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Biotech Grw Tst PLC (BIOG)

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Friday 09 November, 2018

Biotech Grw Tst PLC

Half-year Report

LONDON STOCK EXCHANGE ANNOUNCEMENT

The Biotech Growth Trust PLC (the “Company”)

Unaudited Half Year Results For The Six Months Ended

30 September 2018

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 2018. 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 2018 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 Summary/Company Performance

Key Statistics

As at
30 September
2018
As at
31 March
2018
%
Change
Net asset value per share 895.9p 747.5p +19.9
Share price 828.0p 702.0p +17.9
Discount of share price to net asset value per share* 7.6% 6.1%
Nasdaq Biotechnology Index – (sterling adjusted) “Benchmark” 2,940.9 2,393.1 +22.9
Gearing* 10.3% 6.8%
Ongoing charges* 1.1% 1.1%

*               Alternative Performance Measure (see glossary)

Reviews/Chairman’s Statement

Company Performance

The Company’s net asset value per share rose by 19.9% and the share price by 17.9% during the period. This compares to a rise of 22.9% in the Company’s benchmark, the NASDAQ Biotechnology Index, measured in sterling terms. The performance of both the Company’s share price and the net asset value per share have been strong in absolute terms over the first half of the Company’s financial year, although it is disappointing to report a continued underperformance of the Company’s benchmark.

The Company’s strong absolute performance can be attributed to renewed investor interest in the sector. Currency also had a positive impact on absolute performance as sterling depreciated by 7.0% against the U.S. dollar over the period; the U.S. dollar being the currency in which almost all of the Company’s holdings are denominated. It should also be noted that the level of gearing employed over the period increased from 6.8% at 31 March 2018 to 10.3% as at 30 September 2018.

Underperformance relative to the benchmark over the six months under review was chiefly caused by emerging biotechnology positions, such as Puma Biotechnology and Clovis Oncology, that significantly underperformed the index. Biogen, by contrast, was the leading positive contributor. The Company remains overweight large capitalisation biotechnology companies, though a significant re-rating of that sector has not yet occurred. Concerns over the future growth prospects of large capitalisation companies continue to weigh on their share price performance. However your Portfolio Manager, OrbiMed, remain positive about the earnings prospects for these companies. As mentioned in their report, they have commenced a slight re-balancing of the portfolio in favour of smaller capitalisation names where there is perceived to be less competitive risk. Further information regarding the Company’s investments can be found in the Portfolio Manager’s Review.

After the period end the stock market has experienced weakness and the biotech sector underwent a sharp correction in October. At the time of writing the sector stands at a lower earnings multiple than both the market overall and the general healthcare sector. Historically this has occurred very rarely.

Discount Management

Continued market volatility caused the discount of the Company’s share price to the net asset value per share to widen during the period. As at 30 September 2018 it was 7.6%, having been 6.1% at the beginning of the period.

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 slightly wider 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. A total of 1,395,596 shares were repurchased for cancellation by the Company during the period under review at a cost of £11.4m. Since the half-year end to 8 November, a further 741,980 Shares have been repurchased for cancellation at a cost of £5.6m. Your Board remains committed to defending the 6% discount level over the long term.

Outlook

Despite some volatility, the biotechnology sector performed strongly during the first half of the Company’s financial year. Continued high levels of innovation, and your Portfolio Manager’s ability to identify companies that have and are able to maintain a competitive advantage remain key for the Company’s own performance. The Board believes that OrbiMed are well-placed to continue to identify such opportunities.

Against a backdrop of low valuations, continued merger and acquisition activity, strong innovation, and a favourable regulatory environment, the Board reiterates its belief that the long-term investor in the sector will be well rewarded.

Andrew Joy
Chairman

9 November 2018

Reviews/Portfolio Manager’s Review

Performance

The Company’s net asset value per share increased by 19.9% during the six-month period ended 30 September. This compares to a 22.9% increase in the Company’s benchmark, the NASDAQ Biotechnology Index (measured on a sterling adjusted basis).

