Annual Report and Accounts
The Biotech Growth Trust PLC
Announcement of Annual Financial Report
for the year ended 31 March 2008
The Biotech Growth Trust PLC announces its Annual Financial Report for the year
ended 31 March 2008.
This document is compiled from extracts from the Company's Annual Financial
Report but does not form the full Report. A full copy of the Company's Annual
Financial Report can be found on the Company's website at www.biotechgt.com
COMPANY SUMMARY
Year ended Year % change
31 March ended
2008 31 March
2007
Shareholders' funds (£'000) 64,497 76,803 (16.0)
Net asset value per share 103.4p 117.1p (11.7)
Share price 96.8p 109.8p (11.8)
Discount of share price to net asset value 6.4% 6.2% N/A
per share
NASDAQ Biotechnology Index (sterling 393.1 394.7 (0.4)
adjusted)
Total expense ratio* 1.5% 1.9% N/A
* Based on the average amount of shareholders' funds during the year - excludes
performance fee accrued/written back - see note 3 to the financial statements.
Investment Objective and Policy
The Biotech Growth Trust PLC seeks capital appreciation through investment in
the worldwide biotechnology industry, principally by investing in emerging
biotechnology companies. Performance is measured against the NASDAQ
Biotechnology Index (sterling adjusted).
It is the Company's policy to invest no more than 15.0% of its gross assets in
other listed investment companies (including listed investment trusts). The
Company has never had a holding in an investment company of any sort, and the
Directors do not currently envisage any circumstances in which it is likely to
do so in the future.
The majority of the emerging biotechnology companies that the Company will
invest in are likely to be companies with a market capitalisation of less than
US$3 billion that have undergone an IPO (Initial Public Offering) but as yet
are unprofitable. They will typically be focused on drug research and
development, with their valuations driven by profitable developments, clinical
trial results and partnerships.
Subject to shareholder approval at the forthcoming Annual General Meeting, the
Company intends to invest or commit for investment a maximum of US$15 million,
after the deduction of proceeds of disposal and other returns of capital, in
private equity funds managed by OrbiMed Capital LLC the Company's Investment
Manager or an affiliate thereof. Further information concerning this proposed
investment can be found in the Report of the Directors and details of the
Company's investment policy are also set out in the Report of the Directors.
Capital Structure
As at 31 March 2008, the Company had 62,385,963 shares in issue. During the
year, 3,191,300 shares were bought back for cancellation. Subsequent to the
year end, to 13 June 2008, a further 3,051,000 shares were bought back for
cancellation. As at 13 June 2008, the Company has 59,334,963 shares in issue.
The Following are included:
- Chairman's Statement
- The Board
- OrbiMed Capital LLC
- Review of Investments
- Investment Portfolio
- Report of the Directors
- Corporate Governance
- Income Statement
- Statement of Changes in Equity
- Balance Sheet
- Cash Flow Statement
- Notes to the Financial Statements
For further information please contact Mark Pope at Frostrow Capital on 020
3008 4913
CHAIRMAN'S STATEMENT
Performance
The year under review has been a challenging one for global stock markets and
in particular for the biotechnology sector. It is deeply disappointing to
report another fall in the Company's net asset value per share, which declined
by 11.7% during the year under review. This compares to a fall of 0.4% in the
NASDAQ Biotechnology Index (measured in sterling terms), the Company's
benchmark index.
The Company's share price fell by 11.8% as the discount of share price to net
asset value per share widened slightly to finish the year at 6.4% compared to
6.2% at the beginning of the year.
Larger biotechnology companies delivered strong earnings growth during the year
and performed significantly better than smaller capitalisation stocks. Overall,
the sector was held back by increased caution at the US Food and Drug
Administration (`FDA') over the approval of new drugs. The scarcity of new
approvals led to share price falls in smaller capitalisation biotechnology
companies and in particular in those companies yet to receive approval for
their first product. It is hoped that recent senior appointments at the FDA
will reverse this trend and there have been encouraging signs in recent weeks.
The second half of the year under review was dominated by unusually difficult
credit markets both in the US and the UK and stock markets became increasingly
volatile and unpredictable. This environment was particularly tough for smaller
biotechnology companies and even larger capitalisation pharmaceutical
companies, which have historically shown defensive qualities in bad markets,
performed poorly. Recent attempts by the Federal Reserve Bank, the Bank of
England and other monetary authorities to increase the liquidity of global
markets have been partially successful but confidence is by no means yet fully
restored.
The biotechnology sector has been in the doldrums for a prolonged period and is
now trading at historically low levels. Since the end of 2000 the NASDAQ
Biotechnology Index has declined by 45.9% (in sterling terms) and traditional
valuation methods such as P/E ratios and P/E to growth ratios are at a low
point across the sector. The Board does not believe that these levels are
sustainable and expects valuations to recover in the medium term.
Investment Portfolio
The Board and the Investment Manager keep the allocation of the Company's
assets within the biotechnology sector under regular review and now believe
that attractive returns are potentially available through a modest investment
in private equity funds. Against that background the Company intends, subject
to obtaining shareholder approval at the Annual General Meeting, to make a
commitment of US$5 million (£2.6 million using the current £/US$ exchange rate)
to Caduceus Asia Partners, LP, a limited partnership whose mandate is to invest
in unquoted Asian biotechnology companies, an area of the market in which the
Board and the Investment Manager see significant growth opportunities. Caduceus
Asia Partners, LP is managed by OrbiMed Asia GP, LP, an affiliate of the
Investment Manager who have a track record of delivering upper quartile returns
from similar investment vehicles. Should further opportunities present
themselves, the Board and the Investment Manager will consider making similar
investments. It is currently envisaged that the total investment or the amount
committed for investment to such private equity funds will be limited to US$15
million, after the deduction of proceeds of disposal and other returns of
capital (£7.7 million using the current £/US$ exchange rate).
Loss per Share and Dividend
The loss per share amounted to 13.8p for the year, comprising a revenue deficit
of 0.4p per share (2007: deficit of 0.5p) and a capital loss of 13.4p (2007:
return of 1.7p). No dividend is recommended in respect of the year ended 31
March 2008 (2007: Nil).
Discount Management Policy and Buy-Back Authority
The Board continued to implement its policy of active discount management and
to buy back shares in the event of the market price being at a discount greater
than 6.0% to the net asset value per share. During the year, a total of
3,191,300 shares were bought back for cancellation, at an average discount to
net asset value per share of 6.9%, costing £3,378,000 (including expenses). The
execution and timing of any share buy-back will continue to be at the absolute
discretion of the Board.
Shareholder approval to renew the authority to buy-back shares will be sought
at the Annual General Meeting.
Electronic Communication and Voting
At last year's Annual General Meeting, the necessary resolutions were passed to
facilitate the use of communications with shareholders both in electronic form
and via our website. Further details about this can be found in the Report of
the Directors.
The Company's Articles of Association (the "Articles")
The Board believes that as a result of various legislative and regulatory
developments the Articles should be amended to bring them into line with
current best practice. A Special Resolution will be proposed at the Annual
General Meeting which will, if approved, ratify the adoption of new Articles.
The material differences between the current and the proposed Articles are
summarised in a separate circular to shareholders accompanying this Report and
Accounts.
VAT
As mentioned at the interim stage, the Company is taking steps to recover VAT
paid to its previous manager, Close Investments Limited (formerly Close
Finsbury Asset Management Limited). Given the volume of claims HMRC have to
process it is likely to take a significant time before any amounts are
refunded. The amounts involved are not expected to have a material impact on
the Company's net asset value. The Company will take credit for VAT recovered
when any such recovery can be assessed with reasonable certainty and will
continue to follow guidance issued by The Association of Investment Companies
in this matter.
Savings Plans
The investment plans managed by Close Investments on behalf of the Company
have, subject to FSA rules, recently been transferred to Alliance Trust Savings
Limited ("ATSL"). It is our hope that being included in the much larger,
market-wide scheme run by ATSL will lead to increased private investor interest
in the Company. Existing plan members should have received confirmation of the
transfer, including their new account details.
Outlook
I reported in my statement this time last year that the Board continued to
believe that the prospects for the biotechnology sector were bright. We were
wrong over the year but we remain of the view that the careful investor will be
rewarded in the medium term.
The successful development of new drugs, together with a more positive stance
by the FDA as regards drug approval, is still seen as the key driver of long
term investment returns. Other factors which we believe will drive future
returns are a recovery in stock market conditions generally, supported by an
easing of the recent difficult credit markets, and continued merger and
acquisition activity in the biotechnology sector.
Although we are cautiously optimistic for our sector in the medium term, we
foresee continued volatility and a dangerous economic environment on a shorter
horizon. Our focus will therefore be on the selection of particular stocks with
exceptional prospects for capital enhancement. We plan to remain fully
invested, in line with our ongoing policy.
Annual General Meeting
The Annual General Meeting of the Company will be held at the Barber-Surgeons'
Hall, Monkwell Square, Wood Street, London EC2Y 5BL on Wednesday, 23 July 2008
at 2.45 p.m., and I hope as many shareholders as possible will attend. This
will be an opportunity to meet the Board and to receive a presentation from our
Investment Manager.
John Sclater CVO
Chairman
THE BOARD
John Sclater CVO* (Chairman)
John Sclater, aged 67, has served on the Board as Chairman since the launch of
the Company in June 1997; he is also Chairman of the Nominations Committee. He
is currently self employed and is Chairman or Director of a number of
companies. He was formerly a Trustee of The Grosvenor Estate, Chairman of Hill
Samuel Bank Limited, Chairman of Foreign & Colonial Investment Trust PLC, First
Church Estates Commissioner and President of The Equitable Life Assurance
Society. He remains Chairman of Graphite Enterprise Trust PLC and Argent Group
(Europe) Ltd and a Director of James Cropper PLC.
Sven Borho*
Sven Borho, aged 41, joined the Board in March 2006. He is a founding General
Partner of OrbiMed Capital LLC, the Company's Investment Manager. He is a
portfolio manager for OrbiMed's public equity funds and heads the firm's
trading activities. He started his career in 1991 when he joined Mehta and
Isaly as a Senior Analyst covering European pharmaceutical firms and
biotechnology companies worldwide. Sven studied business administration at
Bayreuth University in Germany and received an M.Sc (Econ.) from The London
School of Economics. Sven, and a number of his fellow partners at OrbiMed
Capital LLC, have a minority financial interest amounting in total to 20.0% in
Frostrow Capital LLP.
Paul Gaunt*
Paul Gaunt, aged 59, joined the Board in June 1997. He has over 30 years'
experience in the investment industry. He was formerly Senior Investment
Manager and an Assistant General Manager of The Equitable Life Assurance
Society and a Director of Brit Insurance Holdings PLC and of Oasis Healthcare
plc. Paul is a Director of Finsbury Worldwide Pharmaceutical Trust PLC. OrbiMed
Capital LLC acts as Investment Manager for both the Company and Finsbury
Worldwide Pharmaceutical Trust PLC. Paul is not employed by and does not have
any other connections with the Company's Investment Manager and is not employed
by any of the companies in which the Company holds an investment. Paul is also
a Director of RCM Technology Trust PLC.
Dr John Gordon*
John Gordon, aged 63, joined the Board in June 1997 and has been designated as
the Senior Independent Director and the Chairman of the Remuneration Committee.
He is currently Chairman of, and employed by, Quercus Management Limited. He
has previously acted as Director of several biotechnology companies, as well as
working at Beecham Research Laboratories, Cambridge University and the Medical
Research Council.
Peter Keen*
Peter Keen, aged 50, has served on the Board as a Director since the launch of
the Company in June 1997 and is Chairman of the Audit and Management Engagement
Committee. A chartered accountant, he has over 24 years' experience in the
management and financing of biotechnology businesses and is Corporate
Development and Finance Director of the privately held biopharmaceutical
company Serentis Limited. He has served as a Director of a number of
biotechnology businesses and is currently a Director of Ark Therapeutics Group
plc and the Senior Independent Director of Abcam plc; he was previously UK
Managing Director of and consultant to Merlin Biosciences Limited.
