Half-year Report
LONDON STOCK EXCHANGE ANNOUNCEMENT
The Biotech Growth Trust PLC
(the “Company”)
Unaudited Half Year Results For The Six Months Ended 30 September 2021
This announcement is not the Company’s Half Year Report. It is an abridged version of the Company’s full Half Year Report & Accounts for the six months ended 30 September 2021. The full Half Year Report & Accounts, together with a copy of this announcement, will shortly be available on the Company’s website at www.biotechgt.com where up to date information on the Company, including daily NAV, share prices and fact sheets, can also be found.
The Company's Half Year Report & Accounts for the six months ended 30 September 2021 has been submitted to the UK Listing Authority, and will shortly be available for inspection on the National Storage Mechanism (NSM) at https://data.fca.org.uk/#/nsm/nationalstoragemechanism
For further information please contact: Katherine Manson, Frostrow Capital LLP 020 3008 4913
CHAIRMAN’S STATEMENT
INTRODUCTION AND RESULTS
Over the two years to 31 March 2021 the Company’s Net Asset Value (“NAV”) per share total return was 83.8%, and in the process it handsomely outperformed its benchmark, the NASDAQ Biotechnology Index (the “Benchmark”). The six months to 30 September 2021 saw something of a correction, with a fall in NAV over the period of 8.3%^, which compares to a rise of 10.3% in the Benchmark.
Some of the factors which contributed to this performance during the half year were the reversal of those that led to the outperformance in the previous two years. By way of backdrop, biotech was a particularly favoured growth sector at the height of the COVID-19 pandemic. However, starting earlier this year, and following signs of a rise in interest rates and receding fears about COVID-19, there has been significant rotation in the stock market from growth to value stocks. Within the biotech sector itself, there was a further significant shift in favour of large cap biotech stocks and away from smaller cap ones. As explained in previous shareholder reports, the Company is largely invested in smaller stocks, being the segment most responsible for innovation and therefore future growth. On page 5 of the Half Year Report, the Portfolio Manager’s Review has a chart showing the evolution of the relative values of large and smaller cap biotech.
Looking at stock specific analysis against the Benchmark, the majority of the portfolio’s underperformance (approximately 11 percentage points of the 18.6%) was attributable to underweight positions in two large biotech stocks in particular, Moderna and BioNTech. The reason for these underweights is explained more fully in the Portfolio Manager’s Review, but in essence the Portfolio Manager’s belief is that the current high valuations placed on these stocks results in large part from their role in the supply of vaccines for COVID-19, and that as the pandemic in the developed world recedes, they are at risk of losing some or all of their premium ratings. Since the end of the half year, those stocks have indeed given back a significant portion of their previous outperformance.
The Company has maintained its selective exposure to crossover investments (investments in a Company’s last private funding round prior to an IPO) and to Chinese biotech, in both of which areas it has a differentiated level of expertise.
At the year end I reported that a significant performance fee had accrued. During the period a performance fee of £6.98 million crystallised and became payable on 30 June 2021. The balance of the performance fee accrual as at 31 March 2021 has now reversed as a result of the underperformance experienced over the period and there is currently no provision within the Company’s NAV for any performance fee payable at a future calculation date.
SHARE PRICE & NAV RETURNS
Mitigating some of the decline in value of our portfolio holdings, the Company’s NAV benefited from the depreciation in sterling over the period by 2.3% against the U.S. dollar, being the currency in which the majority of the Company’s investments are denominated. Over the period gearing was reduced from 6.8% to 4.7%^. The presence of gearing over the period detracted 0.7% from the Company’s NAV performance.
The underperformance of NAV was amplified at the share price level, driven by a widening in the discount to NAV. At 31 March 2021 the discount to NAV was 1.4% and at 30 September, 9.1%^.
When combined with the decline in NAV, this increase in the discount, partly offset by the positive currency effect mentioned above, contributed to a share price fall over the six months of 15.4%^.
As I said at this stage last year, shareholders should bear in mind that positioning the portfolio for long term outperformance also carries the potential for enhanced volatility, and this has proved to be the case in this particular six months.
^ Alternative Performance Measure (see Glossary)
DISCOUNT AND PREMIUM MANAGEMENT
The Company’s shares continued to trade at a premium for the first three months of the period, leading to the issue of 150,000 new shares, at an average premium of 1.0% to the Company’s cum income NAV per share, raising £2.1m of new funds.
However, towards the end of the period, the Company’s share price fell to a discount to the NAV per share. Shareholders will be aware that the Company pursues an active discount management policy, buying back shares when the discount of the Company’s share price to its NAV per share is higher than 6%. Accordingly, during the period the Company bought back 112,613 shares, at an average discount of 6.8% to the cum income NAV per share, at a cost of £1.4m.
At the period end there were 41,622,156 shares in issue and the share price traded at a 9.1% discount to the cum income NAV per share, reflecting volatile market conditions at that time. As we have previously commented, it remains possible for the share price discount to trade at a discount wider than 6% on any one day, however the Company remains committed to protecting a 6% share price discount over the longer term. Since the period end a further 463,474 shares have been bought back for cancellation and at the time of writing the share price discount stands at 5.5%.
BOARD COMPOSITION
By the time of the Company’s next Annual General Meeting in July 2022 (the “AGM”), I will have served ten years on the Board, six of which as Chairman. Accordingly, I have decided to retire at the conclusion of the AGM. The Board is in the final stages of a recruitment process to appoint my successor and it is expected that we will be able to make an announcement later this month.
OUTLOOK
Since the end of the half year up to 8 November, the NAV of the Company has continued to move in line with the Benchmark. The NAV is down 1.9% against a fall of 2.9% for the Benchmark. There are a number of possible catalysts for a return to a more positive environment, one being the passage of some healthcare legislation through Congress. This would allay fears of stringent new pricing arrangements, which are currently concerning the market, but which for the reasons given by the Portfolio Manager, are thought to be unduly pessimistic.
Looking further ahead, our Portfolio Manager is confident that the Company’s portfolio is well positioned to benefit from continued innovation in the sector and any rebound of small cap biotech companies, to which the portfolio is weighted. In addition, a possible acceleration in mergers and acquisitions (“M&A”) activity and a recovery in sentiment towards emerging markets would lead to an improvement in the Company’s overall performance.
The Board shares the Portfolio Manager’s optimism for the long term and anticipates a return to the outperformance achieved over the period since OrbiMed became the Company’s portfolio manager.
Andrew Joy
Chairman
10 November 2021
COMPANY PERFORMANCE
KEY STATISTICS
|
As at 30 September 2021 |
As at 31 March 2021 |
% Change |
|
| Net asset value per share | 1,327.0p | 1,446.4p | -8.3% |
| Share price | 1,206.0p | 1,426.0p | -15.4% |
| Discount of share price to net asset value per share* | 9.1% | 1.4% | |
| Nasdaq Biotechnology Index – (sterling adjusted) “Benchmark” | 3,777.7 | 3,423.9 | +10.3% |
| Gearing* | 4.7% | 6.8% | |
| Ongoing Charges* (excluding performance fees) | 1.0% | 1.1% | |
| Active Share* | 79.0% | 76.3% |
* Alternative Performance Measure (see Glossary)
PORTFOLIO MANAGER’S REVIEW
Performance
The Company’s NAV per share decreased by 8.3% during the six-month period ended 30 September 2021. This compares to a 10.3% increase in the Benchmark, the NASDAQ Biotechnology Index (measured on a sterling adjusted basis).
After posting a strong fiscal year of outperformance in the 12-month period ending 31 March 2021, the Company gave back some of those gains during the 6-month review period. The period began with the continued rotation of investors from growth to value stocks, as managers positioned portfolios to overweight economically sensitive sectors that would benefit most from a reopening of the economy. Growth sectors like biotech, which had proven to be more defensive during the height of the COVID-19 pandemic in 2020, underperformed the broader markets during this period. In June, the Company enjoyed a sharp rebound, catalyzed by positive biotech industry developments, including approval of Aduhelm, a controversial drug for Alzheimer’s disease, and a positive clinical data release for Intellia’s gene editing program for amyloidosis, which had positive ramifications for the entire gene-editing sector. Unfortunately, that rebound proved to be short-lived, as July proved to be a difficult month for the Company due to its exposure to small cap biotech, which underperformed large cap biotech. August saw a rebound in biotech performance, but this was partially offset by general market weakness in Hong Kong, which adversely affected our China investments. In September, the final month of the review period, there was a broad market-wide decline in the U.S. due to concerns about inflation and rising interest rates. However, the Company’s NAV held up relatively well due to positive Phase 2/3 results for the COVID-19 vaccine being developed by Sichuan Clover Biopharmaceuticals, a Chinese crossover* position.
