 1,084 | – | 1,084 | 1,905 | – | 1,905 | |||||||||
| Total income | 624 | – | 624 | 1,084 | – | 1,084 | 1,905 | – | 1,905 | ||||||||||
| Gains on investments | |||||||||||||||||||
| Gains on investments held at fair value through profit or loss | – | 48,298 | 48,298 | – | 77,492 | 77,492 | – | 103,813 | 103,813 | ||||||||||
| Exchange gains/(losses) on currency balances | – | 2,709 | 2,709 | – | (1,803 | ) | (1,803 | ) | – | (2,252 | ) | (2,252 | ) | ||||||
| Expenses | |||||||||||||||||||
| AIFM, Portfolio management and performance fees | 3 | – | (2,427 | ) | (2,427 | ) | – | (1,925 | ) | (1,925 | ) | – | (3,905 | ) | (3,905 | ) | |||
| Other expenses | (385 | ) | – | (385 | ) | (329 | ) | – | (329 | ) | (703 | ) | – | (703 | ) | ||||
| Profit before finance costs and taxation | 239 | 48,580 | 48,819 | 755 | 73,764 | 74,519 | 1,202 | 97,656 | 98,858 | ||||||||||
| Finance costs | – | (223 | ) | (223 | ) | – | (129 | ) | (129 | ) | – | (280 | ) | (280 | ) | ||||
| Profit before taxation | 239 | 48,357 | 48,596 | 755 | 73,635 | 74,390 | 1,202 | 97,376 | 98,578 | ||||||||||
| Taxation | (93 | ) | – | (93 | ) | (165 | ) | – | (165 | ) | (281 | ) | – | (281 | ) | ||||
| Profit for the period/year | 146 | 48,357 | 48,503 | 590 | 73,635 | 74,225 | 921 | 97,376 | 98,297 | ||||||||||
| Basic and diluted earnings per share | 4 | 0.3p | 86.6p | 86.9p | 1.0p | 125.6p | 126.6p | 1.6p | 169.9p | 171.5p | |||||||||
The Company does not have any income or expenses which are not included in the profit for the period. Accordingly the “profit for the period†is also the “Total Comprehensive Income for the periodâ€, as defined in IAS 1 (revised) and no separate Statement of Comprehensive Income has been presented.
All of the profit and total comprehensive income for the period attributable to the owners of the Company.
The “Total†column of the statement is the Company’s Income Statement, prepared in accordance with International Financial Reporting Standards (“IFRSâ€) as adopted by the EU.
The “Revenue and Capital†columns are supplementary to this and are prepared under guidelines published by the Association of Investment Companies.
All items in the above statement derive from continuing operations. No operations were acquired or discontinued in the period.
The financial statements for the six months ended 30 September 2017 have not been audited by the Company’s auditors.
Condensed Statement of Changes in Equity
(Unaudited) Six months ended 30 September 2017
| Ordinary Share |
Share Premium |
Capital | ||||||||||
| Redemption | Capital | Revenue | ||||||||||
| Capital | Account | Reserve | Reserve | Reserve | Total | |||||||
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |||||||
| At 31 March 2017 | 13,960 | 43,021 | 8,839 | 383,283 | (1,926 | ) | 447,177 | |||||
| Net profit for the period | – | – | – | 48,357 | 146 | 48,503 | ||||||
| At 30 September 2017 | 13,960 | 43,021 | 8,839 | 431,640 | (1,780 | ) | 495,680 |
(Unaudited) Six months ended 30 September 2016
| Ordinary | Share | Capital | ||||||||||
| Share | Premium | Redemption | Capital | Revenue | ||||||||
| Capital | Account | Reserve | Reserve | Reserve | Total | |||||||
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |||||||
| At 31 March 2016 | 15,074 | 43,021 | 7,725 | 315,594 | (2,847 | ) | 378,567 | |||||
| Net profit for the period | – | – | – | 73,635 | 590 | 74,225 | ||||||
| Repurchase of own shares for cancellation | (769 | ) | – | 769 | (20,016 | ) | – | (20,016 | ) | |||
| At 30 September 2016 | 14,305 | 43,021 | 8,494 | 369,213 | (2,257 | ) | 432,776 |
(Audited) Year ended 31 March 2017
| Ordinary Share |
Share | Capital | ||||||||||
| Premium | Redemption | Capital | Revenue | |||||||||