The biotechnology sector outperformed the broader market during the review period. We attribute the strength in the sector during the period to positive clinical catalysts reviving interest in the space and the continued favourable regulatory environment. The period also included an influx of new biotechnology initial public offerings (IPOs), indicating continued interest by investors to deploy additional capital in the sector. Following the second quarter earnings season, investors began a rotation into more defensive subsectors within healthcare, including pharmaceuticals and large capitalisation biotechnology, which we believe was driven in part by quality earnings from companies at historically low valuations. While large capitalisation companies have recovered somewhat, the difference in performance between this group and smaller capitalisation companies in the portfolio, which has contributed to the Company’s underperformance since the end of September 2017, has not closed. It appears investors continue to take a “glass half empty” perspective on the future growth prospects of large capitalisation companies, so their performance continues to lag. While we think some of the competitive headwinds for those companies are overblown, we recognise that it may take some time for the market to come to our view. The level of gearing amounted to 10.3% of net assets at the half year end, and we are now overweight both large and small capitalisation companies by roughly equal amounts; we have, however, begun to pivot our focus to the smaller names where there is perceived to be less competitive risk.

Underperformance in the period was also due to investments in two single-product commercial oncology companies, Puma Biotechnology and Clovis Oncology, which have significantly underperformed relative to the index (please see below for further details). We continue to believe many companies in the portfolio are undervalued and will generate outperformance over time.

As we have previously highlighted, we continue to see little meaningful political risk to the sector. In August, the U.S. Centers for Medicare and Medicaid Services implemented its first formal policies aimed at controlling drug spending via the implementation of “step therapy” for Part B drugs in Medicare Advantage plans beginning in 2019. Step therapy allows insurance plans to require patients to first utilise a lower-cost preferred therapeutic prior to switching to a more costly treatment for a condition. We anticipate further incremental policies like this may be put forward but believe there are few formal policies which could meaningfully impact drug pricing schemes on a large scale in the near term. Importantly, the U.S. midterm elections in November resulted in a “split” Congress, with the Democrats taking control of the House and Republicans retaining control of the Senate. While drug pricing initiatives may continue to be discussed by legislators, we would not expect a divided Congress to be able to enact meaningful legislation in this area. Any drug pricing reforms would likely be restricted to limited actions that could be taken unilaterally by regulators or under current law. Not all of the Trump administration’s policies are necessarily contrary to the interests of the biotechnology industry either. For example, consistent with the Trump administration’s view that increased competition can be an effective means of controlling drug prices, the U.S. Food and Drug Administration (FDA) regulatory environment remains very favourable for the approval of new drugs, with the agency on track to approve more new drugs in 2018 than in 2017.

Innovation Continues – Contributors to Performance

Innovation in biotechnology has continued at a staggering pace, spearheaded by new emerging technologies and developments in historically difficult-to-treat conditions. We highlight Biogen as the top contributor to performance for the period, whose shares appreciated after the release of unexpected positive top-line data from its Alzheimer’s disease treatment BAN2401. We view Biogen as a key holding and expect investor attention on Alzheimer’s disease to continue to increase as key trials report data over the next 12-18 months. Medical genetics company Illumina also performed well following increasingly positive investor sentiment regarding the company’s genetic sequencing revenue potential. Additional top contributors to performance during the period include Sarepta Therapeutics, Vertex and Alexion, all focused on the treatment of devastating rare diseases. Sarepta has shown promising early data from its gene therapy candidate for Duchenne muscular dystrophy, which aims to correct the underlying genetic mutation in the disease. Vertex continues to be the undisputed leader in the treatment of cystic fibrosis, with its new triple drug regimens showing unprecedented benefit in clinical trials. Alexion’s complement inhibition franchise continues to impress, with positive clinical data in neuromyelitis optica and successful data with its second-generation antibody in paroxysmal nocturnal haemoglobinuria.

