TIDMWWH
LONDON STOCK EXCHANGE ANNOUNCEMENT
Worldwide Healthcare Trust PLC
Unaudited Half Year Results for the six months ended
30 September 2023
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 2023. The full Half Year Report & Accounts, together
with a copy of this announcement, will also shortly be available on the
Company's website: www.worldwidewh.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
2023 has been submitted to the UK Listing Authority, and will shortly be
available for inspection on the National Storage Mechanism (NSM):
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
For further information please contact: Mark Pope, Frostrow Capital LLP 020 3008
4913.
PERFORMANCE
Six months to One year to
30 September 31 March
2023 2023
Net asset value per share (total return)* # (0.6%) (0.1%)
Share price (total return)* # 0.1% (4.1%)
Benchmark (total return)^ # 0.8% 2.5%
[][]
30 September 31 March Six months
2023 2023 change
Net asset value per share[1] 339.3p 343.5p (1.2%)
Share price[1] 309.5p 311.5p (0.6%)
Discount of share price to the net 8.8% 9.3%
asset value per share*
Leverage* 14.6% 10.5%
Ongoing charges* 0.8% 0.8%
Ongoing charges (including performance 0.8% 0.8%
fees crystallised during the period)*
# Source - Morningstar.
^ Benchmark - MSCI World Health Care Index on a net total return, sterling
adjusted basis (see Glossary).
* Alternative Performance Measure. Leverage calculated under the
Commitment Method (see Glossary).
[1] Comparative figures restated to reflect the ten for one share split
during the period.
STATEMENT FROM THE CHAIR
DOUG MCCUTCHEON
PERFORMANCE
The first half of the Company's financial year was a volatile period for
markets, and the Company was not immune to this. External events continued to
exert their influence, with geopolitics and macroeconomic conditions at the
forefront of investors' minds. The MSCI World and the FTSE All-Share Indices
produced sterling based total returns of +4.5% and +1.4%, respectively. The
Company's Benchmark, the MSCI World Healthcare Index, measured on a net total
return, sterling adjusted basis rose by 0.8%.
Against this backdrop, the Company's net asset value per share total return was
-0.6%, underperforming the Benchmark during the period. The Company's share
price total return was slightly better at +0.1%, which reflected a narrowing of
the discount of the Company's share price to its net asset value per share to
8.8% at the end of the half year (from 9.3% at the beginning). During the
period, in absolute terms, net asset value performance was helped by the
weakness of sterling, as sterling depreciated by 1.3% against the U.S. dollar,
the currency in which the majority of the Company's investments are denominated.
The Company's investment performance has been disappointing in recent periods.
The Board continues to monitor our performance closely and will further report
on it in the full year results.
Looking at specific names in the portfolio, the largest contributions during the
reporting period came from the large capitalisation pharmaceutical companies
Novo Nordisk and Eli Lilly, both of which benefitted from their exposure to the
rapidly growing GLP-1 agonist anti-obesity therapy market. The principal
detractors from performance were the large capitalisation pharmaceutical company
Bristol Myers Squibb and biotechnology company UniQure. Further information
regarding the Company's investments and performance can be found in the Review
of Investments.
The Company had, on average, leverage of 14.7% during the period, which
detracted 0.1% from performance. As at the half year-end, leverage stood at
14.6%, compared to 10.5% at the beginning of the period. Our Portfolio Manager
continues to adopt both a pragmatic and a tactical approach to the use of
leverage, which adds to performance in periods of rising portfolio share prices
and has benefitted the Company over time.
The Company is able to invest up to 10% of the portfolio, at the time of
acquisition, in unquoted securities. Our Portfolio Manager, through its
extensive private equity research capabilities, continues to identify unquoted
opportunities although, in the period under review, no new unquoted investments
were made. Exposure to unquoted equities accounted for 6.5% of the total
portfolio at the half year-end, and these holdings made a negative contribution
of -0.3% to the Company's performance during the period under review.
SHARE SPLIT
In the Company's annual report published on 6 June 2023, the Board set out its
plans to undertake a share split of each of the Company's shares of 25p each
into 10 shares of 2.5p each. The share split proposal was approved by
shareholders at the Company's Annual General Meeting held on 18 July 2023 and
the new shares began trading on 27 July 2023. For every share held immediately
prior to the transaction, shareholders received nine additional shares.
Shareholders should note that the split did not affect the value of your
investment in the Company, nor your shareholder rights.
PERFORMANCE FEE
No performance fee was accrued as at 30 September 2023 and no performance fee
can become payable within the next year. The performance fee arrangements are
described in detail in the Company's Annual Report.
CAPITAL
Challenging stock market conditions and investor sentiment since the beginning
of 2022 have continued to have a negative impact on share price discounts across
the investment company sector, with the average level of discount currently
standing at c.15.2%*.
* Source: Winterflood Investment Trusts
It is the Board's policy to buy back our shares if the Company's share price
discount to the net asset value per share exceeds 6% on an ongoing basis.
Shareholders should note, however, that it remains possible for the discount to
be greater than 6%, particularly when sentiment towards the Company, the sector
and to investment trusts generally remains poor. In such an environment,
buybacks may prove unable to prevent the discount from widening. However, they
enhance the net asset value per share for remaining shareholders and go some way
to dampening discount volatility, which can adversely affect investors' risk
adjusted returns. Therefore, the Company's share buy-back policy remains
unchanged.
During the period under review, the Company regularly repurchased shares. A
total of 42,028,574 shares were repurchased for treasury at a cost of £133.4m
and at an average discount of 9.3%. The total number of shares shown to have
been repurchased during the period has been adjusted to reflect the share split
which took effect from 27 July 2023.
At the period end, there were 584,179,056 shares in issue (excluding the
17,486,144 shares held in treasury). Since the period end to 21 November 2023, a
further 11,923,082 shares have been bought back for treasury, at a cost of
£35.8m and at the time of writing, the share price discount stands at 10.7%.
In line with the Company's stated policy, I confirm that 4,892,258 shares held
in treasury following the date of the Company's Annual General Meeting in July
2022, were cancelled. The cancellation took place prior to the share split. The
Company currently holds 29,409,226 shares in treasury.
DIVIDS
The Board has declared an interim dividend of 0.7p per share, for the year to 31
March 2024, which will be payable on 11 January 2024 to shareholders on the
register of members on 24 November 2023. The associated ex dividend date is 23
November 2023. Last year the Company paid an interim dividend of 7.0p per share.
The level of this year's interim dividend per share is the same level as last
year taking account of the share split which became effective on 27 July 2023.
I remind shareholders that it remains the Company's policy to pay out dividends
at least to the extent required to maintain investment trust status. These
dividend payments are paid out of the Company's net revenue for the year and,
in accordance with investment trust rules, a maximum of 15% of income can be
retained by the Company in any financial year.
It is the Board's continuing belief that it is in shareholders' best interests
to see the Company's capital deployed in its investment portfolio rather than
paid out as dividends to achieve a particular target yield.
COMPOSITION OF THE BOARD
Having joined the Company's Board in 2016, Humphrey van der Klugt has expressed
his intention to retire as a Director at the conclusion of next year's Annual
General Meeting, to be held on 10 July 2024. Humphrey became Chair of the Audit
& Risk Committee in September 2016, handing over this role to Tim Livett in
March of this year. Humphrey's accounting and investment management experience,
as well as his leadership, wisdom and probing questions, have been very valuable
to the Board's deliberations - he will be missed. The process of finding a new
Director has begun and the Board will keep shareholders informed of the progress
made.
OUTLOOK
Macroeconomic conditions continue to be difficult. Against a backdrop of high
interest rates and volatile markets, equity investment remains challenging. This
includes investing in the healthcare sector. However, the fundamentals of the
healthcare sector remain strong.
As our Portfolio Manager sets out in their report, they are positive about the
outlook for the healthcare sector. At some point, investment fundamentals will
again reassert themselves over the macro environment. Our Portfolio Manager
expects the currently elevated level of merger and acquisition activity to
continue, supported by attractive valuations, healthy balance sheets and, within
the larger pharmaceutical and biotechnology sub-sectors, a need to address
future patent expirations. In addition, the pace of scientific and technological
development within the healthcare sector more broadly will remain unchecked,
with clinical and technological catalysts providing a regular flow of
significant share price moving events.
As an indication of the continued strong demand for healthcare investment
opportunities amongst professional investors, it is encouraging that in recent
weeks our Portfolio Manager has been successful in raising three new funds
totalling in excess of U.S$4.3bn to invest in venture capital, royalties and
Asian healthcare companies.