| Capital | Account | Reserve | Reserve | Reserve | Total | |||||||
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |||||||
| At 31 March 2016 | 15,074 | 43,021 | 7,725 | 315,594 | (2,847 | ) | 378,567 | |||||
| Net profit for the year | – | – | – | 97,376 | 921 | 98,297 | ||||||
| Repurchase of own shares for cancellation | (1,114 | ) | – | 1,114 | (29,687 | ) | – | (29,687 | ) | |||
| At 31 March 2017 | 13,960 | 43,021 | 8,839 | 383,283 | (1,926 | ) | 447,177 |
Condensed Statement of Financial Position
as at 30 September 2017
| (Unaudited) | (Unaudited) | (Audited) | |||||
| 30 September | 30 September | 31 March | |||||
| 2017 | 2016 | 2017 | |||||
| Note | £’000 | £’000 | £’000 | ||||
| Non current assets | |||||||
| Investments held at fair value through profit or loss | 541,456 | 461,006 | 461,378 | ||||
| Current assets | |||||||
| Other receivables | 1,760 | 1,243 | 117 | ||||
| 1,760 | 1,243 | 117 | |||||
| Total assets | 543,216 | 462,249 | 461,495 | ||||
| Current liabilities | |||||||
| Other payables | 4,666 | 3,028 | 1,235 | ||||
| Bank overdraft | – | 26,445 | 13,083 | ||||
| Loan facility | 42,870 | – | – | ||||
| 47,536 | 29,473 | 14,318 | |||||
| Net assets | 495,680 | 432,776 | 447,177 | ||||
| Equity attributable to equity holders | |||||||
| Ordinary share capital | 13,960 | 14,305 | 13,960 | ||||
| Share premium account | 43,021 | 43,021 | 43,021 | ||||
| Capital redemption reserve | 8,839 | 8,494 | 8,839 | ||||
| Capital reserve | 431,640 | 369,213 | 383,283 | ||||
| Revenue reserve | (1,780 | ) | (2,257 | ) | (1,926 | ) | |
| Total equity | 495,680 | 432,776 | 447,177 | ||||
| Net asset value per share | 5 | 887.7p | 756.4p | 800.8p |
Condensed Statement of Cash Flows
for the six months ended 30 September 2017
| (Unaudited) | (Unaudited) | (Audited) | ||||
| Six months ended | Six months ended | Year ended | ||||
| 30 September | 30 September | 31 March | ||||
| 2017 | 2016 | 2017 | ||||
| £’000 | £’000 | £’000 | ||||
| Operating activities | ||||||
| Profit before taxation | 48,596 | 74,390 | 98,578 | |||
| Add back interest expense | 223 | 129 | 280 | |||
| Gains on investments held at fair value through profit & loss | (48,298 | ) | (77,492 | ) | (103,813 | ) |
| Decrease in other receivables | 91 | 107 | 45 | |||
| Increase in other payables | 346 | 175 | 186 | |||
| Net cash inflow/(outflow) from operating activities before interest payable and taxation | 958 | (2,691 | ) | (4,724 | ) | |
Interest expense |
(223 | ) | (129 | ) | (280 | ) |
| Tax paid | (93 | ) | (165 | ) | (281 | ) |
Net cash inflow/(outflow) from operating activities |
642 | (2,985 | ) | (5,285 | ) | |
Investing Activities |
||||||
| Purchases of investments | (108,193 | ) | (124,032 | ) | (298,295 | ) |
| Sales of investments | 77,764 | 156,777 | 356,373 | |||
| Net cash (outflow)/inflow from investing activities | (30,429 | ) | 32,745 | 58,078 | ||
Financing activities |
||||||
| Repurchase of shares for cancellation | – | (20,016 | ) | (29,687 | ) | |
| Drawdown from the loan facility* | 42,870 | – | – | |||
| Net cash inflow/(outflow) from financing activities | 42,870 | (20,016 | ) | (29,687 | ) | |
Net increase in cash and cash equivalents |
13,083 | 9,744 | 23,106 | |||
Cash and cash equivalents at the start of the period/year |
(13,083 | ) | (36,189 | ) | (36,189 | ) |
| Cash and cash equivalents at the end of the period/year | – | (26,445 | ) | (13,083 | ) |
* The treatment of certain amounts held with J.P. Morgan Securities LLC has been changed during the period. These amounts are regarded as held for financing purposes rather than cash management purposes. Therefore, these amounts are no longer considered cash and cash equivalents, but are treated as financing items.
