Annual Financial Report

RNS Number : 8396D

Intl. Biotechnology Trust PLC

02 November 2020

 

INTERNATIONAL BIOTECHNOLOGY TRUST PLC (IBT or the Company)

Annual Financial Report Announcement of Audited Results for the year ended 31 August 2020

This announcement contains regulated information.

The information contained in this Annual Financial Report Announcement, including the 31 August 2019 comparatives, has 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 European Union (EU).  The results for the year ended 31 August 2020 are audited but do not constitute statutory accounts as defined in Section 434 of the Act.  The statutory accounts have not yet been delivered to the Registrar of Companies. Full statutory accounts for the year ended 31 August 2019 included an unqualified audit report and have been filed with the Registrar of Companies.

Fund Facts

Financial Highlights

	31 August 2020	31 August 2019
Total equity/Net asset value (NAV) (£'000)	283,897	239,579
NAV per share	738.6p	623.9p
Share price†	730.0p	636.0p
Share price (discount)/premium	(1.2)%	1.9%
Gearing	6.3%	0.0%
Ongoing charges*	1.3%**	1.3%**
Ongoing charges including performance fee	1.4%**	1.7%**

For detailed calculations, please refer to Alternative Performance Measures (APMs) on page 100 of the Annual Report.

* Calculated in accordance with the Association of Investment Companies (the AIC) guidance. Based on total expenses excluding finance costs and performance fee and expressed as a percentage of average daily net assets. The ratio including performance fee has also been provided, in line with the AIC recommendations. Research costs under MiFID II borne by the Company are included in the ongoing charges calculation.

** Includes Management fees paid to SV Health Investors LLP directly from investment in SV Fund VI of £417,000 (2019: £526,000).

† Due to 31 August 2020 being a UK public holiday, share price performance data is reported to 28 August 2020.

Five Year Performance

Cumulative Total Return	12m (%)	3yr (%)	5yr (%)
Share price total return to 28 August*	18.7	32.3	55.8
NAV per share total return to 31 August	22.4	23.2	40.9
NASDAQ Biotechnology Index (NBI) to 31 August	20.6	19.6	40.1
FTSE All-Share Index to 28 August*	-12.6	-8.2	17.4

For detailed calculations, please refer to APMs on page 100 of the Annual Report.

Data for NBI and FTSE All-Share Index sourced from Bloomberg. All sterling adjusted and on a total return basis (with dividends reinvested).

* Due to 31 August 2020 being a UK public holiday, share price and FTSE All-Share Index performance data is reported to 28 August 2020.

Portfolio Overview

	31 August 2020	31 August 2019
Number of total portfolio companies*	69	73
Number of quoted holdings	57	60
Number of unquoted holdings**	12	13
NAV (£'m)	283.9	239.6
Quoted investments (£'m)	266.9	202.2
Unquoted investments (£'m)	35.3	35.2
Net (debt)/cash (£'m)	(17.8)†	2.2

* Excluding unquoted companies fully written off (2020: 9; 2019: 8).

** Includes SV Fund VI as one unquoted holding. SV Fund VI has a further 25 companies in its portfolio.

† Debt as at 31 August 2020 is a result of the Investment Manager's investment strategy. Please refer to Glossary on pages 98 and APMs on page 100 of the Annual Report for more information.

Top 30 Investments

			As at 31 August 2020		As at 31 August 2019
Investment	Therapeutic split	Geographic location	£'000	% of NAV	£'000	% of NAV
Horizon Therapeutics	Rare diseases	United States	21,807	7.7%	2,903	1.2%
SV Fund VI	Venture Fund	United States	21,626	7.6%	22,577	9.4%
Immunomedics	Oncology	United States	15,804	5.6%	-	-
Gilead Sciences	Infectious diseases	United States	15,115	5.3%	16,497	6.9%
BioMarin Pharmaceutical	Rare diseases	United States	14,404	5.1%	3,467	1.4%
Acadia Pharmaceuticals	Central nervous system	United States	13,732	4.8%	1,203	0.5%
Vertex Pharmaceuticals	Rare diseases	United States	13,497	4.8%	14,488	6.0%
PTC Therapeutics	Rare diseases	United States	11,036	3.9%	8,639	3.6%
Genmab	Oncology	Europe	10,958	3.9%	7,062	2.9%
Neurocrine Biosciences	Central nervous system	United States	9,198	3.2%	13,086	5.5%
Chemocentryx	Rare diseases	United States	8,923	3.1%	-	-
Biogen Inc	Central nervous system	United States	8,851	3.1%	3,913	1.6%
Exelixis	Oncology	United States	8,738	3.1%	1,687	0.7%
Amgen Inc	Oncology	United States	8,317	2.9%	11,304	4.7%
Alexion Pharmaceuticals	Rare diseases	United States	7,525	2.7%	8,450	3.5%
Halozyme Therapeutics	Other	United States	6,661	2.3%	4,509	1.9%
Seagen (prev. Seattle Genetics)	Oncology	United States	6,554	2.3%	3,958	1.7%
Incyte Genomics	Oncology	United States	5,613	2.0%	6,482	2.7%
Roche Holdings	Oncology	United States	5,548	2.0%	-	-
Novo Nordisk	Other	Europe	5,504	1.9%	-	-
Myokardia Inc	Other	United States	5,373	1.9%	1,324	0.6%
Regeneron Pharmaceuticals	Ophthalmology	United States	5,315	1.9%	7,458	3.1%
Acceleron Pharma	Oncology	United States	5,166	1.8%	1,106	0.5%
Mirati Therapeutics	Oncology	United States	4,901	1.7%	733	0.3%
Zealand Pharma	Other	Europe	4,356	1.5%	-	-
Biohaven Pharmaceuticals	Central nervous system	United States	3,948	1.4%	-	-
Alnylam Pharmaceuticals	Rare diseases	United States	3,596	1.3%	2,239	0.9%
Argenx	Rare diseases	Europe	3,510	1.2%	780	0.3%
Sarepta Therapeutics	Rare diseases	United States	3,445	1.2%	1,932	0.8%
Protagonist Therapeutics	Oncology	United States	2,543	0.9%	-	-

The full portfolio listing can be found on pages 6 to 9 of the Annual Report.

Chairman's Statement

Summary

For the year ended 31 August 2020, the Company's NAV per share and share price returned* 22.4% (to 31 August 2020) and 18.7% (to 31 August 2020) respectively, whilst the NBI returned 20.6% (to 31 August 2020) and the FTSE All-Share Index returned -12.6% (to 28 August 2020). All figures are on a total return basis, including costs and assuming dividends reinvested, and are sterling-adjusted.

The Company has established an impressive long-term performance, in what has historically been a volatile sector. Its five year performance figures are 40.9% and 55.8%, for the NAV (to 31 August) and share price (to 28 August), respectively. This equates to annualised total returns of 7.1% and 9.3% on the NAV and share price, also respectively.

Market Background

The year ended 31 August 2020 has been an unprecedented year for international economies. The COVID-19 pandemic has had a profound effect on people's personal and professional lives. Global equity markets experienced periods of extreme volatility during the first half of 2020. While the second half of the year saw equity markets recover, the threat of a global recession means that we expect that the effects of COVID-19 will be felt well into the new financial year and beyond.

Whilst COVID-19 has had a significant impact on many businesses around the world, operationally the Company and our Fund Manager have been able to continue relatively unaffected. The Fund Manager was quick to react to the UK's "remote-working" lockdown measures with no interruption to its business activities. In fact, the Fund Manager took the opportunity to increase the number of online and virtual marketing initiatives, which contributed to the overall growth of the Company's NAV.

COVID-19 has significantly increased the general interest in healthcare issues. We do not foresee this interest waning and are confident that this will translate into further interest in the Company.

Quoted Portfolio

For the year ended 31 August 2020, the quoted portfolio returned* 26.4% (gross of management and performance fees), outperforming both the NBI (the Company's benchmark index) and the FTSE All-Share Index, which returned 20.6% and -12.6%, respectively. All figures are on a sterling-adjusted total return* basis, with dividends reinvested.

Noting the severe impact that COVID-19 has had on global equity markets, the Board is pleased with the performance generated by the Fund Manager, which has contributed to the growth of the Company's NAV to £283.9m as at 31 August 2020. The main drivers of the Company's and biotechnology sector's outperformance are discussed in more detail in the Fund Manager's Review.

Unquoted Portfolio

In 2016, the Board took the decision that the Company will no longer make any new investment directly in unquoted investments, but instead will allow investors access to the unquoted market through a diversified venture capital fund. This is a unique differentiator for the Company, granting investors exposure to returns unavailable from quoted markets.

The Company's investment in SV Fund VI had a fair value gain of £2.9m (on a sterling-adjusted basis), representing a total return* of 14.6% on the fund's portfolio. The remainder of the unquoted portfolio, comprising those investments directly held, or whose carrying value comprises contingent milestones expected to be received, experienced a fair value gain of £1.5m (on a sterling-adjusted basis), representing a total return* of 9.6%. SV Fund VI made six distributions to the Company during the year ended 31 August 2020, with a total value of £7.7m. The Company also received three distributions during the year from the directly held unquoted portfolio, amounting to £0.4m, as a result of milestones being achieved by Atopix, Spinal Kinetics and Ikano Therapeutics.

The Company has invested 72.3% of its $30.0m committed capital to SV Fund VI. The Board expects the valuation of SV Fund VI to increase as follow-on investments are made to the fund's investee companies and these companies mature in their lifecycles. As the fund matures and more of its investee companies reach exit, we expect that the previously unrealised gains will be realised through distributions made by the fund.

Performance Fee

Separate performance fees are calculated for the quoted and unquoted portfolios. Following a successful year for the quoted portfolio, a performance fee¹ of £243,039 (2019: £nil) is payable after it outperformed the NBI. No performance fee has been earned on the unquoted portfolio for the year ended 31 August 2020 (2019: £969,781).

Discount Management

As at 31 August 2020, the Company's shares were trading at a 1.2% discount** to its NAV. At the start of the financial year, the Company issued 160,000 Ordinary shares from treasury and at a premium to the NAV. Subsequent market volatility, caused by the onset of the COVID-19 pandemic in the first half of the year, caused the Company's discount to widen to 22.4% at its greatest (19 March 2020). The Board proactively implemented discount management measures and bought back 195,846 shares in February and March 2020, after a period of no buybacks since September 2016. This represented 0.5% of the shares in issue at the start of the year. Since March, volatility has decreased and we have seen several months of positive performance leading to a small premium to NAV which has enabled the Company to issue 75,000 shares for £0.6m in July 2020 and a further 1,191,000 shares for £9.7m since year end and up to 28 October 2020.

The Company was trading at a 0.0% premium on 28 October 2020.

The Board views tap issuances as a key mechanism to grow the Company and will continue to issue shares at a premium to the NAV, when there is demand. The Board is confident, that should the Company continue to outperform the NBI and the FTSE All-Share Index, demand for the Company's shares should increase.

Dividends

In September 2016, the Company announced its dividend policy to issue dividends equal to 4% of NAV as at the end of each preceding financial year, paid in two equal instalments in January and August each year. On 31 January 2020 and 28 August 2020, the Company paid dividends of 12.4 pence per share.

