The Biotech Growth Trust PLC - Annual Financial Report
(the Company)
Annual Results for the Year Ended
The statements below are extracted from the Company’s annual report for the year ended
The Annual Report will be submitted to the
Company Secretary
0203 709 8734
FINANCIAL HIGHLIGHTS
as at
1,078.9p 995.0p £361.3m Net asset value per share** Share price Shareholders’ funds** 2023: 852.6p 2023: 783.0p 2023: £330.3m 26.5% 27.1% 5.0% Net asset value per share Share price Benchmark*† (total return)*^ (total return)*^ 2023: 5.4% 2023: -11.0% 2023: -12.8% 7.8% 1.2% 66.6% Discount of share price to Ongoing Charges^ Active Share*^ net asset value per share*^ 2023: 1.1% 2023: 76.6% 2023: 8.2%
* Source: Morningstar
^ Alternative Performance Measure (see glossary)
† Nasdaq Biotechnology Index (sterling adjusted)
** IFRS Measure
CHAIR’S STATEMENT
INTRODUCTION AND RESULTS
I am pleased to present to shareholders this annual report for the year ended
After a challenging two years, the Company performed well in both absolute and relative terms in the year under review; the net asset value (NAV) per share total return was 26.5% (2023: -11.0%), and the share price total return was 27.1% (2023: -12.8%), both outperforming the Company’s benchmark, the Nasdaq Biotechnology Index (sterling adjusted), which over the year rose 5.0% (2023: 5.4%). The small disparity between the performance of the Company’s NAV per share and its share price reflected a slight narrowing of the share price discount to the NAV per share from 8.2% at the start of the Company’s financial year to 7.8% at the year end.
The average exchange rate over the year was
The Company’s gearing, which increased to 9.1% at the year end from 7.8% at the beginning of the year, contributed 1.2% to the Company’s NAV total return during the year.
While performance this year has been encouraging and we are relieved to be seeing signs of recovery in the sector, the Board is aware that there is still some way to go before the Company fully recovers its relative and absolute losses from the past two years. Nevertheless, our Portfolio Manager’s investment strategy has started once again to yield results. They intend to maintain the Company’s overweighting to small and mid-capitalisation (cap) companies, which they believe will deliver increasingly positive results to shareholders. In addition they anticipate that we can expect to see a continuation of the consolidation in the biotechnology industry, as larger companies seek to acquire smaller companies with promising pipelines of drugs and therapies to address impending patent expirations which threaten their future earnings.
Our portfolio contains a diverse range of biotech companies with exposure to the most exciting and promising new technologies. The areas in which our Portfolio Manager is finding the most promising investment opportunities include obesity, oligonucleotide therapeutics and oncology. I encourage you to read the Portfolio Manager’s Review to find out more about these themes and the companies making breakthroughs in these areas. The fact that the emerging technologies in these areas have been developed into approved new treatments reaffirms our view that the biotechnology industry is maturing and demonstrates its ability to convert laboratory research into effective medicines.
The Company has maintained a small exposure to Chinese biotechnology companies which overall made a negligible contribution to performance over the year. The difficult macroeconomic, geopolitical and local regulatory environment has meant that the valuations of Chinese biotech companies remain depressed although there have been some success stories such as AstraZeneca’s acquisition of
The Company has not invested in any new private companies during the year and at the year end, the two remaining, directly held, private investments (both of which are Chinese companies) comprised 3.2% of the Company’s NAV. As announced earlier in the year and explained further in the Portfolio Manager’s Review, we wrote down the holding in Stemirna Therapeutics and this contributed to the negative return from the private investments over the year.
CAPITAL STRUCTURE
Shareholders will be aware that the Company pursues an active discount management policy, buying back shares when the discount of the Company’s share price to its NAV per share is higher than 6% (under normal market conditions).
The Company’s shares traded at a discount throughout the year, leading to the repurchase of 5,250,221 shares, at an average discount of 7.3% to the Company’s cum income NAV per share at the time, at a total cost of £43.6 million. This is a substantial return of capital, representing 13.6% of the issued share capital of the Company at the start of the year. Buying back these shares at a discount generated an uplift of 0.9% to the NAV over the year.
At the year end there were 33,487,198 shares in issue and the share price traded at an 7.8% discount to the cum income NAV per share. As we have previously commented, the shares can trade at a discount wider than 6% for a period of days or indeed longer, particularly in volatile or muted markets. However, the Company remains committed to protecting a 6% share price discount over the longer term. Since the year end, a further 290,000 shares have been bought back for cancellation and at the time of writing the share price discount stands at 8.2%.
REVENUE RETURN
The revenue return per share was 0.3p (2023: -1.6p). This reflects the relatively low yield generated from the biotechnology sector and, in particular, the small and mid-cap companies in this sector that comprise much of the portfolio.
As the Company has brought forward revenue losses, no dividend is recommended in respect of the year ended 31
BOARD CHANGES
In October we were delighted to announce the appointment of
In anticipation of his retirement, I would like to extend our sincere gratitude to Steve for his dedicated service. Throughout his tenure, his expertise, wealth of knowledge and insightful guidance have been invaluable to the Board. We wish him all the best for the future.
Other directors are coming to the end of their tenure and Board recruitment processes are underway in line with our succession plan.
PERFORMANCE FEE
There is currently no provision within the Company’s NAV for any performance fee payable at a future calculation date.
The arrangements for performance fees are described in detail on pages 51 and 52 of the Annual Report but I would highlight that it is dependent on the long-term outperformance of the Company: any outperformance has to be maintained for 12 months after the relevant calculation date and only becomes payable to the extent that the outperformance gives rise to a total fee greater than the total of all performance fees paid to date. This ensures that a performance fee is not payable for any outperformance that contributes to recovery of prior performance.
CHANGE OF BENCHMARK INDEX
As noted above, the Company’s performance is currently measured against the Nasdaq Biotechnology Index (sterling adjusted) and this is the index used to determine the entitlement (if any) of OrbiMed to a performance fee.
The index measures capital return, and as the biotechnology sector is largely made up of growth companies that tend not to pay dividends, historically there was very little difference between the capital and total return versions of the index.