Notes to the Financial Statements
1.a) General Information
The Biotech Growth Trust PLC is a company incorporated and registered in England and Wales. The Company operates as an investment trust company within the meaning of Section 833 of the Companies Act 2006 and has made a successful application under Regulation 5 of the Investment Trust (Approved Company) (Tax) Regulations 2011 for investment trust status to apply to all accounting periods commencing on 1 April 2012.
1.b) Basis of Preparation
The half year condensed financial statements of the Company for the six months ended 30 September 2017 have been prepared in accordance with IAS 34 “Interim Financial Reportingâ€. They do not include all the financial information required for the full annual financial statements and have been prepared using accounting policies adopted in the audited financial statements for the year ended 31 March 2017.
Those financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSâ€) as adopted by the EU.
1.c) Segmental Reporting
IFRS 8 requires entities to define operating segments and segment performance in the financial statements based on information used by the Board of Directors. The Directors are of the opinion that the Company is engaged in a single segment of business, being investment business.
In line with IFRS 8, additional disclosure by geographical segment has been provided in note 10 on page 15 of this report.
1.d) 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 consists mainly of securities that are readily realisable and, accordingly, the Company has adequate financial resources to continue in operational existence for the foreseeable future. The next continuation vote of the Company will be held at the Annual General Meeting in 2020, and further opportunities to vote on the continuation of the Company will be given to shareholders every five years thereafter.
2. Income
| (Unaudited) | (Unaudited) | (Audited) | ||||
| Six months ended | Six months ended | Year ended | ||||
| 30 September | 30 September | 31 March | ||||
| 2017 | 2016 | 2017 | ||||
| £’000 | £’000 | £’000 | ||||
| Investment income | ||||||
| Overseas dividend income | 582 | 1,084 | 1,823 | |||
| Other income | ||||||
| Other fee income | 42 | – | 82 | |||
| Total income | 624 | 1,084 | 1,905 |
3. AIFM, Portfolio Management and Performance Fees
| (Unaudited) | (Unaudited) | (Audited) | ||||
| Six months ended | Six months ended | Year ended | ||||
| 30 September | 30 September | 31 March | ||||
| 2017 | 2016 | 2017 | ||||
| £’000 | £’000 | £’000 | ||||
| AIFM fee | 668 | 581 | 1,190 | |||
| Portfolio management fee | 1,546 | 1,344 | 2,715 | |||
| Performance fee charged in the period* | 213 | – | – | |||
| 2,427 | 1,925 | 3,905 |
* In accordance with the performance fee arrangements described on page 33 of the Company’s 2017 Annual Report, a performance fee of £213,000 was accrued at 30 September 2017 (30 September 2016: £nil).