* See Glossary.
The underperformance of the Company versus the Benchmark during the review period was principally due to the Company’s significant weighting in smaller cap biotech stocks.
As of 31 March 2021, the beginning of the review period, the Company was significantly overweight small cap biotech stocks (those with a market capitalization under U.S.$2 billion) and significantly underweight large cap biotech (those with a market capitalization above U.S.$10 billion) relative to the Benchmark. This positioning reflects the strategic shift that was implemented over the course of 2019 to tilt the Company towards emerging biotech names, the industry segment responsible for the bulk of the innovation in biotech. If one examines the average stock return of large cap versus small cap stocks in the Benchmark over the course of the review period, large cap stocks outperformed small cap stocks by over 30%. Given the Company’s market cap distribution, this acted as a significant headwind to relative performance.
MARKET CAP PERFORMANCE DIVERGENCE IN BIOTECHNOLOGY
|
Market Cap Breakdown
(As at 31 March 2021) |
BIOG | NBI | Delta |
| Large Cap (>$10bn) | 26% | 59% | -33% |
| Mid Cap ($2-10bn) | 22% | 29% | -7% |
| Small Cap (<$2bn) | 51% | 13% | 38% |
* Snapshot exposure as at 31 March 2021. %NAV Exposure of the Company’s portfolio vs. the Benchmark, excluding private securities.
[A graph showing the divergence in performance of the large, mid and small cap stocks in the Benchmark can be found in the full Half Year Report, available on the Company’s website]
Much of the small cap underperformance was likely due to profit taking, as many small cap stocks experienced strong performance in the prior fiscal year. Many of the initial public offerings (“IPOs”) that delivered strong performance in 2020 also retraced their gains in 2021 on no fundamental news. We would note that small cap stocks underperformed large cap stocks generally in the U.S. across sectors during the review period, though the differential in performance was more pronounced for biotech.
Two companies in particular contributed to large cap outperformance in the Benchmark during the review period: Moderna and BioNTech. These companies developed the highly efficacious mRNA-based COVID-19 vaccines that have become the dominant vaccines in the U.S. While we recognize and applaud the impressive technological achievement of these companies in developing those vaccines, we were significantly underweight both names versus the Benchmark during the review period. The underweight positioning was primarily due to our view that these companies had expensive valuations that already assumed significant future success of their platform technologies in other disease areas. We also believed that the recurring revenue from COVID-19 vaccines beyond the pandemic phase would not be as large as some investors were expecting. Moderna and BioNTech reached a peak weighting in the Benchmark of nearly 18% during the review period. At one point during the review period, Moderna overtook Amgen as the largest biotech company in the world by market cap and had a market cap larger than AstraZeneca, Bristol-Myers Squibb, Sanofi, and Glaxo SmithKline, all of which have larger, more diversified revenue bases. We estimate our underweight positioning in Moderna and BioNTech resulted in approximately 11 percentage points of underperformance during the review period. Our expectation is that as the COVID-19 pandemic continues to subside, the market caps of both names will recalibrate to more reasonable levels.
Contributors to Performance
The principal contributors to performance during the review period were Sichuan Clover Biopharmaceuticals, Trillium Therapeutics, GH Research, Horizon Therapeutics, and DICE Therapeutics.
· Sichuan Clover Biopharmaceuticals is a private Chinese vaccine company which announced positive Phase 2/3 results for its COVID-19 protein subunit vaccine in September. The trial showed the vaccine had 79% efficacy against the Delta variant, making it one of the first vaccines to show strong efficacy against the Delta variant in a large-scale randomized clinical trial. The company went public in Hong Kong on 5 November.
· Trillium Therapeutics is an emerging clinical stage immuno-oncology company developing fusion proteins targeting various hematologic cancers. In late August, Pfizer announced that it was acquiring Trillium for $2.26 billion in cash, representing a 200% premium to Trillium’s stock price the day before the announcement.
· GH Research is a clinical stage biopharmaceutical company dedicated to developing therapies for the treatment of psychiatric and neurological disorders. The Company participated in a crossover round and subsequently in the IPO. Shares performed strongly after the IPO.
· Horizon Therapeutics is a specialty pharmaceutical company that launched Tepezza, a treatment for thyroid eye disease, in the U.S. in early 2020. The commercial launch has been exceptionally strong, beating consensus expectations over successive quarters. Management has continued to raise near term estimates for Tepezza sales, pushing the stock to all-time highs during the reported period.
· DICE Therapeutics is a biopharmaceutical company leveraging its proprietary technology platform to build a pipeline of novel oral therapeutic candidates to treat chronic diseases in immunology and other therapeutic areas. The company’s lead asset is an oral anti-IL17 drug for psoriasis. The Company participated in the IPO and shares appreciated after the IPO.
Detractors from Performance
The principal detractors from performance were Aptose Biosciences, Singular Genomics, Mersana Therapeutics, Keros Therapeutics, and Theravance Biopharma.
· Aptose Biosciences is an emerging biotech company developing personalized therapies addressing unmet medical needs in oncology, with an initial focus on hematology. Aptose shares underperformed after its treatment CG-806 for acute myeloid leukemia failed to show additional clinical responses in a clinical trial update compared to previous disclosures.
· Singular Genomics is an early-stage life science tools company developing next generation genetic sequencing products. The company executed an IPO in May and is set to commercialize its first product, the G4 sequencer, in late 2021. The stock was under pressure largely amid market weakness that saw reduced appetite for early-stage tools companies.
· Mersana Therapeutics develops antibody-drug conjugates (ADCs) for the treatment of cancer. Its lead ADC, UpRi, is currently in a Phase 3 trial in late-line platinum-resistant ovarian cancer. Shares of Mersana were weak after the company released updated early-stage data of UpRi showing some cases of serious pneumonitis, raising concerns about UpRi’s safety profile. As a result, Mersana has amended the protocol for the ongoing Phase 3 trial to utilize a lower UpRi dose.
· Keros Therapeutics is a clinical-stage biopharmaceutical company focused on the discovery and development of novel treatments for patients suffering from hematologic and musculoskeletal disorders with high unmet medical need. Keros shares underperformed over the period after their lead asset KER-050 in myelodysplastic syndrome showed initial efficacy results which disappointed expectations.
· Theravance Biopharma is a biopharmaceutical company specializing in the discovery and development of organ-selective medicines. The company offers Yupelri, a once-daily, nebulized, long-acting muscarinic antagonist used for the treatment of chronic obstructive pulmonary disease (“COPD”) and receives royalties from GlaxoSmithKline’s triple combination therapy, Trelegy, which is approved in both COPD and asthma. Theravance’s shares pulled back over the period due to pipeline failures of TD-1473, a gut-selective drug for ulcerative colitis, and ampreloxetine, a norepinephrine reuptake inhibitor for orthostatic hypotension.
COVID-19 Coming Under Control
Our initial expectation at the outset of the COVID-19 pandemic was that the biopharmaceutical industry would successfully develop multiple effective vaccines and treatments for COVID-19. This has largely come to pass, and we have been encouraged by the steadily increasing adoption of the approved vaccines. While we underestimated the level of vaccine hesitancy in the population, vaccine mandates and fears over the Delta variant continued to increase the percent of vaccinated individuals in the developed world during the review period. As of 30 September, about 65% of the U.S. population had received at least one dose of a COVID-19 vaccine, and upcoming vaccine approvals in children should further increase this percentage. The recent news that Merck’s oral pill, molnupiravir, reduced the risk of hospitalization or death by approximately 50% in patients with mild or moderate COVID-19 suggests the burden of disease from COVID-19 will continue to wane. It is possible that the Delta variant wave will be the last major COVID-19 wave in the U.S., given that most individuals are now either vaccinated or have been infected previously. Widespread vaccination in the developing world continues to be a challenge, but as more vaccines make their way through clinical trials, we expect total manufacturing capacity for COVID-19 vaccines to increase and prices to come down.