In recent years, however, the biotechnology industry as a whole and the constituents of the index have changed as the industry has matured. The number of index constituents that pay a dividend has increased, although the number is still modest and the Company itself is not receiving sufficient income to be required to pay a dividend under current investment trust taxation rules. The Board believes this trend, in which dividend income contributes to the total return from the index, is likely to increase.
Therefore, following consultation with our advisers, the Board is proposing to shareholders that the index used to measure the Company’s performance and so the entitlement of OrbiMed to a performance fee, which is based on outperformance of the index, should be changed to the Nasdaq Biotechnology Index Total Return (sterling adjusted and net of withholding tax).
Under the Listing Rules, the proposed change is a related party transaction and must therefore by approved by shareholders. The proposed change will be put to shareholders at a general meeting which will be held immediately after the conclusion of the forthcoming AGM on
The proposed change is explained in more detail in a circular that will be sent to shareholders with this Annual Report and which will be available on the Company’s website: www.biotechgt.com.
ANNUAL GENERAL MEETING
The Company’s AGM will be held at the Barber-Surgeons’ Hall,
I very much look forward to seeing as many shareholders as possible this year. For those investors who are not able to attend the meeting in person, a video recording of the Portfolio Manager’s presentation will be uploaded to the website after the meeting. Shareholders can submit questions in advance by writing to the Company Secretary at info@frostrow.com.
I encourage all shareholders to exercise their right to vote at the AGM. The Board strongly encourages shareholders to register their votes online in advance. Registering your vote in advance will not restrict you from attending and voting at the meeting in person should you wish to do so, but as the past few years have shown, unforeseen extraordinary events can make attendance difficult or impossible. The votes on the resolutions to be proposed at the AGM will be conducted on a poll. The results of the proxy votes will be published following the conclusion of the AGM by way of a stock exchange announcement and on the Company’s website: www.biotechgt.com.
OUTLOOK
It has been a volatile few years for the biotechnology sector and the Company. 2020 and 2021 saw a surge in investment in healthcare and biotechnology driven by low interest rates, merger and acquisition (M&A) activity and of course, the COVID pandemic. In 2022, as interest rates and inflation rose, the pandemic waned and the valuations of smaller biotech companies fell to all-time lows. This generated a performance headwind for the Company.
In the past year, I am glad to report that there have been signs of recovery which are reflected in the Company’s good performance over the past year, with an increase in regulatory approvals and a potential revival in the IPO market. The challenges facing the sector are still present: regulatory hurdles, uncertainty around funding and more broadly, a difficult macroeconomic environment characterised by persistent inflation and high costs of capital. However, the global biotech industry is expected to continue its growth trajectory, with groundbreaking innovations and new technologies improving and saving lives, creating value for shareholders and, ultimately, driving performance. The Company is exposed to a wide variety of the most promising technologies.
Our Portfolio Manager and the Board are excited about the innovation taking place in the sector and the portfolio companies we hold. As a consequence, our overall investment strategy remains unchanged and, assuming relatively benign markets, we look forward with confidence to good long-term returns for the Company.
Chair
INVESTMENT PORTFOLIO
INVESTMENTS HELD AS AT
Fair value % of Security Country/Region# £’000 investments Biogen USA 23,375 5.9 Janux Therapeutics USA 18,291 4.6 Regeneron Pharmaceuticals USA 17,365 4.4 Sarepta Therapeutics USA 16,610 4.2 Amgen USA 14,265 3.6 Avidity Biosciences USA 13,735 3.5 Argenx** Netherlands 13,580 3.5 Scholar Rock Holding USA 12,757 3.2 Apellis Pharmaceuticals USA 12,467 3.2 Vaxcyte USA 12,383 3.1 Ten largest investments 154,828 39.2 Geron USA 11,634 3.0 XtalPi* China 11,460 2.9 Heron Therapeutics USA 11,044 2.8 Syndax Pharmaceuticals USA 11,000 2.8 Ionis Pharmaceuticals USA 10,865 2.8 Rhythm Pharmaceuticals USA 10,024 2.5 BioMarin Pharmaceutical USA 9,472 2.4 Neurocrine Biosciences USA 9,066 2.3 Mineralys Therapeutics USA 8,664 2.2 Aerovate Therapeutics USA 8,196 2.1 Twenty largest investments 256,253 65.0 Vera Therapeutics USA 7,900 2.0 ALX Oncology Holdings USA 7,863 2.0 Esperion Therapeutics USA 7,038 1.8 Praxis Precision Medicines USA 6,664 1.7 Morphic Holding USA 6,629 1.7 Innovent Biologics China 6,089 1.6 Compass Therapeutics USA 5,570 1.4 Immatics Germany 5,435 1.4 Vertex Pharmaceuticals USA 5,392 1.4 Amicus Therapeutics USA 5,305 1.3 Thirty largest investments 320,138 81.3 Krystal Biotech USA 5,233 1.3 Arrowhead Pharmaceuticals USA 5,146 1.3 Vir Biotechnology USA 5,127 1.3 Tyra Biosciences USA 4,974 1.3 Neumora Therapeutics USA 4,955 1.3 Xenon Pharmaceuticals Canada 4,951 1.3 Dyne Therapeutics USA 4,495 1.1 Nkarta, Inc. USA 4,398 1.1 BeiGene China 4,098 1.0 Edgewise Therapeutics USA 3,829 1.0 Forty largest investments 367,344 93.3 Lexicon Pharmaceuticals, Inc.^* USA 3,747 1.0 CytomX Therapeutics USA 2,900 0.7 Cytokinetics, Inc. USA 2,551 0.6 Ventyx Biosciences USA 2,201 0.6 Fate Therapeutics USA 2,099 0.5 Exact Sciences USA 2,061 0.5 10X Genomics USA 1,781 0.5 Kezar Life Sciences USA 1,375 0.3 Milestone Pharmaceuticals Canada 1,350 0.3 Prelude Therapeutics USA 1,300 0.3 Fifty largest investments 388,709 98.6
Fair value % of Security Country/Region# £’000 investments OrbiMed Asia Partners*† Asia 1,122 0.3 Dynavax Technologies USA 1,115 0.3 New Horizon Health*** China 860 0.2 YS Biopharma China 850 0.2 Enliven Therapeutics USA 653 0.2 Suzhou Basecare Medical China 448 0.1 Gracell Biotechnologies CVR* China 389 0.1 Stemirna Therapeutics* China 219 0.1 Repare Therapeutics Canada 181 0.0 Lyell Immunopharma, Inc. USA 166 0.0 Sixty largest investments 394,712 100.1 Imara USA – – Total investments 394,712 100.1 OTC equity swaps - financed Swaps China 5,890 1.5 Less: Gross exposure on financed swaps (6,308) (1.6) Total OTC swaps (418) (0.1) Total investments including OTC swaps 394,294 100.0
All of the above investments are equities unless otherwise stated. Please refer to the glossary for a definition of financed swaps.