The Board views this policy as a key differentiating factor for the Company which provides investors access to both an attractive dividend yield as well as the strong capital growth associated with the biotechnology sector. By offering a dividend, the Company has widened the universe of potential Shareholders which the Board is confident will lead to increased demand for the Company's shares.

The Board will be seeking Shareholder approval to continue these dividend payments, in accordance with the above-mentioned policy, at the Annual General Meeting (AGM) in December 2020.

Board of Directors

During the year, the Company announced the appointment of Kate Cornish-Bowden and Patrick Magee as non-executive Directors of the Company with effect from Tuesday, 19 May 2020. Please refer to pages 28 and 29 of the Annual Report for the biographies of our two newly appointed Directors.

As explained in the Company's Annual Report for the year ended 31 August 2019, I will retire from the Board at the conclusion of the AGM to be held in December 2020. Dr Véronique Bouchet, our Senior Independent Director, will also step down from the Board during 2021.

I am pleased to announce that Jim Horsburgh will succeed me as Chairman in December 2020. Jim has been on the Board since 2013 and is a highly valued colleague. He brings with him deep experience of fund management and of the investment company sector and I wish him every success in the role.

Annual General Meeting (AGM)

The Company's AGM is scheduled to be held on Tuesday, 15 December 2020 at 2.30 pm. In light of evolving social distancing measures as a result of COVID-19 and in line with current legislation, the Board has decided to hold the AGM as a closed meeting this year, with the minimum quorum permitted by the Company's Articles. Shareholders, their proxies and corporate representatives are therefore not permitted to attend. The Board considers the health and safety of Shareholders, attendees and the wider public paramount and has therefore taken this decision in order to protect public health and safety.

The Board therefore encourages Shareholders to submit their votes by appointing the Chairman as their proxy. For more information on the special resolutions that will be proposed, please refer to the Directors' Report on page 33 of the Annual Report.

Given the AGM will be closed to Shareholders, the Fund Manager will publish an AGM Shareholder video on the Company's website in advance of the AGM in order to provide an overview of the performance of the Company for the year ended 31 August 2020. Shareholders are invited to submit any questions they have on this video or the formal business of the AGM to the Company Secretary at [e-mail]. Questions will be collated and answers will be published on the Company's website at www.ibtplc.com.

Outlook

December 2020 will mark the end of my tenure as Chair and as a member of the Company's Board. I am privileged to have represented the Company as Chair since December 2017 and as a member of the Board since February 2011 over a period when the Company has created value for Shareholders. The Company offers investors access to the biotechnology sector through an expert specialist fund management team. The full spectrum of investment opportunities including unquoted stocks, the regular dividend and the closed-ended structure of the fund are all, in my view attractive differentiating factors. With the outlook for the biotechnology sector remaining strong, the Company can look forward to the future with confidence.

JOHN ASTON OBE | Chairman

30 October 2020

¹ For information on how the performance fee is calculated, please refer to the Directors' Report on page 31 of the Annual Report.

* For more information on total returns, please refer to APMs on page 100 of the Annual Report.

** For detailed calculation of the discount, please refer to APMs on page 100 of the Annual Report.

 

Fund Manager's Review

Summary

As at 31 August 2020, the Company's NAV amounted to £283.9m, the highest year end NAV since the inception of the Company. Despite the impact that COVID-19 has had on global equity markets, the Company's NAV per share returned* 22.4% (to 31 August 2020) and the Company's share price returned* 18.7% (to 28 August 2020) for the year ended 31 August 2020. The Company's NAV has outperformed both the NBI and the FTSE All-Share Index which returned 20.6% (to 31 August 2020) and -12.6% (to 28 August 2020), respectively. All figures are on a sterling-adjusted total return basis, including costs and assuming dividends are reinvested.

As at 31 August 2020, for financial reporting purposes, the quoted portfolio represented 94.0% of NAV (excluding cash and other net assets) at £266.9m. The unquoted portfolio represented 12.3% of NAV at £35.3m and the Company had a gearing of 6.3%. For performance purposes, companies that were first invested in from the unquoted pool and have now become quoted but continue to be strategically managed by the unquoted Investment Managers, are included within the unquoted portfolio.

Impact in a Changing World

The COVID-19 pandemic has had a profound impact worldwide. Understandably, the pandemic had a tumultuous effect on global equity markets with the most severe effects felt in the first half of 2020. US Equity markets have since recovered and have returned to pre COVID-19 levels. Since 86% of the Company's portfolio is denominated in US dollars, the Company has been well positioned to benefit from this recovery and the NAV grew to £283.9m, the highest year end NAV to date.

We expect COVID-19 to continue to impact equity markets in the short to medium-term. We view the increased focus that the pandemic has brought on the biotechnology and healthcare sectors as favourable and will continue to seek out high value investment prospects that we expect will generate superior returns for our investors.

Quoted Portfolio

For the year ended 31 August 2020, the quoted portfolio returned* 26.4% (gross of management and performance fees), outperforming both the NBI and the FTSE All-Share Index by 5.8% and 39.0%, respectively. All figures are on a sterling-adjusted total return basis, with dividends reinvested.

The quoted portfolio gave rise to a performance fee of £243,039 (2019: £nil). We are pleased to have outperformed the benchmark index as well as the broader equity market, for the financial year and are especially proud of the contribution this performance has made to the growth of the Company's NAV.

Company performance

The largest positive contributors to and detractors from the Company's NAV are discussed in more detail below. More broadly, we have made several strategic changes to the Company's portfolio composition throughout the financial year. We have decreased the Company's holdings in companies with market capitalisations of less than £2.0bn (defined as small caps), from 10% of NAV as at 31 August 2019 to 5% as at 31 August 2020 in favour of companies with a larger market capitalisation. As at 31 August 2020, 55% of the portfolio was invested in companies with a market capitalisation in excess of £10.0bn (defined as large caps). In response to COVID-19, the Company decreased its holdings in small cap companies, with financial constraints, as part of its strategy to raise cash and decrease its gearing in January 2020. The Company later deployed this cash by increasing its exposure to high conviction revenue growth investments, therefore resulting in a higher proportion of the quoted portfolio being invested in mid to large cap companies at year end. The Company's approach to gearing is discussed in more detail below.

Our investment strategy includes a rigorous bottom up approach with a top down overlay to ensure diversification. Investments are purchased with the intention of achieving long-term capital growth. However, portfolio composition is adjusted on a regular basis in line with the Company's risk mitigation strategy. By therapeutic specialisation, the most notable changes to portfolio composition include investments in companies that specialise in oncology and rare diseases, as a result of the stock selection process. As at 31 August 2020, 31% of the Company's portfolio was invested in companies that specialise in treatments for rare diseases, a 6% increase from the previous year end. At year end, 27% of the Company's portfolio was invested in companies that specialise in oncology, a decrease of 5% from the previous year end. Further detail on portfolio composition can be found on page 4 of the Annual Report.

Sector performance

For the year ended 31 August 2020, the NBI returned 20.6% (to 31 August 2020) and the FTSE All-Share Index returned -12.6% (to 28 August 2020). All figures are on a sterling-adjusted total return basis, with dividends reinvested. During the COVID-19 pandemic, the biotechnology sector was viewed as a safe-haven for investors, with the sector's relatively stable and visible earnings contributing to its outperformance of the general equity market during the financial year.

Mergers & Acquisitions (M&A)

M&A activity continues to be a key driver of performance for the biotechnology sector despite the impact of COVID-19. During the year ended 31 August 2020, the Company has been well placed to take advantage of this M&A activity to generate returns for its investors. Our view is that many companies within the biotechnology sector are currently undervalued, a sentiment we believe is supported by the increased level of M&A activity within the sector.

In November 2019, Novartis acquired The Medicines Company, a US based biopharmaceutical company, for $9.7bn, which represented a premium of 41%. The sale completed in January 2020. At the time of the announcement, 0.7% of the Company's NAV was invested in The Medicines Company. The Company's NAV benefited from the announcement and the Company sold out of its investment shortly thereafter, therefore crystallising this gain.

In December 2019, Merck acquired ArQule, a biopharmaceutical company focused on kinase inhibitor discovery and development for the treatment of patients with cancer and other diseases, for $2.7bn, representing a 107% premium over the share price. The sale was completed in January 2020. The Company held positions in both Merck (2.2% of NAV) and ArQule (0.1% of NAV) at the time of the announcement and the Company's NAV benefited from this deal.

The second half of the financial year, specifically the month of August, was particularly successful for M&A activity within the biotechnology sector.

Sanofi announced its intention to acquire Principia Biopharma, a late-stage biopharmaceutical company focused on developing treatments for immune-mediated diseases, for approximately $3.7bn, representing a premium of 70%. At the time of the announcement, Principia comprised 0.6% of the Company's NAV and the transaction is expected to complete in the fourth quarter of 2020.

Johnson & Johnson announced its intention to acquire Momenta Pharmaceuticals, a company that discovers and develops novel therapies for immune-mediated diseases, for a cash consideration of $6.5bn, representing a premium of 70% over the share price. Momenta comprised 0.3% of the Company's NAV at the time of the announcement.

This pace of M&A is showing no indications of slowing down. Since the year end, Gilead Sciences has announced that it has entered a deal to acquire Immunomedics for approximately $21bn, which represented a premium of 108% to the share price. The Company's NAV benefited from this announcement as the Company had 3.7% of its NAV invested in Immunomedics and 5.3% of its NAV invested in Gilead Sciences.

In October 2020, Bristol Myers Squibb announced its intention to acquire MyoKardia for a cash consideration of $13.1bn, representing a 61% premium to the share price. At the time of the announcement, the Company had 2.3% of its NAV invested in MyoKardia.

BEST PERFORMING INVESTMENTS			WORST PERFORMING INVESTMENTS
	Contributors to NAV (£'m)			Detractors from NAV (£'m)
Horizon Therapeutics	14.3		Merck & Co	(4.3)
Immunomedics	7.3		Stemline	(4.2)
Genmab	5.7		Amarin	(3.0)

Contributors to the NAV

On an individual holding basis, Horizon Therapeutics was the largest positive contributor to the Company's NAV for the year ended 31 August 2020 and was the largest single holding at year end. Horizon's treatment for patients with thyroid eye disease (TED), Tepezza, was approved by the Food and Drug Administration (FDA) ahead of schedule. With the approval, Tepezza became the first FDA-approved medicine for the treatment of active TED, which represents a significant unmet need. The launch of the drug has been encouraging despite a challenging COVID-19 environment. Based on continued strength of Tepezza, the company's full-year net sales forecast was increased.

Immunomedics' share price benefited after the company, a leading biopharmaceutical company in the area of antibody-drug conjugates, halted its phase 3 confirmatory ASCENT due to compelling evidence of efficacy. This decision was based on the unanimous recommendation by the independent Data Safety Monitoring Committee (DSMC). Immunomedic's share price rose further after the FDA approved its drug, Trodelvy, for the treatment of metastatic triple-negative breast cancer.

Genmab's share price has seen a steady increase during the year ended 31 August 2020. Its lead asset, Darzalex, was approved ahead of schedule by the FDA in 2015. Darzalex treats an incurable cancer called multiple myeloma and global sales reached $3bn in 2019. In August 2020, Novartis, announced the approval of a second antibody generated by Genmab's platform, Kesimpta, which had further positive impacts on Genmab's share price.

