Half-yearly Report
28 November 2008
London Stock Exchange Announcement
The Biotech Growth Trust PLC
Unaudited Interim Results For the Six Months Ended 30 September 2008
Performance Statistics 30 September 31 March
2008 2008 % Change
Shareholders' funds £70.5m £64.5m +9.3
Net asset value per share 126.4p 103.4p +22.2
Share price 117.5p 96.8p +21.4
Discount of share price to net asset 7.0% 6.4% -
value per share
NASDAQ Biotechnology Index (sterling 469.7 393.1 +19.5
adjusted)
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).
It is the Company's policy to invest no more than 15% of its gross assets in
other listed investment companies (including listed investment trusts). The
Company will not invest more than 15% of the investment 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
investment portfolio.
At the Annual General Meeting, held on 23 July 2008, shareholder approval was
obtained for the Company to invest or commit for investment a maximum of
US$15m, after 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 £15m which can be
used, inter alia, to finance any short term borrowing requirements.
A significant proportion of the Company's assets are, 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.
Interim Dividend
The Company has not declared an interim dividend (2007: nil).
Capital Structure
During the half year, a total of 6,596,500 shares were repurchased by the
Company for cancellation. At 30 September 2008, the Company had 55,789,463
shares in issue. Since the end of the half year a further 940,500 shares have
been repurchased for cancellation. As at 25 November 2008 the Company had
54,848,963 shares in issue.
Continuation Vote
The next continuation vote of the Company shall be held at the Annual General
Meeting in 2010, further opportunities to vote on the continuation of the
Company shall be given to shareholders every five years thereafter.
CHAIRMAN'S STATEMENT
Performance
I am delighted to report that, despite a particularly difficult period for
financial markets, the Company has performed well, both in relative and
absolute terms, during the period under review. Despite the difficult market
conditions, the NASDAQ Biotechnology Index, measured in sterling terms, rose by
19.5% buoyed by continued merger & acquisition activity in the sector. Against
this background I am pleased to report that the Company's net asset value per
share rose by 22.2% over the same period, an outperformance of 2.7% over our
benchmark. This outperformance was derived, in part, from the success of our
Investment Manager's strategy of investing in likely takeover targets by large
pharmaceutical companies and other strategic acquirers. The Company's share
price also outperformed the Company's benchmark, rising by 21.4% over the
period. The discount of share price to net asset value per share widened
slightly from 6.4% at the year end to 7.0% at the interim stage. The Company's
performance was helped by a strengthening U.S. dollar; during the half year it
appreciated 10.3% against sterling.
I am also glad to report that for the calendar year to 31 October 2008 the
Company's share price performance, measured on a total return basis, was ranked
third out of 247 listed investment companies (source: Winterflood Securities
Limited).
Further information on the investment performance and the outlook for the
Company is given in the Review of Investments beginning on page 5 of this
Interim Report.
Gearing
The Company has recently negotiated a new £10m 364 day committed revolving
credit facility with Allied Irish Banks p.l.c. This replaces the £5m
uncommitted revolving credit facility that was in place at the half year end.
Share Capital
As previously reported, we have put in place a discount control procedure and
we therefore continued to buy back shares from time to time. During the six
months under review the Company repurchased a total of 6,596,500 shares at a
cost of £6.9m (including expenses) for cancellation. From the half year end to
25 November a further 940,500 shares were repurchased for cancellation at a
cost of £1.1m (including expenses) and, as at this date, there were 54,848,963
shares in issue.
Revenue and Dividends
The revenue loss for the period was £202,000 (Six months ended 30 September
2007: loss of £126,000) and no interim dividend is declared (Six months ended
30 September 2007: nil).
VAT
The position with regard to the repayment of VAT remains as described in the
Chairman's Statement in the Annual Report & Accounts for the year ended 31
March 2008. We continue to work towards a settlement with the Company's
previous Manager, Close Investments Limited, and we will report on developments
as they arise.
Outlook
Extreme market conditions have resulted in unprecedented write-downs of
financial assets and huge losses for many of the world's largest banks, leading
to a general loss of confidence and liquidity within the financial sector. In
light of this difficult situation, we have continued to adopt a cautious stance
with regard to the make-up of the investment portfolio, the majority of which
continues to be invested in liquid stocks. To date, the Company's exposure to
the effects of the current financial crisis appears to have been limited.