# Primary listing
† Partnership interest
* Unquoted investment
** Includes Argenx ADR (see glossary) amounting to £10,139,000
^* Including the unquoted element amounting to £1,948,000 (Lexicon Series A Convertible Preferred stock)
***
Shares suspended on
PORTFOLIO BREAKDOWN
Fair value % of Investments £’000 investments Quoted Equities 379,574 96.3 379,574 96.3 Unquoted Equities 14,016 3.5 Partnership interest 1,122 0.3 15,138 3.8 Derivatives OTC equity swaps (418) (0.1) Total investments 394,294 100.0
PERFORMANCE ATTRIBUTION FOR THE YEAR ENDED
Contribution to total returns % % Benchmark return 5.0 Portfolio Manager’s contribution 20.6 Portfolio total return 25.6 Gearing 1.2 Management fee and other expenses (1.2) Share buyback 0.9 Total 0.9 Return on net assets 26.5%
PORTFOLIO MANAGER’S REVIEW
PERFORMANCE REVIEW
We are pleased to report that the Company delivered strong performance for the fiscal year ended
Macroeconomic factors continued to dominate portfolio performance during most of the fiscal year. The fiscal year began with an auspicious start in April and May, with a number of biotech M&A transactions helping to improve sentiment in the small and mid-cap biotech space. However, from June through October, a string of positive economic news suggested that the
As we have noted over the past two years, our overweight positioning in smaller cap emerging biotech has been premised on three main investment points:
1)
Emerging biotech valuations were driven to unprecedented lows in the performance drawdown beginning in early 2021, primarily due to rising interest rates. That drawdown occurred on both an absolute and relative basis versus the broader market and large cap biotech. We expected interest rate pressure ultimately to abate as inflation declined in the
2) We expected an increase in M&A activity due to: a) the compelling valuations of smaller biotech targets; and b) the urgent need on the part of “Big Pharma” to acquire biotech assets to address revenue gaps due to expected generic and biosimilar competition for their major blockbuster drugs in the second half of the decade.
3) Emerging biotech, rather than large cap biotech, is still contributing about two-thirds of the total biopharmaceutical industry pipeline. That segment of the biotech universe remains the primary driver of innovation for the sector, and importantly, the valuation correction that we have witnessed since early 2021 has not properly reflected the strong fundamental innovation delivered by these companies.
We were pleased to see that the long overdue recovery in smaller biotech began manifesting itself towards the end of the fiscal year. The portfolio’s heavier weighting in smaller cap stocks relative to the Benchmark, aided by some particularly strong individual stocks, led to the Company’s significant outperformance versus the Benchmark during the review period.
As shown in Figure 1 (on page 10 of the Annual Report), if one looks at the market cap distribution of the Company’s portfolio at the beginning of the fiscal year, the portfolio was 41% overweight small caps and 33% underweight large caps relative to the Benchmark. If one plots the average stock price performance of the Benchmark constituents in each of those market capitalisation categories, one observes that small cap biotech significantly outperformed large cap biotech by about 35% during the review period. Figure 2 (on page 11 of the Annual Report) shows the extent of small cap underperformance over a longer period, since
Our
EMERGING BIOTECH VALUATIONS RECOVERING FROM UNPRECEDENTED LOWS
We have been encouraged to see the early stages of a recovery in small cap biotech from unprecedented absolute and relative valuations.
One proxy commonly used to track the performance of small and mid cap biotech is the XBI, an exchange traded fund created in 2006 that tracks an equal-weighted index of biotech companies. About 50% of this index consists of small cap names. If one plots the relative performance of the XBI versus the S&P 500 (shown in Figure 3 on page 12 of the Annual Report), one can see that since inception, the XBI has outperformed the S&P 500, indicating that emerging biotech has historically been a sector offering better returns than the broader market. Over the past 18 years, however, there have been short periods when the XBI has underperformed the S&P 500, shown by the red circles. Typically, these drawdown periods result in underperformance versus the S&P 500 of 30-45%. The most recent relative drawdown was 77%, making it the longest and largest drawdown of the XBI on both an absolute and relative basis. Prior drawdowns have been followed by periods of significant outperformance of the XBI versus the S&P 500, denoted by the green arrows on the graph, which usually results in the biotech index reclaiming prior outperformance highs. We believe the relative performance drawdown of the XBI versus the S&P 500 has likely run its course, as shown by some indications of stabilisation in Figure 3 (on page 12 of the Annual Report) over the past few months. We continue to expect small cap biotech to outperform the S&P 500 from current levels, just as it has rebounded historically.
Despite the nascent recovery in small cap biotech, absolute valuations remain at historically depressed levels. A
significant number of biotech companies are still trading at negative enterprise values (i.e. market caps below the net cash on their balance sheets). As shown in Figures 4 and 5 (on page 13 of the Annual Report), we estimate close to 15% of the biotech universe, representing approximately 60 companies, is now trading at a negative enterprise value as of
We believe the first interest rate cut by the Fed could be the trigger that catalyses a more full-fledged valuation recovery from currently depressed levels. At the current time, the Fed is still anticipating that rate cuts will begin in 2024. In the meantime, continued M&A activity and positive clinical developments should help the sector re-rate.
