Annual Financial Report
INTERNATIONAL BIOTECHNOLOGY TRUST PLC (the "Company")
Annual Financial Report Announcement of Audited Results for the year ended 31 August 2010
This announcement contains regulated information.
The information contained in this Annual Financial Report Announcement, including the 31 August 2009 comparatives, has been prepared in accordance with the applicable UK Accounting Standards (United Kingdom Generally Accepted Accounting Practice) and with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" (issued in January 2009 and adopted early). The results for the year ended 31 August 2010 are audited but do not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The statutory accounts have not yet been delivered to the Registrar of Companies. Full statutory accounts for the year ended 31 August 2009 included an unqualified audit report and have been filed with the Registrar of Companies.
Financial Summary
|
|
31 August |
31 August |
% |
|
|
2010 |
2009 |
Change |
|
Group Performance |
|
|
|
|
Shareholders' funds (£'000) |
93,658 |
98,255 |
(4.7)% |
|
Ordinary shares in issue† ('000) |
60,358 |
64,833 |
(6.9)% |
|
Net asset value ("NAV") per share |
155.17p |
151.55p |
2.4% |
|
Share price |
133.75p |
120.75p |
10.8% |
|
Share price discount |
(13.80)% |
(20.32)% |
|
|
Total expense ratio ("TER")* |
2.17% ------------- |
2.07% ------------- |
------------ |
|
Index Returns |
|
|
|
|
NASDAQ Biotechnology Index ("NBI") (Sterling-adjusted) |
528.42 |
496.12 |
6.5% |
|
Russell 2000 Biotechnology Growth Index ("RGUHSBTG") (Sterling-adjusted) |
605.24 |
666.06 |
(9.1)% |
†Excludes those held in treasury (31 August 2010: 4,475,000; 31 August 2009: 5,760,000).
*Calculated in accordance with The Association of Investment Companies ("the AIC") guidance. Based on total expenses excluding finance costs, performance fees and VAT recovered on management fees and expressed as a percentage of average monthly net assets.
Chairman's Statement
I am pleased to report an increase in both the net asset value ("NAV"), and share price of the Company during the year ended 31 August 2010. The NAV increased by 2.4% to 155.2p per share during the year. This compares with a Sterling-adjusted increase of 6.5% in the NASDAQ Biotechnology Index ("NBI") and a 9.1% decrease in the Russell 2000 Biotechnology Growth Index ("RGUHSBTG"). Broader markets as measured by the FTSE All-Share and S&P500 indices increased by 7.0% and a Sterling-adjusted 9.1%, respectively.
After two disappointing years for the Company's share price, it was particularly pleasing to see the 10.8% increase in the share price during the year. The discount of the share price to the NAV narrowed to 13.8% at 31 August 2010 from 20.3% at 31 August 2009. I believe the improved discount reflects the positive newsflow from the unquoted portfolio - including the sales of portfolio companies ESBATech and RespiVert - as well as an increase in the Company's level of buyback activity.
The quoted portfolio continues to perform relatively well despite the biotechnology sector struggling to outperform the broader stock market while investors remain wary of higher risk assets. Two of the Company's quoted investments - OSI Pharmaceuticals and ev3 - were acquired during the period generating good returns for the Company, demonstrating the ongoing theme that a high level of M&A activity is contributing to strong return potential from investment in the biotechnology and emerging medical device industries.
Currency moves again provided a benefit to the Company's NAV as the US Dollar continued to strengthen against Sterling and a large percentage of the Company's assets are Dollar-denominated. While the value of the Company's investments in local currency terms declined by 1.1% or 2.5p per share, currency movements enhanced the NAV by 3.7% or 8.1p per share. Buybacks during the period of £5.7m added 1.8p to the NAV, while other adjustments, including management and other expenses, reduced the NAV by 3.7p per share.
Longer-term Results
We continue to be pleased with the progress made by the Investment Manager. Over the past five years since 31 August 2005, the NAV per share has increased by 27.9% compared to an increase of 23.2% in the NBI and a decrease of 17.7% in the RGUHSBTG, both Sterling-adjusted.
We think it important to note that on a share price basis, the Company has performed better than the UK stock market (as measured by the FTSE All-Share Index) on a one, three and five year basis. The Company's share price has returned 10.8%, (4.1)% and 28.3% against performance by the FTSE All-Share Index of 7.0%, (17.3)%, and 1.4%, respectively, in these periods.
The Company's long-term track record therefore continues to be respectable.
Share Buybacks and the Discount
Over the course of the last twelve months the Company repurchased a total of 4,475,000 Ordinary shares into treasury at a total cost of £5.7m and at an average discount of 19.9%, resulting in an enhancement to the NAV per share of approximately 1.8p. The Board remains focused on both enhancing and protecting the value of investors' shareholdings in the Company.
I believe the level of share buybacks executed to date has helped the Company negotiate a difficult period of declining investor risk appetite, shareholder register disruption, and muted NAV performance, without threatening the viability of the Investment Manager's strategy by shrinking the assets to unmanageable levels.
The Board continues to devote a considerable amount of time to considering the merits of buybacks and the level of the discount, mindful of the commitment made to the Company's Shareholders at the time of the 'C' Share issue in February 2007 to attempt to maintain the discount of the share price to the NAV at no greater than 8% despite there being no guarantee that this level would be achieved in the near-term. In this regard, when considering buying back shares, I should emphasise that the Board always has to take into account the balance between buying back shares and having cash available to take advantage of attractive opportunities in both unquoted investments and relatively illiquid quoted investments.
As I have discussed previously in my reports to Shareholders, it continues to prove difficult to achieve this target. Despite an ongoing low-level buyback programme and larger ad-hoc repurchases from time to time, this is likely to continue to be the case in the near-term as long as investors remain wary of relatively high risk and illiquid assets, as represented by the Company's unquoted portfolio.
However, I believe that over the longer-term, there is no reason why the current discount level should not move closer to the 8% target and even go below, as the Investment Manager delivers strong returns on the Company's assets, and the appropriate level of "supply and demand" tension is achieved for the Company's shares in the market place.
Overdraft Facility
With effect from 28 September 2010, the Company has an overdraft facility with HSBC Bank plc for the amount of £7.5m to allow the Investment Manager to have the liquidity and flexibility to capture the best opportunities in the markets in which investments are chosen. In addition to this, the Company may from time to time utilise short-term borrowings to facilitate the settlement of transactions.
Board
Mr Ian Macgregor will be retiring as a Director of the Company at the forthcoming Annual General Meeting ("AGM"). The Company has benefited from his considerable experience in investing in the healthcare sector and on behalf of Shareholders, we thank him for his contribution and wish him well in the future.
Prospects
Over the past two and a half years since February 2008 the Investment Manager has achieved a return of 39.9% from investing in the quoted biotechnology sector, against a general investment background of increasing fear and risk aversion as the global economy has stuttered in the wake of the financial crisis that erupted in late 2008. I believe this is both a testament to the fundamental attractions of the biotechnology sector, as well as the Investment Manager's ability in seeking the best listed investment opportunities.
As the Investment Manager has described later in this report, the prospects for the quoted biotechnology sector look good. Fears over the negative impact of US healthcare reform and European government austerity measures on drug pricing appear to be fully reflected in valuations, and in the Investment Manager's view, those fears are overdone. With M&A a perennial theme and some of the leading companies in the sector set to deliver major newsflow on exciting new biotech drugs with blockbuster potential over the coming months, investor sentiment could improve dramatically.
Meanwhile, the Investment Manager continues to build the Company's unquoted portfolio of venture capital investments using the proceeds of the 'C' Share issue in February 2007. The Investment Manager believes that several of the Company's 25 unquoted investments are set to move into the final stages of their investment cycle over the next 12 to 24 months. In the near-term therefore, news flow from this part of the portfolio should increase, and valuations will change according to the success or failure of these businesses.
The Board believes the recent sales of the Company's investments in ESBATech and RespiVert, for returns on invested capital of potentially 6.8x and 4.1x respectively, demonstrate the quality of the unquoted portfolio. Indeed, under the current Investment Manager, all fully realised unquoted venture capital investments (whether successfully sold or written-off) have in total returned 2.3x invested capital at an internal rate of return of 50% to date.
It is the Board's view that the Investment Manager's long-term performance in the life sciences venture capital investment sector justifies confidence in the return potential from the remaining unquoted investments as they begin to mature over the next few years. The strength of this track record enabled the Investment Manager in March 2010 to cement its position as one of the leading specialist life sciences investors through the raising of a $523m venture fund - its fifth since 1994 - in record time, despite a particularly difficult environment for venture capital fundraising. This can only help the Company as the Investment Manager makes many investments alongside the new venture fund.