Lord Waldegrave of North Hill*
Lord Waldegrave of North Hill, aged 61, joined the Board in June 1998. He has
been employed by UBS since June 2003 as a vice-chairman in the Investment
Banking Department. Lord Waldegrave of North Hill was previously Chairman of
the Global Financial Institutions Group at Dresdner Kleinwort Wasserstein. From
1979 to 1997 he was MP for Bristol West and held a number of Cabinet posts
including Secretary of State for Health. Lord Waldegrave of North Hill is
Chairman of the National Museum of Science and Technology.
All members of the Board are non-executive.
* Member of the Audit and Management Engagement, Nominations and Remuneration
Committees
ORBIMED CAPITAL LLC
OrbiMed Capital LLC, based in New York, is an investment manager focused
exclusively on the healthcare sector, with over US$4 billion in assets under
management as at 31 March 2008 across a range of funds, including investment
trusts, hedge funds and other investment vehicles. OrbiMed's investment
management activities were founded in 1989 by Samuel D. Isaly.
Investment Strategy
The Biotech Growth Trust's objective is to seek capital appreciation through
investment in the worldwide biotechnology industry principally by investing in
emerging biotechnology companies.
Consistent with this mandate, OrbiMed has invested the majority of the
Company's assets in emerging biotechnology companies with the remainder
invested in major biotechnology companies. The investment portfolio comprises
37 holdings as at 31 March 2008.
OrbiMed makes investments worldwide - in North America, Europe, and the Far
East. Geographic allocation is in-line with the geographic distribution of
investment opportunities, with a majority of the Company's investments in
companies based in North America.
OrbiMed takes a bottom-up approach to stock selection based on intensive
proprietary research. Stock selection is based on rigorous financial analysis,
exhaustive scientific review, frequent meetings with company management, and
consultations with physicians and other industry experts.
The firm seeks to invest in emerging biotechnology companies with strong
management teams, innovative products in development, and sufficient financial
resources to develop those products. For major biotechnology companies, OrbiMed
looks for strong management teams, healthy organic growth from current
products, and deep pipelines to fuel future growth.
The attainment of profitability frequently acts as a significant catalyst for
biotech share price appreciation. As a result, OrbiMed believes superior
returns can be achieved by investing in emerging biotechnology companies 2-3
years prior to sustainable profitability. Companies that turn profitable
benefit from greater analyst research coverage, a wider institutional investor
base, and reduced clinical development risk (since profitability typically
coincides with a product approval and launch). OrbiMed generally seeks to exit
its investments when the wider investor community starts to value the newly
profitable biotechnology company in excess of its anticipated future growth.
Risk management will be conducted via position size limits, geographic
diversification, and an appropriate weighting between major and emerging
biotechnology. OrbiMed maintains adequate portfolio liquidity by generally
limiting the firm's ownership to 10.0% of an individual company's equity and by
strictly limiting the Company's exposure to unquoted companies.
The OrbiMed Team
OrbiMed's investment professionals possess a combination of extensive
scientific, medical, and financial expertise. The following six individuals
represent the portfolio management team for the Company:
Samuel D. Isaly is a founder and the Managing Partner of OrbiMed. Sam has been
active in global healthcare investing and analysis since 1968 when he joined
Chase Manhattan Bank in New York. During his career, Sam has been a
pharmaceutical analyst with Merrill Lynch, Legg Mason and SocGen Swiss
International.Sam created OrbiMed's asset management business in 1989 through
OrbiMed's predecessor organisation, Mehta and Isaly. Sam has a BA in Economics
from Princeton University and a M.Sc. (Econ.) from The London School of
Economics.
Sven H. Borho, CFA, is a founding General Partner of OrbiMed. Sven is a
portfolio manager for OrbiMed's public equity funds and he heads the firm's
trading efforts. He started his career in 1991 when he joined Mehta and Isaly
as a Senior Analyst covering European pharmaceutical firms and biotechnology
companies worldwide. Sven studied business administration at Bayreuth
University in Germany and received a M.Sc. (Econ.) from The London School of
Economics; he is a citizen of both Germany and Sweden.
ORBIMED CAPITAL LLC (continued)
Carl L. Gordon, Ph.D, CFA, is a founding General Partner of OrbiMed and co-Head
of Private Equity. Carl is active in both private equity and
small-capitalisation public equity investments. He was a senior biotechnology
analyst at Mehta and Isaly from 1995 to 1997. He was a Fellow at The
Rockefeller University from 1993 to 1995. Carl received a Ph.D. in Molecular
Biology from the Massachusetts Institute of Technology. His doctoral work
involved studies of protein folding and assembly. He received a Bachelors
degree from Harvard College.
Richard D. Klemm, Ph.D, CFA, joined OrbiMed in 2000 as a public biotechnology
company analyst. He completed a Ph.D. from the Massachusetts Institute of
Technology in Molecular Biology in 2000. Richard has published scientific
articles in the fields of DNA replication and transcription. He received a BA
from the University of California, Berkeley in 1994 with majors in molecular
and cell biology and economics.
Geoffrey C. Hsu, CFA, joined OrbiMed in 2002 as a public biotechnology analyst.
Prior to joining OrbiMed, he worked as a financial analyst in the healthcare
investment banking group at Lehman Brothers. Geoffrey received his AB degree
summa cum laude from Harvard University and holds an MBA from Harvard Business
School. Prior to business school, he spent two years studying medicine at
Harvard Medical School.
Jeffrey R. Comisarow, M.D., joined OrbiMed in 2006 as a biotechnology analyst.
Prior to joining OrbiMed, he worked at Goldman Sachs & Co. as an analyst
covering the biotechnology sector. Prior to his tenure at Goldman Sachs, he was
an associate in the healthcare investment banking group of SalomonSmithBarney
(Citigroup). Dr. Comisarow has co-authored scientific articles in the fields of
neuroscience and neurologic rehabilitation. He received his B.Sc. degree from
the University of British Columbia and his joint MD/MBA from the University of
California, Los Angeles.
REVIEW OF INVESTMENTS
We present our third Review of Investments for The Biotech Growth Trust PLC.
Performance Review
The Company's net asset value per share declined by 11.7% during the year. This
was a disappointing performance for the Company since the NASDAQ Biotechnology
Index (measured on a sterling adjusted basis) (the "Benchmark Index") was only
down 0.4% for the year. During the time that OrbiMed has managed the Company's
investment portfolio, to 30 May 2008, the Company's net asset value per share
has increased by 11.7% compared to a 10.9% increase in the Benchmark Index.
Currency effects did not significantly impact the Company's performance during
the year.
There was a significant divergence in performance between large capitalisation
and small capitalisation biotechnology companies over the course of the year.
Within the Benchmark Index, we estimate the group of companies with market
capitalisations above US$500 million performed approximately 30.0% better
during the year than the group of companies whose market capitalisations were
below US$500 million. The Company had approximately twice the exposure to
companies with a market capitalisation below US$500 million compared to the
Benchmark Index. As a result, the Company's higher exposure to emerging
biotechnology investments hindered its performance when compared to the
Benchmark Index.
Additionally, close to 15.0% of the weighting in the Benchmark Index at the
beginning of the year consisted of generic companies, diagnostics companies,
and life science tools companies, which are not the focus of the Company's
investment mandate. Those particular subsectors had significantly higher
returns during the year than emerging biotechnology companies, which
exacerbated the difference in performance between the Company and the Benchmark
Index.
The top contributors to performance in the investment portfolio were Gilead
Sciences, BioMarin Pharmaceuticals, and Onyx Pharmaceuticals. Gilead Sciences,
a profitable biotechnology company, saw continued strong sales growth of its
HIV franchise and launched a new drug for pulmonary arterial hypertension
towards the end of 2007. BioMarin Pharmaceuticals received US Food and Drug
Administration ("FDA") approval for Kuvan, a new treatment for a rare genetic
enzyme deficiency called phenylketonuria, which should propel the company to
profitability in 2008. Onyx Pharmaceuticals' Nexavar was shown to be effective
for liver cancer and subsequent sales exceeded expectations.
Noted underperformers in the investment portfolio included Arqule, Kosan
Biosciences, and Momenta Pharmaceuticals. Shares in Arqule have been weak
primarily due to a near-term lack of newsflow around the lead program and the
departure of the company's CEO, who accepted an offer to become CEO of a much
larger and more established pharmaceutical company. Momenta Pharmaceuticals
received a rejection from the FDA for its version of generic Lovenox, an
anticoagulant. Kosan underperformed after results for its cancer drug showed
less activity against myeloma than previously demonstrated. However, subsequent
to the Company's year end Kosan agreed to be acquired by Bristol-Myers Squibb
at a premium in excess of 230.0% to its prevailing share price.
Several other factors dampened performance of the overall biotechnology sector
in the year under review.
1. FDA Conservatism Characterised the Year, But There are Recent Signs of
Improvement
Even though most major biotechnology companies posted strong earnings growth
throughout the year, the sector as a whole was overshadowed by increased FDA
conservatism regarding the approval of new drugs. Emerging biotechnology
companies who have yet to receive approval for a first product were especially
hurt by this trend.
The FDA's cautiousness in approving drugs has been driven by new clinical data
uncovering safety issues with some marketed drugs as well as increased scrutiny
of the agency by Congress. Specifically, there have been a number of high
profile Congressional hearings to debate the FDA's management of safety for
several drugs, including Avandia, Epogen, Aranesp, and Ketek. The increased
Congressional scrutiny has led the FDA to raise its safety hurdle for approving
new drugs. In some cases, such as Zimulti from Sanofi-Aventis, drugs have been
delayed or rejected despite approval in Europe and other markets. The FDA is
also grappling with insufficient staff to handle new drug applications in a
timely manner, leading to delays in the regulatory process.
Illustrative of the safety-conscious regulatory environment this year was the
plight of Amgen, the largest biotechnology company in the world, which suffered
a dramatic share price decline due to safety concerns over its flagship anemia
drug Aranesp. Despite being on the market for years, the drug was found in
clinical studies to cause excess mortality in certain patients with cancer,
leading the FDA to curtail its use. The challenges facing this bellwether stock
probably affected investor sentiment for the biotechnology sector as a whole.
Amgen was the worst performer in the investment portfolio this year, but we
believe the valuation has become overly depressed.
We hope that the recent appointment of Janet Woodcock as permanent head of the
Center for Drug Evaluation and Research at the FDA in March 2008 will
reaccelerate the drug approval process. A number of drug approvals in recent
weeks suggest the FDA's overly cautious stance may be improving.
2. Election Year Politics May Have Cast Overhang Over Healthcare
In November 2008, US citizens will be voting for the next President of the
United States. Both Democratic candidates, Hillary Clinton and Barack Obama,
have campaigned for universal healthcare coverage and lower prices for
prescription drugs. The election year rhetoric may have caused generalist
investors to avoid the biotechnology sector, fearing that drug pricing power
might be threatened.
In the event a Democrat is elected President, we believe any drug reimbursement
proposals they recommend would affect large pharmaceutical companies ("Big
Pharma") much more than biotechnology companies. A streamlined process to
approve generic versions of Big Pharma drugs already exists, while a comparable
pathway for biologics has not yet been worked out. In addition, because most
biotech drugs are novel and address serious unmet medical needs, we believe
there is less opportunity for the government to influence pricing for those
drugs. As long as biotech companies are able to continue introducing innovative
products for unmet needs, we think their pricing power should remain intact.
REVIEW OF INVESTMENTS (continued)
3) Difficult US Equity Markets
The beginning of 2008 saw a sharp pullback in the broader US equity markets due
to problems with the subprime mortgage industry, falling housing prices,
deleveraging of major financial institutions, and fears of a recession.