Notes to the Financial Statements
4. Basic and Diluted Earnings per Share
| (Unaudited) | (Unaudited) | (Audited) | ||||
| Six months ended | Six months ended | Year ended | ||||
| 30 September | 30 September | 31 March | ||||
| 2017 | 2016 | 2017 | ||||
| £’000 | £’000 | £’000 | ||||
| The earnings per share is based on the following figures: | ||||||
| Net revenue gain | 146 | 590 | 921 | |||
| Net capital gain | 48,357 | 73,635 | 97,376 | |||
| Net total gain | 48,503 | 74,225 | 98,297 | |||
| Weighted average number of shares in issue during the period/year | 55,839,913 | 58,615,654 | 57,315,305 | |||
| Pence | Pence | Pence | ||||
| Revenue earnings per share | 0.3 | 1.0 | 1.6 | |||
| Capital earnings per share | 86.6 | 125.6 | 169.9 | |||
| Total earnings per share | 86.9 | 126.6 | 171.5 |
5. Net Asset Value per Share
The Net Asset Value per share is based on the net assets attributable to equity shareholders of £495,680,000 (30 September 2016: £432,776,000; 31 March 2017: £447,177,000) and on 55,839,913 shares (30 September 2016: 57,218,215; 31 March 2017: 55,839,913) being the number of shares in issue at the period end.
6. Transaction Costs
Purchase and sale transaction costs for the six months ended 30 September 2017 were £123,000 (six months ended 30 September 2016: £245,000; year ended 31 March 2017: £472,000). These costs comprise mainly commission.
7. Investments
IFRS 13 requires the Company to classify fair value measurements using the fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy consists of the following three levels
? Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities;
? Level 2 – inputs other than quoted prices included with Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices), and
? Level 3 – inputs for the asset or liability that are not based on observable market data (unobservable inputs)
At 30 September 2017 the investment in OrbiMed Asia Partners LP Fund has been classified as level 3. The fund is valued quarterly by OrbiMed Advisors LLC and is audited annually by KPMG LLP. As the 30 September 2017 valuation is not yet available, the fund has been valued at its net asset value as at 30 June 2017. It is believed that the value of the fund as at 30 September 2017 will not be materially different.
If the value of the fund was to increase or decrease by 10%, while other variables had remained constant, the return and net assets attributable to shareholders for the period ended 30 September 2017 would have increased/decreased by £335,000.
Notes to the Financial Statements
The table below sets out fair value measurements of financial assets in accordance with IFRS13 fair value hierarchy system:
(Unaudited)
Six months ended 30 September 2017
| Level 1 | Level 2 | Level 3 | Total | |
| £’000 | £’000 | £’000 | £’000 | |
| Equity investments | 538,109 | – | – | 538,109 |
| Partnership interest in LP Fund | – | – | 3,347 | 3,347 |
| Total | 538,109 | – | 3,347 | 541,456 |
(Unaudited)
Six months ended 30 September 2016
| Level 1 | Level 2 | Level 3 | Total | |
| £’000 | £’000 | £’000 | £’000 | |
| Equity investments | 456,217 | – | – | 456,217 |
| Partnership interest in LP Fund | – | – | 4,789 | 4,789 |
| Total | 456,217 | – | 4,789 | 461,006 |
(Audited)
Year ended 31 March 2017
| Level 1 | Level 2 | Level 3 | Total | |
| £’000 | £’000 | £’000 | £’000 | |
| Equity investments | 456,309 | – | – | 456,309 |
| Partnership interest in LP Fund | – | – | 5,069 | 5,069 |
| Total | 456,309 | – | 5,069 | 461,378 |
Level 3 reconciliation
Please see below a reconciliation disclosing the changes during the six months for the financial assets and liabilities designated at fair value through profit or loss classified as being Level 3.
| (Unaudited) | (Unaudited) | (Audited) | ||||
| Six months ended | Six months ended | year ended | ||||
| 30 September | 30 September | 31 March | ||||
| 2017 | 2016 | 2017 | ||||
| £’000 | £’000 | £’000 | ||||
| Assets as at beginning of period | 5,069 | 4,014 | 4,014 | |||
| Return of capital* | (1,552 | ) | (228 | ) | (386 | ) |
| Net movement in investment holding gains during the period | (170 | ) | 1,003 | 1,441 | ||
| Assets as at 30 September/31 March | 3,347 | 4,789 | 5,069 |
* During the period a cash distribution of U.S.$2,003,000 (£1,557,000) in relation to the sale of all the fund’s securities of KIMS Healthcare Holding Company LTD and a portion of the fund’s securities in The Strides Shasun Limited was received. This distribution mainly comprised a return of capital, with £5,000 allocated to revenue.