TOP AND BOTTOM FIVE CONTRIBUTORS TO NET ASSET VALUE PERFORMANCE FOR THE YEAR TO 31
Contribution per share Top Five Contributors £’000 (pence)* Vera Therapeutics 18,242 50.6 Scholar Rock Holding 14,957 41.5 Janux Therapeutics 11,182 31.0 Bellus Health# 9,002 25.0 Chinook Therapeutics# 6,942 19.3 60,325 167.4 Top Five Detractors Travere Therapeutics# (9,905) (27.5) uniQure# (6,891) (19.1) Biogen (6,601) (18.3) Stemirna Therapeutics (4,985) (13.8) Mersana Therapeutics# (3,818) (10.6) (32,200) (89.3)
*
Based on 36,041,496 shares being the weighted average number of shares in issue during the year ended
# Not held at the year end.
CONTRIBUTORS AND DETRACTORS
Vera Therapeutics, Scholar Rock Holding, Janux Therapeutics, Bellus Health, and
·
Vera Therapeutics
is a clinical-stage biotechnology
company focused on developing and commercialising treatments for patients with serious immunological diseases. In
· Scholar Rock Holding is a clinical-stage biotechnology company developing medicines that target myostatin, a protein that regulates muscle growth. The stock outperformed after the company announced in October that it will advance programs in obesity. This effort in obesity is intended to help individuals retain muscle mass in the context of GLP-1-targeted weight loss therapies, which are associated with both muscle and fat loss. In conjunction with the announcement of these new programs, Scholar Rock also completed an upsized public offering that extended its cash runway.
· Janux Therapeutics is a clinical-stage immuno-oncology company developing T-cell engager medicines. In February, shares rose following the release of positive Phase 1 data in prostate cancer, which suggested that the company may have a best-in-class asset. This data also suggested that Janux’s technology could be successfully applied to additional targets in tumor types such as lung, kidney, and head and neck cancer.
·
Bellus Health
is a clinical stage company developing
camlipixant for the treatment of refractory chronic cough. In mid-April, GlaxoSmithKline agreed to acquire the company for
·
Travere Therapeutics, uniQure, Biogen, Stemirna Therapeutics, and Mersana Therapeutics were the principal detractors for the year.
· Travere Therapeutics is a commercial-stage biotechnology company focused on rare diseases. In late September, the company’s two-year Phase 3 trial showed a numerical benefit for its drug Filspari versus standard of care on kidney function, but missed statistical significance by a narrow margin in patients with IgA nephropathy. Filspari was subsequently approved under Accelerated Approval, but the commercial launch has been slower than expected.
· uniQure is a clinical-stage gene therapy company that focuses on neurological disorders. In June, the company showed interim data from its Phase 1/2 trial of its gene therapy for Huntington’s disease, a genetic disorder that causes breakdown of nerve cells in the brain, that fell below investor expectations.
· Biogen is a large cap biotechnology company with a pipeline of commercial and clinical stage treatments for neurological and neurodegenerative diseases. The company’s stock declined due to a slower-than-expected launch of Leqembi, its first-in-class treatment for Alzheimer’s disease.
·
Stemirna Therapeutics
is a private Chinese biotech
company developing mRNA-based vaccines and therapeutics. The Company initially invested in Stemirna in 2021 because it was developing one of the leading domestic mRNA-based COVID vaccines in
· Mersana Therapeutics is a clinical stage company developing antibody-drug conjugate therapeutics. At the end of July, the company’s shares declined when the company announced that its lead asset, UpRi, had failed to show a significant benefit in late-stage ovarian cancer patients.
REGULATORY CLIMATE CONTINUES TO BE CONSTRUCTIVE
The
EXPECT SOME ELECTION YEAR NOISE ON DRUG PRICING BUT NOTHING MATERIAL IN THE NEAR TERM
With the upcoming
FINANCING ACTIVITY SURGING WITH CONFIDENTIALLY MARKETED TRANSACTIONS OFFERING OUTSIZED RETURNS
After a relatively quiet 2022 and the first half of 2023, initial public offerings (IPOs) have begun increasing again as valuations have recovered. The Company has selectively participated in some IPOs thus far and will continue to do so. We did not make any new private investments during the fiscal year as the IPO market is still in the early stages of opening up, and we want to make sure any private investment we make has an opportunity to go public within the next 12 months. We continue to monitor the receptivity of the capital markets and will resume making crossover investments once we feel the IPO window has conclusively opened.
As of
The follow-on financing environment for quality emerging biotech companies remained relatively strong throughout the fiscal year, capped by a particularly strong quarter ending
Recently, there has been an increasing trend of companies conducting confidentially marketed offerings to a select number of potential investors. To attract further interest from healthcare investors, companies are disclosing confidential information about their programs as part of the process, including clinical trial data and other material information. The investors that participate are restricted from trading in the stock while they conduct diligence on the investment opportunity before the financing is disclosed to the public. Given OrbiMed’s longstanding presence in the healthcare investment space, the firm is regularly invited to participate in many of these deals, averaging four to five deals per week. We would note that in most cases only a handful of investment firms are informed of these confidential financings; they are not broadly offered to the wider investment community. We have been extremely selective in participating in these deals and only invest in a small minority of them.
Some recent financings where we were able to take advantage of this fundraising paradigm include:
1)
In
2)
In
3)
In
We will continue to leverage the firm’s access to confidentially marketed deal flow to make attractive investments.
M&A ACTIVITY CONTINUES TO BE ROBUST
Biotech M&A activity continued to be robust during the fiscal year, driven by: 1) the low valuations of biotech targets; and 2) the urgent need of Big Pharma to acquire new products to replace lost revenues from expected patent expirations in the second half of the decade.