Historically, healthcare has been a defensive sector in periods of a slowing
economy. However, sudden share price declines for specific stocks in Big Pharma
and healthcare services in 2008 have caused skittish investors to look for
safety elsewhere. In general, shares of major biotechnology companies have held
up relatively well in the current climate because they have stable earnings,
while shares of earlier stage companies have done poorly as investors reduced
their exposure to high beta names.
Biotech Poised for Rebound
Despite the difficult environment for biotechnology companies over the past
year, there are a number of reasons to be sanguine about the industry.
From a valuation perspective, shares in biotechnology and pharmaceutical
companies are trading at historically depressed levels. Customary valuation
metrics such as P/E ratios and P/E to growth ratios are at historic lows for
the industry. We do not think these depressed valuations are sustainable and
expect a rebound in share prices as valuations return to historical norms.
Merger and acquisition ("M&A") activity in the biopharmaceutical space also
continues as cash-rich pharmaceutical companies seek to bolster their product
portfolios. Of the announced transactions during the year, the Company
benefited directly from acquisitions of two target companies in the investment
portfolio: MedImmune and Aspreva. After the year end, the Company benefited
from Bristol-Myers Squibb's announced acquisition of Kosan Biosciences. We
expect M&A activity to remain robust.
Premium
Announcement Target Acquiror Deal size paid
date
5 June 2008 Tercica Ipsen US$660 million 104%
29 May 2008 Kosan Biosciences Bristol-Myers
Squibb US$190 million 233%
22 April 2008 Sirtris GlaxoSmithKline US$720 million 84%
11 April 2008 Millennium Takeda US$8.8 billion 53%
26 February CollaGenex Galderma US$420 million 30%
2008
20 February Encysive Pfizer US$325 million 118%
2008
10 December Adams Respiratory Reckitt US$2.3 billion 37%
2007 Benckiser
10 December MGI Pharma Eisai US$3.9 billion 39%
2007
29 November Axcan Pharma TPG Capita US$1.3 billion 28%
2007
18 November Pharmion Celgene US$2.9 billion 46%
2007
16 November Coley Pfizer US$160 million 167%
2007 Pharmaceuticals
18 October 2007 Aspreva Galenica US$915 million 34%
29 May 2007 Bioenvision Genzyme US$345 million 50%
23 April 2007 MedImmune AstraZeneca US$5.6 billion 53%
Since the end of 2000 the NASDAQ Biotechnology Index, the AMEX Pharmaceutical
Index and the S&P 500 Index have declined 45.9% and 50.4% and 24.7% in sterling
terms respectively. Although the market environment for the biotechnology
sector has been challenging in recent years, we remain confident about the
prospects of the industry. We expect share prices to recover as this value is
recognised.
Sven Borho
OrbiMed Capital LLC Investment Manager
INVESTMENT PORTFOLIO
The investments as at 31 March 2008
were:
2008 2008
Fair Value % of
Security Country £'000 Investments
Gilead Sciences United States 7,255 11.2
Genentech United States 3,836 5.9
Genzyme United States 3,557 5.5
Amgen United States 3,471 5.4
Biogen Idec United States 3,223 5.0
Imclone Systems United States 3,044 4.7
Allos Therapeutics United States 2,842 4.4
Celgene United States 2,771 4.3
Curis * United States 2,731 4.2
Vertex Pharmaceuticals United States 2,705 4.2
Top 10 Investments 35,435 54.8
BioMarin Pharmaceutical United States 1,965 3.0
Medivir Sweden 1,962 3.0
OSI Pharmaceuticals United States 1,784 2.7
Gen-Probe United States 1,722 2.6
Alexion Pharmaceuticals United States 1,673 2.6
Onyx Pharmaceuticals United States 1,618 2.5
Indevus Pharmaceuticals United States 1,602 2.5
United Therapeutics United States 1,311 2.0
Intermune Inc United States 1,233 1.9
American Oriental Bioengineering United States 1,220 1.9
Top 20 Investments 51,525 79.5
Tepnel Life Sciences * United Kingdom 1,191 1.8
Omrix Biopharmaceuticals United States 1,170 1.8
Human Genome Science United States 1,154 1.8
Amag Pharmaceuticals United States 1,118 1.7
Cytokinetics United States 1,095 1.7
Pharmacopeia * United States 1,015 1.6
Rosetta Genomics Israel 917 1.4
Infinity Pharmaceuticals United States 828 1.3
Affymax United States 812 1.2
Arqule United States 770 1.2
Top 30 Investments 61,595 95.0
Kosan Biosciences United States 692 1.0
Caliper Life Sciences United States 631 1.0
Orexigen Therapeutics United States 590 0.9
Pharmasset United States 430 0.7
Merlin Fund (Unquoted) United Kingdom 325 0.5
Biowisdom (Unquoted) United Kingdom 300 0.5
CV Therapeutics United States 243 0.4
Total Investments 64,806 100.0
* Includes warrants
All of the above investments are
equities unless otherwise stated
Portfolio Breakdown
Fair Value % of
Investments £'000 Investments
Equities 64,229 99.1
Warrants 577 0.9
Total Investments 64,806 100.0
REPORT OF THE DIRECTORS INCORPORATING THE BUSINESS REVIEW
The Directors present their report and the audited financial statements for the
year ended 31 March 2008.
Status of the Company
During the year under review the Company has continued to conduct its affairs
so as to qualify as an investment company, as defined under Section 833 of the
Companies Act 2006, and an investment trust within the meaning of Section 842
of the Income and Corporation Taxes Act 1988. HM Revenue & Customs approval of
the Company's status as an investment trust has been received for all years up
to and including the year ended 31 March 2007. This is however subject to
review should there be any enquiry under Corporation Tax Self Assessment. The
Directors are of the opinion that the Company has subsequently directed its
affairs so as to enable it to continue to obtain HM Revenue & Customs approval
as an investment trust.
The close company provisions of the Income and Corporation Taxes Act 1988 do
not apply to the Company.
The Company's shares are eligible for inclusion in the stocks and shares
component of an Individual Savings Account.
Continuation of the Company
In accordance with the Company's Articles of Association, shareholders will
have an opportunity to vote on the continuation of the Company at the AGM in
2010 and every five years thereafter.
Investment Objective and Benchmark
The Company seeks capital appreciation through investment in the worldwide
biotechnology industry, principally by investing in emerging biotechnology
companies. Performance is measured against the NASDAQ Biotechnology Index
(sterling adjusted).
Investment Policy
In order to achieve its investment objective, the Company invests in a
diversified portfolio of biotechnology (including emerging biotechnology
companies) and related securities on a worldwide basis.
Investment Limitations and Guidelines
The Board seeks to manage the Company's risk by imposing various investment
limits and restrictions:
* The Company will not invest more than 15.0% of its assets in other UK
listed investment companies
* The Company will not invest more than 10.0% of the investment portfolio in
any one individual stock at the time of acquisition
* The largest 30 quoted stocks will normally represent at least 50.0% of the
quoted investment portfolio
* Subject to shareholder approval at the forthcoming Annual General Meeting,
the Company intends to invest or commit for investment a maximum of US$15
million, after the deduction of proceeds of disposal and other returns of
capital, in private equity funds managed by Orbimed Capital LLC the
Company's Investment Manager or an affiliate thereof.
* The Company's gearing policy is to borrow up to a maximum of £15 million
which can be used, inter alia, to finance any short term borrowing
requirements. The Company currently has a £5 million uncommitted revolving
credit facility provided by Allied Irish Banks p.l.c. This facility can be
drawn down at the discretion of the Investment Manager
Compliance with the Board's investment limitations and guidelines is monitored
continuously by Frostrow Capital LLP ("Frostrow" or the "Manager") and OrbiMed
Capital LLC ("OrbiMed" or the "Investment Manager") and is reported to the
Board on a monthly basis.
Performance
In the year to 31 March 2008, the Company's net asset value per share decreased
by 11.7% compared to a fall of 0.4% in the NASDAQ Biotechnology Index (sterling
adjusted). The Company's share price fell by 11.8% in the same period.
The Review of Investments includes a review of the principal developments
during the year, together with information on investment activity within the
Company's investment portfolio.
REPORT OF THE DIRECTORS INCORPORATING THE BUSINESS REVIEW (continued)
Top and bottom five contributors to net asset value performance for the year to
31 March 2008
Contribution Contribution
for the year to per share
31 March 2008 (pence)*
£'000
Top Five Contributors
Gilead Sciences 1,840 2.9
BioMarin Pharmaceutical 1,649 2.6
Onyx Pharmaceuticals 1,155 1.8
Savient Pharmaceutical 1,120 1.7
MedImmune 999 1.5
10.5
Bottom Five Contributors
Amgen (2,281) (3.5)
Kosan Biosciences (1,495) (2.3)
Momenta Pharmaceuticals (1,101) (1.7)
Cytokinetics (1,092) (1.7)
Arqule (1,064) (1.7)
(10.9)
* based on 64,473,752 shares being the weighted average number of shares in
issue during the year ended 31 March 2008
Results and Dividends
The results attributable to shareholders for the year and the transfer from
reserves are shown in the Income Statement. No dividend is proposed in respect
of the year ended 31 March 2008 (2007: nil).
Key Performance Indicators ("KPI")
The Board assesses its performance in meeting the Company's objective against
the following Key Performance Indicators:
* Net asset value return
* Share price return
* Stock contribution analysis
* Share price premium/discount to net asset value per share
* Total expense ratio
* Benchmark and peer group performance
* Repurchase of own shares
As indicated, the management of the investment portfolio has been delegated to
the Investment Manager and management, administration, company secretarial and
marketing services have been delegated to the Manager. Each provider is
responsible to the Board which is ultimately responsible to the shareholders
for performing against inter alia the above KPI's within the terms of their
respective agreements by utilising the capabilities of the experienced
professionals within each firm.
Principal Risks and Their Mitigation
The Company's assets consist principally of listed equities; its main area of
risk is therefore market-related. The specific key risks faced by the Company,
together with the Board's mitigation approach, are as follows:
i. Objective and Strategy - The Company and its investment objective become
unattractive to investors.
The Board reviews regularly the Company's investment objective and investment
guidelines in the light of investor sentiment monitoring closely whether the
Company should continue in its present form. The
Board, through the Manager and the Investment Manager, hold regular discussions
with major shareholders. A continuation vote is to be held at the Annual
General Meeting in 2010 and every five years thereafter.
REPORT OF THE DIRECTORS INCORPORATING THE BUSINESS REVIEW (continued)
Each month the Board receives a report which monitors the investments held in
the investment portfolio compared against the Benchmark Index and the
investment guidelines. Additional reports and presentations are received from
and made by the Company's stockbroker and the Company Secretary.
ii. Level of discount/premium - The level of discount/premium can fluctuate
considerably.
The Board undertakes a regular review of the level of discount/premium and
consideration is given to ways in which share price performance may be
enhanced, including the effectiveness of marketing and share buy-backs, if
considered appropriate. The Board has implemented an active discount management
policy, buying back the Company's shares for cancellation or to be held as
treasury shares if the market price is at a discount greater than 6.0% to the
net asset value per share. The making and timing of any share buy-backs is at
the absolute discretion of the Board.
iii. Portfolio Performance - Investment performance may not be meeting
shareholder requirements.
The Board reviews regularly investment performance against the Benchmark and
against the Company's peer group. The Board also receives regular reports that
show an analysis of performance compared to other relevant indices. The
Investment Manager provides an explanation of significant stock selection
decisions and an overall rationale for the make-up of the investment portfolio.