Doug McCutcheon
Chair
22 November 2023
PORTFOLIO
AS AT 30 SEPTEMBER 2023
Market value % of
Investments Sector Country £'000 investments
Novo Nordisk Pharmaceuticals Denmark 133,917 6.3
AstraZeneca Pharmaceuticals Britain 124,043 5.9
Boston Scientific Health Care United 111,522 5.3
Equipment & States
Supplies
Humana Health Care United 103,638 4.9
Providers & States
Services
Intuitive Surgical Health Care United 93,422 4.4
Equipment & States
Supplies
Merck Pharmaceuticals United 72,989 3.4
States
Eli Lilly Pharmaceuticals United 71,276 3.4
States
BioMarin Biotechnology United 70,085 3.3
Pharmaceutical States
Daiichi Sankyo Pharmaceuticals Japan 70,032 3.3
Sanofi Pharmaceuticals France 69,665 3.3
Top 10 investments 920,588 43.4
Roche Pharmaceuticals Switzerland 66,336 3.1
Eisai Pharmaceuticals Japan 60,173 2.8
Biogen Biotechnology United 59,855 2.8
States
Tenet Healthcare Health Care United 51,933 2.4
Providers & States
Services
Stryker Health Care United 49,959 2.4
Equipment & States
Supplies
Baxter International Health Care United 48,558 2.3
Equipment & States
Supplies
Thermo Fisher Life Sciences United 46,882 2.2
Scientific Tools & Services States
Ionis Biotechnology United 46,721 2.2
Pharmaceuticals States
Caris Life Sciences* Life Sciences United 45,531 2.1
Tools & Services States
Evolent Health Health Care United 44,400 2.1
Providers & States
Services
Top 20 investments 1,440,937 68.0
Mirati Therapeutics Biotechnology United 43,372 2.0
States
United Therapeutics Biotechnology United 41,366 2.0
States
Cigna Group Health Care United 39,846 1.9
Providers & States
Services
Sarepta Therapeutics Biotechnology United 31,865 1.5
States
Vertex Biotechnology United 31,624 1.5
Pharmaceuticals States
AbbVie Pharmaceuticals United 31,150 1.5
States
R1 RCM Health Care United 31,052 1.5
Providers & States
Services
Neurocrine Biotechnology United 30,173 1.4
Biosciences States
UnitedHealth Health Care United 28,919 1.4
Providers & States
Services
SI-BONE Health Care United 26,138 1.2
Equipment & States
Supplies
Top 30 investments 1,776,443 83.8
Apellis Biotechnology United 24,767 1.2
Pharmaceuticals States
Natera Life Sciences United 23,398 1.1
Tools & Services States
GSK Pharmaceuticals Britain 22,869 1.1
Shanghai Kindly Health Care China 21,364 1.0
Medical Instruments Equipment &
Supplies
ICON Life Sciences United 20,960 1.0
Tools & Services States
WuXi AppTec Life Sciences China 20,434 1.0
Tools & Services
Vaxcyte Biotechnology United 20,025 0.9
States
Madrigal Biotechnology United 19,384 0.9
Pharmaceuticals States
Crossover Health* Health Care United 17,407 0.8
Providers & States
Services
New Horizon Health Life Sciences China 15,300 0.7
Tools & Services
Top 40 investments 1,982,351 93.5
Beijing Yuanxin Health Care China 15,207 0.7
Technology* Providers &
Services
EDDA Healthcare & Health Care China 14,838 0.7
Technology* Equipment &
Supplies
Wuxi Biologics Life Sciences China 14,072 0.7
Tools & Services
VISEN Biotechnology China 13,621 0.6
Pharmaceuticals*
Jiangxi RiMAG* Health Care China 11,692 0.6
Providers &
Services
Ruipeng Pet Group* Health Care China 11,015 0.5
Providers &
Services
Iovance Biotechnology United 10,657 0.5
Biotherapeutics States
Xenon Biotechnology Canada 10,038 0.5
Pharmaceuticals
uniQure Biotechnology Netherlands 7,410 0.3
Akero Therapeutics Biotechnology United 7,252 0.3
States
Top 50 investments 2,098,155 99.0
MabPlex* Health Care China 6,021 0.3
Providers &
Services
Innovent Biologics Biotechnology China 5,962 0.3
Ikena Oncology Biotechnology United 5,769 0.3
States
Shanghai Bio-heart Health Care China 3,640 0.2
Biological Equipment &
Technology Supplies
Dingdang Health Health Care China 2,658 0.1
Technology Providers &
Services
API Holdings* Health Care India 1,976 0.1
Providers &
Services
Passage Bio Biotechnology United 1,121 0.1
States
Peloton Therapeutics Biotechnology United 512 0.0
- Milestone* States
Total equities 2,125,814 100.3
Equity Swaps
Healthcare M&A Basket Swaps United 101,053 4.8
Target Swap States
Catalyst Swap Basket Swaps United 12,736 0.6
States
Apollo Hospitals Health Care India 13,467 0.6
Enterprise Providers &
Services
WuXi AppTec Life Sciences China 18,543 0.9
Tools & Services
Less: Gross exposure (151,571) (7.1)
on financed swaps
Total Equity Swaps (5,772) (0.3)
Total investments 2,120,042 100.0
including OTC Swaps
* Unquoted holding.
SUMMARY
Market value % of
Investments £'000 investments
Listed Equities 1,987,993 93.8
Unquoted Equities 137,821 6.5
Equity Swaps (5,772) (0.3)
Total of all investments 2,120,042 100.0
PORTFOLIO MANAGER'S REVIEW
MARKETS
In the post-pandemic era, major macro factors have clearly been the largest
influencers shaping global equity returns. Extreme inflationary pressures, the
invasion of Ukraine, supply chain issues, and recessionary fears all helped push
equity markets lower in 2022. So far in 2023, declining recessionary fears and a
soft landing for the economy, despite continued upward pressure for interest
rates, has the broad market rebounding. To note, the total returns in sterling
terms for the MSCI World Index for the calendar year to the end of September was
+11.6%, the S&P 500 was +12.0%, and the FTSE All-Share was +4.3% (source:
Bloomberg).
However, 2023 has been difficult for healthcare stocks. In fact, relative
performance versus the S&P has been the worst in over 20 years, with a -18%
spread of share price underperformance for healthcare (in sterling terms) since
the start of the calendar year. The primary issue - again - was macro in nature.
Specifically, a recession did not materialise in 2023, the economy has been more
robust than anticipated, and investors have chased growth, mostly in technology
and communication stocks. Interest rates being "higher for longer" exacerbated
this situation. This has neutralised the defensive aspects of healthcare stocks
and marginalised absolute performance this year.
PERFORMANCE
For the period under review, the Company produced a net asset value total return
of -0.6% whilst the share price total return was +0.1%. This performance lagged
the Benchmark total return of +0.8% (MSCI World Healthcare Index). Multiple
factors weighed on both absolute and relative performance.
First and foremost, absolute returns were impacted by a lagging healthcare
sector, as discussed on the prior page. With a more robust-than-expected
economy, healthcare share price returns were mostly flat to down in the period
(save for large capitalisation stocks, up modestly on average). The macro impact
on performance can better be identified by breaking down the six-month period
into individual segments. The only segment where healthcare stocks enjoyed a
respite from the macro overhangs was predominantly in April and May 2023. During
this period, the fate of the economy was still being debated and markets were
stable and moved higher as did healthcare stocks. Stock picking mattered,
positive catalysts were rewarded, and the Company's performance was strong at
over a 7% return, more than 5% ahead of the Benchmark.
However, the macro environment reversed at the end of May and into June and
July. Investor confidence in the economy inflected, technology stocks rallied,
and the S&P 500 hit an all-time high at the end of July. During this period,
healthcare stocks lagged materially, fundamentals of the sector were muted, and
catalysts were punished. Biotechnology stocks were particularly out-of-favour,
indiscriminately falling nearly 15% (in U.S.$ terms). This was reflected in the
Company's absolute and relative performance.
The final two-months of the period were a mix of both macro and fundamental
influences. On the macro front, a downgrade of the U.S. credit rating and
messaging that interest rates would be "higher for longer" paused the broad
market rally. Fundamentally, interest in healthcare stocks re-ignited with the
better-than-expected disclosure of the cardiovascular benefits of Novo Nordisk's
weight-loss drug, Wegovy (semaglutide), in August, although it was partially
offset by a sell-off in medical technology stocks as a result.
In the six-month period, the largest contribution came from investments in large
capitalisation pharmaceutical stocks, most notably Novo Nordisk and Eli Lilly.
The phenomenon that the "obesity drugs" have become is real, given the
outstanding weight loss efficacy and now the objective disclosure that these
drugs can significantly lower the possibility of overweight patients
experiencing heart attack, stroke, or death due to a cardiovascular event. This
buoyed investor (and patient) enthusiasm and share prices reflected this
accordingly. On a relative basis, attribution from large capitalisation
pharmaceutical stocks was modestly negative due to allocation, as this sector
remains a strategic underweight in the portfolio.