Against this background, our outlook remains in line with that expressed at the
time of the full year results earlier this year, one of cautious optimism in
the medium term but continued volatility on a shorter term horizon. Our focus
remains on the selection of stocks with strong prospects for capital
enhancement and we continue to believe that the long term investor in our
sector will be well rewarded.
John Sclater CVO Chairman
25 November 2008
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 Review of Investments
beginning on page 5. The principal risks faced by the Company fall into eight
broad categories: objective and strategy; level of discount/premium; investment
portfolio performance; operational and regulatory; market price; liquidity;
shareholder profile; currency. Information on each of these areas is given in
the Business Review within the Annual Report and Accounts for the year ended 31
March 2008. 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.
Related Parties Transactions
During the first six months of the current financial year, no transactions with
related parties have taken place which have affected the financial position or
the performance of the Company during the period.
Directors' Responsibilities
The Directors are responsible for preparing the interim report in accordance
with applicable law and regulations. The Directors confirm that to the best of
their knowledge the condensed set of financial statements, within the interim
report, have been prepared in accordance with IAS 34 and that the Chairman's
Statement and the Interim Management Report include a fair review of the
information required by 4.2.7R and 4.2.8R of the FSA's Disclosure and
Transparency Rules.
The interim report has not been reviewed by the Company's auditors.
The interim report was approved by the Board on 25 November 2008 and the above
responsibility statement was signed on its behalf by:
John Sclater CVO Chairman
REVIEW OF INVESTMENTS
Performance (companies held in the investment portfolio are shown in bold type)
Amidst a challenging environment for biotechnology companies and the financial
markets generally, we are pleased to report that the Company's net asset value
per share posted a strong increase of 22.2% during the period, ahead of the
benchmark increase of 19.5%. Some of the best performance was generated by
portfolio holdings that received acquisition offers, including ImClone Systems
and Kosan Biosciences. Our biggest negative contributors included companies
such as BioMarin Pharmaceutical and Cepheid, which failed to meet investor
expectations for revenue growth, and Indevus Pharmaceuticals, which suffered a
regulatory delay during the period.
Environment and Outlook
The past six months began on a difficult note for biotechnology companies, as
financial markets were generally in decline and investors became more reluctant
about financing emerging biotechnology companies. Over the summer, a flurry of
biotechnology acquisitions helped buoy stock prices and led to a substantial
increase in net asset value for the Company. As the summer months drew to a
close, however, the credit crisis accelerated and financial markets soured
amidst significant turmoil among large investment banks, commercial banks and
other financial institutions.
The healthy increase in the Company's net asset value during the period derives
in part from our strategy of investing in companies which are likely to be
acquisition targets by "big pharma" companies and other strategic acquirers.
The recent surge in acquisitions coupled with high premiums for the acquired
companies demonstrate continued strong demand from pharmaceutical companies as
they look to smaller biotech acquisitions to offset their generally low
research productivity and product pipeline gaps. The past six months have seen
over a dozen such acquisitions, with acquisition premiums ranging from 15% to
233%. The Company owned a number of these companies, including Genentech,
ImClone, and Kosan. ImClone, one of our top performing positions during this
period, became the target of a competitive bidding war between Bristol-Myers
Squibb and Eli Lilly. Eventually Lilly triumphed with a $6.5 billion bid, a
nearly 17% premium to Bristol's original offer. Similarly, Genentech's Board of
Directors has deemed Roche's initial $89 per share bid inadequate, and we
expect the offer price will be raised substantially before the acquisition
process is concluded.
Another element of our current strategy is to avoid companies with poor
financial reserves and a high "cash burn" rate, as current financing conditions
make it unlikely that such companies will obtain financing on favourable terms.
Many of these companies will likely be forced to undergo dilutive financing
through transactions such as PIPEs ("private investment in public equity"). We
expect many such PIPE transactions over the next 12 months as approximately 50%
of the universe of unprofitable biotechnology companies that we analyse
REVIEW OF INVESTMENTS (Continued)
currently have less than one year of cash on hand. At the half year end, only
two companies in the investment portfolio, together comprising 2% of its value,
had less than one year of cash. Additionally, over three-quarters of the
investment portfolio is invested in companies that are either profitable or do
not require financing prior to profitability. We view the current financial
climate as an opportunity to make new investments at compelling prices.