The Investment Manager discusses current and potential investment holdings with
the Board on a regular basis.
iv. Operational and Regulatory - A breach of Section 842 of the Income and
Corporation Taxes Act 1988 could
lead to the Company being subject to capital gains tax on the sale of its
investments, whilst serious breach of other regulatory rules may lead to
suspension from the Stock Exchange or to a qualified Audit Report. Other
control failures, either by the Manager, the Investment Manager or any
other of the Company's service providers, may result in operational and/or
reputational problems, erroneous disclosures or loss of assets through
fraud, as well as breaches of regulations.
All transactions and income and expenditure forecasts are reported to the
Board. The Board considers regularly all major risks, the measures in place to
control them and the possibility of any other risks that could arise. The Board
also ensures that satisfactory assurances are received from service providers.
The Compliance Officer of the Manager and Investment Manager produce regular
reports for review at the Company's Audit and Management Engagement Committee
and are available to attend meetings in person if required.
v. Market Price Risks - Uncertainty about future prices of financial
instruments held.
The Board meets as a team on a regular quarterly basis during the year and on
an ad hoc basis if necessary. At each meeting the Directors consider the asset
allocation of the investment portfolio in order to minimise the risk associated
with particular countries or instruments. The Investment Manager has
responsibility for selecting investments in accordance with the Company's
investment objective and seeks to ensure that investment in individual stocks
falls within acceptable risk levels.
vi. Liquidity Risk - Ability to meet funding requirements when they arise. The
Investment Manager has
constructed the investment portfolio so that funds can be raised at short
notice if required.
vii. Shareholder Profile - Activist shareholders whose interests are not
consistent with the long-term objectives
of the Company may be attracted onto the shareholder register.
The Manager provides a shareholder analysis to every Board Meeting for Board
consideration of action required in addition to regular reporting by the
Company's stockbroker. The Board has implemented an active discount management
policy, buying back the Company's shares for cancellation or to be held as
treasury shares if the market price is at a discount greater than 6.0% to the
net asset value per share. The making and timing of any share buy-backs is at
the absolute discretion of the Board.
viii. Currency Risk - Movements in exchange rates could adversely affect the
performance of the investment
portfolio.
A significant proportion of the Company's assets is, and will continue to be,
invested in securities denominated in foreign currencies, in particular US
dollars. As the Company's shares are denominated and trade in sterling, the
return to shareholders will be affected by changes in the value of sterling
relative to those foreign currencies. The Board has made clear the Company's
position with regard to currency fluctuations which is that it does not
currently hedge against currency exposure.
Further information on financial instruments and risk, as required by IFRS 7,
can be found in note 13 to the financial statements.
REPORT OF THE DIRECTORS INCORPORATING THE BUSINESS REVIEW (continued)
Share Capital
As part of the package of measures adopted in 2005 by the Board to improve the
attraction of the Company's shares to new investors and also to provide the
prospect of a sustained improvement in the rating of the Company's shares, an
active discount management policy was implemented, to buy-back shares if the
market price is at a discount greater than 6.0% to net asset value per share.
The making and timing of any share buy-back remain at the absolute discretion
of the Board. Authority to buy back 14.99% of the Company's issued share
capital is sought at each Annual General Meeting and as at 25 July 2007
authority was obtained to buy back up to 9,815,042 shares. During the year a
total of 3,191,300 shares were bought back for cancellation representing 4.9%
of the issued share capital at the beginning of the year. The purchases were
made at prices ranging between £0.89163 and £1.14 per share at a cost of £
3,378,000 (including expenses), at an average discount of 6.9% to net asset
value per share. Subsequent to the year end, to 13 June 2008, a further
3,051,000 shares were bought back for cancellation at an average discount of
7.0% to the net asset value per share, at a cost of £3,043,000 (including
expenses).
Prospects
The successful development of new drugs, together with a more positive stance
by the FDA as regards drug approval, is still seen as the key driver of long
term investment returns. Other factors which OrbiMed believe will drive future
returns are a recovery in stock market conditions generally, supported by an
easing of the recent difficult credit markets, and continued merger and
acquisition activity in the biotechnology sector.
Although OrbiMed are cautiously optimistic for the biotechnology sector in the
medium term, they foresee continued volatility and a dangerous economic
environment on a shorter horizon. Their focus will therefore be on the
selection of particular stocks with exceptional prospects for capital
enhancement. They plan to remain fully invested, in line with their ongoing
policy.
Management
Management, Administrative and Secretarial Services Agreement: Management,
Administrative, Secretarial and other services are provided to the Company by
the Manager. The Manager is authorised and regulated by the Financial Services
Authority.
For the period 1 April 2007 to 30 June 2007 the management fee payable was 1.0%
per annum of the Company's net asset value and was shared 0.35% to Close
Investments Limited, the previous manager, and 0.65% to the Investment Manager.
In addition Close Investments Limited received a fixed amount equal to £50,000
per annum. With effect from 1 July 2007, the new Manager, Frostrow Capital LLP,
receives a periodic fee equal to 0.30% per annum of the Company's market
capitalisation, plus a fixed amount equal to £50,000 per annum. The notice
period on the Management, Administration and Company Secretarial Agreement with
the Manager is 12 months.
The Manager, under the terms of the Agreement provides inter alia the following
services:
* marketing and shareholder services;
* administrative services to such extent and from such dates as the Board may
determine;
* advice and guidance in respect of corporate governance requirements;
* maintaining adequate accounting records in respect of Company dealing,
investments, transactions, dividends and other income, the income account,
balance sheet and cash books and statements;
* preparation and despatch of the audited annual and unaudited interim report
and financial statements; and
* attending to general tax affairs where necessary.
Investment Management Agreement: Investment Management Services are provided by
the Investment Manager. The Investment Manager is authorised and regulated by
the US Securities and Exchange Commission. The Investment Manager receives a
periodic fee equal to 0.65% p.a. of the Company's net asset value. The
Investment Management Agreement may be terminated by either party giving notice
of not less than 12 months. The Investment Manager under the terms of the
Agreement provides inter alia the following services:
* seeking out and evaluating investment opportunities;
* recommending the manner by which monies should be invested, disinvested,
retained or realised;
* advising on how rights conferred by the investments should be exercised;
* analysing the performance of investments made; and
* advising the Company in relation to trends, market movements and other
matters which may affect the
REPORT OF THE DIRECTORS INCORPORATING THE BUSINESS REVIEW (continued)
investment policy of the Company.
Performance Fee: Dependent on the level of performance achieved, the Manager
and Investment Manager are also entitled to the payment of a performance fee.
The performance fee is calculated by reference to the amount by which the
Company's investment portfolio has out-performed the benchmark index.
The fee is calculated quarterly by comparing the cumulative performance of the
Company's investment portfolio with the cumulative performance of the benchmark
index since 30 June 2005. The performance fee amounts to 16.5% of any
out-performance of the net asset value over the benchmark index, the Investment
Manager receiving 15.0% and the Manager receiving 1.5% of the outperformance.
At each quarterly calculation date any performance fee payable is based on the
lower of:
i. the cumulative out-performance of the investment portfolio over the
benchmark index as at the quarter end date; and
ii. the cumulative out-performance of the investment portfolio over the
benchmark as at the corresponding quarter end date in the previous year.
As at each quarterly calculation date, and on a daily basis, provision is made
within the Company's net asset value for all performance fees that could
crystallise over the ensuing four performance fee calculation dates, assuming
that any outperformance arising is maintained in full for a twelve month period
from the calculation date. In the event that outperformance is not maintained
then the provision is adjusted accordingly within the Company's net asset
value. In accordance with this arrangement, the performance fee accrued of £
1,351,000 as at 31 March 2007 was no longer required as at 31 March 2008 and
was reversed accordingly, see note 3.
Manager and Investment Manager Evaluation and Re-Appointment
The review of the Manager and the Investment Manager's performance is a
continuous process carried out by the Audit and Management Engagement Committee
with a formal evaluation being undertaken each year. As part of this process
the Committee monitors the services provided by the Manager and the Investment
Manager and receives regular reports and views from the Investment Manager on
investment strategy, asset allocation and stock selection. The Committee also
receives comprehensive performance measurement reports to enable it to
determine whether or not the performance objective set by the Board has been
met. In addition the Committee reviewed the appropriateness of the appointment
of the Manager and the Investment Manager in May 2008 with a recommendation
being made to the full Board.
The Board believes the continuing appointment of the Manager and the Investment
Manager, under the terms described above, is in the interests of shareholders
as a whole. In coming to this decision, it also took into consideration the
following additional reasons:
* the quality and depth of experience of the management, administrative,
company secretarial and marketing team that the Manager allocates to the
management of the Company; and
* the quality and depth of experience allocated by the Investment Manager to
the management of the investment portfolio and the level of past
performance of the investment portfolio in absolute terms and also by
reference to the benchmark index.
Going Concern
The Directors believe that it is appropriate to adopt the going concern basis
in preparing the accounts as the assets of the Company consist mainly of
securities that are readily realisable and, accordingly the Company has
adequate financial resources to continue in operational existence for the
foreseeable future.
Creditors' Payment Policy
Terms of payment are negotiated with suppliers when agreeing settlement details
for transactions. While the Company does not follow a formal code, it is the
Company's continuing policy to pay amounts due to creditors as and when they
become due. There were no creditors in respect of goods or services supplied at
the year-end.
Environmental and Ethical Policy
The Company's primary objective is to achieve long term capital growth through
investing in emerging biotechnology companies. The Board, however, recognise
that this should be done in an environmentally responsible way. The Directors
believe, however, that the Company would be in breach of its fiduciary duties
to shareholders if investment decisions were based solely on ethical or
environmental considerations.
REPORT OF THE DIRECTORS INCORPORATING THE BUSINESS REVIEW (continued) Directors
Directors of the Company, all of whom served throughout the year unless stated
otherwise are as follows:
John Sclater CVO (Chairman)
Sven Borho
Paul Gaunt
Dr John Gordon
Peter Keen
Anthony Townsend (retired 8 November 2007)
Lord Waldegrave of North Hill
Directors' Interests
The beneficial interests of the Directors and their families in the Company
were as set out below:
Shares of 25 p each
31 March 31 March
2008 2007
John Sclater 9,410 9,410
Sven Borho 221,218 221,218
Paul Gaunt - -
Dr John Gordon 50,000 50,000
Peter Keen 32,585 32,585
Lord Waldegrave of North Hil 51,066 51,066
As at 13 June 2008, there had been no changes in the above details.
None of the Directors were granted or exercised rights over shares during the
year. None of the Directors has any contract (including service contracts) with
the Company. Each Director is appointed by simple letter of appointment that
sets out the basic terms of appointment. Sven Borho is a partner in the
Investment Manager which is party to the Investment Management Agreement with
the Company. A number of the partners at OrbiMed have a minority financial
interest amounting in total to 20.0% in Frostrow, the Company's Manager.
Directors' & Officers' Liability Insurance Cover
Directors' & officers' liability insurance cover was maintained by the Board
during the year ended 31 March 2008. It is intended that this policy will
continue for the year ended 31 March 2009 and subsequent years.
Directors' Responsibilities
Company law in the United Kingdom requires the Directors to prepare financial
statements for each financial year. The Directors are responsible for preparing
the financial statements in accordance with applicable law and regulations. The
Directors confirm that to the best of their knowledge the financial statements,
within the Annual Report, have been prepared in accordance with applicable
accounting standards, give a true and fair view of the assets, liabilities,
financial position and the loss for the year ended 31 March 2008, and that the
Chairman's Statement, Review of Investments and the Report of the Directors
include a fair review of the information required by 4.1.8R to 4.2.11R of the
FSA's Disclosure and Transparency Rules. In preparing these financial
statements, the Directors have:
* selected suitable accounting policies and applied them consistently;
* made judgements and estimates that are reasonable and prudent;
* followed applicable international accounting standards; and
* prepare the financial statements on a going concern basis.
The Directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
Company and enable them to ensure that the financial statements comply with the
Companies Act 1985. They are also responsible for safeguarding the assets of
the Company and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
REPORT OF THE DIRECTORS INCORPORATING THE BUSINESS REVIEW (continued)
The financial statements are published on the Company's website at
www.biotechgt.com, which is a website maintained by the Manager. The
maintenance and integrity of the website maintained by the Manager is, so far
as it relates to the Company, the responsibility of the Manager. The work
carried out by the auditors does not involve consideration of the maintenance
and integrity of this website and accordingly, the auditors accept no
responsibility for any changes that have occurred to the financial statements
since they were initially presented on the website. Visitors to the website
need to be aware that legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ from
legislation in their jurisdiction.
Auditors
RSM Robson Rhodes LLP merged with Grant Thornton during the year and now
conducts business as Grant Thornton UK LLP. As a matter of formality Robson
Rhodes resigned as auditors and the Board appointed Grant Thornton UK LLP to
fill the casual vacancy. Due to the merger of the businesses, and special
notice having been received, a resolution to reappoint Grant Thornton UK LLP as
auditors to the Company will be proposed at the forthcoming Annual General
Meeting together with a resolution to authorise the Directors to determine the
auditors' remuneration.
Awareness of Relevant Audit Information
So far as the Directors are aware, there is no relevant audit information of
which the auditors are unaware. The Directors have taken all steps they ought
to have to make themselves aware of any relevant audit information and to
establish that the auditors are aware of that information.
Corporate Governance
A formal statement on Corporate Governance is set out in the Corporate
Governance Report.
Beneficial Owners of Shares - Information Rights
Beneficial owners of shares who have been nominated by the registered holder of
those shares to receive information rights under section 146 of the Companies
Act 2006 are required to direct all communications to the registered holder of
their shares rather than to the Company's registrar, Capita Registrars, or to
the Company directly.
Articles of Association
The Companies Act 2006 (the "2006 Act") received Royal Assent in November 2006.
The 2006 Act represents a major reform of UK companies' legislation and is
being brought into force on a staged basis. In order to reflect certain of the
provisions of the 2006 Act which have or will come into force, it is proposed
that a number of alterations be made to the Articles of Association. Details of
the proposed changes are set out in a separate circular to shareholders.
Shareholders should be mindful that the 2006 Act is being implemented over a
period of time, with the final stage taking effect in October 2009.
Electronic Communication and Voting
Following approval gained from shareholders at last year's Annual General
Meeting, shareholders will now have the option to receive their communications
electronically. Electronic communications has a number of benefits to
the Company and to shareholders by reducing costs and increasing the speed of
communication. A letter accompanying this Annual Report contains further
details.
Annual General Meeting
The formal Notice of Annual General Meeting is set out in a separate circular
to shareholders dated 18 June 2008.
Resolutions relating to the following items of special business will be
proposed at the forthcoming Annual General Meeting:
a. Authority to allot shares
Resolution 11 gives the Directors authority to allot new shares, otherwise than
by a pro rata issue to existing shareholders, up to an aggregate nominal amount
of £1,483,374 such amount being equivalent to 10.0% of the issued share capital
at 13 June 2008 and representing 5,933,496 shares of 25p each. Such issues
would only be made at prices greater than the prevailing net asset value per
share ("NAV") thereby increasing the assets underlying each share and spread
administrative expenses, other than those charged as a percentage of assets,
over a greater number of shares.
b. Disapplication of pre-emption rights
Resolution 12 seeks shareholder approval for the disapplication of pre-emption
rights in respect of a) the allotment of shares or the sale by the Company of
shares held by it in treasury ("treasury shares"), pursuant to a rights issue
or a sale equivalent to a rights issue, and b) the allotment (other than as
part of a rights issue) of shares or the sale of treasury shares for cash up to
an aggregate nominal value of £1,483,374. No such allotment will be made at
less than the prevailing NAV per share (as determined in the absolute
discretion of the Directors). Shares held in treasury may also be resold by the
Company at a price greater than the net asset value per share prevailing at the
time of sale.
c. Authority to repurchase shares
Resolution 13 seeks shareholder approval for the Company to have the power to
repurchase its own shares. The Board believes that the ability of the Company
to purchase its own shares in the market will potentially benefit all
shareholders of the Company. The repurchase of shares at a discount to the
underlying NAV would enhance the NAV of the remaining shares.
At the Annual General Meeting the Company will seek shareholder approval to
repurchase up to 8,894,311 shares, representing approximately 14.99% of the
Company's issued share capital (the maximum permitted under the Listing Rules)
at a price that is not less than 25p a share (the nominal value of each share)
and not more than the higher of (a) 105.0% of the average of the middle market
quotations for the five business days preceding the day of purchase; and (b)
the higher of the price of the last independent trade in shares and the highest
then current independent bid for shares on the London Stock Exchange. The
decision as to whether to repurchase any shares will be at the absolute
discretion of the Board. Shares repurchased under this authority may either be
held by the Company in treasury for resale up a maximum of 10.0% of the issued
share capital or cancelled.
d. Adoption of new articles of association
Resolution 14 seeks shareholder approval that new articles of association be
adopted in substitution for, and to the exclusion of, the existing articles of
association.
e. Proposed investment or commitment for investment in private equity funds
Resolution 15 seeks shareholder approval for a proposed investment or
commitment for investment in private equity funds which are managed or advised
by the Company's Investment Manager or its affiliates to a maximum of US$15
million, after the deduction of proceeds of disposal and other returns of
capital, as referred to in the Chairman's Statement. Any investment in such
funds will be excluded from the calculation of the Investment Manager's annual
management and performance fee.
As referred to in the Chairman's Statement, the Company intends to commit US$5
million to Caduceus Asia Partners, L.P., a Cayman Islands exempted limited
partnership (`the Fund') with a ten year life (capable of being extended for up
to a total of four more years). The General Partner of the Fund is OrbiMed Asia
GP, LP, an affiliate of the Company's Investment Manager, the Fund has an
anticipated size of US$150 million. The Fund seeks to generate returns for its
partners principally through long-term capital appreciation by investing in
equity and equity-related investments in healthcare and life science companies
that are based in or have significant business activities in Asia. The Fund
expects to make approximately 12 to 15 investments.
The Fund will pay to the General Partner an annual management fee equal to 2.5%
of the aggregate (drawn or undrawn) capital commitments of the Limited
Partners. Net portfolio gains from the Fund will be allocated as to 80.0% to
the Limited Partners in proportion to their percentage interest in the Fund and
20.0% to the General Partner.
The authorities being sought under resolutions 11, 12 and 13 will last until
the conclusion of the next Annual General Meeting or, if less a period of 15
months.
By order of the Board
Frostrow Capital LLP
Company Secretary
13 June 2008
CORPORATE GOVERNANCE
Compliance
The Board has considered the principles and recommendations of the AIC Code of
Corporate Governance ("AIC Code") by reference to the AIC Corporate Governance
Guide for Investment Companies ("AIC Guide"). The AIC Code, as explained by the
AIC Guide, addresses all the principles set out in Section 1 of the Combined
Code, as well as setting out additional principles and recommendations on
issues that are of specific relevance to The Biotech Growth Trust PLC.
The Board considers that reporting against the principles and recommendations
of the AIC Code, and by reference to the AIC Guide (which incorporates the
Combined Code), will provide better information to shareholders.
The Company has complied with the recommendations of the AIC Code and the
relevant provisions of Section 1 of the Combined Code throughout the year ended
31 March 2008 and up to the date of this report, except with regard to the
composition of its committees and as set out below.
The Combined Code includes provisions relating to:
* The role of the chief executive;
* Executive directors' remuneration; and
* The need for an internal audit function.
For the reasons set out in the AIC Guide, and in the preamble to the AIC Code,
the Board considers these provisions are not relevant to the position of The
Biotech Growth Trust PLC, being an externally managed investment company. The
Company has therefore not reported further in respect of these provisions.
Board Independence, Composition and Tenure
The Board, chaired by John Sclater, currently consists of six non-executive
Directors. The Directors' biographical details demonstrate a breadth of
investment, commercial and professional experience. Dr John Gordon has been
designated as the Senior Independent Director. The Directors review their
independence annually. Paul Gaunt is a Director of Finsbury Worldwide
Pharmaceutical Trust PLC for which OrbiMed also acts as Investment Manager; he
has also served on the Board for over nine years. He is therefore not
considered to be an Independent Director. Sven Borho is a Founding General
Partner of OrbiMed, the Company's Investment Manager, and is also not
considered to be an Independent Director. Mr Sclater, Dr Gordon, Lord
Waldegrave of North Hill and Mr Keen have all served on the Board for over nine
years. The Board considers them to be independent in character and judgement
and, in accordance with the AIC Code, does not believe that the criterion of
length of service should preclude them from being considered independent; they
have no other links to the Investment Manager and have a wide range of other
interests.
The Directors retire by rotation at every third Annual General Meeting and any
Directors appointed to the Board since the previous Annual General Meeting also
retire and stand for election. Any Director who has served on the Board for
more than nine years is subject to annual re-election. In light of the above Mr
Sclater, Dr Gordon, Lord Waldegrave of North Hill and Messrs Borho, Gaunt and
Keen will be retiring from the Board at the forthcoming Annual General Meeting
and will be offering themselves for re-election.
The Board has considered the position of Mr Sclater, Dr Gordon, Lord Waldegrave
of North Hill and Messrs Borho, Gaunt and Keen as part of the evaluation
process, and believes that it would be in the Company's best interests to
propose them for re-election at the forthcoming Annual General Meeting.
None of the Directors has a service contract with the Company. New Directors
are appointed with the expectation that they will serve for a period of three
years. Any Director may resign in writing to the Board at any time. The terms
of their appointment are detailed in a letter sent to them when they join the
Board. These letters are available for inspection at the offices of the
Company's Manager and will be available at the Annual General Meeting. When a
new Director is appointed to the Board, he/she is provided with all relevant
information regarding the Company and his/her duties and responsibilities as a
Director. In addition, a new Director will also
CORPORATE GOVERNANCE (continued)
spend time with representatives of the Manager and Investment Manager in order
to learn more about their processes and procedures. The Board also receives
regular briefings from, amongst others, the Auditors and the Company Secretary
regarding any proposed developments or changes in laws or regulations that
could affect the Company and/or the Directors.
The Board's Responsibilities
The Board is responsible for efficient and effective leadership of the Company
and has reviewed the schedule of matters reserved for its decision. The Board
meets at least on a quarterly basis and at other times as necessary. The Board
is responsible for all aspects of the Company's affairs, including the setting
of parameters for and the monitoring of the investment strategy, the review of
investment performance and investment policy. It also has responsibility for
all corporate strategy issues, dividend policy, share buy-back policy, gearing,
share price and discount/premium monitoring and corporate governance matters.
To enable them to discharge their responsibilities, prior to each meeting the
Directors are provided, in a timely manner, with a comprehensive set of papers
giving detailed information on the Company's transactions, financial position
and performance. Representatives of the Manager and Investment Manager attend
each Board meeting, enabling the Directors to seek clarification on specific
issues or to probe further on matters of concern; a full written report is also
received from the Investment Manager at each quarterly meeting. In light of
these reports, the Board gives direction to the Investment Manager with regard
to the Company's investment objectives and guidelines. Within these established
guidelines, the Investment Manager takes decisions as to the purchase and sale
of individual investments.
There is an agreed procedure for Directors, in the furtherance of their duties,
to take independent professional advice if necessary at the Company's expense.
The Directors have access to the advice and services of the company secretary,
through its appointed representative, who is responsible to the board for
ensuring that Board procedures are followed.
Performance Evaluation
The Board has carried out an evaluation process for the year ended 31 March
2008, independently managed by Dr Gordon, the Senior Independent Director. This
took the form of a questionnaire followed by discussions to identify how the
effectiveness of its activities, including its committees, policies and
processes might be improved. The results of the evaluation process were
presented to and discussed by the Board and, as a result, it was agreed that
the current Directors contributed effectively and that all have the skills and
experience which are relevant to the leadership and direction of the Company.