During the height of the COVID-19 pandemic, commercial biotech companies with promotion-sensitive products witnessed slower revenue growth since their salesforces could no longer visit physician offices in person. While the Delta variant surge delayed the full resumption of promotion activities for these companies, we expect a sales acceleration in 2022 now that Delta cases appear to be declining in the U.S. Delays in clinical trial commencement and enrollment due to COVID-19 no longer appear to be a significant issue for the industry.
While biotech companies with COVID-19 programs experienced strong performance last year during the height of the pandemic and more recently with the Delta wave, we expect some of the exuberance for those stocks to abate as COVID-19 cases decline. While we transiently held some COVID-19-related stocks during the Delta surge, we largely exited those names as cases continued to decline in the U.S. By the end of the review period, the only remaining COVID-19-related names we owned were Novavax, a company with a protein subunit COVID-19 vaccine with positive Phase 3 results, and two crossover investments in China: Sichuan Clover, a vaccine company developing a protein subunit COVID-19 vaccine, and StemiRNA, a vaccine company developing an mRNA-based COVID-19 vaccine. We were able to make both Chinese investments at a significant discount to their U.S peers.
As COVID-19 continues to wane as a phenomenon, generalist and retail investors who invested in biotech in 2020 primarily due to COVID-19 have reduced their exposure to the space. We believe this phenomenon contributed to the pullback in valuations in small and midcap biotech during the review period but has largely played out. Over the long term, positive developments in non-COVID-19 programs should be able to support growth in the industry, as it has historically.
IPO and Crossover Market Now More Valuation-Sensitive
As shown in the graph above, the IPO market for biotech companies remained robust throughout most of the review period. Appetite for biotech new issues remained healthy, underpinned by commitments from existing crossover investors in those companies. However, the period did witness significant retracements in performance for strong performing IPOs from 2020. Due to the reversion in performance of IPOs from 2020 and the broad selloff in small cap biotech in 2021, investors including us have become more valuation-sensitive for new IPOs, especially those without a near-term catalyst. We continue to participate in the IPO market because those companies are the ones developing the most innovative and novel technologies in the industry. The Company participated in 12 IPOs during the review period. Because IPO investments are less liquid and in smaller cap names, the average position size in such investments are typically less than 1% of NAV, which has led to an increase in the number of names in the portfolio over the past one to two years. In order to retain adequate research focus on our existing portfolio, we do not intend to increase the name count in the portfolio beyond current levels.
In addition to IPO investments, the Company has remained active in making crossover investments, i.e. investments in a company’s last private round prior to an IPO. The Company made five crossover investments during the review period, including investments in both U.S. and Chinese companies. The five investments were: GH Research, a company developing a psychedelic drug for depression; Janux Therapeutics, a cancer immunotherapy company developing T-cell engagers; Awakn Life Sciences, a UK-based company developing a drug for alcohol use disorder; StemiRNA, a Chinese company developing an mRNA-based vaccine for COVID-19; and XtalPi, a Chinese artificial-intelligence drug discovery company. Three of the five crossover investments went public during the review period: GH Research, Janux Therapeutics, and Awakn Life Sciences. At 30 September, approximately 10% of the Company’s NAV was invested in crossovers. We will continue to be selective about participating in crossover investments up to the 10% threshold permitted under the investment guidelines.
M&A Activity Could Accelerate with Recent Drawdown in Valuations
M&A activity continued in the sector over the review period. Transactions included Merck’s acquisition of Acceleron Pharma for $11.5 billion, Sanofi’s acquisition of Kadmon Holdings for $1.9 billion, and Pfizer’s acquisition of Trillium Therapeutics for $2.3 billion. The Company benefited directly from the acquisition of Trillium Therapeutics, which was a 1.3% position prior to the acquisition’s announcement. Management teams of large pharma have made it clear to investors that they are still very keen on acquiring biotech companies, both to obtain near-term commercial assets and to acquire interesting platform technologies. We would expect a possible acceleration in M&A activity with the recent drawdown in valuations in small cap biotech.
Regulatory Environment Remains Constructive; FDA Permanent Commissioner Appointment Imminent
The constructive U.S. Food and Drug Administration (FDA) regulatory policies during the Trump administration appear to be continuing during the Biden administration.
As of 30 September 2021, 40 new drugs have been approved at the FDA, consistent with the annual pace of new drug approvals during former President Trump’s term. Although there were some unexpected regulatory delays and rejections for drugs in early 2021, we believe those were likely due to COVID-19-related delays and do not reflect a new risk-averse stance at the FDA. The FDA’s approval of aducanumab, a beta-amyloid antibody for Alzheimer’s disease, in June 2021 despite a mixed Phase 3 dataset and a negative advisory committee vote shows that the agency remains flexible when evaluating innovative drugs for unmet medical needs.
President Biden will soon appoint a permanent FDA commissioner. Thus far, Janet Woodcock, a 35-year veteran at the FDA, has been serving as Acting FDA Commissioner during Biden’s term, but it appears that her candidacy for permanent commissioner may be stymied by certain senators having issues with her record managing the opioid crisis in the U.S. At the time of writing, Robert Califf, a prominent cardiologist and former FDA commissioner during the Obama administration, is widely rumored to be the lead candidate for the position. He is regarded as industry friendly and will likely show deference to the judgment of FDA reviewers on new drug applications. At a time when certain FDA decisions regarding COVID-19 vaccines have been politicized, we believe the appointment of an FDA commissioner that will support data-driven decisions on drug approvals is important to restoring public confidence in the agency’s independence and objectivity.
Short-Term Macro Headwinds in China, But Long-Term Thesis on Chinese Biotech Remains Intact
During the review period, the Company’s China holdings declined due to a deterioration in general market sentiment in Hong Kong. Over the past several months, the Chinese government took a number of sudden regulatory actions across a wide variety of sectors, including internet technology, for-profit education, and the financial industry. These regulatory actions have diminished the investment attractiveness of Chinese companies. Although none of the recent regulations specifically targeted healthcare, healthcare stocks including biotech experienced a decline over the review period in tandem with the rest of the Hong Kong market. We estimate the Company’s Chinese public equity exposure resulted in approximately two percentage points of underperformance versus the Benchmark.
The recent regulatory actions all appear to be instances in which particular industries had to be reined in to achieve the long-term goals of President Xi and the Chinese Communist Party. Importantly, we believe developing a Chinese biotech industry remains a key goal for the government, as evidenced by official published documents and multi-year plans emphasizing innovation. As a result, we expect constructive policies to continue to grow the industry and do not expect adverse regulatory action. In this context, we are still finding interesting opportunities in China, especially in the crossover space.
According to IQVIA, Inc. the percent of the global industry-wide early-stage drug pipeline from Chinese companies now approximates 12%, a four-fold rise in pipeline share in just the past five years. While we recognize that recent regulatory headlines have cooled interest in Hong Kong-listed stock and IPOs generally, we believe having some exposure to the rise of innovation in China is prudent for a diversified global biotech portfolio. As of 30 September, investments in China represented approximately 18% of the Company’s NAV. While there is no formal limit on the proportion of emerging markets investments that can be made by the Company, we do not foresee our China exposure increasing much beyond the current level.
Political Drug Pricing Risk Appears Minimal; Certainty Should Lift Overhang
At the time of writing, the Democrats in Congress are debating a $1.5-2.0 trillion “Build Back Better” social programs bill that would include paid family leave, expanded child tax credits, and incentives to address climate change. For healthcare specifically, the bill would extend subsidies and expand eligibility for Obamacare plans, and potentially expand Medicare services to include dental, hearing and vision services which are not currently covered. This healthcare expansion would in part be paid for by lowering prescription drug prices. While the progressive wing of the Democratic party would like to see broad-based direct government negotiation of drug prices, this seems unlikely given the razor-thin majorities Democrats currently have in Congress. The Democrats can only afford to lose a few votes in the House and zero votes in the Senate in order to pass legislation along partisan lines. Already, some centrist Democrats have publicly announced their opposition to the progressives’ plan regarding drug pricing. We believe a more likely scenario with regards to drug prices would be some drug price inflation caps, caps on out-of-pocket copays, and possible limited negotiation of pricing for older Medicare drugs that do not have existing competition. These incremental changes would be manageable for the biopharmaceutical industry. In our view, the industry would like some incremental drug pricing legislation to pass so that legislators can tell voters they did something about drug pricing and can then move on to other issues.