Early-stage biotechnology and medical device companies are continuing to provide the innovation required for the healthcare industry to meet one of the major social and economic challenges of the 21st Century - the provision of higher quality and more effective healthcare to ageing populations - particularly in the cost-constrained circumstances arising from an environment of lower economic growth rates.
AGM
Your Board welcomes your attendance at the forthcoming AGM as it provides an excellent opportunity for Shareholders to put questions to the Directors and Investment Manager. As in previous years, the Investment Manager will make a presentation. For those unable to attend, the Board would encourage you to submit your proxy votes.
Andrew Barker
Chairman
1 November 2010
Investment Manager's Review
Summary
The year ended 31 August 2010 saw the Company's share price increase by 10.8%. The NAV per share increased by 2.4%, which includes a currency gain of approximately 3.7%. By comparison the NBI increased by 6.5%, and the RGUHSBTG decreased by 9.1%. The FTSE All-Share Index increased by 7.0%, and the S&P500 increased by 9.1%. All figures are Sterling-adjusted.
For the second year running the Company's NAV exhibited significant volatility - with a marked divergence in performance in the first and second halves of the Company's financial year, again mostly reflecting the performance of the equity markets. At the Company's half year end, the NAV had increased by 8.3%, subsequently decreasing 5.4% in the final six months.
The Company's quoted investment portfolio returned 3.3% over the year, driven by positive underlying stock market returns in the first half, and several M&A situations in the second half, including the sales of OSI Pharmaceuticals and ev3 which together returned £6.4m cash to the Company. Returns from the unquoted portfolio were flat over the period at 0.2%. Two sales of portfolio companies ESBATech and RespiVert offset a number of incremental write-downs elsewhere.
After a torrid twelve months for the quoted biotechnology sector during which investor sentiment towards the sector deteriorated to unprecedented levels, the Investment Manager is excited about the quoted portfolio's near-term prospects. Valuations remain at record lows, major M&A activity is ongoing, and a significant amount of clinical and regulatory newsflow for some of the industry's largest companies and new drug candidates is expected over the coming months.
More importantly, some of the Company's later-stage unquoted venture investments are beginning to move into the final stages of their investment cycle. As this part of the Company's portfolio has been built up since the 'C' Share issue in February 2007, newsflow and returns from the unquoteds have been muted. However, over the next 12 to 24 months, the Investment Manager expects multiple sales from the unquoted portfolio to drive NAV returns and shareholder value.
Portfolio Overview
At 31 August 2010, the Company held investments in 58 companies: 33 quoted (representing 72.8% of the NAV) and 25 unquoted (representing 24.8% of the NAV). The remaining 2.4% comprised cash, money market instruments and other net assets. 1.4% of the NAV is legally committed to further investments in unquoted companies, while 8.5% is investment-committee approved or reserved for further investment in unquoted companies.
By subsector, 61.8% of the NAV was invested in the biotechnology sector, 14.4% in the medical device sector, 13.3% in the specialty pharmaceuticals sector and 8.1% in the life sciences tools and diagnostics sector, emphasising the diversified nature of the Company's investments.
Representatives of the Investment Manager sat on the boards of 25 portfolio companies (22 unquoted and 3 quoted) at the end of the year. An active board seat on private companies remains an important aspect of the Investment Manager's investing activities in early-stage unquoted biotechnology companies.
Quoted Investments
At 31 August 2010 the quoted portfolio represented 72.8% of the NAV at £68.3m. The most significant positive contributions during the period came from investments in Alexion, ev3, Genzyme, Micromet and OSI Pharmaceuticals. The most significant negative contributions came from Affymax, Gilead Sciences, Nanosphere, Poniard and ProStrakan.
The performance of the Company's quoted portfolio was positive in the first fiscal half year with a return of 11.0%. From August 2009 to February 2010 the portfolio was largely driven by the strength of the biotechnology sector and the underlying stock market in the absence of major stock-specific developments.
Performance from February 2010 to August 2010 was negative on an absolute basis with a return of (6.7)% as stock markets weakened. However, the quoted portfolio outperformed the broader biotech sector as the NBI fell 8.3% and the RGUHSBTG fell 13.3%. All figures are Sterling-adjusted.
The highlights of the year were sales of the Company's investments in OSI Pharmaceuticals and ev3. Cancer drug company OSI Pharmaceuticals was acquired by the Japanese pharmaceutical company Astellas in May 2010 for $4.0bn, returning £3.1m to the Company. Medical device company ev3 was acquired by the diversified healthcare company Covidien in June 2010 for $2.6bn, returning £3.3m to the Company. In July 2010 the value of the Company's investment in Genzyme increased by £1.1m on news that Sanofi-aventis had made an informal bid to acquire the company for $18.5bn.
Ten new quoted investments were made during the period, and fifteen investments were sold, as the Investment Manager focused the portfolio and replaced names removed through acquisition or sold due to deterioration in specific businesses that were deemed irrecoverable in the near-term. At the end of the period the Company held 33 quoted investments, against 38 at the start of the year. Descriptions of the Company's largest quoted investments at 31 August 2010 are presented on pages 14 and 15 of the Annual Report.
During the year under review, the combined effect of gains and losses on quoted investments, including currency movements, was to increase the Company's NAV by £3.3m or 5.5p per share. The return for the quoted portfolio over the period was an increase of 3.3%, after taking a currency gain of 4.0% into account.
During the year the Investment Manager increased the quoted portfolio's exposure to mid-cap biotechnology companies - particularly those with de-risked late-stage clinical or commercial stage assets. In particular the Investment Manager has focused on drug candidates in development or drugs already commercialised in the rare disease space. Pricing power for these companies is likely to remain insulated from the negative effects of US healthcare reform and European austerity measures, and Big Pharma is increasingly showing an interest in gaining a commercial presence.
The quoted portfolio continues to include a selection of the lower-risk large cap biotechnology companies where valuations have reached decade lows, despite solid earnings growth prospects and a persistent M&A theme. Small-cap biotech investments remain a relatively low weighting in the quoted portfolio. Investment activity in this market segment has been and is likely to remain at a relatively low-level, and somewhat opportunistic in nature, reflecting the high level of clinical, financing and liquidity risk in this segment of the market.
Unquoted Investments
At 31 August 2010, the unquoted portfolio represented 24.8% of the NAV at £23.2m. The highlights of the period were sales of ESBATech and RespiVert in September 2009 and June 2010, respectively. The Company's venture capital investments - most of which have been made following the 'C' Share issue in February 2007 - are continuing to mature, and several are expected to move into the final stages of their investment cycle over the next 12 to 24 months.
The Investment Manager seeks to invest up to 30% of the Company's assets in unquoted companies with a guideline of no more than 40% unquoted company exposure (at the time of investment and after allowing for valuation write-ups and further follow-on investments). The Board has set this guideline and considers this level is appropriate.
In September 2009 Swiss-based biotech company ESBATech was acquired by Alcon to gain access to its lead ophthalmic drug candidate and related antibody fragment platform. The acquisition of ESBATech returned £1.9m to the Company and has the potential to realise a further £6.4m (valued at £0.2m) if certain product development milestones are delivered over the next several years, representing a potential 6.8x return on invested capital.
In June 2010 UK-based biotech company RespiVert was acquired by Centocor Ortho Biotech to gain access to the company's novel small-molecule inhaled therapies to treat pulmonary disease. The acquisition of RespiVert returned £1.9m to the Company and promises a further £0.2m as two escrows are released over the next 12 to 18 months, representing a 4.1x return on invested capital.
During the year ended 31 August 2010 three new investments were made - £307,000 into Ophthotech, £1,500 into Antiva, and £53,000 into Delenex, while 25 follow-on investments were made with a combined value of £7.4m into 17 existing holdings. At year-end, commitments to unquoted companies based on milestones totalled £1.3m, and £8.0m are estimated as reserves for these companies in the longer-term.
During the year under review, nine investments were partially written down: Archemix, CR, Delenex, EUSA, Ikano, Oxagen, Ricerca, TransEnterix and Vantia. Four investments were written up: Cadent, ESBATech, Itero and RespiVert.
The combined effect of these sales and valuation changes, including currency movements, was to reduce the NAV by £197,000 or 0.3p per share. The return for the unquoted portfolio only during the year was an increase of 0.2%, after taking a currency gain of 3.1% into account.