Detractors from Performance

The principal detractors from performance during the review period were Puma Biotechnology and Clovis Oncology, both early commercial-stage oncology companies. Puma’s underperformance during the period was due to concerns over commercial sales and forecasts for its breast cancer treatment Nerlynx. Clovis underperformed due to broader commercial uptake concerns over the PARP inhibitor class in ovarian cancer. We note that early-stage commercial companies have recently fallen out of favour with biotechnology investors. These companies were previously viewed as premier merger & acquisition (M&A) candidates by large pharmaceutical companies, leading to high investor interest and a healthy M&A premium in many stock prices. While there was an initial slew of biotechnology acquisitions early in 2018, investors have been disappointed with the lack of M&A throughout the remainder of the year and thus have begun to rotate away from early commercial companies. As such, we believe valuations of these companies have become disjointed from their fundamentals, and continue to see scarcity value in these assets, particularly in solid tumour oncology. Other detractors included Global Blood Therapeutics, as a result of doubts regarding the viability of its drug voxelotor, a treatment for sickle cell disease. Alnylam Pharmaceuticals, following the release of unexpected positive Phase 3 data from a competitor to the company’s most important product, patisiran, for the treatment of amyloidosis. Acadia Pharmaceuticals were weak following continued media scrutiny and an ongoing FDA investigation over the safety of the company’s Parkinson’s Disease psychosis treatment.

Outlook

The accelerating pace of innovation continues to create value but is also leading to fiercer competition among companies. We believe the key to outperformance going forward will lie in identifying the companies that will be able to maintain their competitive advantage for a sustained period of time.

Geoff Hsu and Richard Klemm
OrbiMed Capital LLC
Portfolio Manager

9 November 2018

Reviews/Investment Portfolio

Investments held as at 30 September 2018

Security Country/Region Fair value
£’000
% of
investments
Celgene United States 46,555 8.6
Biogen United States 44,040 8.2
Vertex Pharmaceuticals United States 40,837 7.6
Alexion Pharmaceuticals United States 38,045 7.1
Illumina United States 34,700 6.4
Sarepta Therapeutics United States 31,942 5.9
Amgen United States 24,098 4.5
Gilead Sciences United States 21,587 4.0
Regeneron Pharmaceuticals United States 20,294 3.8
Deciphera Pharmaceuticals United States 16,313 3.0
Ten largest investments 318,411 59.1
Heron Therapeutics United States 13,072 2.4
Neurocrine Biosciences United States 12,996 2.4
DBV Technologies France 11,457 2.1
Argenx Netherlands 11,106 2.1
Exelixis United States 10,905 2.0
Jazz Pharmaceuticals Ireland 10,752 2.0
Arvibo United States 9,921 1.8
Global Blood Therapeutics United States 9,007 1.7
Dermira United States 8,615 1.6
Coherus Biosciences United States 8,596 1.6
Twenty largest investments 424,838 78.8
Puma Biotechnology United States 8,315 1.6
Mylan Netherlands 7,252 1.3
Array Biopharma United States 6,896 1.3
Assembly Bioscience United States 6,721 1.2
BeiGene Cayman Islands 6,564 1.2
PTC Therapeutics United States 6,479 1.2
Clovis Oncology United States 6,200 1.2
Bluebird Bio United States 6,146 1.1
Foamix Pharmaceuticals Israel 5,847 1.1
BioMarin Pharmaceutical United States 5,689 1.1
Thirty largest investments 490,947 91.1
Insmed United States 5,595 1.0
Athenex United States 5,118 1.0
Genmab Denmark 5,052 0.9
Alkermes Ireland 4,718 0.9
Ironwood Pharmaceuticals United States 4,682 0.9
Spectrum Pharmaceuticals United States 3,775 0.7
Catalyst Pharmaceuticals United States 3,186 0.6
Amicus Therapeutics United States 2,992 0.6
GW Pharmaceuticals United Kingdom 2,782 0.5
OrbiMed Asia Partners L.P. (unquoted)* Asia 2,503 0.5
Forty largest investments 531,350 98.7

All of the above investments are equities unless otherwise stated.