Committees of the Board
During the year the Board delegated certain responsibilities and functions to
committees. Copies of the full terms of reference, which clearly define the
responsibilities of each committee, can be obtained from the Company Secretary,
will be available for inspection at the Annual General Meeting, and can be
found at the Company's website at www.biotechgt.com. Up until 25 July 2007 the
committees were comprised of the independent Directors although the
non-independent Directors were invited to attend meetings when appropriate by
the Chairman. Following a review by the Board, it was agreed, on 25 July 2007,
that, due to its size, the membership of the Remuneration and Nominations
Committees should comprise the whole Board both under the chairmanship of John
Sclater (provided that a majority of the Directors present are independent).
It was further agreed that the Audit Committee should be reconstituted as an
Audit and Management Engagement Committee, under the chairmanship of Peter Keen
and that the membership of the committee, should also comprise the whole Board
(provided that a majority of the Directors present are independent). This
decision was taken to fully utilise the broad experience of the Board whilst
ensuring that a majority of independent Directors formed the quorum for its
meetings. Details of the membership of the committees as at 31 March 2008 are
shown with the Directors' biographies.
The table overleaf details the number of Board and Committee meetings attended
by each Director. During the year there were 5 Board meetings and a separate
meeting devoted to strategy, two Audit and Management Engagement Committee
meetings, 2 meetings of the Nominations Committee and 1 meeting of the
Remuneration Committee.
Type and number of Board Strategy Audit and Nominations
meetings Management Committee Remuneration
Engagement
Committee
held in 2007/8: (5) (1) (2) (2) (1)
John Sclater 5 1 2 2 1
Sven Borho 5 1 0 1 1
Paul Gaunt 5 1 1 1 1
Dr John Gordon 5 1 2 2 1
Peter Keen 5 1 2 2 1
Anthony Townsend* 4 1 1 1 N/A
Lord Waldegrave of North 5 1 2 2 1
Hil
* Anthony Townsend retired from the Board on 8 November 2007.
All of the Directors attended the Annual General Meeting held on 25 July 2007.
Prior to 25 July 2007 Messrs Borho, Gaunt and Townsend were not members of the
Company's committees as they were not considered to be independent by the
Board. After this date, the composition of the committees was changed to
include all Directors.
Nominations Committee
The Nominations Committee is responsible for the Board appraisal process and
for making recommendations to the Board on the appointment of new Directors.
Where appropriate, each Director is invited to submit nominations and external
advisers may be used to identify potential candidates.
Remuneration Committee
The level of Directors' fees is reviewed on a regular basis relative to other
comparable investment companies and in the light of Directors'
responsibilities. Details of the fees paid to the Directors in the year under
review are detailed in the Directors' Remuneration Report.
Audit and Management Engagement Committee
The Audit and Management Engagement Committee meets at least twice a year and
is responsible for the review of the interim and annual financial statements,
the nature and scope of the external audit and the findings there from and the
terms of appointment of the auditors, including their remuneration and the
provision of any non-audit services by them. In addition, the Committee is
responsible for the review of the Company's financial controls and of the
Management and Investment Management agreements and of the services provided by
the Manager and the Investment Manager.
The Audit and Management Engagement Committee meets representatives of the
Manager and Investment Manager and their Compliance Officers who report as to
the proper conduct of business in accordance with the regulatory environment in
which the Company, Manager and Investment Manager operate. The Company's
external auditors also attend meetings of this Committee at its request and
report on their work procedures and their findings in relation to the Company's
statutory audit. They also have the opportunity to meet with the Committee
without representatives of the Manager or the Investment Manager being present.
The Audit and Management Engagement Committee reviews the need for non-audit
services and authorises such fees on a case by case basis, having consideration
to the cost effectiveness of the services and the independence and objectivity
of the auditors. Non audit fees of £2,500 were paid to Grant Thornton UK LLP
for their review of the Company's interim accounts and review of the
performance fee calculation as at 30 September 2007. The Board has concluded,
on the recommendation of the Audit and Management Engagement Committee, that
the auditors continue to be independent and that their reappointment be
proposed at the Annual General Meeting.
Internal Controls
The Combined Code requires the Directors, at least annually, to review the
effectiveness of the Company's system of internal control and to report to
shareholders that they have done so. This encompasses a review of all controls,
which the Board has identified as including business, financial, operational,
compliance and risk management. This accords with the FRC's Internal Control
Guidance for Directors.
The Directors are responsible for the Company's system of internal control
which is designed to safeguard the Company's assets, maintain proper accounting
records and ensure that financial information used within the business, or
published, is reliable. Such a system, however, is designed to manage rather
then eliminate the risks of failure to achieve the Company's business
objectives and can only provide reasonable and not absolute assurance against
material misstatement or loss.
Unlike the boards of most other listed companies, the boards of investment
trust companies obtain the majority of their evidence as to whether internal
controls are operating effectively from third party suppliers to whom
investment management, custody, administration, accounting and secretarial
matters have been delegated. This means that an understanding of the internal
controls for an investment trust company requires Directors to consider
information from a number of independent sources, rather than from a
consolidated single source covering a typical listed company's system of
internal control.
The Directors, through the procedures outlined below, have kept the
effectiveness of the Company's internal controls under review throughout the
period covered by these financial statements and up to the date of their
approval.
The Manager and the Investment Manager have established an internal control
framework to provide reasonable assurance on the effectiveness of the internal
controls operated on behalf of their clients. Their compliance monitoring
programmes assess the effectiveness of and provide the Board with regular
reports on all aspects of internal control (including financial, operational
and compliance control, risk management and relationships with external service
providers including the Company's custodian). Business risks have been analysed
and recorded in a Risk Register, which is reviewed at each meeting of the Audit
and Management Engagement Committee and at other times as necessary.
Relations with Shareholders
The Board reviews the shareholder register at each Board meeting. The Company
has regular contact with its institutional shareholders particularly through
the Manager. The Board supports the principle that the Annual General Meeting
be used to communicate with private investors. The full Board attends the
Annual General Meeting under the Chairmanship of the Chairman of the Board.
Details of proxy votes received in respect of each resolution are made
available to shareholders at the meeting and are also published on the
Company's website at www.biotechgt.com. Representatives from the Investment
Manager attend the Annual General Meeting and give a presentation on investment
matters to those present. The Company has adopted a nominee share code which is
set out below.
The Board receives marketing and public relations reports from the Manager to
whom the marketing function has been delegated. The Board reviews and considers
the marketing plans of the Manager on a regular basis.
The annual and interim financial reports, the interim management statements and
a monthly fact sheet are available to all shareholders. The Board considers the
format of the annual and interim financial reports so as to ensure they are
useful to all shareholders and others taking an interest in the Company. In
accordance with best practice, the annual report, including the Notice of the
Annual General Meeting, is sent to shareholders at least 20 working days before
the Meeting. Separate resolutions are proposed for substantive issues.
Exercise of Voting Powers
The Board has delegated authority to the Investment Manager to vote the shares
held by the Company through its nominee, The Bank of New York (Nominees)
Limited, which accords with current best practice whilst maintaining a primary
focus on financial returns. The Investment Manager may refer to the Board on
any matters of a contentious nature.
Accountability and Audit
The Board has delegated contractually to external agencies, including the
Manager and the Investment Manager, the management of the investment portfolio,
custodial services (which includes the safeguarding of the Company's assets),
the day to day marketing, accounting administration, company secretarial
requirements and registration services. Each of these contracts was entered
into after full and proper consideration by the Board of the quality and cost
of the services offered, including the control systems in operation in so far
as they relate to the affairs of the Company. The Board receives and considers
regular reports from the Manager and ad hoc reports and information are
supplied to the Board as required.
Nominee Share Code
Where shares are held in a nominee company name, where the beneficial owner of
the shares is unable to vote in person, the Company nevertheless undertakes:
* to provide the nominee company with multiple copies of shareholder
communications, so long as an indication of quantities has been provided in
advance;
* to allow investors holding shares through a nominee company to attend
general meetings, provided the correct authority from the nominee company
is available; and
* that investors in the Alliance Trust Savings Scheme or ISA are
automatically sent shareholder communications, including details of general
meetings, together with a form of direction to facilitate voting and to
seek authority to attend.
Nominee companies are encouraged to provide the necessary authority to
underlying shareholders to attend the Company's general meetings.
INCOME STATEMENT
for the year ended 31 March
Notes Revenue 2008 Total Revenue 2007 Total
£'000 Capital £'000 £'000 Capital £'000
Investment income £'000 £'000
Investment income 2 116 - 116 36 - 36
Other income 2 6 - 6 8 - 8
Total income 122 - 122 44 - 44
Gains and losses on
investments
(Losses)/gains on 8 - (9,156) (9,156) - 3,373 3,373
investments held at fair
value through profit or
loss
Exchange losses on - (4) (4) - (277) (277)
currency balances
Expenses
Investment management, 3 - 514 514 - (2,048) (2,048)
management and performance
fees
Other expenses 4 (366) - (366) (355) - (355)
(Loss)/profit before (244) (8,646) (8,890) (311) 1,048 737
finance costs and taxation
Finance costs 5 (26) (12) (38) (20) (17) (37)
(Loss)/profit before (270) (8,658) (8,928) (331) 1,031 700
taxation
Taxation 6 - - - - - -
(Loss)/profit for the year (270) (8,658) (8,928) (331) 1,031 700
(Loss)/earnings per share 7 (0.4)p (13.4)p (13.8)p (0.5)p 1.7p 1.2p
The total column of this statement represents the Company's Income Statement,
prepared in accordance with International Financial Reporting Standards (IFRS).
The revenue return and capital return columns are supplementary to this and are
prepared under guidance published by the Association of Investment Companies.
All items in the above statement derive from continuing operations.
The accompanying notes are an integral part of this statement.
STATEMENT OF CHANGES IN EQUITY
For the year ended 31 March 2008
Capital
Share Share Special Capital Capital Retained
Redemption
capital premium reserve reserve reserve earnings Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
At 31 March 2007 16,394 - 49,443 737 12,232 (2,003) 76,803
Net loss for the year - - - - (8,658) (270) (8,928)
Buy-back of shares (798) - (3,378) 798 - - (3,378)
At 31 March 2008 15,596 - 46,065 1,535 3,574 (2,273) 64,497
For the year ended 31 March 2007
Share Share Special Capital Capital Retained
redemption
capital premium reserve reserve reserve earnings Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
At 31 March 2006 6,935 272 19,167 653 11,201 (1,672) 36,556
Net profit/(loss) for - - - - 1,031 (331) 700
the year
Issue of shares 9,543 31,267 - - - - 40,810
Issue expenses - (938) - - - - (938)
Share premium account - (30,601) 30,601 - -
cancelled
Issue expenses written - - 39 - - - 39
back
Buy-back of shares (84) - (364) 84 - - (364)
At 31 March 2007 16,394 - 49,443 737 12,232 (2,003) 76,803
BALANCE SHEET
as at 31 March
2008 2007
Notes £'000 £'000
Non current assets
Investments held at fair value through 8 64,806 78,088
profit or loss
Current assets
Other receivables 9 850 2,443
Cash and cash equivalents 811 -
1,661 2,443
Total assets 66,467 80,531
Current liabilities
Other payables 10 1,970 2,635
Bank overdraft - 1,093
1,970 3,728
Net assets 64,497 76,803
Equity attributable to equity holders
Ordinary share capita 11 15,596 16,394
Share premium - -
Special reserve 46,065 49,443
Capital redemption reserve 1,535 737
Capital reserve - realised 10,202 12,305
Capital reserve - unrealised (6,628) (73)
Retained earnings (2,273) (2,003)
Total equity 64,497 76,803
Net asset value per share 12 103.4p 117.1p
The accompanying notes are an integral part of this statement.