Detractors from the NAV

Merck & Co was the largest detractor from the NAV during the year ended 31 August 2020. Merck's share price declined after it was reported that Keytruda, a treatment for lung cancer, was outperformed by rivals, including Roche Holdings and AstraZeneca. The Company sold out of its holding in Merck in April 2020.

Following the FDA approval of Stemline Therapeutics' Elzonris, a drug used to treat Blastic Plasmacytoid Dendritic Cell Neoplasm (BPDCN), a type of blood cancer, in December 2018, investors looked favourably upon Stemline. However, Stemline's share price was negatively affected after the company released disappointing preliminary fourth-quarter results, ultimately driven by a lower than expected demand for Elzonris. The Company has responded by reducing its investment in Stemline to a nil position.

Amarin's share price weakened after the key patents protecting Vascepa, a drug used to reduce the risk of heart attacks in patients, were invalidated, placing the franchise at risk from competition from generic drugs.

Gearing

During the first half of 2020, we used gearing as a risk mitigation tool against the extreme market volatility caused by COVID-19. We were quick to anticipate the likely impact of COVID-19 on the market and adapted the Company's investment strategy by increasing cash at the end of January 2020 providing the necessary stability through the market volatility that followed. During the market retraction that occurred in the months that followed, we deployed a proportion of our loan facility to take advantage of investments with high value prospects. As at 31 August 2020, the Company had gearing* of 6.3% (2019: 0.0%).

* For more information on gearing, please refer to APMs on page 100.

Unquoted Portfolio

SUMMARY OF UNQUOTED INVESTMENTS

As at 31 August 2020	Fair value (£'m)	% of NAV	Number of investments
SV Fund VI	21.6	7.6	25*
Exited with contingent milestones	9.9	3.4	5
Directly-held unquoted	3.8	1.3	6
Total unquoted**	35.3	12.3	36
Previously unquoted, now quoted	2.8	1.0	3
Total unquoted for performance measurement	38.1	13.3	39

* The number of investments within SV Fund VI represents the number of investments into underlying individual portfolio companies. Four of these companies were quoted as at 31 August 2020.

** The Board expects the unquoted portfolio to remain within the guideline range of 5-15%.

The total unquoted portfolio, including SV Fund VI, returned* 12.1% for the year ended 31 August 2020. The largest contributors to the performance of the unquoted portfolio are the Company's investments in SV Fund VI and Ikano Therapeutics, both of which are discussed in more detail below.

The Company's investment into SV Fund VI continues to be a success, with the year ended 31 August 2020 being the most successful year to date, from a performance measurement perspective. SV Fund VI's fair value gain amounted to £2.9m, representing a sterling-adjusted total return* of 14.6% and has a currency adjusted  internal rate of return of 21.0%, since inception of the fund. SV Fund VI has made six distributions to the Company during the financial year, totalling £7.7m, crystallising some of the unrealised gains earned during the year.

During the year, SV Fund VI made investments into three new investee companies, taking the total number of investee companies to 25 as at 31 August 2020. Additionally, one of the fund's investee companies successfully listed on the NASDAQ, taking the fund's total quoted holdings to four companies. The venture fund continues to bring greater diversification to the Company's portfolio with investee companies specialising across biotechnology, healthcare services and medical devices, comprising of 42%, 43% and 15% of the fund's portfolio, respectively.

The remainder of the unquoted portfolio experienced a fair value gain of £1.5m, representing a total return* of 9.6%, with Ikano Therapeutics being the strongest contributor to this performance. Ikano's valuation was increased by £3.7m to £7.1m as at 31 August 2020 to reflect improved projected sales data on one of its prescription drugs, Midazolam nasal spray for the treatment of epilepsy. The Company received three distributions during the year, amounting to £0.4m, as a result of milestones being achieved by Atopix, Spinal Kinetics and Ikano Therapeutics.

The largest detractors from the unquoted performance for the financial year were NCP Holdings and TopiVert. NCP Holdings was valued downwards, from £2.4m as at 31 August 2019 to £1.4m, after lower than expected earnings during the current year. TopiVert, which is in the process of being wound up, is currently valued at £0.1m, the residual amount the Company is expecting to receive once operations have been fully wound down. This represents a decrease of £1.0m to the valuation as at 31 August 2019.

Calchan, with carrying value of £0.1m, was liquidated and fully written off during the year.

As several of the investments in the unquoted portfolio are denominated in US dollars, the performance of the investments are subject to foreign currency adjustments. Foreign exchange losses of £2.0m detracted from the fair value gain of the unquoted portfolio during the year.

Outlook

Innovation remains one of the core drivers of the biotechnology sector's performance. This, in conjunction with the positive developments made in the FDA's development and review process, also contributed to the biotechnology sector's relative outperformance during the financial year. As at 31 August 2020, there were over 25,000 ongoing clinical studies, with the number of studies expected to exceed the previous calendar year's by the end of the 2020. It is expected that this pace of innovation and efficiency displayed by the FDA will continue its forward momentum and will be translated into sales and earnings for the biotechnology sector going forward.

The US Presidential Election and any associated potential drug pricing and healthcare reforms have historically caused volatility within the biotechnology and healthcare sectors. Former Vice President Joe Biden's formal election as the Democratic Candidate means that the more disruptive Medicare for All policy changes, favoured by his opponents Elizabeth Warren and Bernie Sanders, are now seen as highly unlikely. The risk to the biotechnology sector has, therefore, lessened, with Biden more generally viewed as a centrist candidate and President Donald Trump considered relatively supportive of the biotechnology sector.

With the fundamentals of the biotechnology sector intact, we are optimistic about the future of the Company and the biotechnology sector, more generally. As ever, we continue to adapt to the ever-changing economic and political landscape and will continue to seek out high growth investment prospects that we are confident will generate strong returns for our investors.

SV HEALTH MANAGERS LLP

30 October 2020

* For more information on total returns, please refer to APMs on page 100 of the Annual Report.

Principal and Emerging Risks

The Board uses a framework of key risks which affect its business, and related internal controls designed to enable the Directors to take steps to mitigate these risks as appropriate. The Directors have carried out a robust assessment of the principal and emerging risks facing the Company, including those that would threaten its business model and its future performance. The Board conducts this robust assessment by reviewing a detailed Risk Map on a six-monthly basis. A full analysis of the Directors' review of internal control, including the review of the Risk Map, is set out in the Corporate Governance Statement on page 38 of the Annual Report.

The principal risks detailed below are assessed by the Audit Committee, which receives regular reports from its main third party service providers as to the internal control processes in place within those organisations.

Strategic/ Performance risk

The Company's returns are affected by changes in economic, financial and corporate conditions, which can cause market and exchange rate fluctuations. A significant fall in US equity markets is likely to adversely affect the value of the Company's portfolio. The Fund Manager provides the Board with the latest market information 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 the broader 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.

The Financial Statements and performance of the Company are denominated in Great British Pound because the Company is a UK company listed on the London Stock Exchange. 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 Board's policy to hedge against foreign currency movements.

Failure to meet the Company's investment objectives and/or poor sentiment towards the general or biotechnology sector-specific equity market can affect the Company's share price, which could result in the Company's shares trading at a relatively large discount to its 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 above..

Investment related risks

Alignment of the Company's investment strategy with its investment objective is essential and an inappropriate approach by the Fund Manager towards stock selection and asset allocation may lead to loss and/or 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 Fund Manager's adherence to the agreed investment strategy.

The Fund Manager 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 Fund Manager, to allow the Board to monitor the implementation of investment strategy and process.

Operational risks

In common with most other investment trusts, the Company has a Board of non-executive Directors and has no executive directors, executive management or employees. Its main functions are delegated to third party service providers which are specialists in their fields. Operational risk arises from insufficient processes of internal control which would include compliance with statutes and regulations governing the functions of the Company. The Board reviews the performance of these third party service providers and their risk control procedures, on a regular basis, as well as the terms on which they provide services to the Company.

For the year ended 31 August 2020, COVID-19 has been the most significant operational risk to the business activities of the Company and its third party service providers. However, the Fund Manager and other third party service providers were quick to react to the global pandemic with limited impact on their day-to-day business operations. The Board are confident that the Company's third party service providers' business continuity plans are sufficient to mitigate the risk posed by COVID-19.

Tax, legal and regulatory risks

To qualify as an investment trust, the Company must comply with Section 1158 Corporation Tax Act 2010 (CTA). HM Revenue & Customs (HMRC) has approved the Company as an investment trust and the Directors expect the affairs of the Company to continue to satisfy the conditions for Capital Gains Tax exemption.

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 embedded into the investment procedures of the Fund Manager. Reports confirming the Company's compliance with the provisions of Section 1158 CTA are submitted by the Fund Manager to each Board Meeting together with relevant portfolio and financial information.

The Company is also subject to other laws and regulations, including the Act, Financial Conduct Authority (FCA) Listing, Prospectus and Disclosure Guidance and Transparency Rules and the Alternative Investment Fund Manager's Directive (AIFMD). 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 Fund Manager and the 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.

Political risk

Political developments are closely monitored and considered by the Board. Following the UK's departure from the European Union on 31 January 2020 (Brexit), the Board continues to assess the potential consequences for the Company's investment portfolio and future business activities. Whilst there continues to be considerable uncertainty, the Board believes that the Company's portfolio, with less than 5% exposure to the United Kingdom, continues to be suitably insulated from Brexit-related risk.

The Board also continues to monitor the developments of the upcoming US election. However, as detailed in the Outlook section of the Fund Manager's Review, the risk to the biotechnology sector has lessened and is not expected to be significant.

Management Report

Listed companies are required by the FCA's Disclosure Guidance and Transparency Rules (the Rules) to include a management report in their Financial Statements. The information required to be included in the management report for the purposes of the Rules is included in the Strategic Report on pages 11 to 26 inclusive (together with the sections of the Annual Report incorporated by reference) and the Directors' Report on pages 30 to 39 of the Annual Report. Therefore, a separate management report has not been included.

Directors' Responsibilities Statement

The Directors are responsible for preparing the Annual Report, the Report on Directors' Remuneration 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 prepared the 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 Company and of the profit or loss of the Company for that period. 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

• State whether applicable IFRS as adopted by the EU have been followed, subject to any material departures disclosed and explained in the Financial Statements

• Prepare the Financial Statements on the going concern basis unless it is inappropriate to presume the Company will continue in business

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 enable them to ensure that the Financial Statements and the Report on Directors' Remuneration comply with the Act. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Annual Report is published on the following website: www.ibtplc.com which is a website maintained by SV Health Managers LLP. The maintenance and integrity of the website is, so far as it relates to the Company, the responsibility of SV Health Managers LLP. The work carried out by the Auditors does not involve consideration of the maintenance and integrity of this website and accordingly, the Auditors accept no responsibility for any changes that have occurred to the 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.

Having taken advice from the Audit Committee, the Directors consider that the Annual Report, taken as a whole, is fair, balanced and understandable and provides information necessary for Shareholders to assess the Company's position, performance, business model and strategy.

Pursuant to Rule 4.1.12 of the Rules, each of the Directors, whose names and functions are listed on pages 28 and 29 of the Annual Report, confirms that, to the best of his or her knowledge:

• The Financial Statements, which have been prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Company

• The Strategic Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces

• As outlined on page 32 of the Annual Report, the Directors have undertaken all necessary reviews to provide a going concern recommendation.