BIOTECH M&A CONTINUING AT ELEVATED RATE
The Company benefited directly from six M&A transactions during the fiscal year because of holdings at the time of the announcement in the target companies:
·
GlaxoSmithKline’s acquisition of Bellus Health for
·
Novartis’ acquisition of
·
Eli Lilly’s acquisition of
·
Bristol Myers Squibb’s acquisition of
·
AstraZeneca’s acquisition of
·
Johnson & Johnson’s acquisition of
Though many transactions have occurred, many Big Pharma companies still need to do more to shore up their pipelines. Acquirors are typically looking for biotech companies with drugs that have already demonstrated proof of concept in a clinical trial and have commercial potential in excess of
BIG PHARMA PATENT CLIFF DRIVES BIOTECH M&A
US Loss of Exclusivity '23 Global Company Drug (Projected) Sales ($bn) Merck Keytruda 2028$25.0 Bristol Myers Squibb & Pfizer Eliquis 2026$12.2 Sanofi Dupixent 2029$11.6 Johnson & Johnson Stelara 2025$10.9 Johnson & Johnson Darzalex 2029$9.7 Bristol Myers Squibb Opdivo 2028$9.0 Abbvie & Johnson & Johnson Imbruvica 2027$4.9 Pfizer Ibrance 2027$4.8
Source:
STRONG INNOVATION CONTINUES TO DRIVE INDUSTRY VALUE
Innovation remains strong for the biotech industry. A significant proportion of the 67 drug approvals by the FDA in 2023 consisted of first-in-class drugs with mechanisms of action different from those of existing therapies. While biotech has generally been a high-risk sector, these approvals of drugs based on previously unproven modalities show that the sector is maturing. Below are just some examples of first-in-class novel drug approvals originated by biotech companies in 2024:
· Casgevy, the first gene-editing CRISPR-based treatment ever approved, for sickle cell disease (Vertex Pharmaceuticals/CRISPR Therapeutics);
·
Roctavian, the first gene therapy approved for hemophilia A (
· Elevidys, the first gene therapy approved for Duchenne muscular dystrophy (Sarepta Therapeutics);
· Vyjuvek, the first topical gene therapy ever approved, for dystrophic epidermolysis bullosa (Krystal Biotech);
· Daybue, the first treatment for Rett syndrome (Acadia Pharmaceuticals);
· Skyclarys, the first treatment for Friedrich’s ataxia (Biogen); and
· Zurzuvae, the first oral medication for postpartum depression (Sage Therapeutics/Biogen).
The number of next generation biotherapeutics entering development based on novel development technologies like cell therapy and gene therapy continues to rise. The Company has exposure across a wide swath of these new technologies, as shown below (note some positions are double counted because they use more than one technology):
Other seminal events in the biotech sector during the review period include:
· Argenx announced positive Phase 3 data for Vyvgart, an anti-FcRN antibody, in chronic inflammatory demyelinating polyneuropathy (CIDP), an autoimmune disease that causes muscle weakness. Vyvgart is expected to become the first novel treatment for CIDP approved in over 10 years.
· MoonLake Immunotherapeutics reported best-in-class Phase 2 efficacy and safety data for its anti-IL17 nanobody sonelokimab in hidradenitis suppurativa, a painful chronic skin condition that causes skin abscesses and scarring of the skin.
· Crinetics Pharmaceuticals announced a positive Phase 3 trial for paltusotine, the first once-daily oral medication for the treatment of acromegaly, a rare condition where the body produces too much growth hormone.
· Cytokinetics reported best-in-class Phase 3 safety and efficacy data for aficamten, a cardiac myosin inhibitor, for the treatment of obstructive hypertrophic cardiomyopathy, a disease that causes impaired heart function. The results of the study showed that aficamten improved exercise capacity and increased peak oxygen uptake relative to a placebo.
While innovation is taking place across all therapeutic areas and drug development technologies, we are currently finding particularly attractive investment opportunities in the following areas:
Obesity
Eli Lilly and
·
Scholar Rock Holding
- Current GLP-1 agents cause
people to lose both fat mass and muscle mass. Scholar Rock is developing an anti-myostatin antibody that could be dosed in conjunction with GLP-1 agents in order to preserve muscle mass. We like the fact that this agent would not directly compete with the leading assets from Eli Lilly and
·
Innovent
- Innovent is a leading Chinese biotech
company that is developing mazdutide, a GLP-1/GPCR dual agonist, for obesity in Phase 3 trials in
· BrightGene Bio-Medical Technology - BrightGene is a Chinese biotech developing a dual GLP-1/GIP agent for obesity in Phase 2. We believe the drug could deliver better efficacy than Eli Lilly’s Mounjaro/Zepbound.
·
Lexicon Pharmaceuticals
- Lexicon announced a weight
loss agent with a novel mechanism of action targeting ACLS5 in
· Amgen - Amgen is a large cap biotech company developing an obesity agent called MariTide that could be dosed on a once-monthly basis rather than on a weekly basis.
· Regeneron Pharmaceuticals - Regeneron is a large cap biotech company that is developing antibodies against myostatin and activin A to preserve lean muscle mass as an adjunct treatment for GLP - 1 agents.
Oligonucleotide Therapeutics
Oligonucleotides are short strands of DNA or RNA that can be administered to patients to allow them to express a new protein or to block expression of a patients’ genes for therapeutic effect. Some examples of biotech companies held in the portfolio as of
· Sarepta Therapeutics - Sarepta Therapeutics is a leader in precision genetic medicine for rare diseases. It currently has three commercial RNA-based products for Duchenne muscular dystrophy (DMD), and it has the first FDA-approved gene therapy, Elevydis, for this devastating disease. Elevidys is only approved for 4-5 year olds currently, but we believe it is likely to secure a broader label this year that will allow it to be marketed to all age groups.
· Ionis Pharmaceuticals - Ionis Pharmaceuticals is a leader in RNA-targeted therapeutics. The company has made tremendous progress in the last 12 months - pivoting from a clinical stage company to an independent commercial organisation. The company’s marketed products include Qalsody for SOD1-amyotrophic lateral sclerosis, Spinraza for spinal muscular atrophy, and Wainua for TTR polyneuropathy. The next wave of late-stage products include donidalorsen for hereditary angioedema and olezarsen for familial chylomicronemia syndrome.
· Dyne Therapeutics - Dyne Therapeutics is a clinical-stage muscle disease company with a proprietary FORCE™ platform to deliver antisense oligonucleotides conjugated to antigen-binding fragments to muscle tissues. Its lead program in myotonic dystrophy Type 1 (DM1) has demonstrated best-in-class efficacy in improving patient function.
· Avidity Biosciences - Avidity Biosciences is an emerging biotech company developing first-in-class antibody oligonucleotide conjugates which combine the tissue selectivity of monoclonal antibodies with the precision of oligonucleotide-based therapies. It is leading the field with clinical development programs for three rare muscle diseases: myotonic dystrophy type 1 (DM1), Duchenne muscular dystrophy (DMD), and facioscapulohumeral muscular dystrophy (FSHD).