The investment thesis for venture capital investing in the life sciences area remains intact. Highly creative and efficient small biotech companies continue to provide the novel products so desperately needed by the pharmaceutical industry. While biotech IPO activity remains suppressed, venture capital investors are continuing to achieve attractive exits for their companies through M&A, with the range of buyers extending beyond the traditional large pharma companies to now include specialty pharmaceutical and large cap biotech companies.
The Investment Manager expects news flow from the unquoted portfolio to increase over the next 12 to 24 months - and volatility in valuations to increase accordingly - as the portfolio's venture-backed companies begin to generate proof-of-concept data on lead drug candidates and medical devices or their businesses develop to a stage where they become attractive acquisition candidates for larger companies. Descriptions of the Company's unquoted investments are presented on pages 16 and 17 of the Annual Report.
Market Review
The year ended 31 August 2010 marked a torrid and ultimately frustrating period for investors in the biotechnology sector. After a strong start from September 2009 through to February 2010 on the back of a recovery in the equity market's appetite for risk, the sector gave up almost all of its gains through to the end of August 2010.
The combination of negative sector and stock-specific newsflow, and more generally a dramatic reversal in the recovery of investor risk appetite on renewed concerns that the world's leading western economies may experience a painful and prolonged "double-dip" recession, has left many investors in the sector frustrated by recent returns.
After a short and sharp correction in early October as investors took profits after six months of straight gains for the biotech sector (as measured by the NBI) from the market lows of March 2009, the sector continued to perform well into year end and into the new year. In the six months to the end of February 2010, the NBI increased by 16.2%.
Investors felt more comfortable increasing allocations to the sector as the larger capitalisation biotech companies such as Amgen, Celgene and Gilead announced strong third and fourth quarter earnings and issued 2010 financial guidance in line with or ahead of investor expectations. Clinical and regulatory newsflow for the later-stage new biotech product candidates was also on balance positive, which served to reduce investors' perception of the sector's risk.
However, the grey clouds of doubt on the sustainability of the dramatic return of investor risk appetite that were gathering on the horizon from early 2010 broke in April. Apart from a few bright moments provided by M&A activity - particularly the acquisition of OSI Pharmaceuticals by Astellas and Sanofi-aventis' interest in acquiring Genzyme - the downpour of negative sentiment towards the sector didn't let up through to period-end, leaving investors despondent, and enthusiasm for the sector as low as it has been for a number of years.
Late in March, US Congress voted narrowly to approve various initiatives to help pay for the expanded scope of a reformed US healthcare system. The various measures that had been hotly debated for the previous twelve months proved to be more benign than many had feared. However, rather than quickly bringing the required clarity, first quarter earnings season for the large biotech companies brought confusion for investors.
Biotech industry leader Gilead - previously thought to be relatively immune from healthcare reform - announced not only disappointing results, but management also lowered guidance for the coming year to reflect the potential impact of healthcare reform measures. Investor confusion was further compounded as other companies such as Amgen and Celgene announced strong results and maintained their confident guidance on revenue and earnings growth for the year.
The month of April also brought the broader equity market's twelve month rally to an abrupt end as a new banking crisis threatened to emerge in Europe precipitated by the parlous state of the public finances of some of the European Union's weaker member states. The sovereign debt crisis and increasingly disappointing economic data from the US, suggesting the economic recovery was stalling, saw investors flee from risky assets, with equity markets posting significant losses through the summer months.
The increased currency volatility in Europe as traders dumped the Euro in favour of the safety of the US Dollar, and the consequent austerity measures introduced by European governments to restore the confidence of the global debt capital markets, served to pile even more downward pressure onto the biotechnology sector.
With a significant proportion of revenues generated from drug sales into the European market, the US-centric biotechnology sector posted disappointing second quarter numbers as the weakening Euro reduced the US Dollar value of drug sales generated in Europe. Furthermore, investors began to question the longer-term outlook for drug sales into countries such as Greece, Spain, Germany, France and Italy. The austerity measures announced by these countries included savings to be made from their respective healthcare systems. That these proposed savings were for the most part to be made through tougher pricing controls on the purchases of generic drugs - rather than their branded counterparts - appeared to have been overlooked.
The capital markets environment for biotech that had been steadily improving throughout 2009 and early 2010, also deteriorated from April 2010 as the broader market reversed its recovery course. In 2009 a total of $24.9bn was invested in the global biotechnology sector through IPOs, follow-ons, venture capital investment and other fundraisings, according to BioCentury. This is a healthy amount compared to the $13.6bn in 2008, and the $30.6bn in 2007. At 31 August 2010, $17.4bn had been invested in the sector year to date, a decrease of $7.5bn from the year before.
While the headline figures for 2009 and 2010 look reasonably robust, long-term risk-tolerant capital remains a scarce commodity. Investors continue to be wary of relatively early-stage and unfamiliar companies or unproven assets, technologies and management teams. High levels of investor aversion to risk and illiquidity means that the later-stage or otherwise validated assets and management teams are attracting a greater share of the capital available in larger fundraisings. For example, small-cap portfolio company Micromet raised $80.5m in March 2010 to advance the first drug candidates to emerge from its promising technology platform.
In the venture capital space, we are seeing the constriction in the overall quantity of equity risk capital that specialist life sciences venture capital investors can pool into new funds. This places the more experienced venture capital firms with strong performance track records in a formidable position to invest in the most attractive early-stage biotech and medical device opportunities.
The Investment Manager invests the Company's capital alongside its own venture funds. In March 2010, the Investment Manager announced it had closed its latest venture fund at $523m, positioning it as one of the strongest venture capital firms in the life sciences area. This enables the Company to access the most attractive early-stage opportunities.
On the unquoted side, the Investment Manager is beginning to see an increase in the number of seed and Big Pharma spin-out opportunities, as Big Pharma continues to adjust their cost bases in response to pressure on top-line sales growth, and attempts to improve the productivity of in-house research and development efforts. While the formation of syndicates to support and finance these opportunities has become more challenging, competition for these sorts of deals has much diminished which improves pricing and the Company's ability to participate with greater ownership and control of the best opportunities.
Opportunities to sell shares in companies through an IPO for investors in private-stage biotechnology companies continue to be limited. Although a reasonable number of US-based companies were able to float in late 2009 and early 2010, after-market performance since listing has in general been very disappointing, despite many of the IPOs being priced at significant discounts to hoped for valuations. While risk appetite in markets remains low, the more attractive route for the strongest assets and management teams remains trade sale to an industry buyer before IPO.
M&A activity during the period was lively - a trend that we expect to continue over the coming few years. During the year, the Investment Manager notes there were thirteen acquisitions of biotechnology companies - both public and private - where the purchaser paid over $500m for the target. Interestingly the range of buyers has moved beyond the traditional Big Pharma names, and has begun to include specialty pharmaceutical companies and, increasingly, larger biotechnology companies. For example, Celgene made two large acquisitions in the period, buying Gloucester Pharmaceuticals for $640m in December 2009, and Abraxis for $2.9bn in June 2010. The major M&A situation during the period was Sanofi-aventis' bid to acquire Genzyme for $18.5bn revealed in July 2010. The unsolicited hostile bid has yet to close at the time of writing.
Clinical and regulatory newsflow in the sector during the year continued to provide excitement and disappointment in often unequal measure. On the clinical side, in February 2010 Amgen's Prolia demonstrated efficacy in treating bone-related complications of prostate cancer. In May and August 2010 Vertex presented positive clinical data for its drug Telaprevir which has the potential to transform the treatment of Hepatitis C. Both these drugs could quickly become multi-billion US Dollar franchises for these companies. But elsewhere, Roche and Genentech suffered a series of setbacks in attempting to gain or retain regulatory approval for the use of Avastin in treating ovarian and breast cancer patients; in March 2010 Medivation's Dimebon failed to show any efficacy in Alzheimer's disease; and in June 2010 Affymax's Hematide failed to demonstrate a sufficiently clean safety profile in treating anaemia patients.
On the regulatory side, in April 2010 Dendreon received FDA approval for its landmark prostate cancer drug Provenge which despite a somewhat laborious method of administration could in time become a major new treatment for this disease. In July 2010 Vivus stumbled in front of an FDA advisory panel while seeking approval for its obesity drug Qnexa, a fate that was also to befall competitor Arena with its obesity drug candidate Lorcaserin shortly after the Company's year-end. The highest profile disappointment of the period came in May 2010 when the FDA refused to approve InterMune's Pirfenidone for fibrotic lung disease despite an expert panel having already narrowly voted in favour of approval.