In November, Barack Obama was elected the next President of the United States,
giving the Democrats control over both the White House and Congress. President
elect Obama and the Democratic congressional leadership have proposed a number
of changes to the healthcare system including universal healthcare coverage,
drug re-importation, government negotiation of drug prices paid by Medicare
(the government-sponsored healthcare programme for senior citizens), and a
pathway for the approval of generic biotech products. We believe that
comprehensive healthcare reform is not likely in 2009, as the general economy
and the war in Iraq are likely to be more pressing issues. We do expect policy
discussion in 2009 and possible legislation in 2010-2011. Many of the proposals
being considered present headline risk for biotech, but we expect
implementation will have a relatively modest impact on the sector.
At the Annual General Meeting on 23 July 2008, shareholders approved a
resolution to allocate up to US$15 million of the investment portfolio to
private equity funds managed by OrbiMed. Following this, the Company made its
first commitment of US$5 million to Caduceus Asia Partners, an OrbiMed-managed
venture capital fund that makes private investments in Asian healthcare
companies. The first capital call representing 7% of the commitment (or
US$350,000) was made in September.
The number of holdings has remained relatively concentrated at nearly 30,
exclusive of unquoted investments and warrants. The geographic distribution of
assets is 89.6% North America, 8.5% Europe and 1.9% Far East. In light of the
difficult market conditions, we are relatively conservatively positioned at
present with approximately 40% of the investment portfolio invested in larger
biotechnology companies and the remaining 60% of assets invested in emerging
and unquoted biotechnology companies. As market conditions improve we expect to
reposition the investment portfolio to include a larger portion of assets
invested in smaller companies.
OrbiMed Capital LLC, Investment Manager 25 November 2008
INVESTMENTS
as at 30 September 2008
Security Country Fair % of
value investments
£'000
Amgen United States 8,418 11.6
Gilead Sciences United States 6,252 8.6
Genentech United States 5,161 7.1
ImClone Systems United States 5,048 6.9
Genzyme United States 4,310 5.9
Celgene United States 3,773 5.2
Vertex Pharmaceuticals United States 3,487 4.8
Allos Therapeutics United States 3,044 4.2
Biogen Idec United States 2,954 4.1
Curis * United States 2,646 3.7
45,093 62.1
Infinity Pharmaceuticals United States 2,519 3.5
Onyx Pharmaceuticals United States 2,343 3.2
Shire United Kingdom 2,250 3.1
Gen-Probe United States 2,109 2.9
Tepnel Life Sciences * United Kingdom 2,007 2.8
BioMarin Pharmaceutical United States 1,927 2.6
Cytokinetics United States 1,754 2.4
Medivir Sweden 1,486 2.0
OSI Pharmaceuticals United States 1,457 2.0
Xoma United States 1,224 1.7
64,169 88.3
Indevus Pharmaceuticals United States 1,128 1.6
American Oriental Far East 1,125 1.6
Bioengineering
Intermune United States 1,106 1.5
Cepheid United States 973 1.3
Human Genome Science United States 829 1.1
Invitrogen Corporation United States 826 1.1
QLT Phototherapeutics United States 706 1.0
Orexigen Therapeutics United States 471 0.7
Avigen United States 452 0.6
Biowisdom (Unquoted) United Kingdom 300 0.4
72,085 99.2
Pharmacopeia Common United States 218 0.3
Caduceus Asia Partners Far East 196 0.3
(Unquoted)
Merlin Fund (Unquoted) United Kingdom 158 0.2
Total investments 72,657 100.0
*Includes warrants
INCOME STATEMENT
for the six months ended 30 September 2008
Unaudited) (Unaudited) (Audited)
Six months Six months Year
ended ended ended
30 30 31 March
September September 2008
2008 2007
Note Revenue Capital Total Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Investment
Income
Investment 2 19 - 19 38 - 38 116 - 116
income
Other 2 - - - 6 - 6 6 - 6
income
Total 19 - 19 44 - 44 122 - 122
income
Gains and
losses on
investments
Gains/ - 13,891 13,891 - (472) (472) - (9,156) (9,156)
(losses) on
investments
held at fair
value through
profit or
loss
Exchange - (397) (397) - (111) (111) - (4) (4)
losses on
currency
balances
Expenses
Investment 3 - (319) (319) - 575 575 - 514 514
management,
management
and
performance
fees
Other (215) (8) (223) (155) - (155) (366) - (366)
expenses
(Loss)/ (196) 13,167 12,971 (111) (8) (119) (244) (8,646) (8,890)
profit
before
finance
costs and
taxation
Finance (6) (22) (28) (15) (7) (22) (26) (12) (38)
costs
(Loss)/ (202) 13,145 12,943 (126) (15) (141) (270) (8,658) (8,928)
profit
before
taxation
Taxation - - - - - - - - -
(Loss)/ (202) 13,145 12,943 (126) (15) (141) (270) (8,658) (8,928)
profit for
the period
(Loss)/ 4 (0.3)p 22.4p 22.1p (0.2)p (0.0)p (0.2)p (0.4)p (13.4)p (13.8)p
earnings
per share
The total column of this statement represents the Company's Income Statement,
prepared in accordance with 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.