Oncology
Oncology remains the largest therapeutic area of drug development for the biopharmaceutical industry given the significant unmet need that still exists. Some examples of biotech companies held in the portfolio as of
· Geron - Geron is a clinical stage oncology company developing imetelstat, a telomerase inhibitor. In 2023, Geron announced positive Phase 3 trial results in low-risk myelodysplastic syndrome (MDS), an indication with few effective options for patients. If approved, imetelstat would become the first ever FDA-approved telomerase inhibitor. We believe that the commercial launch of imetelstat will be successful, driven by broad uptake among academic and community physicians seeking to treat a large fraction of low-risk MDS patients.
· Janux Therapeutics - Janux is developing a bispecific T-cell engager that has shown compelling early data in prostate cancer. The company’s masking technology allows its bispecific to preferentially activate the immune system at the site of the tumor, facilitating tumor-specific killing and reducing toxicity to healthy tissue. The platform has potential broad applicability to a range of solid tumors.
· ALX Oncology - ALX Oncology is developing a CD47 immune checkpoint inhibitor to turn off one of the mechanisms by which cancer cells evade the immune system. The company combines its therapy with anti-cancer antibodies as well as antibody-drug conjugates to enhance its effectiveness. ALX has recently shown that its drug combined with the standard of care in later line gastric cancer significantly increased the number of patients that had their tumors shrink relative to patients on the standard of care alone.
STRATEGY, OUTLOOK, AND ORBIMED UPDATE
We are encouraged that the recovery in small and mid cap biotech that we have been predicting for the past couple of years finally appears to be manifesting itself. Strategy-wise, we intend to remain overweight small caps and underweight large caps versus the Benchmark, as we believe we are still in the early stages of an emerging biotech recovery from depressed valuation levels. Having said that, we are cognisant that the interest rate picture in the
From a risk management perspective, we diversify the portfolio by stage of company, geography (
There were no significant changes to the OrbiMed research team during the fiscal year. Despite the macro volatility, we remain focused on the fundamentals of each company that we invest in and remain committed to delivering the best returns for the Company’s shareholders. We continue to believe that the valuation disconnect we are currently observing in the sector provides an excellent entry point for long-term investors seeking to invest in the breakthrough innovation in biotech.
Portfolio Manager
BUSINESS REVIEW
The Strategic Report contains a review of the Company’s business model and strategy, an analysis of its performance during the financial year and its future developments, as well as details of the principal risks and challenges it faces.
Its purpose is to inform shareholders and help them to assess how the Directors have performed their duty to promote the success of the Company. The Strategic Report contains certain forward-looking statements. These statements are made by the Directors in good faith based on the information available to them up to the date of this report. Such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying such forward-looking information.
BUSINESS MODEL
The purpose of the Company is to achieve long-term growth in its shareholders' wealth by providing a vehicle for investors to gain exposure to a portfolio of worldwide biotechnology companies, through a single investment.
The Company’s strategy is to create value for shareholders by addressing its investment objective. As an externally managed investment trust, all of the Company's day-to-day management and administrative functions are outsourced to service providers. As a result, the Company has no executive directors, employees or internal operations.
The Company employs
The Board is responsible for all aspects of the Company’s affairs, including setting the parameters for and monitoring the investment strategy as well as the review of investment performance and policy.
The Company is an investment company within the meaning of Section 833 of the Companies Act 2006 and has been approved by HM Revenue & Customs as an investment trust (for the purposes of Section 1158 of the Corporation Tax Act 2010). As a result, the Company is not liable for taxation on capital gains. The Directors believe that approval will continue to be retained. The Company is not a close company for taxation purposes.
INVESTMENT OBJECTIVE AND POLICY
The Company seeks capital appreciation through investment in the worldwide biotechnology industry.
In order to achieve its investment objective, the Company invests in a diversified portfolio of shares and related securities in biotechnology companies on a worldwide basis.
In connection with the investment policy, the following guidelines apply:
·
The Company will not invest more than 10%, in aggregate, of the value of its gross assets in other closed ended investment companies (including investment trusts) listed on the
·
The Company will not invest more than 15%, in aggregate, of the value of its gross assets in other closed ended investment companies (including investment trusts) listed on the
· The Company will not invest more than 15% of the value of its gross assets in any one individual stock at the time of acquisition.
· The Company will not invest more than 10% of the value of its gross assets in unquoted investments at the time of acquisition. This limit includes any investment in private equity funds managed by the Portfolio Manager or any affiliates of such entity.
·
The Company may invest or commit for investment a maximum of U.S.
· The Company’s borrowing policy is that borrowings will not exceed 20% of the value of the Company’s net assets. Any loan facility in place from time to time may be drawn by the Portfolio Manager overseen by the AIFM.
· The Company may be unable either to invest directly or invest efficiently in certain countries or share classes. In these circumstances, the Company may gain exposure by investing indirectly through swaps or other derivative instruments where it is more efficient to do so. Exposure to underlying investments thus obtained will count towards and be subject to the investment limits set out above. Further, where the Company invests via swaps or derivatives for such a purpose, exposure to these financial instruments will count towards and be subject to the limits on the use of derivatives and equity swaps set out below.
· In line with the Investment Objective, derivatives are employed, when appropriate, in an effort to enhance returns and to improve the risk-return profile of the Company’s portfolio. The Board has set the following limits within which derivative exposures are managed:
· Derivative transactions (excluding equity swaps) can be used to mitigate risk and/or enhance return and will be restricted to an aggregate net exposure of 5 per cent. of the value of the gross assets measured at the time of the relevant transaction;
· Equity swaps may be used for efficient portfolio management purposes and aggregate net counterparty exposure through a combination of derivatives (as set out in the previous bullet point) and equity swap transactions is restricted to 12 per cent. of the value of the gross assets of the Company at the time of the transaction.
In accordance with the requirements of the
INVESTMENT STRATEGY
The implementation of the Investment Objective has been delegated to OrbiMed by Frostrow (as AIFM) under the Board’s and Frostrow’s supervision and guidance.