Another important source of contribution came from medical technology stocks in
the period. A number of fundamental tailwinds attracted investor flows,
including increased procedural volumes due to a clear inflection in demand and
utilisation of healthcare services (post the pandemic), a positive pricing
environment, and easy year-over-year comparisons. Relative contribution was even
more impressive given positive stock picking in the period. Total contribution
was partially clipped after the cardiovascular benefit of the aforementioned
weight loss drugs was disclosed, as investors feared lowered future demand from
the medical technology industry and much of the sector sold off.
The Company's net underperformance was primarily due to allocation in
biotechnology stocks, particularly small and mid-capitalisation biotechnology.
This sub-sector was down by 3% (in sterling total return terms) in the reported
period and down 13% in the calendar year (as measured by the SPDR S&P Biotech
ETF (XBI)). The sub-sector continued to be out of favour with investors,
especially in this prolonged high interest rate environment. In fact, the
performance of the XBI made new records as it continued its drawdown, now the
longest ever at over 31 months since the peak and the largest as well, now -76%
relative to the S&P (as of 29 September 2023). The negative contribution from
biotechnology was partially exacerbated by stock picking, with some notable
idiosyncratic negative catalysts that occurred during the six-month period.
Another sub-sector of import that contributed to the negative performance was
the investment in Japanese pharmaceutical stocks, predominantly due to stock
picking. Also of note were unquoted (private) holdings which detracted 0.3%.
UNQUOTED HOLDINGS
During the half year, the Company strategically refrained from making new
investments in unquoted (private) companies, as we continued to cautiously
navigate the challenging public offering market for small and mid-capitalisation
therapeutic firms. The capital market funding landscape has been improving and
we are optimistic about the ability of some of our unquoted investments to
achieve listings within the next year.
As of the half year end, unquoted company investments made up 6.5% of the
Company's portfolio, a slight decrease from 6.7% on 31 March 2023. The existing
unquoted portfolio demonstrates a diverse and forward-looking approach.
Geographically, exposure is evenly distributed among emerging markets and North
American companies. On a sub-sector basis, the exposure is concentrated in
services and life science tools, with small exposures to biotechnology and
medical technology.
During the period under review, the Company's unquoted investments returned a
loss of £7.3 million, from an opening market value of £145.2 million across 11
positions, an implied return of -5.1% which detracted -0.3% from performance.
Unfortunately, this negative return was exclusively driven by a single
investment in India, API Holdings (better known as PharmEasy), that experienced
a material write-down in its valuation. The company was compelled to accept a
capital infusion at a distressed valuation after a planned IPO was delayed due
to adverse market conditions, leading to a funding shortfall, including a
potential breach of a debt covenant. Otherwise, eight out of 11 investments
posted small positive returns in the period, including North American unquoted
holdings returning a gain of £4.3 million. Given the emerging positive trends in
the market and our strategic approach, we remain confident in the future
performance of our unquoted investments.
Overall, we remain proud of performance since inception over 28-plus years.
Since its inception as of 28 April 1995, the Company's net asset value has
posted a +4,189% return, a 42x multiple for an average of +14.1% per annum
through to the end of the half year. This compares to a benchmark return of
+2,206% and +11.7% per annum over the same investment horizon, and a FTSE All
Share Index return of +588% and +7.5%.
MAJOR CONTRIBUTORS TO PERFORMANCE
The pursuit of innovation is a longtime hallmark of the Company. In 2023, the
cardiometabolic therapeutic category reached a new level of innovation with
semaglutide, a best-in-class "GLP-1" agonist approved for the treatment of
diabetes (Ozempic) and obesity (Wegovy), a medication from the leader in this
space, Novo Nordisk. Whilst Ozempic was first approved in 2017, and reformulated
as Wegovy in 2021, landmark data was announced in August 2023, in the form of
the "SELECT" trial. This was a global study in nearly 18,000 patients over five
years that unequivocally showed a -20% drop in the risk of an obese patient
suffering a "MACE" event (heart attack, stroke, or cardiovascular related death)
by taking a once-weekly injection of Wegovy. This data surpassed all investor
expectations and moved this drug from a lifestyle intervention into a chronic
care medicine that can prolong a patient's life. So far, the demand for Wegovy
in the U.S. has been insatiable, and the company is literally selling everything
they can make. Despite the supply constraints, sales of the semaglutide
franchise are annualising at U.S.$10 billion per annum. These sales could reach
U.S.$50 billion or more, as the company is developing the drug in a host of
additional indications, including heart failure, fatty liver disease, sleep
apnea, kidney disease, peripheral arterial disease, and even Alzheimer's
disease. With additional manufacturing coming online into 2024, we expect a
potential doubling of Wegovy sales next year. In the nine months to 29 September
2023, the stock appreciated nearly 40% (in local currency terms) to become the
largest company in Europe by market capitalisation (source: Bloomberg).
Another top contributor in 2023, also an undisputed leader in innovation, is Eli
Lilly. The U.S.-based pharmaceutical company, like Novo Nordisk, has a long
history in the diabetes and GLP-1 space. The company's most recent offering is
Mounjaro (tirzepatide), a dual GLP-1 and "GIP" agonist. Whilst approved for
diabetes in 2022, the company presented additional data in obesity in 2023,
showing weight loss eclipsing 20% and even approaching 25% in some cases. This
dual-agonist therapy has pushed weight loss to new levels and the company
benefitted materially from the SELECT trial, with investors (and the company)
assuming that "more is better": the cardiovascular benefits shown by Wegovy
should extend to Mounjaro, if not moreso, given the superior weight loss
profile. Sales of Mounjaro have already reached U.S.$1 billion per quarter, with
the obesity indication still pending approval by the U.S. Food and Drug
Administration (FDA) by year-end.
Another driver of share price in 2023 for Eli Lilly was their efforts in
Alzheimer's disease. Specifically, the company announced in May that their
antibody for removing amyloid plaque from the brain (donenemab) significantly
slowed cognitive and functional decline in a phase III study in early
Alzheimer's disease patients by 35%. This was an impressive result, becoming
only the second molecule to demonstrate disease modifying effects. The drug is
still pending approval by the FDA by year end. During the period under review,
the stock appreciated over 50% (in U.S.$ terms) to become one of the ten largest
companies in the world by market capitalisation (source: Bloomberg).
One of the true pioneers of robotic-assisted surgery is Intuitive Surgical, a
medical equipment company based in California that developed the da Vinci
Surgical System - a combination of software, hardware, and optics that allows
doctors to perform robotically aided surgery from a remote console. In the
quarter proceeding the current financial year, the company's share price came
under pressure due to concerns around a slowdown in the hospital capital
equipment spending cycle and a delay to their next generation surgical robot.
However, in the reported period, the company drove a material inflection in
procedure volume growth rates given a combination of rebounding U.S. surgical
volumes, further adoption of Intuitive technology in international markets such
as China, and uptake of new robotic instruments that allow for new procedure
indication expansion. Moreover, elevated procedure volumes led to increased
robotic system purchases as hospitals become capacity constrained and needed to
add new robots. Looking forward, the combination of heightened research &
development levels over the past several years and historical system launch
timelines suggest the company is on the verge of another new system launch, an
event that would be a strong catalyst for their shares.
Mirati Therapeutics is a clinical stage precision oncology company located in
San Diego, California. The company's lead asset, adagrasib (MRTX849), is an
investigational, highly selective and potent oral small molecule inhibitor of
KRAS, a critical target to treat KRAS-mutated cancers commonly found in lung,
colorectal and pancreatic cancers. The development programme over the past three
plus years has been mixed. However, in August of 2023, the company concurrently
announced several updates, including the return of their well-regarded former
CEO, positive clinical updates from two ongoing development programs focused on
lung cancer, and a U.S.$345 million financing. Shares responded positively as
these updates renewed investors' interest in the company. We would also note
that shortly after the reported period, Bristol-Myers Squibb announced its
intention to acquire Mirati Therapeutics for an equity value of U.S.$4.5 billion
and a total consideration of up to U.S.$5.8 billion, representing a 52% premium
to the 30-day volume-weighted average price (VWAP) as of the unaffected 4
October 2023 close.
Ionis Pharmaceuticals is a leader in RNA-targeted therapeutics, with a focus on
neuro, orphan, and cardiometabolic diseases. Its antisense platform works by
binding and destroying a messenger RNA (mRNA) in a highly specific manner, such
that the amount of disease-causing protein is significantly decreased. The
technology can also be used to treat disease by increasing protein production;
this led to the development of one the most successful medicines on the market
today, Spinraza (nusinersen), for spinal muscular atrophy (SMA). The company has
made tremendous progress in the last 12 months on both wholly owned and
partnered programmes, creating significant value for shareholders. Late last
year, the company reported positive Phase II data from open label extension
study of donidalorsen, a key pipeline asset, in patients with hereditary
angioedema (HAE). The 95%+ reduction in HAE-attacks in the monthly dosing arm
was unprecedented, suggesting its potential to be a new standard of care in HAE.