Historically speaking, the broad healthcare sector, including biotech, tends to trade at a discount to the broader S&P 500 when potential healthcare reform is being debated in Washington. This appears to be the case today. Just as in previous instances, we expect a relief rally once there is certainty about which drug pricing provisions are included in the final bill.
Outlook
Despite the Company’s challenging recent performance, we have many reasons for optimism. All of the industry fundamentals we have outlined previously - robust innovation, M&A activity, a constructive regulatory environment, and reduced political risks - remain intact. Valuations relative to historical norms are compelling. Over the past decade, biotech has outpaced the returns delivered by the S&P 500 and other general market indexes. We regard the review period as a temporary pause in the sector’s continued outperformance.
Given the magnitude of the underperformance of small cap biotech from the February highs, we are optimistic that small cap biotech will rebound from current levels. The drawdown that we have witnessed relative to the broader market is on par with the maximum drawdowns we have seen in this market segment previously, and historically such drawdowns have been followed by rallies of outperformance. At the time of writing, the portfolio remains overweight small cap biotech and underweight large cap biotech relative to the Benchmark, so the Company is well positioned to capture a small cap recovery when it materializes.
OrbiMed Update
With the broad availability of COVID-19 vaccines in the U.S., OrbiMed reopened its offices in September with a hybrid work schedule. We also recently hired an additional senior biotech analyst with 15 years of investment experience in biotech on 1 October. We will continue to expand our team of investment professionals as the investable biotech universe grows larger.
Geoff Hsu
OrbiMed Capital LLC
Portfolio Manager
10 November 2021
INVESTMENT PORTFOLIO
INVESTMENTS HELD AS AT 30 SEPTEMBER 2021
| Country/ | Fair value | % of | |
| Security | Region | £000 | investments |
| Horizon Therapeutics | United States | 27,359 | 4.7 |
| Neurocrine Biosciences | United States | 21,334 | 3.7 |
| Guardant Health | United States | 20,796 | 3.6 |
| Sichuan Clover Biopharmaceuticals (unquoted) | China | 19,521 | 3.4 |
| GH Research+ | Ireland | 19,386 | 3.4 |
| Vertex Pharmaceuticals | United States | 18,027 | 3.1 |
| Yisheng Biopharma (unquoted) | China | 17,103 | 3.0 |
| Gilead Sciences | United States | 14,892 | 2.6 |
| ImmunoGen | United States | 14,575 | 2.5 |
| Biogen | United States | 14,138 | 2.4 |
| Ten largest investments | 187,131 | 32.4 | |
| Seagen | United States | 14,085 | 2.4 |
| Turning Point Therapeutics | United States | 12,557 | 2.2 |
| Keros Therapeutics | United States | 12,049 | 2.1 |
| CRISPR Therapeutics | Switzerland | 11,754 | 2.0 |
| Mirati Therapeutics | United States | 11,437 | 2.0 |
| XtalPi (Quantum Pharma) (unquoted) | China | 11,283 | 1.9 |
| Theravance Biopharma | United States | 11,206 | 1.9 |
| Singular Genomics+ | United States | 10,903 | 1.9 |
| Milestone Pharmaceuticals | Canada | 10,770 | 1.9 |
| Graphite Bio+ | United States | 10,288 | 1.8 |
| Twenty largest investments | 303,463 | 52.5 | |
| Applied Therapeutics | United States | 9,779 | 1.7 |
| MeiraGTx | United States | 9,629 | 1.7 |
| Curis | United States | 9,327 | 1.6 |
| Magenta Therapeutics | United States | 9,196 | 1.6 |
| Mersana Therapeutics | United States | 9,131 | 1.6 |
| Amgen | United States | 9,001 | 1.6 |
| Aclaris Therapeutics | United States | 8,667 | 1.5 |
| Gracell Biotechnologies | China | 8,338 | 1.4 |
| Jounce Therapeutics | United States | 8,198 | 1.4 |
| Prelude Therapeutics | United States | 8,046 | 1.4 |
| Thirty largest investments | 392,775 | 68.0 | |
| Alphamab Oncology | China | 7,545 | 1.3 |
| Vaxcyte | United States | 7,514 | 1.3 |
| Flexion Therapeutics | United States | 7,492 | 1.3 |
| HBM Holdings | China | 7,151 | 1.2 |
| Novavax | United States | 7,000 | 1.2 |
| Janux Therapeutics+ | United States | 6,783 | 1.2 |
| Aerovate Therapeutics | United States | 6,650 | 1.1 |
| Catalyst Biosciences | United States | 6,442 | 1.1 |
| BioMarin Pharmaceutical | United States | 6,357 | 1.1 |
| DICE Therapeutics | United States | 6,355 | 1.1 |
| Forty largest investments | 462,064 | 79.9 |
+ Holding subject to a post IPO lock-in period (see Glossary for further details).
| Country/ | Fair value | % of | |
| Security | Region | £000 | investments |
| Remegen | China | 6,078 | 1.1 |
| PMV Pharmaceuticals | United States | 5,871 | 1.0 |
| Natera | United States | 5,687 | 1.0 |
| VistaGen Therapeutics | United States | 5,479 | 1.0 |
| StemiRNA Therapeutics (unquoted) | China | 5,448 | 0.9 |
| Century Therapeutics+ | United States | 5,409 | 0.9 |
| Intellia Therapeutics | United States | 5,293 | 0.9 |
| Nurix Therapeutics | United States | 4,852 | 0.8 |
| HK Inno | South Korea | 4,029 | 0.7 |
| Nanobiotix | France | 3,960 | 0.7 |
| Fifty largest investments | 514,170 | 88.9 | |
| Iovance Biotherapeutics | United States | 3,915 | 0.7 |
| Burning Rock Biotech | China | 3,274 | 0.6 |
| Edgewise Therapeutics | United States | 3,260 | 0.5 |
| Landos Biopharma | United States | 3,050 | 0.5 |
| ALX Oncology Holdings | United States | 2,974 | 0.5 |
| Deciphera Pharmaceuticals | United States | 2,969 | 0.5 |
| Suzhou Basecare Medical | China | 2,848 | 0.5 |
| Cabaletta Bio | United States | 2,715 | 0.5 |
| Verona Pharma | United Kingdom | 2,695 | 0.5 |
| CSPC Pharmaceutical | China | 2,640 | 0.5 |
| Sixty largest investments | 544,510 | 94.2 | |
| Aslan Pharmaceuticals | Singapore | 2,572 | 0.5 |
| Xenon Pharmaceuticals | Canada | 2,561 | 0.4 |
| AWAKN Life Sciences | Canada | 2,448 | 0.4 |
| Aptose Biosciences | Canada | 2,241 | 0.4 |
| OrbiMed Asia Partners L.P. (unquoted)* | Asia | 2,093 | 0.4 |
| InflaRx | Germany | 2,044 | 0.4 |
| ORIC Pharmaceuticals | United States | 1,931 | 0.3 |
| Field Trip Health | Canada | 1,929 | 0.3 |
| LogicBio Therapeutics | United States | 1,754 | 0.3 |
| Shanghai Junshi Biosciences | China | 1,683 | 0.3 |
| Seventy largest investments | 565,766 | 97.9 | |
| Galapagos | Belgium | 1,683 | 0.3 |
| Prometheus Biosciences | United States | 1,655 | 0.3 |
| I-Mab | China | 1,638 | 0.3 |
| VectivBio Holding | Switzerland | 1,631 | 0.3 |
| Small Pharma | Canada | 1,525 | 0.2 |
| Harpoon Therapeutics | United States | 1,180 | 0.2 |
| Repare Therapeutics | Canada | 958 | 0.2 |
| Talaris Therapeutics | United States | 929 | 0.2 |
| Galecto | Denmark | 764 | 0.1 |
| Longboard Pharmaceuticals | United States | 745 | 0.1 |
| Eighty largest investments | 578,474 | 100.1 |
+ Holding subject to a post IPO lock-in period (see Glossary for further details).
| Country/ | Fair value | % of | |
| Security | Region | £000 | investments |
| Fusion Pharmaceuticals | Canada | 598 | 0.1 |
| Hansoh Pharmaceutical | China | 566 | 0.1 |
| IMARA | United States | 563 | 0.1 |
| AWAKN Life Sciences warrant (unquoted) | Canada | 268 | 0.0 |
| Total investments | 580,469 | 100.4 | |
| OTC Equity Swaps – Financed^ | |||
| BGI Genomics | China | 4,363 | 0.8 |
| Less: Gross exposure on financed swaps | (6,747) | (1.2) | |
| Total OTC Equity Swaps | (2,384) | (0.4) | |
| Total investments including OTC Equity Swaps | 578,085 | 100.0 |
* Partnership interest.