The regulatory review process for New Drug Applications ("NDAs") in both the US and Europe continues to be a robust and for some applicants (and indeed investors) a frustrating process. While the agency appears to be working more effectively under new leadership and a significant investment in infrastructure and staffing, companies still appear to be struggling to receive timely approvals under the current Prescription Drug User Fee Act or "PDUFA" process.
Part of the issue, somewhat ironically, appears to be the FDA's introduction of post-approval Risk Evaluation and Mitigation Strategy - so-called "REMS" - programmes in the United States. These programmes reflect the agency's continued focus on drug safety, and were initially brought in to facilitate drug approvals, shifting the responsibility for patient safety further onto the sponsoring drug company through closer in-market monitoring of a drug's safety profile. Verdicts on NDAs appear routinely to be held up as REMs programmes are discussed with the drug sponsor.
That said, the situation does appear to be improving. At 31 August 2010, the FDA had approved 55 NDAs or Biologic Licence Applications ("BLAs") during the year to date, against 62 and 60 in each of the twelve month periods of 2009 and 2008 respectively. And in defence of the FDA, the quality of new drug applications by industry sponsors has sometimes appeared recently to have been lacking, either due to the execution of the clinical trials, or more fundamentally, the drug candidates themselves don't really appear to have meaningful efficacy to outweigh the potential risks.
Outlook
While the past twelve months have been a period to forget for most investors in the biotechnology sector, the Investment Manager's enthusiasm for the coming few years is undiminished. Indeed, it is the Investment Manager's view that the biotechnology sector as it stands today represents a compelling opportunity for the risk-tolerant contrarian investor.
Investor uncertainty and concern over the biotech industry's fundamentals and prospects is understandable given the potentially negative effects of healthcare reform in the US, austerity measures being implemented throughout Europe by governments attempting to bring stability to public finances, and the seemingly pernicious threat from biosimilars competition. Bringing a new drug to market is not becoming any less expensive or less risky, perhaps even the reverse. But it is the Investment Manager's view that these concerns are overdone.
The Investment Manager has long viewed biotechnology drug pricing as relatively insulated from the effects of healthcare reform. Many biotech therapies treat serious life-threatening diseases with significant efficacy, often in relatively small numbers of patients, and often with no other treatment alternatives, meaning that the overall cost burden on the healthcare system is relatively low. Certainly in specialist areas such as HIV, Hepatitis C, cancer or genetic diseases, we expect drug pricing to remain robust for effective therapies.
Investors have also been inordinately concerned over the prospect of the introduction of "biosimilars" or follow-on biologics legislation, regarding it as a threat to the future growth and profitability of the biotechnology sector. This is because some of the largest biotechnology companies rely heavily on patent-expired (or imminently expiring) drugs for growth and profitability, protected in part by the absence of a regulatory framework for developing and approving generic versions.
However, the healthcare reform bill that was signed into US law in March 2010 gives biotech companies twelve years' marketing exclusivity for their biological molecules, over and above basic patent protection. Even more importantly, companies developing biosimilars will be unable to use the safety and efficacy data of the original innovator's drug except in limited circumstances. This denies "biosimilar" competition a fast track to market as new clinical data will need to be generated, taking time and significant investment, and of course involving risk.
Copycat versions of biotech drugs, whether "biosimilars", follow-on biologics, or "biobetters", will no doubt emerge in time, but we reiterate our view that this new competition is unlikely to have a significant negative impact on existing biotech drug products in the near or even medium-term. There are still significant technical challenges to overcome and the regulatory pathways are still to be developed and refined. Furthermore, the lesson from Europe, where a handful of biosimilar products have been launched, is that biosimilars pricing is much less aggressive than small molecule generic pricing, and market share capture is much less significant.
We note the FDA is to convene a meeting in early November 2010 where the issues surrounding the clinical development and regulatory review of "biosimilars" will be discussed openly in a public forum. We believe this meeting will be an important event for the sector when the US regulator's attitude towards one of the most controversial areas of the industry's future prospects could be made clearer.
With the large-cap biotechnology company group trading on a forward price to earnings multiple of just 13x versus the S&P500 of 14x biotechnology valuations remain at historical lows. Yet despite the headline challenges facing the industry, the sector still offers above-average growth prospects in the near-term. Furthermore, in the current risk adverse environment, the Investment Manager believes investors have become overly sceptical about the sector's longer-term prospects, and that current valuations are failing to reflect the value of the innovation taking place in the sector.
While valuing biotechnology companies is always relatively difficult, a visible manifestation of what could be termed "asset mispricing" on the part of public market investors is the level of M&A activity ongoing in the space. Big Pharma, and now other buyers, are increasingly opting to outsource R&D - through buying or licensing the assets of biotechnology companies - rather than pursue in-house R&D projects due to the low returns on internally invested capital achieved in recent years.
Despite challenges, Big Pharma continues to generate prodigious cash flows. EvaluatePharma, the on-line database, estimates that the Big Pharma groups' annual free cash flows after dividends will remain above $50bn over the next five years - sufficient to acquire the entire biotech universe at current valuations.
The urgency with which this strategy is now being implemented can in part be attributed to the fact that pharmaceutical companies are now entering a period of unprecedented patent expiration. The investment advisory firm Cowen estimates US sales of drugs at risk to generic competition will peak at $25bn in 2011, but will stay in the double digit billions of dollars each year out to 2015 - meaning big holes in revenue lines need to be filled quickly, and with big products.
However, pharmaceutical companies are also investing for the longer-term through a plethora of earlier-stage deals with biotechnology companies that have discovered and developed valuable new biological targets or molecules in areas of unmet medical need with impressive capital efficiency. This is a phenomenon that the Company is uniquely positioned to capture value from with its significant unquoted portfolio of venture capital-stage investments.
We believe the coming months should see significant clinical, regulatory and M&A newsflow for some of the largest biotechnology companies in the industry - more than in previous years - which should improve investor sentiment towards the sector. Several major new biotechnology products and companies are set to emerge, expanding the group of top-tier biotechnology companies who have successfully developed drugs with multi-billion US Dollar sales potential.
SV Life Sciences Managers LLP
Investment Manager
1 November 2010
Principal Risks and Uncertainties
The Board has adopted a matrix of key risks which affect its business, and a robust framework of internal control which is designed to monitor those risks and to provide a monitoring system to enable the Directors to take steps to mitigate these risks as far as possible. A full analysis of the Directors' system of internal control and its monitoring system is set out in the Corporate Governance Statement on page 30 of the Annual Report.
The Company's key risks include:
Market Risk
The Company's returns are affected by changes in economic, financial and corporate conditions which can cause market fluctuations; a significant fall in equity markets is likely to affect adversely the value of the Company's portfolio. The Investment Manager provides the Board with information on the market at each Board meeting and the Board discusses appropriate strategies to manage the impact of any significant change in circumstances.
The biotechnology sector has its own specific risks leading to higher volatility than broad equity market indices. While the Company seeks to maintain a diversified portfolio within the confines of the current investment policy, biotechnology sector-specific or equity market risks cannot be eliminated by a diversified exposure to global biotechnology.
Investment and Strategy
Alignment of the investment strategy with the Company's Investment Objective is essential and an inappropriate approach by the Investment Manager towards stock selection and asset allocation may lead to underperformance and failure to achieve the Company's objective of long-term capital growth, resulting in a widening of the discount. The Board manages these risks through its framework of investment restrictions and regular monitoring of the Investment Manager's adherence to the agreed investment strategy.
As mentioned above, SVLS provides regular reports to the Board on portfolio activity, strategy and performance, as well as risk monitoring. The reports are discussed in detail at Board meetings, which are all attended by the Investment Manager, to allow the Board to monitor the implementation of investment strategy and process. The Investment Manager operates in a collegiate manner, with no one individual having overall control over the Company's investments.
Currency Risk
The Financial Statements and performance of the Company are denominated in Sterling because this is the currency of most relevance to the Company's investors. However, the majority of the Company's assets are denominated in US Dollars. Accordingly, the total return and capital value of the Company's investments can be significantly affected by movements in foreign exchange rates. It is not the Company's policy to hedge against foreign currency risk, although the position is kept under review.
Discount to the NAV
Failure to meet investment objectives and/or poor sector-specific, or general equity, sentiment can affect the Company's share price, resulting in shares trading at a discount to the underlying NAV. The Board continually reviews the Company's investment performance, taking into account changes in the market, and regularly reviews the position of the NAV per share compared to the share price. Further information on the Company's discount is provided in the Chairman's Statement on pages 6 and 7 of the Annual Report.