In April, Ionis Pharmaceuticals together with Biogen, announced the approval of
Qalsody (tofersen), marking a major scientific advance in treatment of a
specific form of amyotrophic lateral sclerosis (ALS). Following a very
successful Phase 3 study in transthyretin polyneuropathy, we expect eplontersen
(developed with partner AstraZeneca) to be approved on 22 December 2023. In
September, the company announced positive olezarsen topline data from Phase III
study in patients with familial chylomicronemia syndrome (FCS); impressively,
the drug eradicated acute pancreatitis events versus placebo, making this
another important medical breakthrough.
MAJOR DETRACTORS FROM PERFORMANCE
In Japan, Daiichi-Sankyo has emerged as the global leader in next generation
antibody-drug conjugates (ADCs). Unlike conventional chemotherapy treatments,
which can damage healthy cells, ADCs are a construct of a targeted medicine
linked to chemotherapy agents that only attack cancer cells. Daiichi-Sankyo has
created new breakthroughs in this technology that has led to new levels of
efficacy and survival in cancer patients across a host of tumour types. Their
first commercial offering, Enhertu (fam-trastuzumab deruxtecan-nxki) has already
achieved blockbuster status, becoming the new standard of care in metastatic
breast cancer (with HER2+ expression). Hence, investor enthusiasm increased for
their second ADC offering, Dato-DXd (datopotamab deruxtecan), and its role in
treating lung cancer. Rising expectations pushed the stock to an all-time high
in June 2023. However, a press release in July 2023, confirmed that the first
Phase III trial for Dato-DXd in lung cancer met its primary endpoint of
progression free survival, whilst the final overall survival metric was not yet
reached. Coupled with equivocal qualitative language about clinical significance
of this finding, plus potentially worse than expected safety, pushed the stock
price lower, falling over 25% (local currency) from its high over the subsequent
month. We believe this reaction was overdone due to a misinterpretation of the
company's press release. We held the stock in anticipation of further data
disclosures.
Nonalcoholic steatohepatitis, or NASH, is a severe form of fatty liver disease,
a condition in which the liver builds up excessive fat deposits. Over time,
inflammation, fibrosis, and cirrhosis can occur, leading to liver failure. With
few options to treat this deadly condition and a huge prevalence globally, the
commercial opportunity is large. Madrigal Pharmaceuticals is a clinical-stage
biopharmaceutical company based in Pennsylvania, pursuing novel therapeutics for
the treatment of NASH. Their primary pipeline asset, resmetirom, is a thyroid
hormone ?-receptor agonist which is believed to play a role in liver health. It
has shown promising data in late stage, pivotal trials for this disease.
However, the emergence of data for the GLP-1 class of drugs (for the treatment
of diabetes and obesity from Eli Lilly and Novo Nordisk) have shown significant
ability to reduce liver fat accumulation, decrease inflammation, and prevent the
progression of fibrosis in patients with NASH. This finding dramatically hurt
investor sentiment for all NASH players, including Madrigal. Pharmaceuticals
Share price declines were exacerbated by a change in the CEO chair and a
subsequent financing, which removed the takeout premium in the stock.
Massachusetts-based Apellis Pharmaceuticals is developing treatments for
diseases driven by overactivation of the "complement system", a complex
ecosystem of plasma proteins in the blood that work together to fight infection.
The company has two commercial products which are different formulations of
pegcetacoplan, an inhibitor of the complement protein "C3". The first, Empaveli,
a systemic formulation for the treatment of a rare blood disease called
paroxysmal nocturnal haemoglobinuria, a disease that involves the destruction of
red blood cells and can present as anaemia, blood clots, bone marrow failure,
and can be lethal. The second is Syfovre, an "in the eye" formulation for the
treatment of an age-related macular degeneration called geographic atrophy (GA)
which leads to blindness. Approved by the FDA in February 2023, Syfovre was the
first marketed therapy for the treatment of GA. Apellis Pharmaceuticals shares
rose in mid-2023 as the commercial launch of Syfovre was very successful with
rapid adoption. However, in July 2023, shares fell sharply on an unexpected
report of severe safety events, called retinal vasculitis, that worsened vision
in a handful of patients following treatment with Syfovre. Nevertheless, sales
of Syfovre have continued to increase quarter-over-quarter despite the risk of
retinal vasculitis. We held the stock as we believe the share price overly
discounted the risk of this rare adverse event compared to its important
benefit.
The Netherlands-based gene therapy player, UniQure, is a clinical-stage company
that focuses on neurological disorders. Gene therapy, whilst still somewhat
nascent, represents an incredible leap in innovation that has curative
properties. Thecompany's lead asset is a novel gene therapy, AMT-130, for
Huntington's disease, an inherited disorder that causes cells in parts of the
brain to gradually degenerate and die, progressively impacting a person's
functional abilities and results in movement, cognitive, and psychiatric
disorders. However, in June 2023 the company provided a mixed interim update
from its Phase I/II trial for AMT-130, which raised investor concern over target
engagement of the gene therapy. That said, we were encouraged by the totality of
the data, including the early indication of function benefit across
multiple measures.
The global pharmaceutical company, Bristol-Myers Squibb, is well known for its
leadership in oncology, with major cancer franchises in both immuno-oncology and
multiple myeloma. However, both franchises are aged and have reached or are
nearing expiration of exclusivity. With a declining topline, the company's price
-to-earnings multiple has compressed to below 10x, creating the most heavily
discounted stock in the large cap pharmaceutical space. However, this "value
play" turned into a "value trap" in 2023. The company has had one of the most
productive pipelines in the industry over the past three years, with new
approvals in immunology, haematology, oncology, and cardiovascular disease.
However, commercial execution of the many new product launches has underwhelmed,
and a top line renaissance has so far failed to materialise. The share price has
subsequently fallen further as has the multiple. We exited the stock during the
period but will look to revisit the investment opportunity in 2024 where perhaps
utilisation and reimbursement of their new drug portfolio may inflect.
DERIVATIVE STRATEGY
The Company has the ability to utilise equity swaps and options as part of its
financial strategy. Throughout the financial year, the Company leveraged single
stock equity swaps to access Chinese and Indian investments in emerging markets,
which would otherwise be inaccessible through more traditional investment
methods. During the period under review, single stock equity swaps contributed
£7.1 million to performance, and we remain confident in the long-term prospects
of emerging market securities, particularly those trading locally in mainland
China.
Additionally, the Company strategically invested in two customised tactical
basket swaps, targeting growth opportunities in undervalued small and mid
-capitalisation therapeutic companies. These baskets were constructed to
capitalise on two prevailing themes that we anticipate will deliver strong
returns in the current financial year: 1) investment opportunities possessing
considerable potential as attractive acquisition targets for larger
corporations, and 2) those exhibiting a favourable risk/reward profile in light
of upcoming clinical catalysts.
During the period under review, the basket swaps detracted £8.0 million from
performance, primarily due to their direct exposure within the emerging
biotechnology space, which remained under pressure.
LEVERAGE STRATEGY
Historically, the typical leverage level employed by the Company has been in the
mid-to-high teens range. Considering the market volatility during the past three
plus financial years, we have, more recently, used leverage in a more tactical
fashion. For example, around the beginning of the COVID-19 pandemic in March
2020 after the dramatic "V"-shape market recovery of April 2020, leverage was
significantly reduced by over 10% month-over-month, to 3% and ultimately to 1%
in May 2020. Another example includes lowered leverage ahead of and into the
U.S. Presidential election, under the threat of a Democratic "sweep" of the U.S,
Congress.
In 2023, we have flexed leverage modestly in response to the economic climate,
including in consideration of a putative recession and interest rate
fluctuations and speculation. Most recently, we increased leverage back into the
low-to-mid-teens, a reflection of our overall bullishness on the portfolio, a
hopeful turn in biotechnology stocks, and the relative outlook for healthcare
ahead of a potential recession. One caveat that keeps us from extending leverage
even further, is the continued volatile and uncertain macro backdrop, either
economic in nature or even further geopolitical risk factors.
SECTOR DEVELOPMENTS
The plethora of innovation that underpins our positive investment stance in
healthcare has certainly continued in 2023. Whilst not a perfect scorecard, the
number of new drug approvals by the FDA in 2023 is once again at a record pace.
With 51 new drug approvals through the end of September and at least another 14
novel applications with user fee deadlines by the end of the year (source:
Washington Analysis), the potential to eclipse recent highs is almost a
certainty in 2023.