Details of OrbiMed’s investment strategy and approach are set out in the Portfolio Manager’s Review. While performance is measured against the Benchmark, the Board encourages OrbiMed to manage the portfolio without regard to the Benchmark and its make-up.
While the Board’s strategy is to allow flexibility in managing the investments, in order to manage investment risk it has imposed the various investment, gearing and derivative guidelines and limits, within which Frostrow and OrbiMed are required to manage the investments, as set out in the Investment Policy.
PERFORMANCE MEASUREMENT
The Board measures OrbiMed's performance against the Nasdaq Biotechnology Index (sterling adjusted). The Board also monitors the Company's performance against its peer group.
The Board is recommending to shareholders a change to the Benchmark Index. Please refer to the Chair's Statement beginning for further information.
DIVIDEND POLICY
The Company invests with the objective of achieving capital growth and it is expected that dividends, if any, are likely to be small. The Board intends only to pay dividends on the Company’s shares to the extent required in order to maintain the Company’s investment trust status.
No dividends were paid or declared during the year (2023: None).
CONTINUATION OF THE COMPANY
An opportunity to vote on the continuation of the Company is given to shareholders every five years. The next such continuation vote will be proposed at the Annual General Meeting to be held in 2025.
COMPANY PROMOTION
The Company has appointed Frostrow to provide marketing and investor relations services, in the belief that a well - marketed investment company is more likely to grow over time, have a more diverse, stable list of shareholders and its shares will trade closer to the net asset value per share over the long term. Frostrow actively promotes the Company in the following ways:
Engaging regularly with institutional investors, discretionary wealth managers and a range of execution-only platforms: Frostrow regularly meets with institutional investors, discretionary wealth managers and execution-only platform providers to discuss the Company’s strategy and to understand any issues and concerns, covering both investment and corporate governance matters;
Making Company information more accessible: Frostrow works to raise the profile of the Company by targeting key groups within the investment community, holding periodic investment seminars, commissioning and overseeing PR output and managing the Company’s website and wider digital offering, including Portfolio Manager videos and social media;
Disseminating key Company information: Frostrow performs the Investor Relations function on behalf of the Company and manages the investor database. Frostrow produces all key corporate documents, distributes monthly fact sheets, annual and half yearly reports and updates from OrbiMed on the portfolio and market developments; and
Monitoring market activity, acting as a link between the Company, shareholders and other stakeholders: Frostrow maintains regular contact with sector broker analysts and other research and data providers, and conducts periodic investor perception surveys, liaising with the Board to provide up-to-date and accurate information on the latest shareholder and market developments.
KEY PERFORMANCE INDICATORS (KPIs)
The Board assesses the Company’s performance in meeting its objective against the following KPIs:
· net asset value total return;
· share price total return;
· share price discount to net asset value per share; and
· ongoing charges.
A full description of the Company’s performance is provided in the Chair’s Statement and the Portfolio Manager’s Review and a record of these measures is shown on pages 1, 5 and 6 of the Annual Report. The KPIs have not changed from the prior year:
NET ASSET VALUE PER SHARE TOTAL RETURN^
The Directors regard the Company’s net asset value per share total return as being the overall measure of value generated by the Portfolio Manager over the long term. The Board considers the principal comparator to be the Nasdaq Biotechnology Index (sterling adjusted) (the Benchmark). OrbiMed’s investment style is such that performance is likely to deviate from that of the Benchmark.
During the year under review, the Company’s net asset value per total share return was 26.5%, outperforming the Benchmark by 21.5% (2023: -11.0%, underperforming the Benchmark by 16.4%). Since OrbiMed’s date of appointment (
SHARE PRICE TOTAL RETURN^
The Directors also regard the Company’s share price total return to be a key indicator of performance. This reflects the Company's share price growth which the Board recognises is important to investors.
During the year under review the Company’s share price total return was 27.1% (2023: -12.8%). Since OrbiMed’s date of appointment (
^ Alternative Performance Measure (See glossary).
SHARE PRICE (DISCOUNT)/PREMIUM TO NET ASSET VALUE PER SHARE^
The Board regularly reviews the level of the discount/ premium of the Company’s share price to the net asset value per share and considers ways in which share price performance may be enhanced, including the effectiveness of marketing, share issuance and buybacks, where appropriate. The Board has a discount control mechanism in place, the aim of which is to prevent the level of the share price discount to the net asset value per share exceeding 6%. Shareholders should note, however, that it remains possible for the discount to be greater than 6% on any one day due to sector volatility and the fact that the share price continues to be influenced by the overall supply of and demand for the Company’s shares in the secondary market. Any decision to repurchase shares is at the discretion of the Board. 5,205,221 shares were repurchased by the Company during the year (2023: 2,421,263).
When the Company's shares trade at a premium to the net asset value per share, new shares can be issued at a premium to the net asset value per share.
The Board believes that the benefits of issuing new shares in such conditions are as follows:
· to fulfil excess demand in the market in order to help manage the premium at which the Company’s shares trade to net asset value per share;
· to provide a small enhancement to the net asset value per share of existing shares through new share issuance at a premium to the estimated net asset value per share;
· to grow the Company, thereby spreading operating costs over a larger capital base, which should reduce the ongoing charges ratio; and
· to improve liquidity in the market for the Company’s shares.
As the Company's shares traded at a discount to the net asset value per share throughout the year, no new shares were issued during the year (2023: Nil).
The volatility of the net asset value per share in an asset class such as biotechnology is a factor over which the Board has no control. The making and timing of any share buy-backs or share issuance is at the absolute discretion of the Board.
ONGOING CHARGES^
Ongoing charges represent the costs that the Company can reasonably expect to pay from one year to the next, under normal conditions. The Board continues to be conscious of expenses and seeks to maintain a sensible balance between high quality service and costs. The Board therefore considers the ongoing charges ratio to be a KPI and reviews the figure on a regular basis.
As at
^ Alternative Performance Measure (see glossary).
RISK MANAGEMENT
The Board is responsible for managing the risks faced by the Company. Through delegation to the Audit Committee, the Board has established procedures to manage risk, to review the Company’s internal control framework and to establish the level and nature of the principal risks the Company is prepared to accept in order to achieve its long-term strategic objective. The Audit Committee has carried out a robust assessment of the principal and emerging risks with the assistance of Frostrow (the AIFM). A risk management process has been established to identify and assess risks, their likelihood and the possible severity of impact. Further information is provided in the Audit Committee Report. These principal risks and the ways they are managed or mitigated are set out on the following pages.