*               Partnership interest.

Security Country/Region Fair value
£’000
% of
investments
Cellectis France 2,238 0.4
CRISPR Therapeutics Switzerland 1,574 0.3
Immunogen United States 1,459 0.3
Fluidigm United States 873 0.2
Allakos United States 724 0.1
Total investments 538,218 100.0

All of the above investments are equities unless otherwise stated.

Portfolio Breakdown

Investments Fair value
£’000
% of
investments
Equities 535,715 99.5
Partnership interest (Unquoted) 2,503 0.5
Total investments 538,218 100.0

Reviews/Principal Contributors to and Detractors from Net Asset Value Performance

For the Six Months ended 30 September 2018

Top Five Contributors

Contribution
for the
Six months
ended
30 September
2018
£’000
Contribution
per share
(pence)*
Biogen 17,127 30.8
Illumina 13,920 25.1
Sarepta Therapeutics 11,828 21.3
Vertex Pharmaceuticals 11,275 20.3
Alexion Pharmaceuticals 9,819 17.7
63,969 115.2

Top Five Detractors

Contribution
for the
Six months
ended
30 September
2018
£’000
Contribution per
share
(pence)*
Puma Biotechnology (4,356) (7.8)
Clovis Oncology (4,163) (7.5)
Global Blood Therapeutics (2,939) (5.3)
Alnylam Pharmaceuticals (2,857) (5.1)
Acadia Pharmaceuticals (2,347) (4.2)
(16,662) (29.9)

*               based on 55,520,183 ordinary shares being the weighted average number of shares in issue for the six months ended 30 September 2018

†              not held in the portfolio as at 30 September 2018

Source: Frostrow Capital LLP

Financial Statements/Condensed Income Statement

for the six months ended 30 September 2018

(Unaudited)
Six months ended
30 September 2018
(Unaudited)
Six months ended
30 September 2017
(Audited)
Year ended
31 March 2018
Note Revenue
£’000
Capital
£’000
Total
£’000
Revenue
£’000
Capital
£’000
Total
£’000
Revenue
£’000
Capital
£’000
Total
£’000
Investment income
Investment income 2 571 571 624 624 1,576 1,576
Total income 571 571 624 624 1,576 1,576
Gains/(losses) on investments
Gains/(losses) on investments held at fair value through profit or loss 86,485 86,485 48,298 48,298 (28,544) (28,544)
Exchange (losses)/gains on currency balances (2,282) (2,282) 2,709 2,709 2,878 2,878
Expenses
AIFM, Portfolio management and performance fees 3 (2,212) (2,212) (2,427) (2,427) (4,225) (4,225)
Other expenses (289) (289) (385) (385) (739) (739)
Profit/(loss) before finance costs and taxation 282 81,991 82,273 239 48,580 48,819 837 (29,891) (29,054)
Finance costs (404) (404) (223) (223) (489) (489)
Profit/(loss) before taxation 282 81,587 81,869 239 48,357 48,596 837 (30,380) (29,543)
Taxation (85) (85) (93) (93) (238) (238)
Profit/(loss) for the period/year 197 81,587 81,784 146 48,357 48,503 599 (30,380) (29,781)
Basic and diluted earnings/(loss) per share 4 0.4p 147.0p 147.4p 0.3p 86.6p 86.9p 1.1p (54.4)p (53.3)p

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 period”, 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 is 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 (“IFRS”) 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 2018 have not been audited by the Company’s auditors.