Interestingly, the contribution of new vaccines, cell therapy, and gene therapy
to the new product approvals (from the Center for Biologics Evaluation and
Research - CBER) has clearly inflected over the past three plus years,
representing a paradigm shift in technological advancement of novel medications
and platforms. Over the past three and a half years, there have been 31
approvals compared to eight in the previous four years - yet another key metric
in the accelerating innovation engine in bio-pharmaceuticals. Moreover, after a
down year in 2022, the past six plus years have been the most productive in
industry history, with nearly 350 new product approvals during that span.
Despite a continued - if not accelerated - innovation stemming from the
biotechnology industry, valuations have lagged in historical fashion. According
to the annual IQVIA audit of therapeutic company pipelines, the number of
clinical assets in development has increased more than 70% since 2016 across
more than15 categories. We note that these numbers exclude COVID-related
programs. This has pushed the cumulative number of product pipelines in the
industry to all-time highs.
Of this incredible productivity, we note that effectively two-thirds of this
innovation comes from emerging biotechnology companies, which represent a core
holding in the portfolio and have been a strategic investment target of ours,
historically. However, in this more recent macro-driven environment, the
industry has not been rewarded and valuations are so depressed, that the net
return of the XBI is below June 2015 levels by 12%, compared to returns of the
healthcare sector of 80%; the S&P 500 which returned 142%; and the NASDAQ which
returned 189% over this same period. We expect this valuation gap to close.
Specific examples of innovation are plentiful. In 2022, we focused on some
specific development opportunities that we believed could deliver "The Next Big
Thing" in healthcare, including oncology, obesity, and Alzheimer's disease. In
2023, the industry delivered.
First in oncology, the leaders in antibody drug conjugate (ADC) technology,
Daiichi-Sankyo (and partner AstraZeneca), have achieved blockbuster status with
Enhertu (fam-trastuzumab deruxtecan-nxki), the breast cancer drug for patients
with metastatic disease who express any level of the protein called HER2+. Data
for the company's latest ADC offerings, Dato-DXd and HER3-DXd, were also
presented in the period and we expect regulatory filings as soon as this year.
In immuno-oncology, Roche (unintentionally) disclosed data for their next
generation agent, tiragolumab (an anti-TIGIT agent), showing a 20% benefit on
top of the standard of care in progression free survival in lung cancer
patients. We are eagerly awaiting more mature data sets in this setting in 2024.
AstraZeneca also announced two critically important data sets for their best-in
-class targeted therapy Tagrisso (Osimertinib), which is used to treat lung
cancer patients with a specific EGFR mutation. These data sets included usage in
early stages of the disease (showed a 51% reduction in death) and in combination
with chemotherapy (38% reduction in progression free survival or death) compared
to simply taking Tagrisso alone. These new indications for Tagrisso will put
upward pressure on sales estimates and/or aid in fending off incoming
competition.
Without question, obesity has become the "hot" space in therapeutics in 2023.
The advancement of the GLP-1 drugs beyond diabetes and into weight loss has
caught the attention of investors and the public alike. In 2023, we learned of
best-in-class weight loss, at more than 20%, for Eli Lilly's Mounjaro
(tirzepatide) in obese patients. We expect Eli Lilly to launch tirzepatide for
obesity early in 2024. Not to be outdone, Novo Nordisk confirmed unprecedented
cardiovascular benefit of Wegovy (semaglutide) in obese patients in a five-year
landmark trial called SELECT. Competition rushing to this space has been
significant, but 2023 also demonstrated the stranglehold that both Eli Lilly and
Novo Nordisk have here.
The opportunity for GLP-1 drugs is immense, and it does not stop with just
diabetes and weight loss. Rather, the impact of these "incretins" may have
beneficial effects across multiple organs and disease states. The list of
conditions and co-morbidities, for example, that Novo Nordisk is pursuing
includes heart failure, kidney disease, sleep apnea, peripheral arterial
disease, and even Alzheimer's disease. Phase III data is already presented or in
-house at the company for heart failure and kidney failure. We look forward to
additional data sets from both Novo Nordisk and Eli Lilly for years to come.
Finally, a word on Alzheimer's disease. We have previously described this
category as the "Holy Grail" of new drug development, owing to the huge unmet
medical need, large global prevalence, and potential for lucrative price
flexibility. Whilst now overshadowed by the obesity category, Alzheimer's
disease still represents a huge opportunity with mega-blockbuster prospects,
where individual medicines could reach over U.S.$10 billion per product per
annum. 2023 bore witness to the first ever full FDA approval for a novel,
disease modifying drug, in this case, Leqembi (lecanemab) from Eisai of Japan
and their U.S. partner, Biogen. The drug launched in March 2023 and we await key
sales milestone in 2024 and beyond.
Eli Lilly was the second company to announce positive Phase III data for yet
another disease modifying agent, donanemab, for Alzheimer's disease. Acting on
the same target, beta-amyloid, as Leqembi, donanemab may be more efficacious at
slowing cognitive decline but perhaps with some increased side effect concerns
(transient brain swelling). The company expects approval before the end of 2023.
We expect a meaningful launch in 2024.
Another key investment theme we have been monitoring is the pace of mergers and
acquisitions in the therapeutics space, fuelled by distressed biotechnology
valuations, and a looming wave of drug patent expirations for the large cap
pharmaceutical companies. This has created a very positive environment for deal
making as high interest and a quiet initial public offering market has created
some barriers to access for capital. 2023 is on pace for a record year, with 21
deals so far in the financial year, including four deals alone in the first
three weeks of October. We certainly expect the number of transactions this year
to eclipse the previous financial year (29) with total deal value potentially
surpassing U.S.$100 billion.
A new emerging regulatory theme is a more activist Federal Trade Commission
("FTC"), which has increasingly opposed mergers & acquisitions. Within
healthcare, the FTC has opposed the Amgen/Horizon Therapeutics acquisition and
is reviewing the Pfizer/Seagen transaction. In some cases, the FTC is relying on
novel and unproven theories, for example that a merger could hamper innovation
and slow the pace of drug development. Our focus (and a key return driver) is on
smaller biotechnology companies that are acquired by larger pharmaceutical
companies, transactions that remain largely uncontested by the FTC. That said,
in September 2023 the FTC relented and has allowed the Horizon transaction to
move forward to completion. The Seagen acquisition appears to have been less
acrimonious and we expect that to also conclude favourably before the end of the
year.
The Inflation Reduction Act (IRA) of 2022 has further advanced in 2023, with the
most recent development being the disclosure by the Centers for Medicare &
Medicaid Services (CMS) its list of 10 drugs up for the first price negotiations
under the IRA. The list contained a mix of expected drugs, such as Eliquis and
Xarelto for cardiovascular disease, and unexpected drugs, like Jardiance,
Farxiga, and Fiasp for diabetes. We conclude that it was mostly benign. The
majority of drugs are facing imminent patent expirations and or generics anyhow,
including Eliquis, Xarelto, Januvia, Entresto, Enbrel, Imbruvica, Farxiga, and
Stelara. This blunts much of the impact that a lower Medicare price will bring
to the financials of these companies. As we have postulated before, the net
impact of the IRA is negative, but mostly manageable by the industry. That said,
the mix of drugs listed for the first cycle of negotiation does raise some
questions, including: How were they selected by CMS? How were total sales
calculated? Were there any political motivations? Were new formulations
protected? Some of these answers may become more transparent in 2024.
The industry is not accepting the immediate consequences of the IRA. We note
that several companies have sued the Biden administration on the IRA including
Bristol-Myers Squibb, Johnson & Johnson, Merck, AstraZeneca, Novartis, and
Boehringer Ingelheim. In addition, the lobby group Pharmaceutical Research
Manufactures of America and the U.S. Chamber of Commerce sued as well. We do
note that Astellas withdrew their suit after their cancer drug, Xtandi,
unexpectedly did not make the list.
There are a host of arguments that are being made by the industry that are
questioning the constitutionality of IRA, whilst AstraZeneca has claimed the IRA
contravenes the Orphan Drug Act. Tactically, the industry is taking a "shots on
goal" approach. In other words, any judge from any district from any court in
any of these cases could rule in favour of the industry on any argument. Even a
SINGLE ruling against the government could halt the drug price negotiations
portion of the IRA. Ultimately the Supreme Court will have the final say. We do
not expect these legal proceedings to result in any near-term victory by the
industry, and any potential preliminary injunction, whilst possible, would be an
upside surprise. Nevertheless, this accumulation of legal proceedings allows the
industry to maintain optionality to quash price negotiations anytime ahead of
the 2026 enactment of the drug price negotiation clause of the IRA.