Accounting, Legal and Regulatory
To qualify for the status of an investment trust, the Company must comply with Section 1158 CTA 2010. Further details of the Company's approval under Section 1158 CTA are set out earlier in this report in "Status of the Company" on page 20 of the Annual Report. A breach of Section 1158 CTA could result in the Company being subject to Capital Gains Tax on the sale of investments. Consequently, pre-trade compliance checks are imbedded into the investment procedures of the Investment Manager.
Reports confirming the Company's compliance with the provisions of Section 1158 CTA are submitted by the Investment Manager to each Board meeting together with relevant portfolio and financial information.
The Company is also subject to compliance with other laws and regulations, including the Companies Act 2006 and the FSA's Listing, Prospectus and, Disclosure and Transparency Rules. Breaches of these laws and regulations could lead to criminal action being taken against Directors or suspension of the Company's shares from trading. The Investment Manager and Company Secretary provide regular reports to the Board on compliance with relevant provisions and report breaches without delay. The Board also relies on the services of its other professional advisers to minimise these risks.
Corporate Governance and Shareholder Relations
Failure to follow good practice guidelines or maintain good relations with Shareholders could adversely affect the Company's reputation. Details of the Company's compliance with corporate governance best practice guidelines, including compliance with the Combined Code 2008 and the maintenance of good communication with Shareholders, are set out in the Corporate Governance Statement on pages 26 to 31 of the Annual Report.
Operational
As the Company's main functions are delegated to third party service providers, operational risk arises from insufficient processes of internal control which would include compliance with statutes and regulations governing the functions of the Company.
Such risks are assessed by the Board, which receives quarterly reports from its main service providers as to the internal control processes in place within those organisations. These serve to minimise the Company's risk exposure. The Board and Audit Committee annually review the internal control reports of the Company's main service providers produced in accordance with AAF01/06 and SAS 70 guidance.
Financial
The financial risks faced by the Company are set out in note 24 to the Financial Statements on pages 55 to 63 of the Annual Report.
Related Party Transactions
Details of the management fee arrangement are given in the Directors' Report on page 25 of the Annual Report.
The total fee payable under this Agreement to SVLS for the year ended 31 August 2010 was £1,340,000 (2009: £1,309,000) of which £nil (2009: £nil) was outstanding at the year end.
The Directors of the Company are key management personnel. The total remuneration payable to Directors in respect of the year ended 31 August 2010 was £199,000 (2009: £173,000) of which £179,000 (2009: £40,000) was outstanding at the year end. Following the year end, this outstanding amount was settled.
As the Investment Manager, SVLS will often take seats on boards of companies in which the Company holds an investment. These positions help to monitor the investee companies and in many cases add to the strength and depth of management. They sometimes provide an economic benefit to the individual who takes the position - often in the form of a director's fee or share awards. SVLS has agreed with the Board a set of guidelines on how any economic interest will be divided between the Company and SVLS. The Board is informed of both the position held and any economic benefits as they arise and a summary of all the positions, benefits and allocations is presented for review at each Board meeting for formal approval. During the year ended 31 August 2010 £nil (2009: £2,000) was received.
Management Report
Listed companies are required by the FSA's Disclosure and Transparency Rules (the "Rules") to include a management report in their annual financial statements. The information required to be in the management report for the purposes of the Rules is included in the Chairman's Statement on pages 6 and 7, the Investment Manager's Review on pages 8 to 13 and the Business Review as contained in the Director's Report on pages 19 to 20 of the Annual Report. Therefore, a separate management report has not been included.
Directors' Responsibility Statement
The Directors are responsible for preparing the Annual Report, the Directors' Remuneration Report and the Financial Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare Financial Statements for each financial year. Under that law the Directors have elected to prepare the Group and parent Company Financial Statements in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU"). Under company law the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the parent Company and of the profit or loss of the Group for that year. In preparing these Financial Statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and accounting estimates that are reasonable and prudent; and
• state whether applicable IFRSs as adopted by the EU have been followed, subject to any material departures disclosed and explained in the Financial Statements.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the Financial Statements and the Directors' Remuneration Report comply with the Companies Act 2006 and, as regards the Group Financial Statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the Company's website. Legislation in the UK governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions.
The Annual Report is published on the following website: www.ibtplc.com, which is a website maintained by the Company's Investment Manager. The maintenance and integrity of the website maintained by the Investment Manager is, so far as it relates to the Company, the responsibility of the Investment Manager. The work carried out by the Auditor does not involve consideration of the maintenance and integrity of this website and accordingly, the Auditor accepts no responsibility for any changes that have occurred to the Annual Report since it was initially presented on the website. Visitors to the website need to be aware that legislation in the UK governing the preparation and dissemination of the Annual Report may differ from legislation in their home jurisdiction.
Each of the Directors, whose names and functions are listed on page 5 of the Annual Report, confirm that, to the best of their knowledge:
• the Group Financial Statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and
• the Directors' Report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.
In accordance with Section 418 of the Companies Act 2006, the Directors at the date of approval of this Report, as listed on page 5 of the Annual Report, confirm that:
(a) so far as the Director is aware, there is no relevant audit information of which the Company's Auditors are unaware; and
(b) he/she has taken all the steps that he/she ought to have taken as a Director in order to make himself/herself aware of any relevant audit information and to establish that the Company's Auditors are aware of that information.
By order of the Board
Andrew Barker
Chairman
1 November 2010
GROUP STATEMENT OF COMPREHENSIVE INCOME
|
|
|
For the year ended |
For the year ended |
||||
|
|
|
31 August 2010 |
31 August 2009 |
||||
|
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
|
Note |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
Gains/(losses) on investments held at fair value |
2 |
- |
3,338 |
3,338 |
- |
(6,949) |
(6,949) |
|
Exchange losses on currency balances |
|
- |
(181) |
(181) |
- |
(196) |
(196) |
|
Income |
3 |
52 |
- |
52 |
291 |
- |
291 |
|
Expenses |
|
|
|
|
|
|
|
|
Management fees |
|
(1,340) |
- |
(1,340) |
(1,309) |
- |
(1,309) |
|
VAT on management fees recoverable |
|
- |
- |
- |
540 |
- |
540 |
|
Administrative expenses |
|
(801) ----------- |
- --------- |
(801) --------- |
(703) --------- |
- --------- |
(703) --------- |
|
(Loss)/profit before finance costs and tax |
|
(2,089) |
3,157 |
1,068 |
(1,181) |
(7,145) |
(8,326) |
|
Finance costs |
|
|
|
|
|
|
|
|
Interest payable |
|
- ---------- |
- --------- |
- ---------- |
(9) ---------- |
- ---------- |
(9) --------- |
|
(Loss)/profit on ordinary activities before tax |
|
(2,089) |
3,157 |
1,068 |
(1,190) |
(7,145) |
(8,335) |
|
Taxation expense |
|
- ---------- |
- --------- |
- ---------- |
- ---------- |
- ---------- |
- --------- |
|
(Loss)/profit for the year and total comprehensive income |
|
(2,089) ====== |
3,157 ===== |
1,068 ====== |
(1,190) ====== |
(7,145) ====== |
(8,335) ====== |
|
Earnings per Ordinary share |
4
|
(3.36)p ====== |
5.07p ===== |
1.71p ====== |
(1.80)p ====== |
(10.78)p ====== |
(12.58)p ====== |
The total column of this statement represents the Group's Statement of Comprehensive Income, prepared in accordance with International Financial Reporting Standards ("IFRS").
The Group does not have any other comprehensive income and hence the net profit for the year, as disclosed above, is the same as the Group's total comprehensive income.
The revenue and capital columns are supplementary to this and are prepared under guidance published by the AIC.
All income is attributable to the equity holders of the parent company. There are no minority interests.
All items in the above statement derive from continuing operations.
The accompanying notes form part of these Financial Statements.