All income is attributable to the equity holders of The Biotech Growth Trust
PLC.
No operations were acquired or discontinued during the period.
STATEMENT OF CHANGES IN EQUITY
for the six months ended 30 September 2008
(Unaudited)
six months ended 30 September 2008
Capital
Share Special Redemption Capital Retained
Capital Reserve Reserve Reserve Earnings Total
£'000 £'000 £'000 £'000 £'000 £'000
At 31 March 2008 15,596 46,065 1,535 3,574 (2,273) 64,497
Net profit/(loss) for - - - 13,145 (202) 12,943
period
Buy-back of shares (1,649) (6,897) 1,649 - - (6,897)
At 30 September 2008 13,947 39,168 3,184 16,719 (2,475) 70,543
(Unaudited)
six months ended 30 September 2007
Capital
Share Special Redemption Capital Retained
Capital Reserve Reserve Reserve Earnings Total
£'000 £'000 £'000 £'000 £'000 £'000
At 31 March 2007 16,394 49,443 737 12,232 (2,003) 76,803
Net loss for the - - - (15) (126) (141)
period
Buy-back of shares (244) (1,062) 244 - - (1,062)
At 30 September 2007 16,150 48,381 981 12,217 (2,129) 75,600
(Audited)
for the year ended 31 March 2008
Capital
Share Special Redemption Capital Retained
Capital Reserve Reserve Reserve Earnings Total
£'000 £'000 £'000 £'000 £'000 £'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 30 September 2008
Note (Unaudited) (Unaudited) (Audited)
30 30 31 March
September September 2008
2008 2007 £'000
£'000 £'000
Non current assets
Investments held at fair value 72,657 74,695 64,806
through profit or loss
Current assets
Other receivables 257 695 850
Cash and cash equivalents 483 1,184 811
740 1,879 1,661
Total assets 73,397 76,574 66,467
Current liabilities
Other payables 932 974 1,970
Bank overdraft 239 - -
Bank loan 1,683 - -
2,854 974 1,970
Net assets 70,543 75,600 64,497
Equity attributable to equity
holders
Share capital 13,947 16,150 15,596
Special reserve 39,168 48,381 46,065
Capital redemption reserve 3,184 981 1,535
Capital reserve - realised 9,982 14,052 10,202
Capital reserve - unrealised 6,737 (1,835) (6,628)
Retained earnings (2,475) (2,129) (2,273)
Total equity 70,543 75,600 64,497
Net asset value per share 5 126.4p 117.0p 103.4p
CASH FLOW STATEMENT
for the six months ended 30 September 2008
(Unaudited) (Unaudited) (Audited)
Six months Six months Year
ended ended ended
30 September 30 September 31 March
2008 2007 2008
£'000 £'000 £'000
Net cash inflow from operating activities 5,382 3,398 4,946
(note 6)
Net cash inflow before financing 5,382 3,398 4,946
Net cash outflow from financing activities (5,552) (1,010) (3,038)
Net (decrease)/increase in cash and cash (170) 2,388 1,908
equivalents
Cash and cash equivalents at start of 811 (1,093) (1,093)
period
Realised loss on foreign currency (397) (111) (4)
Cash and cash equivalents at period end 244 1,184 811
NOTES TO THE FINANCIAL STATEMENTS
ACCOUNTING POLICIES
1. Accounting Policies
The condensed financial statements have been prepared under the historical cost
convention, except for the measurement at fair value of investments, in
accordance with applicable accounting standards and with the Statement of
Recommended Practice `Financial Statements of Investment Trust Companies'. All
of the Company's operations are of a continuing nature.