OUTLOOK
Whilst the investment backdrop for healthcare has been challenging, the state of
the industry is strong. The long-term growth potential of healthcare remains,
underpinned by global demographics, aging populations, and constant, persistent
demand. Innovation, the true hallmark of the Company, continues to advance in
unparalleled fashion. Innovation is not just in the domain of biotechnology, but
across therapeutics, medical technology, patient services, analytics, and
platform technologies. Together, they are improving patient care, advancing
medical knowledge, and creating new medicines, with many that now can offer a
cure. The productivity in the therapeutics space continues to be exceptional,
with pipelines the fullest they have ever been, and the number of new drug
approvals at all-time highs. The inflection in M&A in the space is just one
testimony to this productivity, one that we believe will continue in 2024. We
look forward to what next year brings, across the entirety of the healthcare
spectrum, as the growth of this industry continues to create a multitude of
exciting investment opportunities.
Sven H. Borho and Trevor M. Polischuk
OrbiMed Capital LLC
Portfolio Manager
22 November 2023
CONTRIBUTION BY INVESTMENT
PRINCIPAL STOCK CONTRIBUTORS TO AND DETRACTORS FROM ABSOLUTE NET ASSET VALUE
PERFORMANCE
FOR THE SIX MONTHSED 30 SEPTEMBER 2023
Contribution
Contribution per share*
Top Five Sector Country £'000 p
Contributors
Novo Nordisk Pharmaceuticals Denmark 27,228 4.5
Eli Lilly Pharmaceuticals United States 26,553 4.4
Intuitive Health Care United States 19,329 3.2
Surgical Equipment &
Supplies
Mirati Biotechnology United States 10,817 1.8
Therapeutics
Ionis Biotechnology United States 10,348 1.7
Pharmaceuticals
Top Five
Detractors
Bristol-Myers Pharmaceuticals United States 12,246 (2.0)
Squibb **
UniQure Biotechnology Netherlands 14,545 (2.4)
Apellis Biotechnology United States 14,617 (2.4)
Pharmaceuticals
Madrigal Biotechnology United States 14,797 (2.4)
Pharmaceuticals
Daiichi Sankyo Pharmaceuticals Japan 17,996 (3.0)
* Based on 606,004,086 shares being the weighted average number in issue
during the period.
** Not held at 30 September 2023.
INTERIM MANAGEMENT REPORT
PRINCIPAL RISKS AND UNCERTAINTIES
The Directors continue to review the Company's key risk register, which
identifies the risks and uncertainties that the Company is exposed to, and the
controls in place and the actions being taken to mitigate them.
A review of the half year and the outlook for the Company can be found in the
Chair of the Board's Statement and the Portfolio Manager's Review. The principal
risks and uncertainties faced by the Company include the following:
· Exposure to market risks and those additional risks specific to the
sectors in which the Company invests, such as political interference in drug
pricing.
· The Company uses leverage (both through derivatives and gearing) the
effect of which is to amplify the gains or losses the Company experiences.
· Macro events may have an adverse impact on the Company's performance by
causing exchange rate volatility, changes in tax or regulatory environments,
and/or a fall in market prices. Emerging markets, which a portion of the
portfolio is exposed to, can be subject to greater political uncertainty and
price volatility than developed markets.
· Unquoted investments are more difficult to buy, sell or value and so
changes in their valuations may be greater than for listed assets.
· The risk that the individuals responsible for managing the Company's
portfolio may leave their employment or may be prevented from undertaking their
duties.
· The risk that, following the failure of a counterparty, the Company
could be adversely affected through either delay in settlement or loss of
assets.
· The Board is reliant on the systems of the Company's service providers
and as such disruption to, or a failure of, those systems could lead to a
failure to comply with law and regulations leading to reputational damage and/or
financial loss to the Company.
· The risk that investing in companies that disregard Environmental,
Social and Governance (ESG) factors will have a negative impact on investment
returns and also that the Company itself may become unattractive to investors if
ESG is not appropriately considered in the Portfolio Manager's decision making
process.
· The risk, particularly if the investment strategy and approach are
unsuccessful, that the Company may underperform, resulting in the Company
becoming unattractive to investors and a widening of the share price discount to
NAV per share. Also, falls in stock markets, and the risk of a global recession,
are likely to adversely affect the performance of the Company's investments.
Further information on these risks is given in the Annual Report for the year
ended 31 March 2023. The Board has noted that global markets are continuing to
experience unusually high levels of uncertainty and heightened geopolitical
risks. Against a background of rising interest rates and slowing economic
growth, risks associated with leverage and illiquid assets, especially in
combination, have become more elevated. The Board has investment guidelines in
place to mitigate these risks.
RELATED PARTY TRANSACTIONS
During the first six months of the current financial year no material
transactions with related parties have taken place which have affected the
financial position or the performance of the Company during the period.
GOING CONCERN
The Directors believe, having considered the Company's investment objectives,
risk management policies, capital management policies and procedures, the 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 12 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.
In reviewing the position as at the date of this report, the Board has
considered the guidance issued by the Financial Reporting Council.
As part of their assessment, the Directors have given careful consideration to
the next continuation vote to be held in 2024. As previously reported, stress
testing was carried out in May 2023, which modelled the effects of substantial
falls in markets and significant reductions in market liquidity, on the
Company's net asset value, its cash flows and its expenses.
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 have been prepared in accordance with Financial Reporting Standard 104
(Interim Financial Reporting); and
ii. the interim management report includes a true and 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 reviewed or audited by the Company's auditors.
This Half Year Report contains certain forward-looking statements. These
statements are made by the Directors in good faith based on the information
available to them up to the date of this report and such statements should be
treated with caution due to the inherent uncertainties, including both economic
and business risk factors, underlying any such forward-looking information.
For and on behalf of the Board
Doug McCutcheon
Chair
22 November 2023
INCOME STATEMENT
FOR THE SIX MONTHSED 30 SEPTEMBER 2023
(Unaudited) (Unaudited)
Six months Six months
ended ended
30 30
September September
2023 2022
Revenue Capital Revenue Capital
Return Return Total Return Return Total
£'000 £'000 £'000 £'000 £'000 £'000
(Losses)/Gains - (11,111) (11,111) - 82,697 82,697
on investments
Foreign - (6,791) (6,791) - (15,052) (15,052)
exchange
losses
Income from 12,481 - 12,481 9,295 - 9,295
investments
(note
2)
AIFM, (411) (7,803) (8,214) (444) (8,430) (8,874)
portfolio
management,
and
performance
fees (note
3)
Other expenses (686) - (686) (579) (22) (601)
Net 11,384 (25,705) (14,321) 8,272 59,193 67,465
return/(loss)
before
finance
charges and
taxation
Finance (246) (4,673) (4,919) (61) (1,157) (1,218)
charges
Net 11,138 (30,378) (19,240) 8,211 58,036 66,247
return/(loss)
before
finance
Taxation (1,486) - (1,486) (323) - (323)
Net 9,652 (30,378) (20,726) 7,888 58,036 65,924
return/(loss)
after
taxation
Return/(loss) 1.6p (5.0)p (3.4)p 1.2p 8.9p 10.1p
per share
(note
4)*
The "Total" column of this statement is the Income Statement of the Company. The
"Revenue" and "Capital" columns are supplementary to this and are prepared under
guidance published by the Association of Investment Companies.
All revenue and capital items in the above statement derive from continuing
operations.
The Company has no recognised gains and losses other than those shown above and
therefore no separate Statement of Total Comprehensive Income has been
presented.
The accompanying notes are an integral part of these statements.
* The comparative return per share figures have been restated to reflect the
ten for one share split. For weighted average purposes, the share split has been
treated as happening on the first day of the accounting periods.
STATEMENT OF CHANGES IN EQUITY
FOR THE SIX MONTHSED 30 SEPTEMBER 2023
(Unaudited) (Unaudited)
Six months ended Six months ended
30 September 30 September
2023 2022
£'000 £'000
Opening shareholders' funds 2,150,721 2,268,233
Shares purchased for treasury (133,365) (36,086)
(Loss)/Return for the period (20,726) 65,924
Dividends paid - revenue (14,709) (12,721)
Closing shareholders' funds 1,981,921 2,285,350
STATEMENT OF FINANCIAL POSITION
AS AT 30 SEPTEMBER 2023
(Unaudited) (Audited)
30 September 31 March
2023 2023
£'000 £'000
Fixed assets
Investments 2,125,814 2,186,417
Derivatives - OTC swaps 5,499 209
2,131,313 2,186,626
Current assets
Debtors 16,734 4,376
Cash and cash equivalents 43,642 58,925
60,376 63,301
Current liabilities
Creditors: amounts falling due within one year (198,497) (72,105)
Derivative - OTC Swaps (11,271) (27,101)
(209,768) (99,206)
Net current liabilities (149,392) (35,905)
Total net assets 1,981,921 2,150,721
Capital and reserves
Ordinary share capital - (note 5) 15,042 16,265
Capital redemption reserve 9,564 8,341
Share premium account 841,599 841,599
Capital reserve 1,097,282 1,261,025
Revenue reserve 18,434 23,491
Total shareholders' funds 1,981,921 2,150,721
Net asset value per share - (note 6)* 339.3p 343.5p
* The comparative Net asset value per share figures have been restated to
reflect the ten for one share split. See notes 5 and 6 for further details.