Notes to the Financial Statements
8. Principal Risks Profile
The principal risks which the Company faces include exposure to:
i) market price risk, including currency risk, interest rate risk and other price risk;
ii) liquidity risk; and
iii) credit risk
Market price risk – is the risk that 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.
Liquidity risk – This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities.
Credit risk – This is the risk of the failure of the counterparty to a transaction to discharge its obligations under that transaction could result in the Company suffering a loss. (see note 11 below).
Further details of the Company’s management of these risks can be found in note 13 of the
Company’s 2017 Annual Report.
There have been no changes to the management of or the exposure to these risks since that date.
9. Related Party Transactions
There have been no changes to the related party arrangements or transactions as reported in the Annual Report for the year ended 31 March 2017.
10. Segmental Reporting
Geographical Segments
| (Unaudited) | (Unaudited) | (Audited) | |
| Six months ended | Six months ended | Year ended | |
| 30 September 2017 | 30 September 2016 | 31 March 2017 | |
| Value of Investments | Value of Investments | Value of Investments | |
| £’000 | £’000 | £’000 | |
| North America | 501,233 | 410,695 | 398,949 |
| Europe | 36,876 | 45,522 | 57,360 |
| Asia | 3,347 | 4,789 | 5,069 |
| Total | 541,456 | 461,006 | 461,378 |
11. Credit Risk
Credit risk is the risk of failure of a counterparty to discharge its obligations resulting in the Company suffering a loss.
J.P. Morgan Securities LLC (J.P. Morgan) may take assets with a value of up to 140% of the loan as collateral. Such assets held by J.P. Morgan are available for rehypothecation*.
As at 30 September 2017, the maximum value of assets available for rehypothecation was £60.0 million (31 March 2017: £18.3 million). As at this date, assets with a total market value of £60.0 million were rehypothecated (31 March 2017: £7.8 million).
*See glossary on page 18.
12. Comparative Information
The financial information contained in this half year report does not constitute statutory accounts as defined in sections 434 to 436 of the Companies Act 2006. The financial information for the six months ended 30 September 2017 and 2016 has not been audited by the auditors. The information for the year ended 31 March 2017 has been extracted from the latest published audited financial statements. The audited financial statements for the year ended 31 March 2017 have been filed with the Registrar of the Companies. The report of the auditors on those accounts was unqualified, did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report and did not contain statements under section 498(2) or 498(3) of the Companies Act 2006.
Independent Review Report
Introduction
We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the period 1 April 2017 to 30 September 2017 which comprises the Condensed Income Statement, the Condensed Statement of Changes in Equity, the Condensed Statement of Financial Position, the Condensed Statement of Cash Flows and the related notes 1 to 12.
We have read the other information contained in the half yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.
This report is made solely to the Company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) “Review of Interim Financial Information Performed by the Independent Auditor of the Entity†issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our work, for this report, or for the conclusions we have formed.
Directors’ Responsibilities
The half-yearly financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom’s Financial Conduct Authority.
As disclosed in note 1, the financial statements of the Company are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, “Interim Financial Reportingâ€, as adopted by the European Union.
Our Responsibility
Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.
Scope of Review
We conducted our review in accordance with the International Standard on Review Engagements (UK and Ireland) 2410, “Review of Interim Financial Information Performed by the Independent Auditor of the Entity†issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the period from 1 April 2017 to 30 September 2017 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom’s Financial Conduct Authority.
Ernst & Young LLP
London
9 November 2017
Interim Management Report
Principal Risks and Uncertainties
A review of the half year, including reference to the risks and uncertainties that existed during the period and the outlook for the Company can be found in the Chairman’s Statement beginning on page 2 and in the Portfolio Manager’s Review beginning on page 4. The principal risks faced by the Company fall into the following broad categories: objective and strategy; volatility and the level of discount/premium; portfolio performance; Investment Management key person risk; operational and regulatory; market price risks; liquidity risk; shareholder profile; currency risk; the risk associated with the Company’s overdraft facility; and credit risk. Information on each of these areas is given in the Strategic Report/ Business Review within the Annual Report and Accounts for the year ended 31 March 2017. In the view of the Board these principal risks and uncertainties are applicable to the remaining six months of the financial year as they were to the six months under review.