^ See note 7 to the Financial Statements for further details in relation to the OTC Swaps.
All of the above investments are equities unless otherwise stated.
PORTFOLIO BREAKDOWN
| Fair value | % of | |
| Investments | £000 | investments |
| Quoted | ||
| Equities | 524,753 | 90.8 |
| Total quoted investments | 524,753 | 90.8 |
| Unquoted | ||
| Equities | 53,355 | 9.2 |
| Warrants | 268 | – |
| Partnership interest | 2,093 | 0.4 |
| Total unquoted investments | 55,716 | 9.6 |
| Derivatives | ||
| OTC Equity Swaps | (2,384) | (0.4) |
| Total investments | 578,085 | 100.0 |
PRINCIPAL CONTRIBUTORS TO AND DETRACTORS FROM NET ASSET VALUE PERFORMANCE
FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2021
TOP FIVE CONTRIBUTORS
|
Contribution for the Six months ended 30 September 2021 £000 |
Contribution per share (pence)* |
|
| Sichuan Clover Biophamaceuticals (unquoted) | 14,320 | 34.3 |
| Trillium Therapeutics+ | 7,755 | 18.6 |
| GH Research | 6,104 | 14.6 |
| Horizon Therapeutics | 4,651 | 11.2 |
| DICE Therapeutics | 3,110 | 7.5 |
| 35,940 | 86.2 |
+ not held in the portfolio as at 30 September 2021
TOP FIVE DETRACTORS
|
Contribution for the Six months ended 30 September 2021 £000 |
Contribution per share (pence)* |
||
| Aptose Biosciences | (10,389) | (24.9) | |
| Singular Genomics | (8,595) | (20.6) | |
| Mersana Therapeutics | (6,356) | (15.3) | |
| Keros Therapeutics | (6,093) | (14.6) | |
| Theravance Biopharma | (5,930) | (14.2) | |
| (37,363) | (89.6) | ||
* based on 41,693,267 shares being the weighted average number of shares in issue during the six month period ended 30 September 2021
Source: Frostrow Capital LLP
CONDENSED INCOME STATEMENT
FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2021
| (Unaudited) | (Unaudited) | (Audited) | ||||||||
| Six months ended | Six months ended | Year ended | ||||||||
| 30 September 2021 | 30 September 2020 | 31 March 2021 | ||||||||
| Revenue | Capital | Total | Revenue | Capital | Total | Revenue | Capital | Total | ||
| Notes | £000 | £000 | £000 | £000 | £000 | £000 | £000 | £000 | £000 | |
| Investment Income | ||||||||||
| Investment income | 2 | 587 | – | 587 | 490 | – | 490 | 986 | – | 986 |
| Total income | 587 | – | 587 | 490 | – | 490 | 986 | – | 986 | |
| (Losses)/gains on investments | ||||||||||
| (Losses)/gains on investments held at fair value through profit or loss | – | (57,118) | (57,118) | – | 197,215 | 197,215 | – | 221,127 | 221,127 | |
| Exchange (losses)/gains on currency balances | – | (888) | (888) | – | 1,973 | 1,973 | – | 3,394 | 3,394 | |
| Expenses | ||||||||||
| AIFM, Portfolio management and performance fees | 3 | (134) | 8,191 | 8,057 | (185) | (20,843) | (21,028) | (268) | (23,826) | (24,094) |
| Other expenses | (310) | – | (310) | (235) | – | (235) | (647) | (30) | (677) | |
| Profit/(loss) before finance costs and taxation | 143 | (49,815) | (49,672) | 70 | 178,345 | 178,415 | 71 | 200,665 | 200,736 | |
| Finance costs | (4) | (78) | (82) | (6) | (116) | (122) | (9) | (170) | (179) | |
| Profit/(loss) before taxation | 139 | (49,893) | (49,754) | 64 | 178,229 | 178,293 | 62 | 200,495 | 200,557 | |
| Taxation | (73) | – | (73) | (68) | – | (68) | (131) | – | (131) | |
| Profit/(loss) for the period/year | 66 | (49,893) | (49,827) | (4) | 178,229 | 178,225 | (69) | 200,495 | 200,426 | |
| Basic and diluted earnings/(loss) per share | 4 | 0.2p | (119.7)p | (119.5)p | 0.0p | 452.7p | 452.7p | (0.2)p | 500.7p | 500.5p |
The Company does not have any income or expenses which are not included in the profit or loss for the period. Accordingly the “loss for the period” is also the “Total Comprehensive Income for the period”, as defined in IAS 1 (revised) and no separate Statement of Comprehensive Income has been presented.
All of the profit and total comprehensive income for the period is attributable to the owners of the Company.
The “Total” column of the statement is the Company’s Income Statement, prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and International Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union (“IFRS”).
The “Revenue” and “Capital” columns are supplementary to this and are prepared under guidelines published by the Association of Investment Companies.
All items in the above statement derive from continuing operations. No operations were acquired or discontinued in the period.
The financial statements for the six months ended 30 September 2021 have not been audited by the Company’s auditors.