CASH FLOW STATEMENT
FOR THE SIX MONTHSED 30 SEPTEMBER 2023
(Unaudited) (Unaudited)
Six months ended Six months ended
30 September 30 September
2023 2022
Note £'000 £'000
Net cash inflow/(outflow) 8 5,174 3,678
from operating activities
Purchases of investments (554,711) (460,385)
and derivatives
Sales of investments and 560,892 580,399
derivatives
Realised losses on (2,218) (14,343)
foreign exchange
Net cash inflow/(outflow) 3,963 105,671
from investing activities
Issue of shares - -
Shares repurchased (133,365) (36,086)
Equity dividends paid (14,709) (12,721)
Interest paid (4,919) (1,218)
Net cash (outflow)/inflow (152,993) (50,025)
from financing activities
Decrease/(increase) in (143,856) 59,324
net debt
Cash flows from operating activities includes interest received of £1,885,000
(2022: £592,000) and dividends received of £10,135,000 (2022: £9,235,000).
RECONCILIATION OF NET CASH FLOW MOVEMENT TO MOVEMENT IN NET DEBT
(Unaudited) (Unaudited)
Six months ended Six months ended
30 September 30 September
2023 2022
£'000 £'000
(Increase)/decrease in net (143,856) 59,324
debt resulting from
cashflows
Losses on foreign currency (4,574) (709)
cash and cash equivalents
Movement in net debt in the (148,430) 58,615
period
Net debt at 1 April 2,997 (87,003)
Net debt at 30 September (145,433) (28,388)
NOTES TO THE FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
The condensed Financial Statements for the six months to 30 September 2023
comprise the Income Statement, the Statement of Changes in Equity, the Statement
of Financial Position, the Cash Flow Statement and the Reconciliation of Net
Cash Flow Movement to Movement in Net Debt together with the related notes
below. They have been prepared in accordance with FRS 104 `Interim Financial
Reporting', the AIC's Statement of Recommended Practice published in February
2021 (`SORP') and using the same accounting policies as set out in the Company's
Annual Report and Financial Statements at 31 March 2023.
GOING CONCERN
After making enquiries, and having reviewed the Investments, Statement of
Financial Position and projected income and expenditure for the next 12 months,
the Directors have a reasonable expectation that the Company has adequate
resources to continue in operation for the foreseeable future. The Directors
have therefore adopted the going concern basis in preparing these condensed
financial statements.
FAIR VALUE
Under FRS 102 and FRS 104 investments have been classified using the following
fair value hierarchy:
Level 1 - Quoted market prices in active markets
Level 2 - Prices of a recent transaction for identical instruments
Level 3 - Valuation techniques that use:
(i) observable market data; or
(ii) non-observable data
Level 1 Level 2 Level 3 Total
AS AT 30 SEPTEMBER 2023 £'000 £'000 £'000 £'000
Investments held at fair 1,987,993 - 137,821 2,125,814
value through profit or
loss
Derivatives: OTC swaps - 5,499 - 5,499
(assets)
Derivatives: OTC swaps - (11,271) - (11,271)
(liabilities)
Financial instruments 1,987,993 (5,772) 137,821 2,120,042
measured at fair value
Level 1 Level 2 Level 3 Total
AS AT 31 MARCH 2023 £'000 £'000 £'000 £'000
Investments held at fair 2,041,247 - 145,170 2,186,417
value through profit or
loss
Derivatives: OTC swaps - 209 - 209
(assets)
Derivatives: OTC swaps - (27,101) - (27,101)
(liabilities)
Financial instruments 2,041,247 (26,892) 145,170 2,159,525
measured at fair value
2. INCOME
(Unaudited) (Unaudited)
Six months ended Six months ended
30 September 30 September
2023 2022
£'000 £'000
Investment income 10,596 8,713
Interest Income 1,885 582
Total 12,481 9,295
3. AIFM, PORTFOLIO MANAGEMENT AND PERFORMANCE FEES
(Unaudited) (Unaudited)
Six months ended Six months ended
30 September 2023 30 September 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
AIFM fee 72 1,369 1,441 76 1,444 1,520
Portfolio 339 6,434 6,773 368 6,986 7,354
management fee
Performance fee - - - - - -
charge for the
period*
411 7,803 8,214 444 8,430 8,874
As at 30 September 2023 no performance fees were accrued or payable (31 March
2023: nil accrued).
No performance fee could become payable by 30 September 2024.
See Glossary for further information on the performance fee.
4. RETURN/(LOSS) PER SHARE
(Unaudited) (Unaudited)
Six months ended Six months ended
30 September 30 September
2023 2022
£'000 £'000
The return per share is
based on the following
figures:
Revenue return 9,652 7,888
Capital return/(loss) (30,378) 58,036
Total return (20,726) 65,924
Weighted average number of 606,004,086 650,534,570
shares in issue for the
period
Revenue return per share 1.6p 1.2p
Capital return/(loss) per (5.0)p 8.9p
share
Total return per share (3.4)p 10.1p
The calculation of the total, revenue and capital returns per ordinary share is
carried out in accordance with IAS 33, "Earnings per Share (as adopted in the
EU)".
The comparative return per ordinary share figures have been restated to reflect
the ten for one share split on 27 July 2023. For weighted average purposes, the
share split has been treated as happening on the first day of the accounting
period.
5. SHARE CAPITAL
Total
Treasury shares
Shares shares in issue
number number number
As at 1 April 2023 62,620,763 2,438,015 65,058,778
Purchase of shares into (2,507,439) 2,507,439 -
treasury - pre-share
split
Shares cancelled from - (4,892,258) (4,892,258)
Treasury
Issue of shares following 541,019,916 478,764 541,498,680
ten for one share split
Purchase of shares into (16,954,184) 16,954,184 -
treasury - post-share
split
As at 30 September 2023 584,179,056 17,486,144 601,665,200
(Unaudited) (Audited)
30 September 31 March
2023 2023
£'000 £'000
Issued and fully paid:
Nominal value of ordinary shares of 2.5p 14,604 16,265
During the period ended 30 September 2023 the Company bought back ordinary
shares into treasury at a cost of £133,365,000 (Year ended 31 March 2023:
£91,514,000).
At the AGM of the Company held in July 2023, shareholders approved a resolution
for a ten for one share split such that each shareholder would receive ten
shares with a nominal value of 2.5 pence each for every one share held.
541,498,680 additional shares (541,019,916 to shareholders and 478,764 in
relation to shares held in treasury) were created on 27 July 2023 following this
approval.
6. NET ASSET VALUE PER SHARE
The net asset value per share is based on the assets attributable to equity
shareholders of £1,981,921,000 (31 March 2023: £2,150,721,000) and on the number
of shares in issue at the period end of 584,179,056 (31 March 2023:
626,207,630*).
* restated to reflect the ten for one share split.
7. TRANSACTION COSTS
Purchase transaction costs for the six months ended 30 September 2023 were
£499,000 (six months ended 30 September 2022: £705,000).
Sales transaction costs for the six months ended 30 September 2023 were £528,000
(six months ended 30 September 2022: £592,000).
8. RECONCILIATION OF OPERATING RETURN TO NET CASH INFLOW/(OUTFLOW) FROM
OPERATING ACTIVITIES
(Unaudited) (Unaudited)
Six months ended Six months ended
30 September 30 September
2023 2022
£'000 £'000
(Loss)/Gains before finance costs and (14,321) 67,465
taxation
Add: capital loss/(Less: capital 25,705 (59,193)
gain)/before finance charges and
taxation
Revenue return before finance charges 11,384 8,272
and taxation
Expenses charged to capital (7,803) (8,452)
(Increase)/Decrease in other debtors (474) 525
Increase in other creditors and 2,678 3,422
accruals
Net taxation suffered on investment (611) 19
income
Amortisation - (108)
Net cash inflow from operating 5,174 3,678
activities
9. PRINCIPAL RISKS AND UNCERTAINTIES
The principal risks facing the Company are listed in the Interim Management
Report. An explanation of these risks and how they are managed is contained in
the Strategic Report and note 16 of the Company's Annual Report & Accounts for
the year ended 31 March 2023.