This interim report is prepared in accordance with IAS 34 and on the basis of
the accounting policies set out in the Company's Annual Report and Accounts as
at 31 March 2008.
2. Income
(Unaudited) (Unaudited) (Audited)
Six months Six months Year
ended ended ended
30 September 30 September 31 March
2008 2007 2008
£'000 £'000 £'000
Income from listed investments
Investment income 19 38 116
19 38 116
Other operating income Interest receivable – 6 6
Total income 19 44 122
3. Investment Management, Management and Performance Fees
(Unaudited) (Unaudited) (Audited)
Six months Six months Year
ended ended ended
30 September 30 September 31 March
2008 2007 2008
£'000 £'000 £'000
Investment management fee 223 246 471
Management fee 96 145 218
Performance fee - 406 169
Performance fee accrual - (1,351) (1,351)
written back
Irrecoverable VAT thereon - (21) (21)
319 (575) (514)
4. (Loss)/Earnings per Share
The (loss)/earnings per share figure is based on the net gain for the six
months of £12,943,000 (six months ended 30 September 2007: £141,000 loss; year
ended
31 March 2008: £8,928,000 loss) and on 58,644,725 (six months ended 30
September 2007: 65,176,968 and year ended 31 March 2008: 64,473,752) shares,
being the weighted average number of shares in issue during the period.
The return per share detailed above can be further analysed between revenue and
capital, as follows:
(Unaudited) (Unaudited) (Audited)
Six months Six months Year
ended ended ended
30 September 30 September 31 March
2008 2007 2008
£'000 £'000 £'000
Net revenue loss (202) (126) (270)
Net capital gain/(loss) 13,145 (15) (8,658)
Net total gain/(loss) 12,943 (141) (8,928)
Weighted average number of 58,644,725 65,176,968 64,473,752
shares in issue during the
period
Pence Pence Pence
Revenue loss per share (0.3) (0.2) (0.4)
Capital earnings/(loss) per 22.4 - (13.4)
share
Total earnings/(loss) per 22.1 (0.2) (13.8)
share
5. Net Asset Value per Share
The net asset value per share is based on the net assets attributable to equity
shareholders of £70,543,000 (30 September 2007: £75,600,000; 31 March 2008: £
64,497,000) and on 55,789,463 (30 September 2007: 64,599,263; 31 March 2008:
62,385,963) shares, being the number of shares in issue at the period end.
6. Reconciliation of Profit/(Loss) Before Taxation to Net Cash Inflow From
Operating Activities
(Unaudited) (Unaudited) (Audited)
Six months Six months Year
ended ended ended
30 September 30 September 31 March
2008 2007 2008
£'000 £'000 £'000
Profit/(loss) before taxation 12,943 (141) (8,928)
(Gain)/loss on investments held (13,494) 583 9,160
at fair value through profit or
loss
Net sales of investments held 5,926 3,843 6,094
at fair value
through profit or loss
Decrease/(increase) in other 5 (3) (21)
receivables
Increase/(decrease) in other 2 (884) (1,359)
payables
Net cash inflow 5,382 3,398 4,946
7. Transaction Costs
Purchase and sale transaction costs for the six months ended 30 September 2008
were £125,000 (year ended 31 March 2008: £350,000; six months ended 30
September 2007: £178,000). These costs comprise mainly stamp duty and
commission.
8. VAT
On 31 October 2007 the Association of Investment Companies announced that HM
Revenue and Customs had confirmed to the Investment Management Association that
investment trust management fees should no longer attract Value Added Tax
(VAT). The Company is now taking steps to recover VAT paid to its previous
Manager, Close Investments Limited (formerly Close Finsbury Asset Management
Limited), and the Company will take credit for any VAT recovered when any such
recovery can be assessed with reasonable certainty.
9. Comparative Information
The financial information contained in this interim report does not constitute
statutory accounts as defined in section 240 of the Companies Act 1985. The
financial information for the six months ended 30 September 2008 and 2007 has
not been audited, or reviewed by the auditors.
The information for the year ended 31 March 2008 has been extracted from the
latest published audited financial statements. The audited financial statements
for the year ended 31 March 2008 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 237(2) or (3) of the Companies Act 1985.
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