CONDENSED STATEMENT OF CHANGES IN EQUITY
(UNAUDITED) SIX MONTHS ENDED 30 SEPTEMBER 2021
| Ordinary | Share | Capital | ||||
| Share | premium | redemption | Capital | Revenue | ||
| capital | account | reserve | reserve | reserve | Total | |
| £000 | £000 | £000 | £000 | £000 | £000 | |
| At 31 March 2021 | 10,396 | 77,895 | 12,997 | 500,594 | (415) | 601,467 |
| Net (loss)/profit for the period | – | – | – | (49,893) | 66 | (49,827) |
| Issue of new shares | 37 | 2,056 | – | – | – | 2,093 |
| Repurchase of own shares for cancellation | (28) | – | 28 | (1,396) | – | (1,396) |
| At 30 September 2021 | 10,405 | 79,951 | 13,025 | 449,305 | (349) | 552,337 |
(UNAUDITED) SIX MONTHS ENDED 30 SEPTEMBER 2020
| Ordinary | Share | Capital | ||||
| Share | premium | redemption | Capital | Revenue | ||
| capital | account | reserve | reserve | reserve | Total | |
| £000 | £000 | £000 | £000 | £000 | £000 | |
| At 31 March 2020 | 9,802 | 43,021 | 12,997 | 300,099 | (346) | 365,573 |
| Net profit/(loss) for the period | – | – | – | 178,229 | (4) | 178,225 |
| Issue of new shares | 120 | 6,056 | – | – | – | 6,176 |
| At 30 September 2020 | 9,922 | 49,077 | 12,997 | 478,328 | (350) | 549,974 |
(AUDITED) YEAR ENDED 31 MARCH 2021
| Ordinary | Share | Capital | ||||
| Share | premium | redemption | Capital | Revenue | ||
| capital | account | reserve | reserve | reserve | Total | |
| £000 | £000 | £000 | £000 | £000 | £000 | |
| At 31 March 2020 | 9,802 | 43,021 | 12,997 | 300,099 | (346) | 365,573 |
| Net profit/(loss) for the year | – | – | – | 200,495 | (69) | 200,426 |
| Issue of new shares | 594 | 34,874 | – | – | – | 35,468 |
| At 31 March 2021 | 10,396 | 77,895 | 12,997 | 500,594 | (415) | 601,467 |
CONDENSED STATEMENT OF FINANCIAL POSITION
AS AT 30 SEPTEMBER 2021
| (Unaudited) | (Unaudited) | (Audited) | ||
| 30 September | 30 September | 31 March | ||
| 2021 | 2020 | 2021 | ||
| Notes | £000 | £000 | £000 | |
| Non current assets | ||||
| Investments held at fair value through profit or loss | 580,469 | 591,117 | 643,270 | |
| Current assets | ||||
| Other receivables | 32 | 8,643 | 4,760 | |
| Cash and cash equivalents | 3,871 | – | 1,502 | |
| 3,903 | 8,643 | 6,262 | ||
| Total assets | 584,372 | 599,760 | 649,532 | |
| Current liabilities | ||||
| Other payables | 10,378 | 25,400 | 20,668 | |
| Loan facility | 19,273 | 24,386 | 26,779 | |
| Derivative – OTC equity swaps | 2,384 | – | 618 | |
| 32,035 | 49,786 | 48,065 | ||
| Net assets | 552,337 | 549,974 | 601,467 | |
| Equity attributable to equity holders | ||||
| Ordinary share capital | 10,405 | 9,922 | 10,396 | |
| Share premium account | 79,951 | 49,077 | 77,895 | |
| Capital redemption reserve | 13,025 | 12,997 | 12,997 | |
| Capital reserve | 449,305 | 478,328 | 500,594 | |
| Revenue reserve | (349) | (350) | (415) | |
| Total equity | 552,337 | 549,974 | 601,467 | |
| Net asset value per share | 5 | 1,327.0p | 1,385.8p | 1,446.4p |
CONDENSED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2021
| (Unaudited) | (Unaudited) | (Audited) | |
| Six months ended | Six months ended | Year ended | |
| 30 September 2021 | 30 September 2020 | 31 March 2021 | |
| £000 | £000 | £000 | |
| Operating activities | |||
| (Loss)/profit before taxation* | (49,754) | 178,293 | 200,557 |
| Add back interest expense | 82 | 122 | 179 |
| Losses/(gains) on investments held at fair value | |||
| through profit & loss | 57,118 | (197,215) | (221,127) |
| Exchange losses/(gains) on currency balances | 888 | (1,973) | (3,394) |
| Decrease/(increase) in other receivables | 6 | (33) | 3 |
| (Decrease)/increase in other payables | (17,852) | 18,952 | 18,239 |
| Taxation paid | (73) | (68) | (131) |
| Net cash outflow from operating activities | (9,585) | (1,922) | (5,674) |
| Investing activities | |||
| Purchases of investments and derivatives | (253,568) | (260,320) | (599,971) |
| Sales of investments and derivatives | 273,301 | 262,566 | 574,422 |
| Net cash inflow/(outflow) from investing activities | 19,733 | 2,246 | (25,549) |
| Financing activities | |||
| Repurchase of shares for cancellation | (1,396) | – | – |
| Proceeds from the issue of shares | 2,093 | 6,176 | 35,468 |
| Net repayment of the loan facility | (8,394) | (6,378) | (2,564) |
| Finance costs - interest paid | (82) | (122) | (179) |
| Net cash (outflow)/inflow from financing activities | (7,779) | (324) | 32,725 |
| Net increase in cash and cash equivalents | 2,369 | – | 1,502 |
| Cash and cash equivalents at start of period/year | 1,502 | – | – |
| Cash and cash equivalents | 3,871 | – | 1,502 |
* Includes dividends earned during the period/year of £532,000 (six months ended 30 September 2020: £453,000; year ended 31 March 2021: £875,000) and bond income of £55,000 (six months ended 30 September 2020: £37,000; year ended 31 March 2021: £111,000).
CHANGES IN LIABILITIES ARISING FROM FINANCING ACTIVITIES
| (Unaudited) | (Unaudited) | (Audited) | |
| Six months ended | Six months ended | Year ended | |
| 30 September 2021 | 30 September 2020 | 31 March 2021 | |
| £000 | £000 | £000 | |
| Balance as at start of period/year | 26,779 | 32,737 | 32,737 |
| Net cash flow | (8,394) | (6,378) | (2,564) |
| Exchange losses/(gains) on currency balances | 888 | (1,973) | (3,394) |
| 19,273 | 24,386 | 26,779 |
NOTES TO THE FINANCIAL STATEMENTS
1.A) GENERAL INFORMATION
The Biotech Growth Trust PLC is a company incorporated and registered in England and Wales. The Company operates as an investment trust company within the meaning of Section 833 of the Companies Act 2006 and has made a successful application under Regulation 5 of the Investment Trust (Approved Company) (Tax) Regulations 2011 for investment trust status to apply to all accounting periods commencing on or after 1 April 2012.
1.B) BASIS OF PREPARATION
The Company’s condensed financial statements for the six months ended 30 September 2021 have been prepared in accordance with IAS 34 “Interim Financial Reporting”. They do not include all the financial information required for the full annual financial statements and have been prepared using accounting policies adopted in the audited financial statements for the year ended 31 March 2021.
Those financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”).
Where presentational guidance set out in the statement of Recommended Practice (the “SORP”) for Investment Trust Companies and Venture Capital Trusts produced by the Association of Investment Companies (“AIC”) dated October 2019 and updated in April 2021. The Directors have sought to prepare the Financial Statements on a basis compliant with the recommendations of the SORP.
1.C) SEGMENTAL REPORTING
IFRS 8 requires entities to define operating segments and segment performance in the financial statements based on information used by the Board of Directors. The Directors are of the opinion that the Company is engaged in a single segment of business, being investment business.
1.D) GOING CONCERN
The Directors believe that it is appropriate to adopt the going concern basis in preparing the accounts as the assets of the Company 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. The next continuation vote of the Company will be held at the Annual General Meeting in 2025 and further opportunities to vote on the continuation of the Company will be given to shareholders every five years thereafter.
2. INCOME
| (Unaudited) | (Unaudited) | (Audited) | |
| Six months ended | Six months ended | Year ended | |
| 30 September | 30 September | 31 March | |
| 2021 | 2020 | 2021 | |
| £000 | £000 | £000 | |
| Investment income | |||
| Overseas dividend income | 532 | 453 | 875 |
| Fixed interest income | 55 | 37 | 111 |
| Total income | 587 | 490 | 986 |
3. AIFM, PORTFOLIO MANAGEMENT AND PERFORMANCE FEES
| Total | Total | ||||||||
| (Unaudited) | (Unaudited) | Total | |||||||
| Six months | Six months | (Audited) | |||||||
| ended | ended | Year ended | |||||||
| 30 September | 30 September | 31 March | |||||||
| Revenue | Capital | 2021 | Revenue | Capital | 2020 | Revenue | Capital | 2021 | |
| £000 | £000 | £000 | £000 | £000 | £000 | £000 | £000 | £000 | |
| AIFM fee | 40 | 757 | 797 | 39 | 732 | 771 | 84 | 1,600 | 1,684 |
| Portfolio management fee | 94 | 1,781 | 1,875 | 86 | 1,637 | 1,723 | 184 | 3,493 | 3,677 |
| Performance fee (written back)/charged in the period/year* | – | (10,729) | (10,729) | – | 18,534 | 18,534 | – | 18,733 | 18,733 |
| 134 | (8,191) | (8,057) | 125 | 20,903 | 21,028 | 268 | 23,826 | 24,094 |
During the six months ended 30 September 2021, due to underperformance against the Benchmark and in accordance with the performance fee arrangements in place, a reversal of prior period provisions totalling £10,729,000 occurred (six months ended 30 September 2020: charge of £18,534,000; year ended 31 March 2021: charge of £18,733,000).
As at 30 September 2021, no performance fees were accrued or payable (31 March 2021: £17,708,000 accrued. The £17,708,000 accrual is included within the opening period’s “Other payables” balance of £20,668,000 shown in the Condensed Statement of Financial Position). Of the 31 March 2021 accrual, £6,979,000 crystallised and became payable at 30 June 2021, resulting in the £10,729,000 reversal noted above.