Financial Statements/Condensed Statement of Changes in Equity

(Unaudited) Six months ended 30 September 2018

Ordinary
Share
Capital
£’000
Share
Premium Account
£’000
Capital
Redemption
Reserve
£’000

Capital
Reserve
£’000

Revenue Reserve
£’000


Total
£’000
At 31 March 2018 13,960 43,021 8,839 352,903 (1,327) 417,396
Net pro?t for the period 81,587 197 81,784
Repurchase of own shares for cancellation (349) 349 (11,430) (11,430)
At 30 September 2018 13,611 43,021 9,188 423,060 (1,130) 487,750

(Unaudited) Six months ended 30 September 2017

Ordinary
Share
Capital
£’000
Share
Premium Account
£’000
Capital
Redemption
Reserve
£’000

Capital
Reserve
£’000

Revenue Reserve
£’000


Total
£’000
At 31 March 2017 13,960 43,021 8,839 383,283 (1,926) 447,177
Net pro?t for the period 48,357 146 48,503
At 30 September 2017 13,960 43,021 8,839 431,640 (1,780) 495,680

(Audited) Year ended 31 March 2018

Ordinary
Share
Capital
£’000
Share
Premium
Account
£’000
Capital
Redemption
Reserve
£’000

Capital
Reserve
£’000

Revenue
Reserve
£’000
Total
£’000
At 31 March 2017 13,960 43,021 8,839 383,283 (1,926) 447,177
Net (loss)/pro?t for the year (30,380) 599 (29,781)
At 31 March 2018 13,960 43,021 8,839 352,903 (1,327) 417,396

Financial Statements/Condensed Statement of Financial Position

as at 30 September 2018



 
Note (Unaudited)
30 September
2018
£’000
(Unaudited)
30 September
2017
£’000
(Audited)
31 March
2018
£’000
Non current assets
Investments held at fair value through pro?t or loss 538,218 541,456 445,666
Current assets
Other receivables 659 1,760 408
659 1,760 408
Total assets 538,877 543,216 446,074
Current liabilities
Other payables 8,885 4,666 6,560
Loan facility 42,242 42,870 22,118
51,127 47,536 28,678
Net assets 487,750 495,680 417,396
Equity attributable to equity holders
Ordinary share capital 13,611 13,960 13,960
Share premium account 43,021 43,021 43,021
Capital redemption reserve 9,188 8,839 8,839
Capital reserve 423,060 431,640 352,903
Revenue reserve (1,130) (1,780) (1,327)
Total equity 487,750 495,680 417,396
Net asset value per share 5 895.9p 887.7p 747.5p

Financial Statements/Condensed Statement of Cash Flows

for the six months ended 30 September 2018

(Unaudited)
Six months
 ended
30 September
2018
£’000
(Unaudited)*
Six months
ended
30 September
2017
£’000
(Audited)
Year ended
31 March
2018
£’000
Operating activities
Pro?t (losses) before taxation 81,869 48,596 (29,543)
Add back interest expense 404 223 489
(Gains)/losses on investments held at fair value through pro?t & loss (86,485) (48,298) 28,544
Losses/(gains) on foreign exchange 2,282 (2,709) (2,878)
Decrease in other receivables 16 91 96
Increase/(decrease) in other payables 187 346 (86)
Net cash outflow from operating activities before interest payable and taxation (1,727) (1,751) (3,378)
Interest expense (404) (223) (489)
Tax paid (85) (93) (238)
Net cash outflow from operating activities (2,216) (2,067) (4,105)
Investing Activities
Purchases of investments (228,517) (108,193) (293,180)
Sales of investments 221,620 77,764 285,372
Net cash outflow from investing activities (6,897) (30,429) (7,808)
Financing activities
Repurchase of shares for cancellation (8,729)
Drawdown from the loan facility 17,842 45,579 24,996
Net cash inflow from financing activities 9,113 45,579 24,996
Net increase in cash and cash equivalents 13,083 13,083
Cash and cash equivalents at the start of the period/year (13,083) (13,083)
Cash and cash equivalents at the end of the period/year

Changes in liabilities arising from financing activities

(Unaudited)
Six months
ended
30 September
2018
£’000
(Unaudited)
Six months
ended
30 September
2017
£’000
(Audited)
Year ended
31 March
2018
£’000
Balance as at 31 March 2018 22,118
Net cash ?ow 17,842 45,579 24,996
Foreign currency losses/(gains) 2,282 (2,709) (2,878)
42,242 42,870 22,118

*               The presentation of the six months ended 30 September 2017 cashflows has been aligned to match the disclosure of the 2018 cash flows.