Additionally, the Company acknowledges the continued uncertainty surrounding the UK’s decision to leave the EU.
Related Party Transactions
During the first six months of the current financial year, no transactions with related parties have taken place which have materially affected the financial position or the performance of the Company.
Going Concern
The Directors believe, having considered the Company’s investment objectives, risk management policies, capital management policies and procedures, nature of the portfolio and expenditure projections, that the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future and, more specifically, that there are no material uncertainties relating to the Company that would prevent its ability to continue in such operational existence for at least twelve months from the date of the approval of this half yearly financial report. For these reasons, they consider there is reasonable evidence to continue to adopt the going concern basis in preparing the accounts.
Directors’ Responsibilities
The Board of Directors confirms that, to the best of its knowledge:
(i) the condensed set of financial statements contained within the Half Year Report has been prepared in accordance with applicable International Accounting Standards, (IAS) 34; and
(ii) the Interim Management Report and the Chairman’s Statement includes a fair review of the information required by 4.2.7R and 4.2.8R of the UK Listing Authority Disclosure and Transparency Rules.
In order to provide these confirmations, and in preparing these financial statements, the Directors are required to:
? select suitable accounting policies and then apply them consistently;
? make judgments and accounting estimates that are reasonable and prudent;
? state whether applicable IFRS have been followed, subject to any material departures disclosed and explained in the financial statements; and
? prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business;
and the Directors confirm that they have done so.
The Half Year Report has not been audited by the Company’s auditors.
The Half Year Report was approved by the Board on 9 November 2017 and the above responsibility statement was signed on its behalf by:
Andrew Joy
Chairman
Glossary of Terms
AIFMD
The Alternative Investment Fund Managers Directive (the “Directiveâ€) is a European Union Directive that entered into force on 22 July 2013. The Directive regulates EU fund managers that manage alternative investment funds (this includes investment trusts).
Discount or Premium
A description of the difference between the share price and the net asset value per share. The size of the discount or premium is calculated by subtracting the share price from the net asset value per share and is usually expressed as a percentage (%) of the net asset value per share. If the share price is higher than the net asset value per share the result is a premium. If the share price is lower than the net asset value per share, the shares are trading at a discount.
Gearing
Gearing represents prior charges, adjusted for net current liabilities, expressed as a percentage of net assets. Prior charges includes all loans and bank overdrafts for investment purposes.
| 30 September | 31 March | ||
| 2017 | 2017 | ||
| £’000 | £’000 | ||
| Prior Charges | 42,870 | 13,083 | |
| Net Current Liabilities | 2,906 | 1,118 | |
| 45,776 | 14,201 | ||
| Net Assets | 495,680 | 447,177 | |
| Gearing | 9.2% | 3.2% |
Net Asset Value (NAV)
The value of the Company’s assets, principally investments made in other companies and cash being held, minus any liabilities. 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 of the shares in the secondary market.
Ongoing Charges
Ongoing charges are calculated by taking the Company’s annualised operating expenses expressed as a proportion of the average daily net asset value of the Company over the year/period. The costs of buying and selling investments are excluded, as are interest costs, taxation, performance fees, cost of buying back or issuing ordinary shares and other nonrecurring costs.
| 30 September | 31 March | ||
| 2017 | 2017 | ||
| £’000 | £’000 | ||
| Operating Expenses | 5,219 | * | 4,608 |
| Average Assets for the period/year | 460,139 | 419,235 | |
| Ongoing charges | 1.1% | 1.1% |
* Estimated expenses for the year ending 31 March 2018, as at 30 September 2017.
Rehypothecation
Rehypothecation is the practice by banks and brokers of using, for their own purposes, assets that have been posted as collateral by clients.
9 November 2017
Frostrow Capital LLP
Company Secretary
END
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