CASH FLOW STATEMENT
for the year ended 31 March
2008 2007
£'000 £'000
Operating activities
(Loss)/profit before tax (8,928) 700
Add back interest paid 38 37
Less: loss/(gain) on investments held at fair 9,160 (3,096)
value through profit or loss
Purchases of investments held at fair value (79,383) (97,713)
through profit or loss
Sales of investments held at fair value through 85,477 58,760
profit or loss
Increase in other receivables (21) -
(Decrease)/increase in other payables (1,359) 1,406
Net cash inflow/(outflow) from operating 4,984 (39,906)
activities before interest and taxation
Interest paid (38) (37)
Tax on overseas income - -
Net cash inflow/(outflow) from operating 4,946 (39,943)
activities
Financing activities
Issue of shares - 40,810
Buy-back of shares (3,038) (364)
Issue expenses paid - (899)
Net cash (outflow)/inflow from financing (3,038) 39,547
Increase/(decrease) in cash and cash equivalents 1,908 (396)
Cash and cash equivalents at start of year (1,093) (420)
Effect of foreign exchange rate changes (4) (277)
Cash and cash equivalents at end of year 811 (1,093)
NOTES TO THE FINANCIAL STATEMENTS
1. Accounting Policies
The financial statements of the Company have been prepared in accordance with
International Financial Reporting Standards ("IFRS"). These comprise standards
and interpretations approved by the International Accounting Standards Board
("IASB"), together with interpretations of the International Accounting
Standards and Standing Interpretations Committee approved by the International
Accounting Standards Committee ("IASC") that remain in effect, to the extent
that IFRS have been adopted by the European Union.
a. Accounting Convention
The financial statements have been prepared under the historical cost
convention, except for the measurement at fair value of investments. Where
presentational guidance set out in the revised Statement of Recommended
Practice ("the SORP") for Investment Trust Companies produced by the
Association of Investment Companies ("AIC") dated December 2005 is consistent
with the requirements of IFRS, the Directors have sought to prepare the
financial statements on a basis compliant with the recommendations of the SORP.
The Company has adopted IFRS 7: "Financial Instruments: Disclosures" for the
first time in these financial statements.
b. Investments
Investments are recognised and de-recognised on the trade date.
As the entity's business is investing in financial assets with a view to
profiting from their total return in the form of interest, dividends or
increases in fair value, quoted investments are designated as fair value
through profit or loss and are initially recognised at fair value. The entity
manages and evaluates the performance of these investments on a fair value
basis in accordance with its investment strategy, and information about the
investments is provided internally on this basis to the Board.
Investments designated as at fair value through profit or loss, which are
quoted investments, are measured at subsequent reporting dates at fair value,
which is either the bid or the last trade price, depending on the convention of
the exchange on which it is quoted.
In respect of unquoted investments, or where the market for a financial
instrument is not active, fair value is established by using valuation
techniques, which may include using recent arm's length market transactions
between knowledgeable, willing parties, if available, reference to the current
fair value of another instrument that is substantially the same, discounted
cash flow analysis and option pricing models. Where there is a valuation
technique commonly used by market participants to price the instrument and that
technique has been demonstrated to provide reliable estimates of prices
obtained in actual market transactions, that technique is utilised.
On disposal, realised gains and losses are also recognised in the Income
Statement.
The total transaction costs for the year were £350,000 (31 March 2007: £
378,000) broken down as follows: purchase transaction costs for the year to 31
March 2008 were £170,000, (31 March 2007: £248,000), sale transaction costs
were £180,000 (31 March 2007: £130,000) These costs consist mainly of
commission.
(c) Presentation of Income Statement
In order to better reflect the activities of an investment trust company, and
in accordance with guidance issued by the AIC, supplementary information which
analyses the Income Statement between items of a revenue and capital nature has
been presented alongside the Income Statement. In accordance with the Company's
status as a UK investment company under section 833 of the Companies Act 2006,
the capital reserves may not be distributed by way of dividend, although may be
utilised for the purposes of share buybacks. Additionally, the net revenue is
the measure the Directors believe appropriate in assessing the Company's
compliance with certain requirements set out in section 842 of the Income and
Corporation Taxes Act 1988.
d. Income
Dividends receivable on equity shares are recognised on the ex-dividend date.
Where no ex-dividend date is quoted, dividends are recognised when the
Company's right to receive payment is established.
Dividends and interest on investments in unquoted shares and securities are
recognised when they become receivable.
e. Expenses and Finance costs
All expenses are accounted for on an accruals basis. Expenses are charged
through the Income Statement except as follows:
i. expenses which are incidental to the acquisition or disposal of an
investment are charged to the capital
column of the income statement;
ii. expenses are charged to the capital column of the income statement where a
connection with the
maintenance or enhancement of the value of the investments can be
demonstrated, and accordingly;
iii. investment management and management fees and related irrecoverable VAT
are charged to the capital
column of the income statement as the Directors expect that in the long
term virtually all of the Company's returns will come from capital, and
iv. Loan interest is charged to the income statement and allocated to capital
as the Directors expect that in
the long term virtually all of the Company's returns will come from
capital.
f. Taxation
In line with the recommendations of the SORP, the allocation method used to
calculate tax relief on expenses presented against capital returns in the
supplementary information in the income statement is the "marginal basis".
Under this basis, if taxable income is capable of being offset entirely by
expenses presented in the revenue return column of the income statement, then
no tax relief is transferred to the capital return column.
Investment trusts which have approval under Section 842 Income and Corporation
Taxes Act 1988 are not liable for taxation on capital gains.
Deferred tax is the tax expected to be payable or recoverable on differences
between the carrying amounts of assets and liabilities in the financial
statements and the corresponding tax bases used in the computation of taxable
profit, and is accounted for using the balance sheet liability method. Deferred
tax liabilities are recognised for all taxable temporary differences and
deferred tax assets are recognised to the extent that it is probable that
taxable profits will be available against which deductible temporary
differences can be utilised.
Deferred tax is calculated at the tax rates that are expected to apply in the
period when the liability is settled or the asset is realised. Deferred tax is
charged or credited in the income statement, except when it relates to items
charged or credited directly to equity, in which case the deferred tax is also
dealt with in equity.
g. Foreign Currencies
The currency of the primary economic environment in which the Company operates
(the functional currency) is pounds sterling ("sterling"), which is also the
presentational currency of the Company. Transactions involving currencies other
than sterling, are recorded at the exchange rate ruling on the transaction
date. At each Balance Sheet date, monetary items and non-monetary assets and
liabilities that are fair valued, which are denominated in foreign currencies,
are retranslated at the closing rates of exchange.
Exchange differences arising on settlements of monetary items and from
retranslating at the Balance Sheet date:
* investments and other financial instruments measured as fair value through
profit or loss, and
* other monetary items, are included in the Income Statement and allocated as
capital if they are of a capital nature, or as revenue if they are of a
revenue nature.
(h) Reserves
Capital reserves
The following are charged to the capital column of the Income Statement and
then transferred to the Capital Reserve:
* gains or losses on the realisation of investments
* exchange differences of a capital nature
* expenses charged to this reserve in accordance with the above referred
policies
* increases and decreases in the valuation of investments held at year end
Special reserve
During the financial year ended 31 March 2004 a special reserve was created,
following the cancellation of the Share Premium account, in order to provide an
increased distributable reserve out of which to purchase its own shares.
2. Income
2008 2007
£'000 £'000
Income from listed
investments
Unfranked interest 116 36
116 36
Other operating income
Interest receivable 6 8
Total income 122 44
3. Investment Management, Management and Performance Fees
Revenue Capital Total Revenue Capital Total
2008 2008 2008 2007 2007 2007
£'000 £'000 £'000 £'000 £'000 £'000
Investment management - 471 471 - 437 437
periodic fee
Management fee - 218 218 - 235 235
Performance fee paid - 169 169 - - -
Performance fee accrual - (1,351) (1,351) - 1,351 1,351
written back
Irrecoverable VAT thereon - (21) (21) - 25 25
- (514) (514) - 2,048 2,048
As at 30 September 2007, a performance fee of £169,000 crystalised and became
payable and the £1,351,000 accrual at 31 March 2007 was reversed in accordance
with the performance fee arrangements described in the Report of the Directors.
As at 30 September 2006, this amount was accrued by the Company based on the
cumulative outperformance of the Company's net asset value over the benchmark
index since the appointment of OrbiMed Capital LLC in 2005. As at 30 September
2007, based on the continued outperformance of the Company's net asset value
over the benchmark for a twelve month period, such fee crystallised and became
payable.
4. Other Expenses
Revenue Capital Total Revenue Capital Total
2008 2008 2008 2007 2007 2007
£'000 £'000 £'000 £'000 £'000 £'000
Directors' emoluments 112 - 112 99 - 99
Administration fee 50 - 50 50 - 50
Marketing 4 - 4 27 - 27
ISA, Savings Scheme and PEP 30 - 30 21 - 21
Plan expenses
Auditors' remuneration for the 22 - 22 18 - 18
audit
of the Company's financial
statements
Auditors' remuneration for 3 - 3 2 - 2
review of
the interim accounts and
performance fee calculation
Advisory and Consultancy 25 - 25 26 - 26
Other including irrecoverable 120 - 120 112 - 112
VAT
366 - 366 355 - 355
5. Finance Costs
Revenue Capital Total Revenue Capital Total
2008 2008 2008 2007 2007 2007
£'000 £'000 £'000 £'000 £'000 £'000
Bank overdraft 26 - 26 20 - 20
Bank loan interest - 12 12 - 17 17
26 12 38 20 17 37
6. Taxation
a. Factors affecting current tax charge for year Approved investment trusts
are exempt from tax on capital gains made within the Company.
The tax assessed for the year is higher than the standard rate of corporation
tax in the UK of 30.0% (2007: 30.0%). The differences are explained below:
2008 2007
£'000 £'000
Net (loss)/profit on ordinary (8,928) 700
activities before tax
tax
Corporation tax at 30.0% (2,678) 210
Effects of:
Non taxable gains on 2,748 (929)
investments held at fair
value through profit or loss
Excess expenses unused (79) 712
Disallowed expenses 9 7
Current tax charge - -
b. Provision for deferred tax
No provision for deferred taxation has been made in the current or prior year.
The Company has not recognised a deferred tax asset of £3,484,000 (2007: £
3,551,000) arising as a result of excess management expenses. These excess
management expenses will only be utilised if the Company generates sufficient
taxable income in the future.
7. (Loss)/Earnings per Share
Revenue Capital Total Revenue Capital Total
2008 2008 2008 2007 2007 2007
£'000 £'000 £'000 £'000 £'000 £'000
(Loss)/earnings per share (0.4)p (13.4)p (13.8p) (0.5)p 1.7p 1.2p
Total loss per share of 13.8p (2007: gain 1.2p) is based on total loss
attributable to equity shareholders of £8,928,000 (2007: gain £700,000).
The revenue loss per share 0.4p (2007: 0.5p) is based on the revenue loss
attributable to equity shareholders of £270,000 (2007: £331,000).
The capital loss per share of 13.4p (2007: gain 1.7p) is based on the capital
loss attributable to equity shareholders of £8,658,000 (2007: gain £1,031,000).
Total loss, revenue loss and capital loss are based on the weighted average
number of shares in issue during the year of 64,473,752 (2007: 59,520,000).