GROUP AND COMPANY STATEMENTS OF CHANGES IN EQUITY
|
|
Called up |
Share |
Capital |
Share |
|
|
|
|
|
share |
premium |
redemption |
purchase |
Capital |
Revenue |
|
Group |
capital |
account |
reserve |
reserve |
reserves |
reserve |
Total |
For the year ended 31 August 2010 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
Balance at 31 August 2009 |
17,648 |
18,746 |
24,169 |
58,637 |
(5,248) |
(15,697) |
98,255 |
Total Comprehensive Income: |
|
|
|
|
|
|
|
Net profit/(loss) for the year |
- |
- |
- |
- |
3,157 |
(2,089) |
1,068 |
Transactions with owners, recorded directly to equity: |
|
|
|
|
|
|
|
Shares bought back and held in treasury |
- |
- |
- |
(5,724) |
- |
- |
(5,724) |
Shares cancelled from treasury |
(1,440) |
- |
1,440 |
- |
- |
- |
- |
Rebate of share issue costs |
----------- |
59---------- |
----------- |
----------- |
----------- |
----------- |
59---------- |
Balance at 31 August 2010 |
16,208====== |
18,805====== |
25,609====== |
52,913====== |
(2,091)====== |
(17,786)======= |
93,658====== |
|
|
Called up |
Share |
Capital |
Share |
|
|
|
|
|
share |
premium |
redemption |
purchase |
Capital |
Revenue |
|
Group |
capital |
account |
reserve |
reserve |
reserves |
reserve |
Total |
For the year ended 31 August 2009 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
Balance at 31 August 2008 |
17,648 |
18,746 |
24,169 |
65,564 |
1,897 |
(14,507) |
113,517 |
Total Comprehensive Income: |
|
|
|
|
|
|
|
Net loss for the year |
- |
- |
- |
- |
(7,145) |
(1,190) |
(8,335) |
Transactions with owners, recorded directly to equity: |
|
|
|
|
|
|
|
Shares bought back and held in treasury |
----------- |
----------- |
----------- |
(6,927)---------- |
----------- |
------------ |
(6,927)---------- |
Balance at 31 August 2009 |
17,648====== |
18,746====== |
24,169====== |
58,637====== |
(5,248)====== |
(15,697)====== |
98,255====== |
|
|
Called up |
Share |
Capital |
Share |
|
|
|
|
|
share |
premium |
redemption |
purchase |
Capital |
Revenue |
|
Company |
capital |
account |
reserve |
reserve |
reserves |
reserve |
Total |
For the year ended 31 August 2010 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
Balance at 31 August 2009 |
17,648 |
18,746 |
24,169 |
58,637 |
(5,759) |
(15,697) |
97,744 |
Total Comprehensive Income: |
|
|
|
|
|
|
|
Net profit/(loss) for the year |
- |
- |
- |
- |
3,157 |
(2,089) |
1,068 |
Transactions with owners, recorded directly to equity: |
|
|
|
|
|
|
|
Shares bought back and held in treasury |
- |
- |
- |
(5,724) |
- |
- |
(5,724) |
Shares cancelled from treasury |
(1,440) |
- |
1,440 |
- |
- |
- |
- |
Rebate of share issue costs |
------------- |
59---------- |
------------ |
------------ |
------------ |
------------ |
59---------- |
Balance at 31 August 2010 |
16,208======= |
18,805====== |
25,609====== |
52,913====== |
(2,602)====== |
(17,786)====== |
93,147====== |
|
|
Called up |
Share |
Capital |
Share |
|
|
|
|
|
share |
premium |
redemption |
purchase |
Capital |
Revenue |
|
Company |
capital |
account |
reserve |
reserve |
reserves |
reserve |
Total |
For the year ended 31 August 2009 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
Balance at 31 August 2008 |
17,648 |
18,746 |
24,169 |
65,564 |
1,386 |
(14,507) |
113,006 |
Total Comprehensive Income: |
|
|
|
|
|
|
|
Net loss for the year |
- |
- |
- |
- |
(7,145) |
(1,190) |
(8,335) |
Transactions with owners, recorded directly to equity: |
|
|
|
|
|
|
|
Shares bought back and held in treasury |
----------- |
----------- |
------------ |
(6,927)------------ |
------------- |
------------- |
(6,927)----------- |
Balance at 31 August 2009 |
17,648====== |
18,746====== |
24,169====== |
58,637======= |
(5,759)======= |
(15,697)======= |
97,744====== |
The accompanying notes form part of these Financial Statements.
GROUP AND COMPANY BALANCE SHEETS
|
|
|
At 31 August |
At 31 August |
At 31 August |
At 31 August |
|
|
|
2010 |
2010 |
2009 |
2009 |
|
|
|
Group |
Company |
Group |
Company |
|
|
Note |
£'000 |
£'000 |
£'000 |
£'000 |
Non-current assets |
|
|
|
|
|
Investments held at fair value through profit or loss |
|
91,449---------- |
91,449----------- |
94,049---------- |
94,049----------- |
|
|
|
91,449 |
91,449 |
94,049 |
94,049 |
Current assets |
|
|
|
|
|
Current asset investments |
|
1,500 |
1,500 |
3,512 |
3,512 |
Other receivables |
|
874 |
874 |
584 |
584 |
Cash and cash equivalents |
|
1,245---------- |
1,245----------- |
574---------- |
574---------- |
|
|
|
3,619---------- |
3,619----------- |
4,670---------- |
4,670---------- |
Total assets |
|
95,068 |
95,068 |
98,719 |
98,719 |
Current liabilities |
|
|
|
|
|
Other payables |
|
(1,410)---------- |
(1,921)----------- |
(464)---------- |
(975)---------- |
Net assets |
|
93,658---------- |
93,147----------- |
98,255---------- |
97,744---------- |
Equity attributable to equity holders |
|
|
|
|
|
Called up share capital |
|
16,208 |
16,208 |
17,648 |
17,648 |
Share premium account |
|
18,805 |
18,805 |
18,746 |
18,746 |
Capital redemption reserve |
|
25,609 |
25,609 |
24,169 |
24,169 |
Share purchase reserve |
|
52,913 |
52,913 |
58,637 |
58,637 |
Capital reserves |
|
(2,091) |
(2,602) |
(5,248) |
(5,759) |
Revenue reserve |
|
(17,786)----------- |
(17,786)----------- |
(15,697)----------- |
(15,697)----------- |
Equity Shareholders' funds |
|
93,658====== |
93,147====== |
98,255====== |
97,744======= |
Net asset value per Ordinary share |
5 |
155.17p====== |
154.33p====== |
151.55p====== |
150.76p======= |
Approved by the Board and authorised for issue on 1 November 2010 by Andrew Barker, Chairman and Peter Collacott, Director.
The accompanying notes form part of these Financial Statements.
GROUP AND COMPANY CASH FLOW STATEMENTS
|
|
|
For the |
For the |
For the |
For the |
|
|
|
year ended |
year ended |
year ended |
year ended |
|
|
|
31 August |
31 August |
31 August |
31 August |
|
|
|
2010 |
2010 |
2009 |
2009 |
|
|
|
Group |
Company |
Group |
Company |
|
|
|
£'000 |
£'000 |
£'000 |
£'000 |
|
Cash flows from operating activities |
|
|
|
|
|
|
Net profit/(loss) before finance costs and taxation |
|
1,068 |
1,068 |
(8,326) |
(8,326) |
|
Exchange losses on currency balances |
|
181 |
181 |
196 |
196 |
|
Adjustments for: |
|
|
|
|
|
|
Decrease in investments |
|
2,600 |
2,600 |
8,767 |
8,767 |
|
Decrease in current asset investments |
|
2,012 |
2,012 |
8,326 |
8,326 |
|
Increase in receivables |
|
(290) |
(290) |
(553) |
(553) |
|
Increase/(decrease) in payables |
|
946 --------- |
946 ---------- |
(705) --------- |
(705) ---------- |
|
Net cash flows from operating activities |
|
6,517 --------- |
6,517 ---------- |
7,705 --------- |
7,705 ---------- |
|
Cash flows from financing activities |
|
|
|
|
|
|
Share repurchase costs |
|
(5,724) |
(5,724) |
(6,927) |
(6,927) |
|
Share issue costs rebated |
|
59 |
59 |
- |
- |
|
Interest paid on bank overdrafts |
|
- --------- |
- --------- |
(9) --------- |
(9) ---------- |
|
Net cash used in financing activities |
|
(5,665) ===== |
(5,665) ====== |
(6,936) ===== |
(6,936) ====== |
|
Net increase in cash and cash equivalents |
|
852 |
852 |
769 |
769 |
|
Effect of foreign exchange losses |
|
(181) |
(181) |
(196) |
(196) |
|
Cash and cash equivalents at 1 September |
|
574 ---------- |
574 ---------- |
1 --------- |
1 ---------- |
|
Cash and cash equivalents at 31 August |
|
1,245 ====== |
1,245 ====== |
574 ===== |
574 ====== |
The accompanying notes form part of these Financial Statements.
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 August 2010
1. |
Accounting Policies |
|
||
|
|
|
|
||
The Group comprises International Biotechnology Trust plc (the "Company") and its wholly owned subsidiary, IBT Securities Limited (the "Subsidiary").