On behalf of the Board

JOHN ASTON OBE | Chairman

30 October 2020

 

Statement of Comprehensive Income

		For the year ended 31 August 2020			For the year ended 31 August 2019
	Notes	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Gains/(losses) on investments held at fair value	2	-	54,127	54,127	-	(13,940)	(13,940)
Exchange gains/(losses) on currency balances		-	1,765	1,765	-	(517)	(517)
Income	3	1,134	-	1,134	669	-	669
Expenses
Management fee	4	(1,878)	-	(1,878)	(1,610)	-	(1,610)
Performance fee	4	-	(243)	(243)	-	(970)	(970)
Administrative expenses	5	(1,051)	-	(1,051)	(862)	-	(862)
Profit/(loss) before finance costs and tax		(1,795)	55,649	53,854	(1,803)	(15,427)	(17,230)
Finance costs
Interest payable	6	(260)	-	(260)	(214)	-	(214)
Profit/(loss) on ordinary activities before tax		(2,055)	55,649	53,594	(2,017)	(15,427)	(17,444)
Taxation	7	(170)	-	(170)	(96)	-	(96)
Profit/(loss) for the year attributable to Shareholders		(2,225)	55,649	53,424	(2,113)	(15,427)	(17,540)
Basic and diluted earnings/(loss) per Ordinary share	8	(5.79)p	144.70p	138.91p	(5.58)p	(40.75)p	(46.33)p

All revenue and capital items in the above statement derive from continuing operations. The total column of this statement represents the Company's Statement of Comprehensive Income, prepared in accordance with IFRSs as adopted by the EU.

The Company does not have any other comprehensive income and hence the net profit/(loss) for the year, as disclosed above, is the same as the Company's total comprehensive income.

The revenue and capital columns are supplementary and are prepared under guidance published by the AIC.

The accompanying notes form part of these Financial Statements.

Statement of Changes in Equity

For the year ended 31 August 2020	Notes	Called up share capital £'000	Share premium account £'000	Capital redemption reserve £'000	Capital reserves £'000	Revenue reserve £'000	Total £'000
Balance at 1 September 2019		10,335	19,993	31,482	216,525	(38,756)	239,579
Total Comprehensive Income:
Profit/(loss) for the year		-	-	-	55,649	(2,225)	53,424
Transactions with owners, recorded directly to equity:
Dividends paid in the year	9	-	-	-	(9,547)	-	(9,547)
Ordinary shares bought back into treasury		-	-	-	(1,131)	-	(1,131)
Ordinary shares issued from treasury		-	441	-	1,131	-	1,572
Balance at 31 August 2020		10,335	20,434	31,482	262,627	(40,981)	283,897
For the year ended 31 August 2019	Notes	Called up share capital £'000	Share premium account £'000	Capital redemption reserve £'000	Capital reserves £'000	Revenue reserve £'000	Total £'000
Balance at 1 September 2018		10,335	18,805	31,482	238,494	(36,643)	262,473
Total Comprehensive Expense:
Loss for the year		-	-	-	(15,427)	(2,113)	(17,540)
Transactions with owners, recorded directly to equity:
Dividends paid in the year	9	-	-	-	(10,616)	-	(10,616)
Ordinary shares issued from treasury		-	1,188	-	4,074	-	5,262
Balance at 31 August 2019		10,335	19,993	31,482	216,525	(38,756)	239,579

The accompanying notes form part of these Financial Statements.

 

Balance Sheet

	Notes	At 31 August 2020 £'000	At 31 August 2019 £'000
Non-current assets
Investments held at fair value through profit or loss	10	302,223	237,360
		302,223	237,360
Current assets
Receivables	11	161	2,616
Cash and cash equivalents	12	324	886
		485	3,502
Total assets		302,708	240,862
Current liabilities
Borrowings	12	(18,096)	-
Payables	13	(715)	(1,283)
		(18,811)	(1,283)
Net assets		283,897	239,579
Equity attributable to equity holders
Called up share capital	15	10,335	10,335
Share premium account	16	20,434	19,993
Capital redemption reserve	17	31,482	31,482
Capital reserves	18	262,627	216,525
Revenue reserve	19	(40,981)	(38,756)
Total equity		283,897	239,579
NAV per Ordinary share	20	738.61p	623.94p

The Financial Statements were approved by the Board on 30 October 2020 and signed on its behalf by John Aston OBE, Chairman and Caroline Gulliver, Chair of the Audit Committee.

The accompanying notes form part of these Financial Statements.

Cash Flow Statement

	Notes	For the year ended 31 August 2020 £'000	For the year ended 31 August 2019 £'000
Cash flows from operating activities
Profit/(loss) before tax		53,594	(17,444)
Adjustments for:
(Increase)/decrease in investments		(64,863)	25,665
Decrease/(increase) in receivables		2,455	(2,566)
(Decrease)/increase in payables		(568)	913
Taxation		(170)	(96)
Net cash flows (used in)/generated from operating activities	21	(9,552)	6,472
Cash flows used in financing activities
Issue of Ordinary shares from treasury		1,572	5,262
Buyback of Ordinary shares into treasury		(1,131)	-
Dividends paid		(9,547)	(10,616)
Net cash used in financing activities		(9,106)	(5,354)
Net (decrease)/increase in cash and cash equivalents		(18,658)	1,118
Cash and cash equivalents at 1 September		886	(232)
Cash and cash equivalents at 31 August	12	(17,772)	886

The accompanying notes form part of these Financial Statements.

 

Notes to the Financial Statements

1. Accounting policies

The nature of the Company's operations and its principal activities are set out in the Strategic Report and Directors' Report of the Annual Report

The Company's Financial Statements have been prepared in accordance with 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.

For the purposes of the Financial Statements, the results and financial position of the Company are expressed in pounds sterling, which is the functional currency and the presentational currency of the Company. Sterling is the functional currency because it is the currency which is most relevant to the majority of the Company's Shareholders and creditors and the currency in which the majority of the Company's operating expenses are paid.

The principal accounting policies followed, which have been applied consistently for all years presented, are set out below:

(a) Basis of preparation

The Company Financial Statements have been prepared on a going concern basis (as set out on page 32 of the Annual Report) and under the historical cost convention, as modified by the inclusion of investments at fair value through profit or loss.

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 October 2019 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.

Following the guidance of the revised SORP, issued in October 2019, the presentation of gains and losses arising from disposals of investments and gains and losses on revaluation of investments have now been combined, as shown in note 10 with no impact to the NAV or profit/(loss) reported for both the current or prior year. No other accounting policies or disclosures have changed as a result of the revised SORP.

The financial position of the Company as at 31 August 2020 is shown in the Balance Sheet above. As at 31 August 2020 the Company's total assets exceeded its total liabilities by a multiple of over 16. The assets of the Company consist mainly of securities that are held in accordance with the Company's Investment Policy, as set out on page 20 of the Annual Report. The Directors have considered a detailed assessment of the Company's ability to meets its liabilities as they fall due. The assessment took account of the Company's current financial position, its cash flows and its liquidity position. In addition to the assessment, the Company carried out stress testing, including for the impact of COVID-19, which used a variety of falling parameters to demonstrate the effects in the Company's share prices and NAV. In light of the results of these tests, the Company's cash balances, and the liquidity position, the Directors consider that the Company has adequate financial resources to enable it to continue in operational existence. Further, and in accordance with the AIC SORP, it is reasonable to believe that if satisfactory performance is achieved over the period until the next continuation vote in 2021, Shareholders will vote in favour of continuation. Accordingly, the Directors believe that it is appropriate to continue to adopt the going concern basis in preparing the Company's accounts.

(b) 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.

The net loss after taxation in the revenue column is the measure the Directors believe appropriate in assessing the Company's compliance with certain requirements set out in Section 1158 CTA.

(c) Income

Dividends receivable on equity shares are recognised as revenue for the year on an ex-dividend basis. Special dividends are treated as revenue return or as capital return, depending on the facts of each individual case. Income from current asset investments is included in the revenue for the year on an accruals basis and is recognised on a time apportionment basis. Where the Company 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.

Interest from fixed income securities is recognised on a time-apportionment basis so as to reflect the effective yield on the fixed income securities.

Deposit interest outstanding at the year end is calculated and accrued on a time apportionment basis using market rates of interest.

(d) Expenses and interest payable

Administrative expenses including the management fee and interest payable are accounted for on an accruals basis and are recognised when they fall due.

All expenses and interest payable 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.

• 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.

(e) Taxation

Deferred tax is calculated 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 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.

(f) Non-current asset investments held at fair value

The Company holds three types of investments: Direct investments in quoted companies, direct investments in unquoted companies and investments in funds.

Investments are recognised or derecognised 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 Company 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.

Any gains and losses realised on disposal are recognised in the capital column of the Statement of Comprehensive Income.

Quoted investments

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.

Unquoted Investments

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 International Private Equity and Venture Capital (IPEV) Valuation Guidelines (December 2018) and Special Valuations Guidance (March 2020). These may include reference to the transaction price at recent rounds of re-financing undertaken by investee companies involving knowledgeable parties, an earnings or multiple, a discounted cashflow model or the present value of future milestone payments, all with reference to recent arm's length market transactions between knowledgeable parties, where available.

The valuations of the unquoted investments are assessed up or down with reference to a range of factors, including: the ability of portfolio company management to keep cash and operating budgets; investor milestone targets; clinical trial data; progress of competitor products; performance of the investment and quality of the management team; the market for the product being developed; and the broad climate of the economies of the countries in which they will likely be sold by reference to public stock market performance.

Investment in Funds

The Company receives formal quarterly reports from each of the private equity funds in which SV Fund VI holds an investment. The value of SV Fund VI's investment in these funds is reported in these quarterly reports. The reports typically arrive within 60 days of the end of the quarter (90 days at calendar year end). As soon as a quarterly report is received by the Company, the reported value of the SV Fund VI's investment in that fund is reflected in the NAV on the next NAV date.

During the period between quarterly reports, the Company may be advised of a sale of a portfolio company (or its securities) held within one of the funds at a different price from the last reported value in that quarterly report. As soon as the Company is informed of the completion of any such transaction establishing a new value for the investment, the new NAV of that investment to SV Fund VI is reflected in the NAV on the next NAV date. With respect to any investments within SV Fund VI for which there is a listed price, the Company revalues its investment in SV Fund VI to take account of market movements in the underlying security. The listed price of these underlying securities is monitored on a daily basis. Any price move in SV Fund VI's underlying investments that materially impacts the Company's holding in SV Fund VI is immediately reflected in the NAV on the next NAV date. If there are no material movements, these underlying securities are revalued on a monthly basis and immediately reflected in the NAV on the next NAV date.

The Company does not change the valuation of fund investments based on anticipated transactions that are not yet completed, changes in company performance or any other factors unless and until such changes are reflected in a quarterly report received from the manager of the fund.

The value of a fund investment used by the Company in determining the NAV is always based on the most current information known to the Company on the NAV date.

(g) 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".

(h) Critical accounting estimates and judgements

The preparation of the Financial Statements requires the use of estimates and judgements. These estimates and judgements affect the reported amounts of assets and liabilities at the reporting date. While estimates are based on best judgement using information and financial data available, the actual outcome may differ from these estimates. The key sources of estimation and uncertainty relate to the fair valuation of the unquoted investments.