The maximum that could become payable by September 2022 is £10,729,000. This would only be payable in full if the current period underperformance is reversed and the outperformance achieved as at 31 March 2021 is re-attained.
For further details on the performance fee arrangements see pages 42 and 43 of the 2021 Annual Report.
4. BASIC AND DILUTED EARNINGS/(LOSS) PER SHARE
| (Unaudited) | (Unaudited) | (Audited) | |
| Six months ended | Six months ended | Year ended | |
| 30 September | 30 September | 31 March | |
| 2021 | 2020 | 2021 | |
| £000 | £000 | £000 | |
| The earnings/(loss) per share is based on the following figures: | |||
| Net revenue gain/(loss) | 66 | (4) | (69) |
| Net capital (loss)/gain | (49,893) | 178,229 | 200,495 |
| Net total (loss)/gain | (49,827) | 178,225 | 200,426 |
| Weighted average number of shares in issue during the period/year | 41,693,267 | 39,373,690 | 40,046,064 |
| Pence | Pence | Pence | |
| Revenue earnings/(loss) per share | 0.2 | – | (0.2) |
| Capital (loss)/earnings per share | (119.7) | 452.7 | 500.7 |
| Total (loss)/earnings per share | (119.5) | 452.7 | 500.5 |
5. NET ASSET VALUE PER SHARE
The Net Asset Value per share is based on the net assets attributable to equity shareholders of £552,337,000 (30 September 2020: £549,974,000; 31 March 2021: £601,467,000) and on 41,622,156 shares (30 September 2020: 39,687,269; 31 March 2021: 41,584,769) being the number of shares in issue at the period end.
6. TRANSACTION COSTS
Purchase and sale transaction costs for the six months ended 30 September 2021 amounted to £517,000 (six months ended 30 September 2020: £530,000; year ended 31 March 2021: £1,435,000), broken down as follows: purchase transactions for the six months ended 30 September 2021 amounted to £201,000 (six months ended 30 September 2020: £259,000; year ended 31 March 2021: £851,000). Sale transactions amounted to £316,000 (six months ended 30 September 2020: £271,000; year ended 31 March 2021: £584,000). These costs comprise mainly commission.
7. INVESTMENTS
IFRS 13 requires the Company to classify fair value measurements using the fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy consists of the following three levels:
· Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities;
· Level 2 – inputs other than quoted prices included with Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
· Level 3 – inputs for the asset or liability that are not based on observable market data (unobservable inputs)
At 30 September 2021 the investment in OrbiMed Asia Partners LP Fund (the LP Fund), XtalPi (Quantum Pharma), Sichuan Clover Biopharmaceuticals, StemiRNA and Yisheng Biopharma have been classified as Level 3.
The LP Fund is valued quarterly by OrbiMed Advisors LLC and is audited annually by KPMG LLP. As the 30 September 2021 valuation is not yet available, the LP Fund has been valued at its net asset value as at 30 June 2021 (see Level 3 reconciliation below). It is believed that the value of the LP Fund as at 30 September 2021 will not be materially different. If the value of the LP Fund was to increase or decrease by 10%, while other variables had remained constant, the return and net assets attributable to shareholders for the period ended 30 September 2021 would have increased or decreased by £209,000 (2020: £239,000).
The following investments have been valued by Duff & Phelps, an independent valuer, using the probability-weighted expected returns methodology: XtalPi, Sichuan Clover Biopharmaceuticals, StermiRNA and Yisheng Biopharma. If during the same period, the values of XtalPi, Sichuan Clover Biopharmaceuticals, StemiRNA and Yisheng Biopharma were to increase or decrease by 10%, the return and net assets attributable to shareholders would have increased or decreased by £5,336,000.
Awakn Life Sciences warrants have been classified as Level 2 at the period end. If the value of the warrants were to increase or decrease by 10%, the return and net assets attributable to shareholders would have increased or decreased by £27,000.
The table below sets out fair value measurements of financial assets in accordance with the IFRS13 fair value hierarchy system:
(UNAUDITED)
SIX MONTHS ENDED 30 SEPTEMBER 2021
| Level 1 | Level 2 | Level 3 | Total | |
| £000 | £000 | £000 | £000 | |
| Equity investments | 524,753 | – | 53,355 | 578,108 |
| Derivatives: equity Swap (liabilities) | – | (2,384) | – | (2,384) |
| Warrants | – | 268 | – | 268 |
| Partnership interest in LP Fund | – | – | 2,093 | 2,093 |
| Total | 524,753 | (2,116) | 55,448 | 578,085 |
(UNAUDITED)
SIX MONTHS ENDED 30 SEPTEMBER 2020
| Level 1 | Level 2 | Level 3 | Total | |
| £000 | £000 | £000 | £000 | |
| Equity investments | 550,908 | – | 13,690 | 564,598 |
| Bond | – | – | 7,193 | 7,193 |
| Warrants | – | 16,939 | – | 16,939 |
| Partnership interest in LP Fund | – | – | 2,387 | 2,387 |
| Total | 550,908 | 16,939 | 23,270 | 591,117 |
(AUDITED)
YEAR ENDED 31 MARCH 2021
| Level 1 | Level 2 | Level 3 | Total | |
| £000 | £000 | £000 | £000 | |
| Equity investments | 605,536 | 251 | 37,483 | 643,270 |
| Derivatives: equity Swap (liabilities) | – | (618) | – | (618) |
| Total | 605,536 | (367) | 37,483 | 642,652 |
LEVEL 3 RECONCILIATION
Please see below a reconciliation disclosing the changes during the six months for the financial assets and liabilities, designated at fair value through profit or loss, classified as being Level 3.
| (Unaudited) | (Unaudited) | (Audited) | |
| Six months ended | Six months ended | Year ended | |
| 30 September | 30 September | 31 March | |
| 2021 | 2020 | 2021 | |
| £000 | £000 | £000 | |
| Assets as at beginning of period | 37,483 | 16,906 | 16,906 |
| Purchase of unquoted investments | 13,266 | 17,937 | 29,735 |
| Sale of unquoted investments | – | – | (11,726) |
| Net movement in investment holding gains during the period/year | 18,940 | (1,399) | 2,568 |
| Transfer from level 3 to level 1 | (14,241) | (10,174) | – |
| Assets as at 30 September/31 March | 55,448 | 23,270 | 37,483 |
8. PRINCIPAL RISKS PROFILE
The principal risks which the Company faces from its financial instruments are:
- market price risk, including currency risk, interest rate risk and other price risk;
- liquidity risk; and
- credit risk
Market price risk – This is the risk that the fair value or future cash flows of a financial instrument held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements – currency risk, interest rate risk and other price risk.
Liquidity risk – This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities.
Credit risk – This is the risk that the counterparty to a transaction fails to discharge its obligations under that transaction, which could result in the Company suffering a loss.
Further details of the Company’s management of these risks can be found in note 14 of the Company’s 2021 Annual Report.
There have been no changes to the management of or the exposure to these risks since the date of the Annual Report.
9. RELATED PARTY TRANSACTIONS
There have been no changes to the related party arrangements or transactions as reported in the Annual Report for the year ended 31 March 2021.
10. CREDIT RISK
J.P. Morgan Securities LLC (J.P. Morgan) may take assets with a value of up to 140% of the Company’s loan facility as collateral. Such assets held by J.P. Morgan are available for rehypothecation*.
As at 30 September 2021, the maximum value of assets available for rehypothecation was £27.0 million being 140% of the loan balance (£19.3 million) (30 September 2020: £34.2 million, 31 March 2021: £37.5 million).
* See Glossary for further information.
11. COMPARATIVE INFORMATION
The financial information contained in this half year report does not constitute statutory accounts as defined in sections 434 to 436 of the Companies Act 2006. The financial information for the six months ended 30 September 2021 and 2020 has not been audited by the Independent Auditor.
The information for the year ended 31 March 2021 has been extracted from the latest published audited financial statements. The audited financial statements for the year ended 31 March 2021 have been filed with the Registrar of the Companies. The report of the Independent Auditor on those accounts was unqualified, did not include a reference to any matters to which the Independent Auditor drew attention by way of emphasis without qualifying the report and did not contain statements under section 498(2) or 498(3) of the Companies Act 2006.