The nature of the Group's operations and its principal activities are set out in the Report of the Directors on page 19 of the Annual Report.
Group and Company Financial Statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") and those parts of the Companies Act 2006 ("the Act") applicable to companies reporting under IFRS. These comprise standards and interpretations approved by the International Accounting Standards Board ("IASB") and International Accounting Standards Committee ("IASC"), as adopted by the EU.
These Financial Statements are presented in pounds Sterling, as this is the principal currency in which the Group's transactions are undertaken and is therefore considered to be the functional currency of the Group.
The principal accounting policies followed are set out below:
(a) Basis of preparation
The Group and Company Financial Statements have been prepared on a going concern basis and under the historical cost convention, except for the revaluation of certain financial instruments.
Where presentational guidance set out in the Statement of Recommended Practice ("the SORP") for investment trusts issued by The Association of Investment Companies ("the AIC") in January 2009 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.
(b) Basis of consolidation
The Group Financial Statements incorporate the audited accounts of the Company and the Subsidiary made up to 31 August each year. Control is achieved where the Company has power to govern the financial and operating policies of an investee entity so as to obtain all the benefits from its activities. All intra-group transactions, balances, income and expenses are eliminated on consolidation.
The Statement of Comprehensive Income is only presented in consolidated form, as provided by Section 408 of the Act.
(c) Presentation of Statement of Comprehensive Income
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 Statement of Comprehensive Income between items of a revenue and capital nature has been presented alongside the Statement of Comprehensive Income.
In accordance with the Company's status as a UK investment company under Section 833 of the Act, net capital returns may not be distributed by way of a dividend. Additionally, the net profit after taxation in the revenue column is the measure the Directors believe appropriate in assessing the Group's compliance with certain requirements set out in Section 1158 of the Corporation Tax Act 2010 (with effect from 1 April 2010).
(d) Income
Dividends receivable on equity shares are recognised as revenue for the year on an ex-dividend basis. Income from current asset investments is included in the revenue for the year on an accruals basis. Where the Group has elected to receive its dividends in the form of additional shares rather than cash, the amount of cash dividend foregone is recognised as income in the revenue column of the Statement of Comprehensive Income. Any excess in the value of shares over the amount of cash dividend foregone is recognised as a gain in the capital column of the Statement of Comprehensive Income.
Deposit and other interest receivable are accounted for on an accruals basis.
(e) Expenses and interest payable
Administrative expenses including the management fee and interest payable are accounted for on an accruals basis.
All expenses have been presented as revenue items except as follows:
• Any performance fee payable is allocated wholly to capital, as it is primarily attributable to the capital performance of the Company's assets; and
• Transaction costs incurred on the acquisition or disposal of investments are expensed and included in the costs of acquisition or deducted from the proceeds of sale as appropriate.
(f) Taxation
Deferred tax is provided in full, using the liability method, on all taxable and deductible temporary differences at the Balance Sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets and liabilities are measured, without discounting, at the tax rates that are expected to apply to the period when the asset is realised or the liability settled, based on tax rates and tax laws that have been enacted or substantively enacted at the Balance Sheet date.
Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the deductible temporary differences can be utilised. In line with recommendations of the SORP, the allocation method used to calculate tax relief on expenses presented in the capital column of the Statement of Comprehensive Income is the marginal basis. Under this basis, if taxable income is capable of being offset entirely by expenses presented in the revenue column of the Statement of Comprehensive Income, then no tax relief is transferred to the capital column.
Due to the Company's status as an investment trust company, and the intention to continue to meet the conditions required by Section 1158 of the Corporation Tax Act 2010 (with effect from 1 April 2010) to obtain approval in the foreseeable future, the Company has not provided for deferred tax on any capital gains and losses arising on the revaluation of investments, or current tax on any capital gains on the disposal of investments.
(g) Non-current asset investments held at fair value
Investments are recognised or de-recognised on the trade date where a purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned. On initial recognition, all non-current asset investments are designated as held at fair value through profit or loss as defined by IFRS.
They are further categorised into the following fair value hierarchy:
• Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.
• Level 2: Having inputs other than quoted prices included within Level 1 that are observable for the asset or liability,
either directly (ie. as prices) or indirectly (ie. derived from prices).
• Level 3: Having inputs for the asset or liability that are not based on observable market data.
All non-current investments (including those over which the Group has significant influence) are measured at fair value with gains and losses arising from changes in their fair value being included in net profit or loss for the year as a capital item.
The fair value for quoted investments is either the bid price or the last traded price, depending on the convention of the exchange on which the investment is quoted.
In respect of unquoted investments, or where the market for a financial instrument is not active, fair value is established by using various valuation techniques, in accordance with the 2009 International Private Equity and Venture Capital ("IPEVC") Valuation Guidelines. These may include using recent arm's length market transactions between knowledgeable, willing parties, if available, reference to recent rounds of re-financing undertaken by investee companies involving knowledgeable parties, reference to the current fair value of another instrument that is substantially the same, or an earnings multiple. 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, then that technique is utilised.
Any gains and losses realised on disposal are recognised in the capital column of the Statement of Comprehensive Income and are not distributable by way of dividend.
(h) Current asset investments
Current asset investments are measured at fair value with gains and losses arising from their changes in fair value being included in the Statement of Comprehensive Income as a revenue item.
(i) Investment in subsidiary
The parent Company's investment in the Subsidiary is valued at fair value in the parent Company's Balance Sheet. Fair value is considered to be the cost of the Subsidiary.
(j) Foreign currencies
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. Foreign currency exchange differences arising on translation are recognised in the Statement of Comprehensive Income. Exchange gains and losses on investments held at fair value through profit or loss are included within "gains/(losses) on investments held at fair value".
(k) Critical accounting estimates and judgements
The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources.
The critical estimates and assumptions relate, in particular, to the valuation of unquoted investments, as summarised in (g) above.
Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
(l) Cash and cash equivalents
Cash and cash equivalents comprises cash at bank, short-term deposits and bank overdrafts. These are subject to an insignificant risk of changes in value and are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes.
(m) Other receivables
Other receivables do not carry any right to interest and are short-term in nature. Accordingly they are stated at their nominal value reduced by appropriate allowances for estimated irrecoverable amounts.
(n) Other payables
Other payables are not interest-bearing and are stated at their nominal amount.
(o) Repurchase of Ordinary shares (including those held in treasury)
The cost of repurchasing Ordinary shares including related stamp duty and transaction costs are taken directly to equity and reported through the Statement of Changes in Equity. Share repurchase transactions are accounted for on a trade date basis. The nominal value of Ordinary share capital repurchased and cancelled is transferred out of called up share capital and into the capital redemption reserve. Where shares are repurchased and held in treasury, the transfer to capital redemption reserve is made if and when such shares are subsequently cancelled.
(p) Reserves
(i) Capital redemption reserve
The capital redemption reserve, which is non-distributable, holds the amount by which the nominal value of the Company's issued share capital is diminished when shares are redeemed or purchased out of the Company's profits.
(ii) Share premium account
A non-distributable reserve, which represents the amount by which the fair value of the consideration received exceeds the nominal value of shares issued.
(iii) Share purchase reserve
A distributable reserve, which is used to finance the repurchase of shares in issue.
(iv) Capital reserves
The following are accounted for in this reserve:
• gains and losses on the realisation of investments;
• unrealised investment holding gains and losses;
• foreign exchange gains and losses; and
• performance fee.
(v) Revenue reserve
Comprises accumulated undistributed revenue profits available for distribution as dividends.
(q) Accounting developments
(i) Standards, amendments and interpretations becoming effective in the year to 31 August 2010:
• IFRS 1 (Amendment), 'First-time adoption of International Financial Reporting Standards' simplified the structure of IFRS 1 without making any technical changes. No impact on the Group's Financial Statements.
• IAS 1 (Revised), 'Presentation of Financial Statements'. Requires the separate presentation of changes in equity attributable to the owners (equity shareholders) and other non-owner changes. Non-owner changes are required to be shown in a performance statement, which can either comprise a statement of comprehensive income or an income statement together with a statement of comprehensive income. The Group has applied IAS 1 (revised) from 1 September 2009 and has elected to present solely a statement of comprehensive income. Where an entity restates or reclassifies comparative information, they are also required to present a restated balance sheet as at the beginning of the comparative period. The adoption of this revised standard has not resulted in a significant change to the presentation of the Group's performance statement, as the Group has no elements of comprehensive income not previously included in its Income Statement.
• IFRS 3 (Revised), 'Business combinations' harmonised business combination accounting with US GAAP. Not currently relevant to the Group and therefore has no impact on the Financial Statements.