Judgements

The Directors consider that the preparation of the Financial Statements involves the following key judgements:

(i)  the fair value of the unquoted investments.

The key judgements in the fair valuation process are:

(i)  the Investment Managers' determination of the appropriate application of the IPEV Valuation Guidelines and Special Valuations Guidelines (March 2020) to each unquoted investment; and

(ii)  the Directors' consideration of whether each fair value is appropriate following detailed review and challenge. The judgement applied in the selection of the methodology used for determining the fair value of each unquoted investment can have a significant impact upon the valuation.

Estimates

The key estimate in the Financial Statements is the determination of the fair value of the unquoted investments by the Investments Managers for consideration by the Directors. This estimate is key as it significantly impacts the valuation of the unquoted investments at the Balance Sheet date. The fair valuation process involves estimation using subjective inputs that are unobservable (for which market data is unavailable). The main estimates involved in the selection of the valuation process inputs are:

(i)  the selection of appropriate comparable companies in order to derive revenue multiples and meaningful relationships between enterprise value, revenue and earnings growth. Comparable companies are chosen on the basis of their business characteristics, such as the industry sector in which they operate and the geographic location of the company's operations, and revenue earnings and growth rates;

(ii)  the application of an appropriate discount factor to reflect macro-economic factors and the reduced liquidity of unquoted companies;

(iii)  the selection of an appropriate estimate of the probability of royalty income reflecting potential commercial uptake risk, competitor risk and uncertainty around drug pricing; and

(iv)  The calculation of valuation adjustments derived from milestone achievement analysis incorporating the likelihood of clinical trial success.

Fair value estimates are cross-checked to alternative estimation methods where possible to improve the robustness of the estimate. As the valuation outcomes may differ from the fair value estimates a price sensitivity analysis is provided in Level 3 investments at fair value through profit and loss - price risk sensitivity in note 23(7)(iii) below to illustrate the effect on the Financial Statements of an over or under estimation of the significant observable inputs.

(i) Cash and cash equivalents

In the Cash Flow Statement, cash and cash equivalents includes cash in hand, short-term deposits and bank overdrafts. These are held for the purpose of meeting short-term cash commitments rather than for investment or other purpose and cash balances are held at their fair value (translated to sterling at the Balance Sheet date where appropriate.)

(j) Receivables

Other receivables do not carry any right to interest and are short-term in nature. Accordingly they are stated at their nominal value (amortised cost) reduced by appropriate allowances for estimated irrecoverable amounts.

(k) Other payables

Other payables are not interest-bearing and are stated at their nominal amount (amortised cost). Where there are any long-term borrowings, finance costs are calculated over the term of the debt on the effective interest basis.

(l) Repurchase of Ordinary shares (including those held in treasury) and subsequent re-issues

The costs 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 as a charge on the capital reserves.

The sales proceeds of treasury shares reissued are treated as a realised profit up to the amount of the purchase price of those shares and is transferred to capital reserves. The excess of the sales proceeds over the purchase price is transferred to the share premium account.

Share purchase 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.

(m) 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 redeemed or purchased out of the Company's distributable reserves are subsequently cancelled.

(ii) Share premium account:

A non-distributable reserve, represents the amount by which the fair value of the consideration received exceeds the nominal value of shares issued.

(iii) Capital reserves

The following are accounted for in this reserve and are potentially distributable:

• Gains and losses on the realisation of investments;

• Unrealised investment holding gains and losses;

• Foreign exchange gains and losses;

• Performance fee;

• Re-issue of Ordinary shares from treasury;

• Repurchase of Ordinary shares in issue; and

• Dividends paid to Shareholders.

Note: Unrealised unquoted holding gains are not distributable.

(iv) Revenue reserve:

Comprises accumulated undistributed revenue profits and losses.

(n) New and revised accounting Standards

There were no new IFRSs or amendments to IFRSs applicable to the current year which had any significant impact on the Company's accounts.

The following standards became effective on 1 January 2019 and the adoption of the standards and interpretations have not had a material impact on the Financial Statements of the Company.

IFRS 16 Leases

As the Company neither holds, trades or has any lease obligations of any type, the provisions of this standard are not expected to have a material impact on the Financial Statements.

IFRS 9 (amended) Prepayment Features with Negative Compensation

Negative compensation arises where the contractual terms permit a borrower to prepay the instrument before its contractual maturity, but the prepayment amount could be less than unpaid amounts of principal and interest. The Company has no such terms in any of its loan agreements in place and the amendment is not expected to have any impact on the Financial Statements.

IFRIC 23 Uncertainty over Income Tax Treatments

The interpretation provides guidance on considering uncertain tax treatments in relation to taxable profit or loss and does not add any new disclosures. The Company complies with all relevant tax laws where applicable and the provisions of this interpretation are not expected to have a material impact on the Financial Statements.

IAS 19 (amended) Employee Benefits

As the Company has no employees, the amendment to this standard is not expected to have any impact on the Financial Statements.

IAS 28 (amended) Investments in Associates and Joint Ventures

As the Company has no investment in associates or joint ventures, the amendment to this standard is not expected to have any impact on the Financial Statements.

Annual Improvement Cycles 2015-2017 (amendments)

This makes narrow-scope amendments to four IFRS Standards: IFRS 3 Business Combinations, IFRS 11 Joint Arrangements, IAS 12 Incomes Taxes and IAS 23 Borrowing Costs. These limited amendments are not expected to have any impact on the Financial Statements.

At the date of authorisation of the Company's Financial Statements, the following new IFRSs that potentially impact the Company are in issue but are not yet effective and have not been applied in the Financial Statements:

Effective for periods commencing on or after 1 January 2020:

IFRS 3 Business Combinations (amended)

The IASB has made narrow-scope amendments to improve the definition of a business in order to help companies determine whether an acquisition made is of a business or a group of assets. These amendments are not expected to have any impact on the Financial Statements.

IFRS 9, IAS 39 and IFRS 7: Interest Rate Benchmark Reform (amended)

The IASB has issued amendments to IFRS 9, IAS 39 and IFRS 7 that provide certain reliefs in connection with interest rate benchmark reform. The reliefs relate to hedge accounting and have the effect that IBOR reform should not generally cause hedge accounting to terminate. These amendments are not expected to have any impact on the Financial Statements.

IAS 1 and IAS 8 Definition of Material (amended)

The definition of material has been amended to state that "information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity." This new definition is not expected to change how materiality judgements are currently made by the Company nor have any impact to the material information inclusive in the Annual Report.

References to the Conceptual Framework in IFRS Standards (amended)

The Amendments to References to the Conceptual Framework in IFRS Standards was issued to support transition to the revised Conceptual Framework for companies that develop accounting policies using the Conceptual Framework when no IFRS Standard applies to a particular transaction. This amendment is not expected to have any impact to the Financial Statements.

Effective for periods commencing on or after 1 January 2021:

IFRS 17 Insurance Contracts

The Directors expect that the adoption of the standards listed above will have either no impact or that any impact will not be material on the Financial Statements of the Company in future periods.

2. Gains/(Losses) on Investments Held at Fair Value

	For the year ended 31 August 2020 £'000	For the year ended 31 August 2019 £'000
Net gains on disposal of investments at historic cost	16,281	5,931
Less fair value adjustments in earlier years	(1,031)	(20,169)
Total realised gains/(losses)	15,250	(14,238)
Investment holding gains during the year	38,877	298
Total unrealised gains	38,877	298
	54,127	(13,940)
Attributable to:
Quoted investments	49,841	(20,345)
Unquoted investments	4,286	6,405
	54,127	(13,940)

3. Income

	For the year ended 31 August 2020 £'000	For the year ended 31 August 2019 £'000
Income from investments held at fair value through profit or loss:
Unfranked dividends	1,128	642
Other income:
Bank interest	6	27
	1,134	669

4. Management and Performance Fees

	For the year ended 31 August 2020 £'000	For the year ended 31 August 2019 £'000
Fees payable to the Fund Manager are as follows:
Management fees paid by the Company (allocated to revenue)	1,878	1,610
	1,878	1,610
Performance fee (allocated to capital)	243	970
	243	970

Details of the management and performance fee arrangements are included in the Directors' Report on page 31 of the Annual Report

.

Following the investment into the SV Fund VI venture capital fund on 3 October 2016, management fees are partially paid through the venture capital investment. Venture Capital fees paid through the SV Fund VI investment in the year were £417,000 (2019: £526,000). Total Management fees on a comparative basis were £2,295,000 (2019: £2,136,000). Refer to note 22 Related Party Transactions below, for further details.

5. Administrative Expenses

	For the year ended 31 August 2020 £'000	For the year ended 31 August 2019 £'000
General expenses*	619	468
Directors' fees**	149	133
Company Secretarial and administration fees	233	223
Auditors' remuneration:
Fees payable to the Company's Auditors for the audit of the Annual Financial Statements	50	38
	1,051	862

* Includes research costs under MiFID II related solely to specialist biotechnology research of £132,000 (annual cap of £160,000).

These costs were previously partly wrapped up in trade commission. Under MiFID II which applied from 3 January 2018, changes were made to how investment managers pay for their research. This new regime requires investment managers to budget separately for research and trading costs.

**See the Directors' Remuneration Report on pages 40 to 43 of the Annual Report

6. Interest Payable

	For the year ended 31 August 2020 £'000	For the year ended 31 August 2019 £'000
Bank overdraft interest payable	260	214
	260	214

7. Taxation

(a)  Analysis of charge in year

	For the year ended 31 August 2020 £'000	For the year ended 31 August 2019 £'000
Oversees tax	170	96
Total tax charge for the year	170	96

(b) Factors affecting tax charge for the year

Approved investment trust companies are exempt from tax on capital gains within the Company. The tax assessed for the year is lower (2019: higher) than that resulting from applying the standard rate of Corporation Tax in the UK for a medium or large company of 19% (2019: 19%). The differences are explained below:

	For the year ended 31 August 2020			For the year ended 31 August 2019
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Factors affecting tax charge for the year:
Profit/(loss) on ordinary activities before taxation	(2,055)	55,649	53,594	(2,017)	(15,427)	(17,444)
Tax at the UK corporation tax rate of 19% (2019: 19%)	(390)	10,573	10,183	(383)	(2,931)	(3,314)
	(390)	10,573	10,183	(383)	(2,931)	(3,314)
Tax effect of:
Non-taxable dividend income	(215)	-	(215)	(122)	-	(122)
Capital returns on investments	-	(10,284)	(10,284)	-	2,649	2,649
Exchange (losses)/gains	-	(335)	(335)	-	98	98
Expenses not utilised in the year	605	46	651	505	184	689
Overseas tax	170	-	170	96	-	96
	170	-	170	96	-	96

(c) Provision for deferred taxation

No provision for deferred tax has been made in the current or prior year.

(d) Factors that may affect future tax charges

The Company has an unrecognised deferred tax asset of £12,649,000 (2019: £10,732,000) based on a main rate of corporation tax of 19% (2019: 19%). At Budget 2020, the Government announced that the main rate of corporation tax (for all profits except ring fence profits) for the years starting 1 April 2020 and 2021 would remain at 19%.