Financial Statements/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 Company’s half year condensed financial statements for the six months ended 30 September 2018 have been prepared in accordance with IAS 34 “Interim Financial Reporting”. 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 2018.

Those financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the EU.

IFRS 9 Financial Instruments – became effective for annual periods beginning on or after 1 January 2018. IFRS 9 sets out the requirements for recognising and measuring financial assets and liabilities. The implementation of IFRS 9 did not have an impact on these financial statements, as financial assets continued to be classified as fair value through profit or loss (FVTL) and financial liabilities continued to be classified as held as amortised cost.

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, a disclosure by geographical segment has been provided in note 10 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)
Six months
ended
30 September
2018
£’000
(Unaudited)
Six months
ended
30 September
2017
£’000
(Audited)
Year ended
31 March
2018
£’000
Investment income
Overseas dividend income 571 582 1,462
Other income
Other fee income 42 114
Total income 571 624 1,576

3. AIFM, Portfolio Management and Performance Fees

(Unaudited)
Six months
ended
30 September
2018
£’000
(Unaudited)
Six months
ended
30 September
2017
£’000
(Audited)
Year ended
31 March
2018
£’000
AIFM fee 669 668 1,291
Portfolio management fee 1,543 1,546 2,934
Performance fee charged in the period 213
2,212 2,427 4,225

4. Basic and Diluted Earnings/(Loss) per Share

(Unaudited)
Six months
ended
30 September
2018
£’000
(Unaudited)
Six months
ended
30 September
2017
£’000
(Audited)
Year ended
31 March
2018
£’000
The earnings/(loss) per share is based on the following figures:
Net revenue gain 197 146 599
Net capital gain/(loss) 81,587 48,357 (30,380)
Net total gain/(loss) 81,784 48,503 (29,781)
Weighted average number of shares in issue during the period/year 55,520,183 55,839,913 55,839,913

   

Pence Pence Pence
Revenue earnings per share 0.4 0.3 1.1
Capital earnings/(loss) per share 147.0 86.6 (54.4)
Total earnings/(loss) per share 147.4 86.9 (53.3)

5. Net Asset Value per Share

The Net Asset Value per share is based on the net assets attributable to equity shareholders of £487,750,000 (30 September 2017: £495,680,000; 31 March 2018: £417,396,000) and on 54,444,317 shares (30 September 2017: 55,839,913; 31 March 2018: 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 2018 amounted to £286,000 (six months ended 30 September 2017: £123,000; year ended 31 March 2018: £418,000), broken down as follows: purchase transactions for the six months ended 30 September 2018 amounted to £164,000 (six months ended 30 September 2017: £70,000; year ended 31 March 2018: £205,000). Sale transactions amounted to £122,000 (six months ended 30 September 2017: £53,000; year ended 31 March 2018 £213,000). 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 2018 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 2018 valuation is not yet available, the fund has been valued at its net asset value as at 30 June 2018 adjusted for the return of capital received during the period (see level 3 reconciliation). It is believed that the value of the fund as at 30 September 2018 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 2018 would have increased/decreased by £250,000.