10. COMPARATIVE INFORMATION
The condensed financial statements contained in this half year report do not
constitute statutory accounts as defined in section 434 of the Companies Act
2006. The financial information for the half years ended 30 September 2023 and
30 September 2022 has not been audited or reviewed by the Company's auditor.
The information for the year ended 31 March 2023 has been extracted from the
latest published audited financial statements of the Company. Those financial
statements have been filed with the Registrar of Companies. The report of the
auditor on those financial statements 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 either
section 498 (2) or 498 (3) of the Companies Act 2006.
Earnings for the first six months should not be taken as a guide to the results
for the full year.
GLOSSARY OF TERMS AND ALTERNATIVE PERFORMANCE MEASURES ("APMs")
ALTERNATIVE INVESTMENT FUND MANAGERS DIRECTIVE ("AIFMD")
Agreed by the European Parliament and the Council of the European Union and
transposed into UK legislation, the AIFMD classifies certain investment
vehicles, including investment companies, as Alternative Investment Funds
("AIFs") and requires them to appoint an Alternative Investment Fund Manager
("AIFM") and depositary to manage and oversee the operations of the investment
vehicle. The Board of the Company retains responsibility for strategy,
operations and compliance and the Directors retain a fiduciary duty to
shareholders.
BENCHMARK
The performance of the Company is measured against the MSCI World Health Care
Index on a net total return, sterling adjusted basis.
The net total return is calculated by reinvesting dividends after the deduction
of withholding taxes.
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.
EMERGING BIOTECHNOLOGY
Biotechnology companies with a market capitalisation less than U.S.$10 billion.
EQUITY SWAPS
An equity swap is an agreement in which one party (counterparty) transfers the
total return of an underlying equity position to the other party (swap holder)
in exchange for a one-off payment at a set date. Total return includes dividend
income and gains or losses from market movements. The exposure of the holder is
the market value of the underlying equity position.
Your Company uses two types of equity swap:
· funded, where payment is made on acquisition. They are equivalent to
holding the underlying equity position with the exception of additional
counterparty risk and not possessing voting rights in the underlying; and,
· financed, where payment is made on maturity. As there is no initial
outlay, financed swaps increase economic exposure by the value of the underlying
equity position with no initial increase in the investments value - there is
therefore embedded leverage within a financed swap due to the deferral of
payment to maturity.
The Company employs swaps for two purposes:
· To gain access to individual stocks in the Indian, Chinese and other
emerging markets, where the Company is not locally registered to trade or is
able to gain in a more cost efficient manner than holding the stocks directly;
and,
· To gain exposure to thematic baskets of stocks (a Basket Swap). Basket
Swaps are used to build exposure to themes, or ideas, that the Portfolio Manager
believes the Company will benefit from and where holding a Basket Swap is more
cost effective and operationally efficient than holding the underlying stocks or
individual swaps.
LEVERAGE ("APM")
Leverage is defined in the AIFMD as any method by which the AIFM increases the
exposure of an AIF. In addition to the gearing limit the Company also has to
comply with the AIFMD leverage requirements. For these purposes the Board has
set a maximum leverage limit of 140% for both methods. This limit is expressed
as a percentage with 100% representing no leverage or gearing in the Company.
There are two methods of calculating leverage as follows:
The Gross Method is calculated as total exposure divided by Shareholders' Funds.
Total exposure is calculated as net assets, less cash and cash equivalents,
adding back cash borrowing plus derivatives converted into the equivalent
position in their underlying assets.
The Commitment Method is calculated as total exposure divided by Shareholders'
Funds. In this instance total exposure is calculated as net assets, less cash
and cash equivalents, adding back cash borrowing plus derivatives converted into
the equivalent position in their underlying assets, adjusted for netting and
hedging arrangements.
As at As at
30 September 2023 31 March 2023
Fair Value Exposure* Fair Value Exposure*
£'000 £'000 £'000 £'000
Investments 2,125,814 2,125,814 2,186,417 2,186,417
OTC equity swaps (5,772) 145,799 (26,892) 190,704
2,120,042 2,271,613 2,159,525 2,377,121
Shareholders' funds 1,981,921 2,150,721
Leverage % 14.6% 10.5%
* Calculated in accordance with AIFMD requirements using the Commitment
Method
MSCI WORLD HEALTH CARE INDEX (THE COMPANY'S BENCHMARK)
The MSCI information (relating to the Benchmark) may only be used for your
internal use, may not be reproduced or redisseminated in any form and may not be
used as a basis for or a component of any financial instruments or products
or indices. None of the MSCI information is intended to constitute investment
advice or a recommendation to make (or refrain from making) any kind of
investment decision and may not be relied on as such. Historical data and
analysis should not be taken as an indication or guarantee of any future
performance analysis, forecast or prediction. The MSCI information is provided
on an "as is" basis and the user of this information assumes the entire risk of
any use made of this information. MSCI, each of its affiliates and each other
person involved in or related to compiling, computing or creating any MSCI
information (collectively, the "MSCI Parties") expressly disclaims all
warranties (including, without limitation, any warranties of originality,
accuracy, completeness, timeliness, non-infringement, merchantability and
fitness for a particular purpose) with respect to this information. Without
limiting any of the foregoing, in no event shall any MSCI Party have any
liability for any direct, indirect, special, incidental, punitive, consequential
(including, without limitation lost profits) or any other damages.
(www.msci.com)
NET ASSET VALUE (NAV) TOTAL RETURN ("APM")
The theoretical total return on shareholders' funds per share, reflecting the
change in NAV assuming that dividends paid to shareholders were reinvested at
NAV at the time the shares were quoted ex-dividend. A way of measuring
investment management performance of investment trusts which is not affected by
movements in discounts/premiums.
Six months to Year to
30 September 31 March
2023 2023*
(p) (p)
Opening NAV per share 343.5 346.5
Decrease in NAV per share (4.2) (3.0)
Closing NAV per share 339.3 343.5
% Change in NAV per share (1.2%) (0.9%)
Impact of reinvested dividends 0.6% 0.8%
NAV per share Total Return (0.6%) (0.1%)
* The comparative NAV per share figures have been restated to reflect the
ten for one share split. See notes 4 to 6 for further details.
ONGOING CHARGES ("APM")
Ongoing charges are calculated by taking the Company's annualised ongoing
charges, excluding finance costs, taxation, performance fees and exceptional
items, and expressing them as a percentage of the average daily net asset value
of the Company over the year.
Six months to One year to
30 September 31 March
2023 2023
£'000 £'000
AIFM & Portfolio Management fees 8,214 17,534
Other Expenses 686 1,142
Total Ongoing Charges 8,900 18,676
Performance fees paid/crystallised - -
Total 8,900 18,676
Average net assets 2,111,076 2,247,296
Ongoing Charges (annualised) 0.8% 0.8%
Ongoing Charges (annualised, including 0.8% 0.8%
performance fees paid or crystallised during
the period)
PERFORMANCE FEE
Dependent on the level of long-term outperformance of the Company, a performance
fee can become payable. The performance fee is calculated by reference to the
amount by which the Company's net asset value (`NAV') performance has
outperformed the Benchmark.
The fee is calculated quarterly by comparing the cumulative performance of the
Company's NAV with the cumulative performance of the Benchmark since the launch
of the Company in 1995. Provision is also made within the daily NAV per share
calculation as required and in accordance with generally accepted accounting
standards. The performance fee amounts to 15.0% of any outperformance over the
Benchmark (see Company's Annual Report & Accounts for the year ended 31 March
2023 for further information).
In order to ensure that only sustained outperformance is rewarded, at each
quarterly calculation date any performance fee payable is based on the lower of:
i. The cumulative outperformance of the investment portfolio over the Benchmark
as at the quarter end date; and
ii. The cumulative outperformance of the investment portfolio over the Benchmark
as at the corresponding quarter end date in the previous year.
The effect of this is that outperformance has to be maintained for a 12 month
period before the related fee is paid.
In addition, a performance fee only becomes payable to the extent that the
cumulative outperformance gives rise to a total fee greater than the total of
all performance fees paid to date.
SHARE PRICE TOTAL RETURN ("APM")
Return to the investor on mid-market prices assuming that all dividends paid
were reinvested.
Six months to One year to
30 September 31 March
2023 2023*
Opening share price 311.5 327.5
Decrease in share price (2.0) (16.0)
Closing share price 309.5 311.5
% Change in share price (0.6%) (4.8%)
Impact of reinvested dividends 0.7% 0.7%
Share price Total Return 0.1% (4.1%)
* The comparative share price figures have been restated to reflect the
ten for one share split. See notes 4 to 6 for further details.
For and on behalf of
Frostrow Capital LLP, Secretary
22 November 2023
- ENDS -
This information was brought to you by Cision http://news.cision.com
END
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