The deferred tax asset has arisen due to the cumulative excess of deductible expenses over taxable income. Given the composition of the Company's portfolio, it is not likely that this asset will be utilised in the foreseeable future and therefore no asset has been recognised in the accounts.

Given the Company's status as an investment trust company, no provision has been made for deferred tax on any capital gains or losses arising on the revaluation or disposal of investments.

8. Net Earning/(Loss) per Ordinary share

	For the year ended 31 August 2020 £'000	For the year ended 31 August 2019 £'000
Net revenue loss	(2,225)	(2,113)
Net capital profit/(loss)	55,649	(15,427)
	53,424	(17,540)
Weighted average number of Ordinary shares in issue during the year*	38,458,263	37,853,827
	Pence	Pence
Revenue loss per Ordinary share	(5.79)	(5.58)
Capital profit/(loss) per Ordinary share	144.70	(40.75)
Total earning/(loss) per Ordinary share	138.91	(46.33)

*Excluding those Ordinary shares held in treasury.

9. Dividends

	For the year ended 31 August 2020 £'000	For the year ended 31 August 2019 £'000
Dividends paid
2020 First interim dividend paid of 12.40p (2019: 14.00p)	4,781	5,267
2020 Second interim dividend paid of 12.40p (2019: 14.00p)	4,766	5,349
Total dividends paid in the year	9,547	10,616

Dividends are included in the Financial Statements in the year in which they are paid.

The Company is not required to pay a dividend under the requirements of Section 1158 of the CTA due to the negative accumulated balance on its revenue reserve. The above dividends are paid out of the capital reserve.

10. Investments Held at Fair Value Through Profit or Loss

(a) Analysis of investments

	At 31 August 2020 £'000	At 31 August 2019 £'000
Quoted overseas	266,947	202,215
	266,947	202,215
Unquoted in the United Kingdom	2,350	3,549
Unquoted overseas	32,926	31,596
	35,276	35,145
Valuation of investments	302,223	237,360

(b) Movements on investments

	For the year ended 31 August 2020 £'000	For the year ended 31 August 2019 £'000
Opening book cost	225,341	231,135
Opening investment holdings gains	12,019	31,890
Opening fair value	237,360	263,025
Analysis of transactions made during the year*
Purchases at cost	246,864	256,198
Proceeds of disposals	(236,128)	(267,923)
Gains/(losses) on investments held at fair value	54,127	(13,940)
Closing fair value	302,223	237,360
Closing book cost	252,358	225,341
Closing investment holding losses	49,865	12,019
Closing fair value	302,223	237,360

The Company received £236,128,000 (2019: £267,923,000) from disposal of investments in the year. The book cost of these investments when they were purchased were £219,847,000 (2019: £261,992,000). These investments have been revalued over time and until they were sold any unrealised gains/losses were included in the fair value of the investments.

* Note 10, including the prior year, has been updated in accordance with the presentational guidance set out in the SORP for Investment Trusts issued by the AIC in October 2019.

The following transaction costs, including stamp duty and broker commissions were incurred during the year:

	For the year ended 31 August 2020 £'000	For the year ended 31 August 2019 £'000
On acquisitions	144	151
On disposals	138	161
	282	312

(c) Significant undertakings

The Company has interests of 3% or more of any class of capital in the following investee companies.

	Class of share held	% of class of share held	Country of incorporation
Archemix	Series B	3.80%	US
EBR Systems	Series C	7.84%	US
Karus Therapeutics	Series B Pref	4.34%	UK
Oxagen Stocks*	Series B Pref	9.10%	UK
Oxagen Stocks*	Series A Pref	4.63%	UK
Oxagen Stocks*	Series C Pref	4.18%	UK
Topivert	Series B	3.02%	UK

* Although the Company continues to hold its investment in, this fair value of this holding has been fully written off in prior years.

(d) Disposals of unquoted investments

There were no significant unquoted investment disposals during the year (2019: Proceeds of £1.4m received for the partial disposal of the Company's holding in Ikano Therapeutics).

(e) Significant changes in fair value of unquoted investments

During the year under review the following unquoted investments were written up/(down) by a significant extent (adjusted for currency movements):

	Write up/(down) £'000
Ikano Therapeutics	3,720
SV Fund VI*	2,853
NCP Holdings	(1,029)
Topivert	(1,020)
Convergence	(638)

* The fair value gain returned by SV Fund VI was offset by the capital calls and six distributions received, totalling £7.7m. This resulted in the value of the Company's investment in SV Fund VI decreasing from £22.6m as at 31 August 2019 to £21.6m as at 31 August 2020.

11 . Receivables

	At 31 August 2020 £'000	At 31 August 2019 £'000
Amounts due within one year:
Sales awaiting settlement	-	2,491
Accrued income	45	67
Prepaid expenses	47	29
Tax recoverable	43	8
VAT recoverable	26	21
	161	2,616

12. Cash and Cash Equivalents

Cash and cash equivalents include the following for the purposes of the Statement of Cash Flows:

	At 31 August 2020 £'000	At 31 August 2019 £'000
Cash at bank	324	886
Bank overdraft	(18,096)	-
Cash and cash equivalents	(17,772)	886

The Company has a £55.0m uncommitted multi-currency overdraft facility. On 31 August 2020, £17.8m (2019: £nil) was drawn down. The principal covenants relating to this facility are that there must be at least twenty investments in the portfolio and that performance must not fall by more than 15% in a month, 25% in two months or 30% in any six month period. The Company has complied with the terms of the facility throughout the financial year.

13. Payables

	At 31 August 2020 £'000	At 31 August 2019 £'000
Amounts falling due within one year:
Purchases awaiting settlement	124	42
Accrued expenses	572	1,221
Other	19	20
	715	1,283

14. Capital Commitments - Contingent Assets and Liabilities

The Company made a $30.0m commitment to SV Fund VI in 2016. Of this $30.0m commitment, the Company has commitments of £6.1m outstanding as at 31 August 2020 (2019: £7.8m). The outstanding capital commitments are callable by SV Fund VI at any time. While the fund will no longer make new investments, additional follow on investments are likely to be made by the fund into its investee companies.

15. Called Up Share Capital

Allotted, Called up and Fully paid:

	At 31 August 2020 Number	At 31 August 2019 Number	At 31 August 2020 £'000	At 31 August 2019 £'000
Allotted, Called up and Fully paid shares of 25p each:
Ordinary shares in issue	38,436,817	38,397,663	9,609	9,599
Ordinary shares held in treasury	2,905,846	2,945,000	726	736
	41,342,663	41,342,663	10,335	10,335

During the year, there were 235,000 Ordinary shares issued from treasury for total proceeds of £1,572,000 (2019: 850,000 Ordinary shares issued for a total cost of £5,262,000).

In addition, 195,846 Ordinary shares were repurchased and held in treasury during the year for a total cost of £1,131,000 (2019: nil). No Ordinary shares were cancelled (2019: nil).

The Ordinary shares held in treasury have no voting rights and are not entitled to dividends.

16. Share Premium Account

	At 31 August 2020 £'000	At 31 August 2019 £'000
Balance brought forward	19,993	18,805
Ordinary shares issued from treasury	441	1,188
Balance carried forward	20,434	19,993

This reserve is not distributable.

17. Capital Redemption Reserve

	At 31 August 2020 £'000	At 31 August 2019 £'000
Balance brought forward	31,482	31,482
Balance carried forward	31,482	31,482
Movement during the year	-	-

This reserve is not distributable.

18. Capital Reserves

	At 31 August 2020 £'000	At 31 August 2019 £'000
Balance brought forward	216,525	238,494
Gains/(losses) on investments	54,127	(13,940)
Proceeds from Ordinary shares re-issued from treasury	1,131	4,074
Cost of Ordinary shares bought back into treasury	(1,131)	-
Performance fee	(243)	(970)
Dividend paid out of capital	(9,547)	(10,616)
Realised exchange gains/(losses) on currency balances	1,765	(517)
Balance carried forward	262,627	216,525
The capital reserves may be further analysed as follows:
Reserve on investments sold (i)	212,762	204,506
Reserve on investments held (ii)	49,865	12,019
	262,627	216,525

(i) These are realised distributable capital reserves which may be used to repurchase the Company's shares or be distributed as dividends.

(ii) This reserve comprises holding gains on investments (which may be deemed to be realised) and other amounts which are unrealised. An analysis has not been made between amounts that are realised (and may be distributed or used to repurchase the Company's shares) and those that are unrealised.

19. Revenue Reserve

	At 31 August 2020 £'000	At 31 August 2019 £'000
Balance brought forward	(38,756)	(36,643)
Net loss for the year	(2,225)	(2,113)
Balance carried forward	(40,981)	(38,756)

The revenue reserve may be distributed or used to repurchase the Company's shares (subject to being a positive balance).

20. 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
	2020	2019
NAV (£'000)	283,897	239,579
Number of Ordinary shares in issue	38,436,817	38,397,663
Basic NAV per Ordinary share (pence)	738.61	623.94

The increase in the NAV per share from 623.94p (31 August 2019) to 738.61p (31 August 2020) includes the total gain per share as disclosed above and the effect on the Company, of any issue of Ordinary shares during the year, at a discount to the prevailing NAV per share, any share buybacks and by dividend payments.

21. Notes to the Cash Flow Statement

Cash and cash equivalents comprise cash at bank, short-term deposits and bank overdrafts.

Included within the cash flows from operating activities are the cash flows associated with the purchases and sales of investments.

Cash flow from operating activities can therefore be further analysed as follows:

	For the year ended 31 August 2020 £'000	For the year ended 31 August 2019 £'000
Proceeds on disposal of fair value through profit and loss investments	238,619	265,432
Purchases of fair value through profit and loss investments	(246,782)	(256,156)
Net cash (outflow)/inflow from investing activities	(8,163)	9,276
Cash flows from other operating activities	(1,389)	(2,804)
Net cash flows (used in)/generated from operating activities	(9,552)	6,472

22. Transactions with the Fund Manager and Related Party Transactions

(a) Transactions with the Fund Manager

Details of the management fee arrangement are given in the Directors' Report on page 31 of the Annual Report. The total fee payable under this Agreement to SV Health Managers LLP for the year ended 31 August 2020 was £2,295,000 (2019: £2,136,000) of which £nil (2019: £nil) was outstanding at the year end. In addition to this, SV Health Managers LLP is also entitled to a performance fee of £243,039 on the quoted portfolio (2019: £969,781 on the unquoted portfolio). Through the Company's investment into SV Fund VI, management fees of £417,000 (2019: £526,000) are paid to SV Health Investors LLP.

SV Health Managers LLP 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. The Fund Manager has agreed with the Board a set of guidelines on how any economic interest will be divided between the Company and the Fund Manager. 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. During the year ended 31 August 2020 £nil (2019: £nil) was received.

(b) Related party transactions

The Directors of the Company are key management personnel. The total remuneration payable to Directors in respect of the year ended 31 August 2020 was £148,826 (2019: £133,000) of which £115,500 (2019: £33,250) was outstanding at the year end.

23. Financial Instruments

Risk management policies and procedures

The Company's financial assets and liabilities, in addition to short-term debtors and creditors and cash, comprise financial instruments which include investments in equity.

The holding of securities, investment activities and associated financing undertaken pursuant to the investment policy involve certain inherent risks. Events may occur that would result in either a reduction in the Company's net assets or a reduction of the total return.