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 2018

Level 1
£’000
Level 2
£’000
Level 3
£’000
Total
£’000
Equity investments 535,715 535,715
Partnership interest in LP Fund 2,503 2,503
Total 535,715 2,503 538,218

(Unaudited)
Six months ended 30 September 2017

Level 1
£’000
Level 2
£’000
Level 3
£’000
Total
£’000
Equity investments 538,109 538,109
Partnership interest in LP Fund 3,347 3,347
Total 538,109 3,347 541,456

(Audited)
Year ended 31 March 2018

Level 1
£’000
Level 2
£’000
Level 3
£’000
Total
£’000
Equity investments 442,175 442,175
Partnership interest in LP Fund 3,491 3,491
Total 442,175 3,491 445,666

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)
Six months
ended
30 September
2018
£’000
(Unaudited)
Six months
ended
30 September
2017
£’000
(Audited)
Year ended
31 March
2018
£’000
Assets as at beginning of period 3,491 5,069 5,069
Return of capital* (1,533) (1,552) (1,552)
Net movement in investment holding gains during the period 545 (170) (26)
Assets as at 30 September/31 March 2,503 3,347 3,491

*          During the period a cash distribution of U.S.$2,015,000 (£1,538,000) (2017: U.S.$2,003,000 (£1,557,000)) was received. The distribution mainly comprised a return of capital, with £5,000 allocated to revenue (2017: £5,000).

8. Principal Risks Profile

The principal risks which the Company faces from its financial instruments are:

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 which could result in the Company suffering a loss. (see note 11).

Further details of the Company’s management of these risks can be found in note 13 of the Company’s 2018 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 2018.

10. Segmental Reporting

Geographical Segments

(Unaudited)
Six months
ended
30 September 2018
Value of Investments
£’000
(Unaudited)
Six months
ended
30 September 2017
Value of Investments
£’000
(Audited)
Year ended
31 March
2018
Value of Investments
£’000
North America 472,937 501,233 401,727
Europe 56,931 36,876 36,425
Asia 8,350 3,347 7,514
Total 538,218 541,456 445,666

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 2018, the maximum value of assets available for rehypothecation was £59.1 million being 140% of the loan balance (£42.2 million) (31 March 2018: £31.0 million). As at this date, assets with a total market value of £54.0 million were rehypothecated (31 March 2018: £31.0 million).

*               See glossary.

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 2018 and 2017 has not been audited by the auditors.

The information for the year ended 31 March 2018 has been extracted from the latest published audited financial statements. The audited financial statements for the year ended 31 March 2018 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.

Governance/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 and in the Portfolio Manager’s Review. 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 (including cyber risk); market price risks; liquidity risk; shareholder profile; currency risk; the risk associated with the Company’s loan 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 2018. 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 ?rst six months of the current ?nancial year, no transactions with related parties have taken place which have materially affected the ?nancial 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 ?nancial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future and, more speci?cally, 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 ?nancial 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 con?rms that, to the best of its knowledge:

(i)      the condensed set of ?nancial 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 includes a fair review of the information required by:

(a)     DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b)     DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do 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 2018 and the above responsibility statement was signed on its behalf by:

Andrew Joy
Chairman

Further Information/Glossary of Terms and Alternative Performance Measures (‘APMs’)

AIFMD

The Alternative Investment Fund Managers Directive (the “Directive”) 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 (APM)

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 (APM)

Gearing represents prior charges, adjusted for net current liabilities, expressed as a percentage of net assets. Prior charges includes all loans for investment purposes.

30 September
2018
£’000
31 March
2018
£’000
Prior Charges 42,242 22,118
Net Current Liabilities 8,226 6,152
50,468 28,270
Net Assets 487,750 417,396
Gearing 10.3% 6.8%

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 (APM)

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 non- recurring costs.

30 September
2018
£’000
31 March
2018
£’000
Operating Expenses 5,171* 4,964
Average Assets for the period/year 458,480 457,120
Ongoing charges 1.1% 1.1%

*               Estimated expenses for the year ending 31 March 2019, as at 30 September 2018.

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 2018
Frostrow Capital LLP
Company Secretary

END


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