INTERIM MANAGEMENT REPORT
PRINCIPAL RISKS AND UNCERTAINTIES
A review of the half year, including reference to the risks and uncertainties that existed during the period and the outlook for the Company can be found in the Chairman’s Statement and in the Portfolio Manager’s Review. The principal risks faced by the Company fall into the following broad categories: objective and strategy; volatility and the level of discount/premium; portfolio performance; investment management key person risk; operational and regulatory (including cyber risk); market price risk; liquidity risk; shareholder profile; currency risk; the risk associated with the Company’s loan facility; and credit risk. Information on each of these areas is given in the Strategic Report/ Business Review within the Annual Report and Accounts for the year ended 31 March 2021. In the view of the Board these principal risks and uncertainties are applicable to the remaining six months of the financial year as they were to the six months under review.
The Board, the AIFM and the Portfolio Manager continue to consider emerging risks and monitor, amongst other things, the potential for the Company’s portfolio to be affected by the COVID-19 pandemic and geopolitical risks.
RELATED PARTY TRANSACTIONS
During the first six months of the current financial year, no transactions with related parties have taken place which have materially affected the financial position or the performance of the Company.
GOING CONCERN
The Directors believe, having considered the Company’s investment objectives, risk management policies, capital management policies and procedures, the nature of the portfolio and expenditure projections, that the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future and, more specifically, that there are no material uncertainties relating to the Company that would prevent its ability to continue in such operational existence for at least twelve months from the date of the approval of this half yearly financial report. For these reasons, they consider there is reasonable evidence to continue to adopt the going concern basis in preparing the accounts.
DIRECTORS’ RESPONSIBILITIES
The Board of Directors confirms that, to the best of its knowledge:
- the condensed set of financial statements contained within the Half Year Report have been prepared in accordance with applicable International Accounting Standards, (IAS) 34; and
- the interim management report includes a true and fair review of the information required by:
- DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and
- DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.
The Half Year Report has not been audited by the Company’s auditors.
This Half Year Report contains certain forward-looking statements. These statements are made by the Directors in good faith based on the information available to them up to the date of this report and such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.
For and on behalf of the Board
Andrew Joy
Chairman
10 November 2021
GLOSSARY OF TERMS AND ALTERNATIVE PERFORMANCE MEASURES (‘APMS’)
AIC
Association of Investment Companies.
ALTERNATIVE INVESTMENT FUND MANAGERS DIRECTIVE (“AIFMD”)
Agreed by the European Parliament and the Council of the European Union and transposed into UK legislation, the AIFMD classifies certain investment vehicles, including investment companies, as Alternative Investment Funds (AIFs) and requires them to appoint an Alternative Investment Fund Manager (AIFM) and depositary to manage and oversee the operations of the investment vehicle. The Board of the Company retains responsibility for strategy, operations and compliance and the Directors retain a fiduciary duty to shareholders.
ALTERNATIVE PERFORMANCE MEASURE (“APMs”)
An APM is a numerical measure of the Company’s current, historical or future financial performance, financial position or cash flows, other than a financial measure defined or specified in the applicable financial framework. In selecting these Alternative Performance Measures, the Directors considered the key objectives and expectations of typical investors in an investment trust such as the Company.
ACTIVE SHARE
Active Share is expressed as a percentage and shows the extent to which a fund’s holdings and their weightings differ from those of the fund’s benchmark index. A fund that closely tracks its index might have a low Active Share of less than 20% and be considered passive, while a fund with an Active Share of 60% or higher is generally considered to be actively managed.
CROSSOVER INVESTMENTS
Investments in a company’s last private round prior to an initial public offering (IPO).
DISCOUNT OR PREMIUM^
A description of the difference between the share price and the net asset value per share. The size of the discount or premium is calculated by subtracting the share price from the net asset value per share and is usually expressed as a percentage (%) of the net asset value per share. If the share price is higher than the net asset value per share the result is a premium. If the share price is lower than the net asset value per share, the shares are trading at a discount.
| As at | As at | ||
| 30 September | 31 March | ||
| 2021 | 2021 | ||
| Pages | pence | pence | |
| Share Price | 3 | 1,206.0 | 1,426.0 |
| Net asset value per share (see note 5 for further information) | 3 | 1,327.0 | 1,446.4 |
| Discount of share price to net asset value per share | 3 | 9.1% | 1.4% |
GEARING^
Gearing represents prior charges, adjusted for net current liabilities, expressed as a percentage of net assets. Prior charges includes all loans for investment purposes.
| As at | As at | ||
| 30 September | 31 March | ||
| 2021 | 2021 | ||
| Pages | £000 | £000 | |
| Loan facility | 18 | 19,273 | 26,779 |
| Net current liabilities (excluding loan and derivatives) | – | 6,475 | 14,406 |
| 25,748 | 41,185 | ||
| Net assets | 18 | 552,337 | 601,467 |
| Gearing | 3 | 4.7% | 6.8% |
IPO LOCK-IN
When a company offers shares in an initial public offering (IPO), investors sometimes enter into a lock-in agreement preventing them from selling their shares for a specific period after the IPO.
NET ASSET VALUE (“NAV”)
The value of the Company’s assets, principally investments made in other companies and cash being held, minus any liabilities. The NAV is also described as ‘shareholders’ funds’. The NAV is often expressed in pence per share after being divided by the number of shares which have been issued. The NAV per share is unlikely to be the same as the share price which is the price at which the Company’s shares can be bought or sold by an investor. The share price is determined by the relationship between the demand and supply of the shares in the secondary market.
NET ASSET VALUE PER SHARE TOTAL RETURN^
The net asset value per share total return for the period ended 30 September 2021 is calculated by taking the percentage movement from the net asset value per share as at 31 March 2021 of 1,446.4p to the net asset value at 30 September 2021 of 1,327.0p. The Company has not paid any dividends to shareholders during the above mentioned period.
ONGOING CHARGES^
Ongoing charges are calculated by taking the Company’s annualised operating expenses expressed as a proportion of the average daily net asset value of the Company over the year.
The costs of buying and selling investments are excluded, as are interest costs, taxation, performance fees, cost of buying back or issuing ordinary shares and other non-recurring costs.
| As at | As at | ||
| 30 September | 31 March | ||
| 2021 | 2021 | ||
| Pages | £000 | £000 | |
| AIFM and Portfolio Management fees* | – | 5,132 | 5,361 |
| Operating expenses* | – | 652 | 677 |
| Total expenses* | – | 5,784 | 6,038 |
| Average assets for the period/year | – | 561,566 | 551,514 |
| Ongoing charges | 3 | 1.0% | 1.1% |
* Estimated expenses for the year ending 31 March 2022 based on assets as at 30 September 2021.
OTC EQUITY SWAPS
Over-the-Counter (OTC) refers to the process of how securities are traded via a broker - dealer network, as opposed to a centralised exchange.
An equity swap is an agreement where one party (counterparty) transfers the total return of an underlying equity position to the other party (swap holder) in exchange for a payment of the principal, and interest for financed swaps, at a set date. Total return includes dividend income and gains or losses from market movements. The exposure of the holder is the market value of the underlying equity position.
There are two main types of equity swaps:
· Funded – where payment is made on acquisition. They are equivalent to holding the underlying equity position with the exception of additional counterparty risk and not possessing voting rights in the underlying; and
· Financed – where payment is made on maturity. As there is no initial outlay, financed swaps increase exposure by the value of the underlying equity position with no initial increase in the investments value – there is therefore embedded leverage within a financed swap due to the deferral of payment to maturity.
During the period the Company invested in financed swaps.
REHYPOTHECATION
Rehypothecation is the practice by banks and brokers of using collateral posted as security for loans as regulated by the U.S. Securities Exchange Commission.
SHARE PRICE TOTAL RETURN^
The share price total return for the period ended 30 September 2021 is calculated by taking the percentage movement from the share price as at 31 March 2021 of 1,426.0p to the share price as at 30 September 2021 of 1,206.0p. The Company has not paid any dividends to shareholders during the above mentioned period.
^ Alternative Performance Measure
10 November 2021
Frostrow Capital LLP
Company Secretary
END
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