• IFRS 7 (Amendment), 'Financial Instruments: Disclosures'. Introduces new disclosure requirements, whereby financial instruments must be categorised under a three-level fair value hierarchy. A reconciliation is also required for any investments categorised as Level 3. The additional disclosures resulting from this amendment have been included in note 24 on pages 62 and 63 of the Annual Report.
• IFRS 8, 'Operating Segments'. Replaces IAS 14 and aligns segment reporting with the requirements of the US standard SFAS 131. The new standard requires a 'management approach' under which segment information is presented on the same basis as that used for internal reporting purposes. The adoption of this standard has not had a significant effect.
• IAS 23 (Amendment), 'Borrowing Costs'. Requires an entity to capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset. The Group has no qualifying assets and therefore this standard is not relevant.
• IAS 27 (Revised), 'Consolidated and separate financial statements' introduced changes to the accounting for transactions with non-controlling interests (minority interests), the accounting for a loss of control and the presentation of non-controlling interests in consolidated financial statements. Adoption did not have any impact on the Group's Financial Statements.
• IAS 32 (Amendment), 'Financial Instruments: Presentation' and IAS 1 (Amendment), 'Presentation of financial statements - Puttable financial instruments and obligations arising on liquidation'. Provides exemptions from financial liability classification for (a) puttable financial instruments that meet certain conditions; and (b) certain instruments, or components of instruments, that impose on the entity an obligation to deliver to another party a pro rate share of the net assets of the entity only on liquidation. Adoption did not have any impact on the Group's Financial Statements.
• IAS 39 (Amendment), 'Financial Instruments: Recognition and Measurement'. Permits an entity to reclassify particular financial assets in some circumstances and the definition of financial asset or liability at fair value through profit or loss as it relates to items that are held for trading was amended. Adoption did not have a significant impact on the Group's Financial Statements.
(ii) Standards, amendments and interpretations to existing standards that become effective in future accounting periods and have not been adopted early by the Group or Company
• IAS 24 (Revised), 'Related Party Disclosures' (effective for financial periods beginning on or after 1 January 2011, subject to EU endorsement), revises the definition of related parties. Adoption is unlikely to have a significant effect on the Group's Financial Statements.
• Improvements to IFRS' were issued in May 2008 and April 2009 and comprise numerous amendments to IFRS that result in accounting changes for presentation, recognition or measurement purposes as well as terminology or editorial amendments related to a variety of individual standards. Most of the amendments are effective for annual periods beginning on or after 1 September 2009 and 1 September 2010 with earlier application permitted. No material changes to accounting policies are expected as a result of these amendments.
(iii) The following standards, amendments and interpretations to existing standards become effective in future accounting periods, but are not relevant for the Company's operations
• IFRS 1 (Amendment), 'First-time Adoption of International Financial Reporting Standards' and 'Additional exemptions for first-time adopters' (effective from 1 July 2010).
• IFRS 2 (Amendment), 'Group cash-settled share-based payment transactions' (effective from 1 January 2010).
• IFRS 5 (Amendment), 'Non-current Assets Held for Sale and Discontinued Operations'.
• IAS 17 (Amendment), 'Leases'.
• IAS 32 (Amendment), 'Financial Instruments: Presentation' - Amendments relating to classification of rights issues.
• IFRIC 15, 'Agreements for construction of real estates'.
(r) Operating Segments
The Group has adopted IFRS 8, 'Operating Segments' for the first time, replacing the previous reporting under IAS 14, 'Segment Reporting'. Under IFRS 8, operating segments are considered to be components of an entity about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Directors (who are collectively the Chief Operating Decision Maker) are of the opinion that the Group is engaged in a single segment of business, namely the investment in development stage biotechnology and other life sciences companies in accordance with the Company's Investment Objective, and consequently no segmental analysis is provided.
All activities are conducted in the UK and revenue and capital profits from investment activities are disclosed in the Group Statement of Comprehensive Income.
|
2 |
Gains/(losses) on investments held at fair value |
|
|
For the year ended |
For the year ended |
|
|
31 August |
31 August |
|
|
2010 |
2009 |
|
|
£'000 |
£'000 |
|
Net loss on disposal of investments at historic cost |
(1,682) |
(5,412) |
|
Less fair value adjustments in earlier years |
8,102 ------------ |
1,971 ------------ |
|
Gains/(losses) based on carrying value at previous Balance Sheet date |
6,420 |
(3,441) |
|
Investment holding losses during the year |
(3,082) ------------ |
(3,508) ------------ |
|
|
3,338 ======= |
(6,949) ======= |
|
Attributable to: |
|
|
|
Listed investments |
3,294 |
(4,271) |
|
Unquoted investments |
44 ------------ |
(2,678) ------------ |
|
|
3,338 ======= |
(6,949) ======= |
|
3. |
Income |
|
|
For the year ended |
For the year ended |
|
|
31 August |
31 August |
|
|
2010 |
2009 |
|
|
£'000 |
£'000 |
|
Income from investments held at fair value through profit or loss: |
|
|
|
Unfranked dividends |
21 |
41 |
|
Interest on debt securities |
4 ---------- |
- ---------- |
|
|
25 |
41 |
|
Other income: |
|
|
|
Income from current asset investments |
15 |
131 |
|
Interest on deposits |
1 |
3 |
|
VAT reclaim interest |
11 |
114 |
|
Other income |
- ---------- |
2 ---------- |
|
|
52 ====== |
291 ====== |
4. |
Net (Loss)/Profit per Ordinary Share |
|
|
For the year ended |
For the year ended |
|
|
31 August |
31 August |
|
|
2010 |
2009 |
|
|
£'000 |
£'000 |
Net revenue loss |
(2,089) |
(1,190) |
Net capital profit/(loss) |
3,157----------- |
(7,145)----------- |
|
|
1,068====== |
(8,335)====== |
Weighted average number of Ordinary shares in issue during the year |
62,228,267 |
66,280,828 |
|
|
|
|
|
|
Pence---------- |
Pence--------- |
Revenue loss per Ordinary share |
(3.36) |
(1.80) |
Capital profit/(loss) per Ordinary share |
5.07---------- |
(10.78)--------- |
Total profit/(loss) per Ordinary share |
1.71====== |
(12.58)====== |
The increase in the NAV per share from 151.55p (31 August 2009) to 155.17p (31 August 2010) includes the total profit per share as disclosed above and the effect of the Company, during the year, purchasing shares at a discount to the prevailing NAV per share.
All activities are conducted in the UK and revenue and capital profits from investment activities are disclosed in the Group Statement of Comprehensive Income.
|
5. |
Net Asset Value per Ordinary Share |
The calculation of the NAV per Ordinary share is based on the following:
|
|
At 31 August |
At 31 August |
At 31 August |
At 31 August |
|
|
2010 |
2010 |
2009 |
2009 |
|
|
Group |
Company |
Group |
Company |
|
Net asset value (£'000) |
93,658 ========= |
93,147 ========= |
98,255 ========= |
97,744 ========= |
|
Number of Ordinary shares in issue |
60,357,664 ========= |
60,357,664 ========= |
64,832,664 ========= |
64,832,664 ========= |
|
Basic net asset value per Ordinary share (pence) |
155.17 ========= |
154.33 ========= |
151.55 ========= |
150.76 ========= |
6. |
The figures and financial information for the year ended 31 August 2009 have been extracted from the latest published Financial Statements and do not constitute the statutory accounts for that year as defined in Section 434 of the Companies Act 2006. Those Financial Statements have been delivered to the Registrar of Companies and included the report of the auditors which was unqualified and did not contain a statement under Section 498 of the Companies Act 2006.This Annual Financial Report Announcement does not constitute statutory accounts for the year ended 31 August 2010 as defined in Section 434 of the Companies Act 2006. |
|
7. |
The Annual Report for the year ended 31 August 2010 will be posted to shareholders in October 2010 and thereafter copies will be available upon request at the Company's registered office: 55 Moorgate, London EC2R 6PA. The Annual Report will also be available on the Company's website, www.ibtplc.com, from today. The Company's AGM will be held at 12 noon on Wednesday, 8 December 2010 at the offices of BNP Paribas Fortis, 5 Aldermanbury Square, London EC2V 7HR. |
For further information, please contact:
Kate Bingham
Telephone: 020 7412 7070
SV Life Sciences Managers LLP
Investment Manager
Rhona Gregg
Telephone: 0141 225 3009
BNP Paribas Secretarial Services Limited
Company Secretary
1 November 2010
This information is provided by RNS
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