8.Investments Held at Fair Value Through Profit and Loss
Listed Non-
Equity equity AIM Unquoted Total
£'000 £'000 £'000 £'000 £'000
Cost at 1 April 2007 73,700 - 711 3,750 78,161
Opening unrealised 1,876 - 64 (2,013) (73)
appreciation/
(depreciation)
Valuation at 1 April 2007 75,576 - 775 1,737 78,088
Movement in the year
Purchases at cost 73,406 5,920 - 411 79,737
Sales - proceeds (77,492) (6,019) - (352) (83,863)
- realised (losses)/gains (2,700) 99 - - (2,601)
Movement in unrealised (6,087) - 125 (593) (6,555)
(depreciation)/
appreciation
Valuation at 31 March 2008 62,703 - 900 1,203 64,806
Closing book cost at 31 66,914 - 711 3,809 71,434
March 2008
Closing unrealised (4,211) - 189 (2,606) (6,628)
(depreciation)/
appreciation
Valuation at 31 March 2008 62,703 - 900 1,203 64,806
2008 2007
£'000 £'000
(Losses)/gains on investments:
Realised (losses)/gains based on historical (2,601) 8,071
cost
Amounts recognised as unrealised in previous (464) (4,229)
year
Realised (losses)/gains based on carrying (3,065) 3,842
value at previous balance sheet date
Net movement in unrealised depreciation (6091) (469)
(Losses)/gains on investments (9,156) 3,373
The unquoted investments include the following investment.
Jersey
Limited
Partnership Fair Value
% of Cost of Of
Total net Latest investment Investment Investment
Assets audited Owned by As at
the Company 31/3/08
£'000 accounts Dividends £'000 £'000
Merlin Fund 3,965 31/12/07 - 15.0% 3,052 325
L.P.
9. Other Receivables
2008 2007
£'000 £'000
Future settlements - sales 816 2,430
Other debtors 9 -
Prepayments and accrued income 25 13
850 2,443
10. Other Payables
2008 2007
£'000 £'000
Future settlements - purchases 1,345 991
Other creditors and accruals 625 1,644
1,970 2,635
11. Share Capital
2008 2007
£'000 £'000
Allotted, called up, issued and fully paid:
62,385,963 shares of 25p (2007: 65,577,263) 15,596 16,394
Authorised:
100,000,000 shares of 25p each 25,000 25,000
At the date of this report the Company had 62,385,963 shares of 25p in issue.
During the year 3,191,300 shares were repurchased for cancellation at a cost of
£3,378,000 (including expenses). Subsequent to the year end, to 13 June 2008, a
further 3,051,000 shares were bought back for cancellation at a cost of £
3,043,000 (including expenses).
12. Net Asset Value per Share
2008 2007
£'000 £'000
Net asset value per share 103.4p 117.1p
The net asset value per share is based on the net assets attributable to equity
shareholders of 64,497,000 (2007: £76,803,000 and on 62,385,963 (2007:
65,577,263) shares in issue at 31 March 2008.
NOTES TO THE FINANCIAL STATEMENTS (continued)
13. Risk Management Policies and Procedures
As an investment trust, the Company invests in equities and other investments
for the long term so as to secure its investment objective. In pursuing its
investment objective, the Company is exposed to a variety of risks that could
result in either a reduction in the Company's net assets or a reduction in the
profits available.
The Company's financial instruments comprise securities and other investments,
cash balances and debtors and creditors that arise directly from its operations
(for example, in respect of sales and purchases awaiting settlement).
The main risks the Company faces from its financial instruments are (i) market
price risk (comprising currency risk, interest rate risk and other price risk
(i.e. changes in market prices other than those arising from interest rate or
currency risk)), (ii) liquidity risk and (iii) credit risk.
The Board regularly reviews and agrees policies for managing each of these
risks.
1. Market Price risk:
The fair value or future cash flows of a financial instrument held by the
Company may fluctuate because of changes in market prices. This market risk
comprises three elements - currency risk, interest rate risk and other price
risk.
The Company's investment portfolio is exposed to market price fluctuations
which are monitored by the Investment Manager in pursuance of the investment
objective.
No derivatives or hedging instruments are utilised to specifically manage
market price risk.
(a) Currency risk:
A significant proportion of the Company's investment portfolio is denominated
in currencies other than sterling (the Company's functional currency, and in
which it reports its results). As a result, movements in exchange rates can
significantly affect the sterling value of those items.
Management of risk
The Investment Manager and Manager monitor the Company's exposure to foreign
currencies on a continuous basis and report to the Board on a regular basis.
The Investment Manager does not hedge against foreign currency movements, but
takes account of the risk when making investment decisions.
Income denominated in foreign currencies is converted into sterling on receipt.
The Company does not use financial instruments to mitigate the currency
exposure in the period between the time that the income is included in the
financial statements and its receipt.
Foreign currency exposure
At the balance sheet date the Company held £61,028,000 (2007: £70,524,000) of
investments denominated in US dollars and £3,778,000 (2007: £7,564) in other
currencies.
Currency sensitivity
The following table details the sensitivity of the Company's profit or loss
after taxation for the year to a 5.0% increase and decrease in sterling against
US dollars (2007: 10.0% increase and decrease).
The above percentages have been determined based on market volatility in
exchange rates over the previous twleve months. The analysis is based on the
Company's foreign currency financial instruments held at each balance sheet
date, after adjusting for an increase/decrease in management fees.
If sterling had weakened against the currencies below this would have the
following effect:
2008 2007
USD USD
£'000 £'000
Impact on revenue return - -
Impact on capital return 3,191 3,688
Total return after tax/effect on 3,191 3,688
shareholders funds
If sterling had strengthened against the currencies below this
would have the following effect:
2008 2007
USD USD
£'000 £'000
Impact on revenue return - -
Impact on capital return (2,887) (3,337)
Total return after tax/effect on (2,887) (3,337)
shareholders funds
(b) Interest rate risk:
Interest rate risk is the risk that the fair value of future cash flows of a
financial instrument will fluctuate because of changes in market interest
rates.
As the Company holds only modest amounts of cash on deposit and generally does
not invest in fixed interest investments, it is deemed that this risk is
immaterial.
Management of the risk
The possible effects on fair value and cash flows that could arise as a result
of changes in interest rates are taken into account when making investment
decisions.
The Company, generally, does not hold significant cash balances, with short
term borrowing being used when required.
Interest rate exposure
The Company has a £5m uncommitted revolving credit facility provided by Allied
Irish Banks p.l.c. At the year end the facility was not utilised (2007:not
utilised). At the year end the Company held £811,000 (2007: nil) cash at Bank
of New York and did not utilise the bank overdraft facility held with Bank of
New York (2007: overdraft £1,093,000).
Average interest receivable and finance costs are at the following rates:
* Interest receivable on cash balances held in off-shore money market fund is
was 4.5%.
* Interest payable on borrowings under the uncommitted revolving credit
facility provided by Allied Irish Banks p.l.c was at an average rate of
7.1%.
(c) Other price risk
Other price risk may affect the value of the quoted investments.
If market prices at the balance sheet date had been 10.0% higher or lower while
all other variables remained constant, the return and net assets attributable
to shareholders for the year ended 31 March 2008 would have increased/decreased
by £6,438,000 (2007: 7,758,000), after adjusting for an increase or decrease in
management fees. The calculations are based on the investment portfolio
valuations as at the respective Balance Sheet dates.
2. Liquidity risk:
This is the risk that the Company will encounter difficulty in meeting
obligations associated with financial liabilities.
Management of the risk
Liquidity risk is not significant as the majority of the Company's assets are
investments in quoted equities and other quoted securities that are readily
realisable. The Company has a £5m uncommitted revolving credit facility with
Allied Irish Banks p.l.c.
The Board gives guidance to the Investment Manager as to the maximum amount of
the Company's resources that should be invested in any one company.
Liquidity exposure
Contractual maturities of the financial liabilities as at 31 March 2008, based
on the earliest date on which payment can be required are as follows:
3 months Not more More
or less than one year than one year Total
31 March 2008 £'000 £'000 £'000 £'000
Current
liabilities:
Amounts due to
brokers and
accruals 1,970 - - 1,970
1,970 1,970
31 March 2007 3 months or Not more than More than one Total
less one year year
£'000
£'000 £'000 £'000
Current
liabilities:
Bank overdraft 1,093 - - 1,093
Amounts due to 2,635 - - 2,635
brokers and
accruals
3,728 - - 3,728
3. Credit risk:
The failure of the counterparty to a transaction to discharge its obligations
under that transaction could result in the Company suffering a loss.
Management of the risk
The risk is not significant and is managed as follows:
* by only dealing with brokers which have been approved by OrbiMed Capital
LLC and banks with high credit ratings and
* by setting limits to the maximum exposure to any one counterparty at any
time.
2008 2008 2007 2007
Balance Maximum Balance Maximum
sheet exposure sheet exposure
£'000 £'000 £'000 £'000
Current assets:
Other receivables (amounts due from 850 3,513 2,443 4618
brokers, dividends and interest
receivable)
Cash at bank and on deposit 811 4,814 -- 3,289
Fair value of financial assets and financial liabilities:
Financial assets and financial liabilities are either carried in the Balance
Sheet at their fair value or at a reasonable approximation of fair value.
Capital management policies and procedures
The Company's capital management objectives are:
* to ensure that it will be able to continue as a going concern; and
* to maximise the income and capital return to its equity shareholders
through an appropriate balance of equity capital and debt. The policy is that
debt as shown below should amount to no more than 20.0% of the investment
portfolio. The Company currently has a £5m uncommitted revolving credit
facility, provided by Allied Irish Banks p.l.c., which can be used to finance
any short term borrowing requirements.
The Company's capital at 31 March comprises:
2008 2007
£'000 £'000
Debt:
Bank overdraft - 1,093
- 1,093
Equity:
Equity share capital 15,596 16,394
Retained earnings and other reserves 48,901 60,409
Total capital 64,497 76,803
Debt as a percentage of total capital - 1.4%
NOTES TO THE FINANCIAL STATEMENTS (continued)
The Board, with the assistance of the Investment Manager, monitors and reviews
the broad structure of the Company's capital on an ongoing basis. This review
includes:
* the planned level of gearing, which takes into account the Investment
Manager's view on the market;
* the need to buy back equity shares, either for cancellation or to hold in
treasury, which takes account of the difference between the net asset value
per share and the share price (ie the level of share price discount or
premium);
* the need for new issues of equity shares, including issues from treasury;
and
* the extent to which revenue in excess of that which is required to be
distributed should be retained.
The Company's objectives, policies and processes for managing capital are
unchanged from the preceding accounting period.
The Company is subject to several externally imposed capital requirements:
* borrowings under the uncommitted revolving credit facility are not to
exceed 20.0% of the investment portfolio;
* as a public company, the Company has a minimum share capital of £50,000;
and
* in order to be able to pay dividends out of profits available for
distribution, the Company has to be able to meet one of the two capital
restriction tests imposed on investment companies by company law.
These requirements are unchanged since last year, and the Company has complied
with them at all times.
14. Related Parties
Sven Borho is a Director of the Company, as well as a Partner of the Company's
Investment Manager, OrbiMed Capital LLC. During the year ended 31 March 2008,
OrbiMed Capital LLC received £471,000 in respect of the periodic fee and £
153,000 in respect of a performance fee, of which £106,000 in respect of the
periodic fee was outstanding at the year end.
15. Substantial Interests
The Company holds interests in 3.0% or more of any class of capital in the
following companies:
% of issued Fair
value
Company Shares held share capital £'000
Curis 3,606,611 5.7% 2,504
Tepnel Life Sciences* 10,000,000 4.3% 900
Rosetta Genomics 375,000 3.2% 917
* Excludes warrants. A total of 8,840,000 warrants were held as at 31 March
2008.
These investments are not considered significant in the context of these
financial statements.
16. Contingent Assets
On 5 November 2007, the European Court of Justice ruled that management fees
should be exempt from VAT. HMRC has announced its intention not to appeal
against this case to the UK VAT Tribunal. The Board is currently in the process
of quantifying the potential repayment that should be due. However, the amount
the Company will receive, the period to which it will refer, and the time scale
for receipt are all uncertain and hence the Company has made no provision in
these financial statements for any such payment.
Frostrow Capital LLP
Company Secretary
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