The main risks arising from the Company's pursuit of its investment objective are those that affect stock market levels: market risk, credit risk and liquidity risk. In addition, there are specific risks inherent in investing in the biotechnology sector. The Board reviews and agrees policies for managing these risks, as summarised below. These policies have remained substantially unchanged throughout the current and preceding year. In assessing any changes to these risks, the Board considered the impact of COVID-19 and noted that it did not have a significant impact on the risk management policies for the year ended 31 August 2020.

1. Market risk

The fair value or future cash flows of a financial instrument held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - price risk, currency risk and interest rate risk. The Fund Manager assesses the exposure to market risk when making each investment decision, and monitors the overall level of market risk on the whole of the investment portfolio on an ongoing basis.

a) Price risk

The Company is an investment company and as such its performance is dependent on the valuation of its investments. A breakdown of the investment portfolio is given on page 4 of the Annual Report. Market price risk arises mainly from uncertainty about future prices of the financial instruments held.

Management of the risk

The Board regularly considers the asset allocation of the portfolio as part of the process of managing the risks associated with the biotechnology sector, described in greater detail in the section on specific risk, whilst continuing to follow the investment objective. It is not the Company's current policy to use derivative instruments to hedge the investment portfolio against market price risk.

Price risk exposure

At the year end, the Company's assets exposed to market price risk were as follows:

	At 31 August 2020 £'000	At 31 August 2019   £'000
Non-current asset investments at fair value through profit or loss	302,223	237,360
Total	302,223	237,360

The level of assets exposed to market price risk increased by approximately 27.3% during the year, through a combination of acquisitions and disposal of investments and increases in fair values.

Concentration of exposure to price risk

The Company currently holds investments in 69 companies, in a mixture of quoted and unquoted investments in a variety of countries, which significantly spreads the risk of individual investments performing poorly and reduces the concentration of exposure. This includes the Companies investment into SV Fund VI as one unquoted holding. However, SV Fund VI has a further 25 companies in its portfolio. The classification of investments by sector is provided within the Fund Facts contained in the Annual Report.

Price risk sensitivity

The following table illustrates the sensitivity of the profit for the year and the equity to an increase or decrease of 10% in the fair values of the Company's investments. This level of change is considered to be reasonably possible based on observation of current market conditions. The sensitivity analysis is based on the Company's investments at each Balance Sheet date, with all other variables held constant.

	31 August 2020		31 August 2019
	Increase in Fair value £'000	Decrease in  Fair value £'000	Increase in Fair value £'000	Decrease in Fair value £'000
Effect on revenue return	(272)	272	(214)	214
Effect on capital return	30,222	(30,222)	23,736	(23,736)
Effect on total return and net assets	29,950	(29,950)	23,522	(23,522)

b) Currency risk

The Financial Statements and performance of the Company are denominated in sterling. However, the majority of the Company's assets and the total return 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 movement.

Management of the risk

The Fund Manager monitors the Company's exposure to foreign currencies on a daily basis, and reports to the Board on a regular basis.

Foreign currency exposure

The fair values of the Company's monetary items that have foreign currency exposure at 31 August 2020 are shown below. Where the Company's equity investments (which are not monetary items) are priced in a foreign currency, they have been included separately in the analysis so as to show the overall level of exposure.

	At 31 August 2020 £'000	At 31 August 2019 £'000
Monetary (liabilities)/assets
Cash and cash equivalents:
US dollars	(18,096)	714
Short-term receivables:
US dollars	67	2,558
Danish krone	21	8
Short-term payables:
US dollars	(131)	(67)
Foreign currency exposure on net monetary items	(18,139)	3,213
Non-current asset investments held at fair value
US dollars	273,773	216,427
Danish krone	20,656	7,062
Euros	5,444	10,322
Total net foreign currency exposure	281,734	237,024

At the year end, approximately 99% (2019: 99%) of the Company's net assets were denominated in currencies other than sterling. This level of exposure is broadly representative of the levels throughout the year.

Foreign currency sensitivity

During the financial year sterling strengthened by 9.9% against the US dollar, 0.1% against the Swiss franc and by 1.2% against the Euro (2019: weakened 6.3%, 4.1% and 1.0% respectively). Given the movements over the last two years, a change of 10% or even more is possible.

The following table illustrates the sensitivity of the profit after taxation for the year and the equity in regard to the Company's financial assets and financial liabilities, assuming a 10% change in exchange rates.

If sterling had weakened by 10% against the exposure currencies, with all other variables held constant, this would have affected Company net assets and net profit for the year attributable to equity Shareholders as follows:

	At 31 August 2020 £'000	At 31 August 2019 £'000
US dollars	25,561	21,963
Euros	544	1,032
Danish krone	2,068	707
Swiss francs	-	1
	28,173	23,703

If sterling had strengthened by 10% against the exposure currencies, with all other variables held constant, this would have affected Company net assets and net profit after taxation attributable to equity Shareholders as follows:

	At 31 August 2020 £'000	At 31 August 2019 £'000
US dollars	(25,561)	(21,963)
Euros	(544)	(1,032)
Danish krone	(2,068)	(707)
Swiss francs	-	(1)
	(28,173)	(23,703)

In the opinion of the Directors, the above sensitivity analyses are not necessarily representative of the year as a whole, since the level of exposure changes as part of the currency risk management process used to meet the Company's objectives.

c) Interest rate risk

The Company will be affected by interest rate changes as it holds interest-bearing financial assets and liabilities. Interest rate changes will also have an impact on the valuation of investments, although this forms part of price risk, which is considered separately above.

Management of the risk

Interest rate risk is limited by the Company's financial structure with operations mainly financed through share capital, share premium and retained reserves. The majority of the Company's financial assets are, under normal circumstances, equity shares and other investments which neither pay interest nor have a stated maturity date. Liquidity and overdraft facilities are managed with the aim of increasing returns for Shareholders.

In the normal course of business, the Company's policy is to be fully invested and, other than as arising from the timing of investment transactions, the cash holding is kept to a minimum.

At the year end £17.8m (2019: £nil) was drawn down under the Company's committed overdraft facility.

It is not the Company's policy to use derivative instruments to mitigate interest rate risk, as the Board believes that the effectiveness of such instruments does not justify the costs involved.

Interest rate exposure

The exposure, at 31 August 2020, of financial assets and liabilities to interest rate risk is shown by reference to:

• Floating interest rates (i.e. giving cash flow interest rate risk) - when the rate is due to be re-set; and

• Fixed interest rates (i.e. giving fair value interest rate risk) - when the financial instrument is due for repayment.

	At 31 August 2020			At 31 August 2019
	Within one year £'000	More than one year £'000	Total £'000	Within one year £'000	More than one year £'000	Total £'000
Exposure to floating interest rates:
Cash and cash equivalents	(17,772)	-	(17,772)	886	-	886
Exposure to fixed interest rates:
Non-current asset investments held at fair value through profit or loss	-	-	-	202	-	202
Total exposure to interest rates	(17,772)	-	(17,772)	1,088	-	1,088

The above amounts are not necessarily representative of the exposure to interest rates in the year ahead, as the level of cash or cash like assets such as money market funds and borrowings varies during the year according to the performance of the stock market, events within the wider economy and opportunities within the unquoted market and the Fund Manager's decisions on the best use of cash or borrowings over the period. During the year under review the level of financial assets and liabilities exposed to interest rates fluctuated between £9.4m and £17.8m.

Interest rate sensitivity

The following table illustrates the sensitivity of the profit after taxation for the year and equity to an increase or decrease of 50 (2019: 50) basis points in interest rates in regard to the Company's monetary financial assets, which are subject to interest rate risk. This level of change is considered to be reasonably possible based on observation of current market conditions.

The sensitivity analysis is based on the Company's monetary financial instruments held at each Balance Sheet date, with all other variables held constant.

	At 31 August 2020		At 31 August 2019
	Increase in rate £'000	Decrease in rate £'000	Increase in rate £'000	Decrease in rate £'000
Effect on revenue return	(89)	89	4	(4)
Effect on capital return	-	-	-	-
Effect on total return on net assets	(89)	89	4	(4)

In the opinion of the Directors, the above sensitivity analyses may not be representative of the year as a whole, since the level of exposure may change.

2. Credit risk

Credit risk is the exposure to loss from failure of a counterparty to deliver securities or cash for acquisitions or disposals of investments. Additionally, the Company has funds on deposit with banks or in money market funds. HSBC Bank plc is the Custodian of the Company's assets. The Company's investments are held in accounts which are segregated from the Custodian's own trading assets. If the Custodian were to be become insolvent, the Company's right of ownership is clear and they are therefore protected. However cash balances deposited with the Custodian may be at risk in this instance, as the Company would rank alongside other creditors.

Management of the risk

During the year the Company bought and sold investments only through brokers which had been approved by the Fund Manager as acceptable counterparties. In addition, limits are set as to the maximum exposure to any individual broker that may exist at any time. These limits are reviewed regularly.

Cash balances will only be deposited with reputable banks with high quality credit ratings.

Credit risk exposure

	At 31 August 2020 £'000	At 31 August 2019 £'000
Sales awaiting settlement	-	2,491
Accrued income	45	67
Cash at bank	324	886
	369	3,444

All of the above financial assets are current, their fair values are considered to be the same as the values shown and the likelihood of a material credit default is considered to be low.

None of the Company's financial assets are past due or impaired.

3. Liquidity risk

Liquidity risk is the possibility of failure of the Company to realise sufficient assets to meet its financial liabilities.

Management of the risk

Liquidity and cash flow risk are minimised as the Fund Manager aims to hold sufficient Company assets in the form of readily realisable securities which can be sold to meet funding commitments as necessary. In addition, the Company has an overdraft facility with HSBC Bank plc of £55.0m (2019: £55.0m).

It should be noted, however, that investments in unquoted securities will not be readily realisable. Furthermore, even where the Company holds an investment in quoted securities, the Company may be restricted in its ability to trade that investment either because the investment becomes subject to restrictions when the company concerned becomes publicly quoted or, at certain times, as a consequence of the Company being privy to confidential price sensitive information as a result of the Fund Manager's active involvement in that company.

Liquidity risk exposure

As an investment trust, the Company has limited liquidity risk. In any event, the Company estimates it could liquidate 60% (2019: 59.1%) of the portfolio within five days if required. A summary of the Company's financial liabilities is provided below in sub-note 6.

4. Sector specific risk

As well as the general risk factors outlined above, investing in the biotechnology sector carries some particular risks:

Liquidity and cash flow risk are minimised as the Fund Manager aims to hold sufficient Company assets in the form of readily realisable securities which can be sold to meet funding commitments as necessary. In addition, the Company has an overdraft facility with HSBC Bank plc of £55.0m (2019: £55.0m).

(a) the stock prices of publicly quoted biotechnology companies have been characterised by periods of high volatility;

(b) a significant proportion of the Company's investments will be in companies whose securities are not publicly traded or freely marketable and may, therefore, be difficult to realise. In addition, there are inherent difficulties in valuing unquoted investments and the realisations from sales of investments could be less than their carrying value;

(c) biotechnology companies typically have a limited product range and those products may be subject to extensive government regulation. Obtaining necessary approval for new products can be a lengthy process, which is expensive and uncertain as to outcome;

(d) technological advances can render existing biotechnology products obsolete;

(e) intense competition exists in certain product areas in relation to obtaining and sustaining proprietary technology protection and the complex nature of the technologies involved can lead to patent disputes;

(f) certain biotechnology companies may be exposed to potential product liability risks, particularly in relation to the testing, manufacturing and sales of healthcare products;

(g) biotechnology companies spend a considerable proportion of their resources on R&D, which may be commercially unproductive or require the injection of further funds to exploit the results of their work; and

(h) the growing cost of providing healthcare has placed financial strains on governments, insurers, employers and individuals, all of whom are searching for ways to reduce costs. As a result, certain areas may be affected by price controls and reimbursement limitations.

5. Fair values of financial assets and financial liabilities

All financial assets and liabilities are either carried in the Balance Sheet at fair value or the Balance Sheet amount is a reasonable approximation of fair value. The fair value of quoted shares and securities is based on the bid price or last traded price, depending on the convention of the exchange on which the investment is quoted.

Unquoted investments are valued in accordance with IPEV Guidelines. The methods commonly used to value unquoted securities are stated in accounting policy 1(f).

6. Summary of financial assets and financial liabilities by category

The carrying amounts of the Company's financial assets and financial liabilities as recognised at the Balance Sheet date of the reporting periods under review are categorised as follows:

Financial assets

	At 31 August 2020 £'000	At 31 August 2019 £'000
Financial assets at fair value through profit or loss:
Non-current asset investments - designated as such on initial recognition	302,223	237,360
Cash and receivables:
Current assets:
Receivables	114	2,587
Cash at bank	324	886
	438	3,473

Financial liabilities

	At 31 August 2020 £'000	At 31 August 2019 £'000
Measured at amortised cost
Creditors: amounts falling due within one month:
Purchases awaiting settlement	124	42
Bank overdraft	18,096	-
Accruals	572	1,221
Payables	19	20
	18,811	1,283

Note: Amortised cost is the same as the carrying value shown above.

7. Classification under the fair value hierarchy

The table below sets out fair value measurements using the IFRS 7 fair value hierarchy:

(i) Financial assets at fair value through profit or loss

At 31 August 2020	Total £'000	Level 1 £'000	Level 2 £'000	Level 3 £'000
Equity investments	302,223	266,947	-	35,276
	302,223	266,947	-	35,276
At 31 August 2019	Total £'000	Level 1 £'000	Level 2 £'000	Level 3 £'000
Equity investments	237,158	202,215	-	34,943
Fixed interest investments	202	-	-	202
	237,360	202,215	-	35,145

Categorisation within the hierarchy has been determined on the basis of the lowest level of input that is significant to the fair value measurement of the relevant asset as follows:

Level 1 - valued using quoted prices in active markets for identical assets.

Level 2 - valued by reference to valuation techniques using observable inputs other than quoted prices included within Level 1.

Level 3 - valued by reference to valuation techniques using inputs that are not based on observable market data.

The valuation techniques used by the Company are explained in the accounting policies above.

There have been no transfers during the year between Levels 1, 2 and 3. A reconciliation of fair value measurements in Level 3 is set out below.

(ii) Level 3 investments at fair value through profit or loss

	At 31 August 2020 £'000	At 31 August 2019 £'000
Opening valuation	35,145	32,436
Acquisitions	2,551	1,338
Disposal proceeds	(6,707)	(5,033)
Total gains included in the Statement of Comprehensive Income
- on assets sold	325	703
- on assets held at the year end	3,962	5,701
Closing valuation	35,276	35,145

(iii) Level 3 investments at fair value through profit and loss - price risk sensitivity

Investments are reported at their fair values. A full list of the Company's investments is given on pages 6 to 9 of the Annual report. As at 31 August 2020, 94.0% of the Company's net assets are invested in quoted investments and 12.3% of Company's net assets are invested in unquoted investments.

The fair value of unquoted investments is influenced by the estimates, assumptions and judgements made in the valuation process. A sensitivity analysis is provided below which recognises that the valuation methodologies used involve different levels of subjectivity in their inputs. The sensitivity stresses of 10% either way in the prior year have been specifically enhanced this year to better reflect the current market.

Year ended 31 August 2020			Effect of reasonably possible alternative assumptions
Valuation techniques	Fair value £'000	Significant unobservable inputs*	Favourable impacts £'000	Unfavourable impacts £'000
Discounted future cash flows	7,097	Probability estimate of royalty income	710	(1,355)
		Discount rate	599	(304)
Present value of future milestone payments	2,809	Probability estimate of milestone achievement	238	(451)
		Discount rate	32	(17)
Price multiples	1,358	Estimated sustainable earnings	272	(272)
		Selection of appropriate price multiple	353	(353)
Calibration price of recent investment	2,243	Calibration price of recent investment	224	(224)
	13,507		2,428	(2,976)
Net asset value	143	No significant judgements applied	-	-
	13,650		2,428	(2,976)
Year ended 31 August 2019			Effect of reasonably possible alternative assumptions
Valuation techniques	Fair value £'000	Significant unobservable inputs*	Favourable impacts £'000	Unfavourable impacts £'000
Discounted future cash flows	3,377	Probability estimate of royalty income	453	(453)
		Discount rate	405	(216)
Present value of future milestone payments	3,313	Probability estimate of milestone achievement	279	(279)
		Discount rate	21	(22)
Price multiples	2,387	Estimated sustainable earnings, selection of appropriate price multiple	239	(239)
Calibration price of recent investment	2,218	Calibration price of recent investment	-	-
	11,295		1,397	(1,209)
Net asset value	1,272	No significant judgements applied	-	-
	12,567		1,397	(1,209)

Please refer to the accounting policy note 1 (f) above for details on the valuation methodology for SV Fund VI. As at 31 August 2020, SV Fund VI has been valued in accordance with this valuation methodology. No key estimates or assumptions have been applied to the valuation of SV Fund VI between the date of the last quarterly report received and 31 August 2020.

* Significant unobservable inputs

The significant unobservable inputs applicable to each type of valuation technique will vary dependent on the particular circumstances of each unquoted company valuation. An explanation of each of the significant unobservable inputs is provided below and includes an indication of the range in value for each input, where relevant. The assumptions made in the production of the inputs are described in note 1(f) above.

Probability estimate of royalty income

The probability estimate of royalty income is a key variable input in the discounted future cash flow valuation technique and represents the potential commercial uptake risk, competitor risk and uncertainty around drug pricing. To factor in the uncertainty surrounding the probability estimate of royalty income, the input has been stressed by a factor of +/- 10%.

Probability estimate of milestone achievement

The probability estimate of milestone achievement is a key variable input in the present value of future milestone payments valuation technique and represents the potential risk that commercial milestones are not achieved/ not achieved in accordance with the estimated timeline. To factor in the uncertainty surrounding the probability estimate of milestone achievement, the input has been stressed by a factor of +/- 10%.

Discount rate

The application of a risk adjusted discount rate has been applied to discounted future cash flow and the present value of future milestone payments valuation techniques. The discount rate takes into account the macro market risk and a liquidity premium. To factor in the uncertainty surrounding the discount rate, the input has been stressed by +/- 2%.

Estimated sustainable earnings

The selection of sustainable revenue or earnings will depend on whether the company is sustainably profitable or not and the value of the investment's assets and liabilities on the valuation date. The valuation approach will typically assess companies based on the last twelve months of revenue or earnings, as they are the most recent available and therefore viewed as the most reliable. To factor in the uncertainty surrounding the estimated sustainable earnings, the fair value of the investment at the reporting date has been stressed by +/- 10%.

Selection of appropriate price multiple

The selection and relevance of the appropriate multiples is assessed individually for each investment at the date of valuation. The key criteria used in selecting appropriate comparable companies on which the multiple is selected are the industry sector in which they operate, the geographic location of the company's operations, the respective revenue and earnings growth rates and the operating margins. Approximately 10 comparable companies will be selected for each investment, depending on how many relevant comparable companies are identified. To factor in the uncertainty surrounding the selection of comparable companies, the applicable multiple has been stressed by +/- 2%.

Calibration price of recent investment

The fair values of the underlying investments are based on the calibration price but remain unadjusted from the recent price of the investment. To factor in the uncertainty surrounding the selection of calibration price, the fair value of the investment at the reporting date has been stressed by +/- 10%.

8. Capital management policies and procedures

The Company's objectives, policies and processes for managing capital are unchanged from the preceding accounting year.

	At 31 August 2020 £'000	At 31 August 2019 £'000
Debt
Bank overdraft	18,096	-
Equity
Called up share capital	10,335	10,335
Reserves	273,562	229,244
Total equity	283,897	239,579
Total debt and equity	301,993	239,579

The Company's capital is managed to ensure that it will continue as a going concern and to maximise the capital return to its equity Shareholders over the longer-term.

The Board, with the assistance of the Fund Manager, monitors and reviews the broad structure of the Company's capital on an ongoing basis. This includes consideration of:

(i) the planned level of gearing;

(ii) the need to buyback or issue equity shares; and

(iii) the determination of dividend payments.

The Company is subject to externally imposed capital requirements through the Act, with respect to its status as a public limited company. In addition, with respect to the obligation and ability to pay dividends, the Company must comply with the provisions of Section 1158 CTA and the Act respectively.

Gearing represents borrowings used for investment purposes, less cash, expressed as a percentage of net assets.

	At 31 August 2020 £'000	At 31 August 2019 £'000
Borrowings used for investment purposes less cash	17,772	-
Net assets	283,897	239,579
Gearing	6.3%	0.0%

Borrowings are made on a relatively short-term basis to exploit specific investment opportunities, rather than to apply long-term structural gearing to the Company's portfolio of investments.

24. Segmental Reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board.

The Board is of the opinion that the Company is engaged in a single segment of business, namely the investment in biotechnology and other life sciences companies in accordance with the Company's investment objective, and consequently no segmental analysis is provided.

25. Post Balance Sheet Events

After the year end and up to 28 October 2020, a further 1,191,000 Ordinary shares were issued from treasury. Following these share issuances, the total number of shares in issue was 41,342,663 of which 1,714,846 shares were held in treasury. No other significant events occurred after the end of the reporting period to the date of this Report requiring disclosure.

There are no other significant events that have occurred after the end of the reporting period to the date of this Report which require disclosure.

26. The figures and financial information for the year ended 31 August 2019 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 Act.  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 Act. This Annual Report Announcement does not constitute statutory accounts for the year ended 31 August 2020 as defined in Section 434 of the Act.

27. The Annual Report for the year ended 31 August 2020 will be posted to Shareholders in November 2020 and thereafter copies will be available upon request at the Company's Registered Office: 10 Harewood Avenue, London NW1 6AA.  The Annual Report will also be available on the Company's website, www.ibtplc.com , shortly.  A copy of the Annual Report for the year ended 31 August 2020 has been submitted to the National Storage Mechanism of the Financial Conduct Authority and will shortly be available for inspection at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism .

 

 

For further information, please contact:

Lucy Costa Duarte

Telephone: [phone]

SV Health Managers LLP

Fund Manager

Gemma Metson

Telephone: [phone]

BNP Paribas Secretarial Services Limited

Company Secretary

2 NOVEMBER 2020

 

 

END

 

 

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