PRINCIPAL RISKS AND UNCERTAINTIES MANAGEMENT/MITIGATION MARKET RISK (No change) To an extent, this risk is accepted as being inherent to the Company's activities. However, the Board has set limits in the investment policy which ensure the portfolio is diversified. Compliance with the limits and guidelines contained in the Company’s investment policy is monitored daily by The Company’s portfolio is exposed to Frostrow and OrbiMed and reported fluctuations in market prices (changes monthly to the Board. in broad market measures, individual security prices and foreign exchange OrbiMed report at each Board meeting on rates) in the biotechnology sector and the Company’s performance including the the regions in which it invests, which impact of wider market trends and may result in a reduction in assets due events. to market falls and higher volatility. The Portfolio Manager spreads The biotechnology sector has investment risk over a wide portfolio historically been more volatile than of investments. At the year end the other equity sectors, reflecting Company’s portfolio comprised factors inherent in biotech companies, investments in 62 companies. including emerging technologies, uncertainty of drug approval outcomes, As part of its review of the going regulatory and pricing policy. concern and long-term viability of the Company, the Board considers the More generally, geopolitical and sensitivity of the portfolio to changes economic uncertainties have affected in market prices and foreign exchange markets globally and are likely to rates (see note 14) and the ability of continue to do so. These include the the Company to liquidate its portfolio continued impact of the war inUkraine if the need arose. Further details are and the effect of sanctions against included in the Going Concern andRussia , tensions between the US/ West Viability Statements. andChina , and theIsrael /Palestine conflict. New regulations designed to The Board monitors and challenges the combat climate change and uncertainties Portfolio Manager's awareness of associated with shifts in population emerging climate change risks and the and resource availability/demand may resources they have devoted to also have an impact on global markets. assessing climate risks. In addition, climate change events could have an impact on the business The Board is conscious that climate models of the portfolio companies and change poses a general risk to the their operations. Broad economic risks investment environment and, through include prolonged inflation and discussions with the Portfolio Manager, elevated interest rates, slowing global has noted that the biotechnology economic growth and the fear or industry is not a major contributor to presence of recession. greenhouse gas emissions. For this reason, the Portfolio Manager does not consider climate change to be a material ESG consideration when engaging with investee companies. However energy management is noted as a material concern in the wider healthcare and pharmaceutical sectors, and this forms part of OrbiMed’s ESG monitoring. PORTFOLIO PERFORMANCE (No change) The Portfolio Manager has responsibility for selecting investments in accordance with the Investment Objective and Policy and seeks to ensure that investments in individual stocks fall within Investment performance may not achieve acceptable risk levels. the Investment Objective and the value of the investments held in the To manage this risk, the Board: portfolio may fall materially out of line with the sector. · reviews and challenges, at each Board meeting, reports from OrbiMed which The Portfolio Manager’s approach is cover portfolio composition, asset expected to lead to performance that allocation, concentration and will deviate from comparators, performance; including both market indices and other investment companies investing in the · reviews investment performance over biotechnology sector. the long term against the Benchmark and the Company's peer group; and · formally reviews OrbiMed's appointment, including their performance, service levels and contractual arrangements, each year. SHARE PRICE PERFORMANCE (No change) To manage this risk, the Board: · regularly reviews the level of the share price discount/premium to the net asset value per share and considers ways in which share price performance may be enhanced, including the effectiveness of marketing and investor relations services, new share issuance and share buybacks, as appropriate; · has implemented a discount management policy, buying back the Company’s shares when the level of the share The risk that the Company’s share price price discount to the net asset value is not representative of its underlying per share exceeds 6% (in normal market net assets. conditions). · may issue shares at a premium to the net asset value per share to help prevent a share price premium reaching too high a level; · reviews an analysis of the shareholder register at each Board meeting and is kept informed of shareholder sentiment; and · regularly discusses the Company’s future development and strategy with the Portfolio Manager and the AIFM. CYBER RISK (No change) The Board relies on controls in place at OrbiMed, Frostrow, J.P. Morgan,Link Cyber crime may lead to the disruption and other third-party service or failure of systems covering dealing, providers. trade processing, administrative services, financial and other Audit Committee reviews the internal operational functions. controls reports of the principal service providers, as well as their data storage and information security arrangements.KEY PERSON RISK (Decreased) The Board manages this risk by: · appointing OrbiMed, who in turn have appointedGeoff Hsu andJosh Golomb to manage the Company’s portfolio.Mr Hsu andMr Golomb are supported by a team of researchers and analysts dedicated to the biotechnology sector; · receiving reports from OrbiMed at each Board meeting, which include any significant changes in the make-up of the team supporting the Company; The risk that the individuals responsible for managing the Company’s · meeting the wider team at OrbiMed’s portfolio may leave their employment or offices and encouraging the may be prevented from undertaking their participation of the wider OrbiMed team duties. in investor updates; and · delegating to the Management Engagement Committee the responsibility to perform an annual review of the service received from OrbiMed, including, inter alia, the team supporting the lead managers and their succession plans. In light of the successful introduction ofMr Golomb as co-portfolio manager, the Board considers that this risk has reduced during the year. VALUATION RISK (Decreased) Unquoted investments comprised 3.8% of the Company's portfolio at the year end. The Company’s directly held unquoted investments are valued by an independent, third-party valuation agent. The Board has established a Valuation Committee to review the valuations of the unquoted investments Pursuant to the Investment Policy, the and the methodologies used in the Company may invest up to 10% of its valuations. The valuations are gross assets in unquoted investments at recommended to the Committee by the time of acquisition. The valuation Frostrow, the Company's AIFM, following of unquoted assets involves a degree of review by its own valuations committee. subjectivity and there is a risk that The Valuation Committee makes proceeds received on the disposal of recommendations to the Board, as unquoted holdings may prove to be appropriate. Further information can be significantly lower than the value at found in the Audit Committee Report and which the investment is held in the note 1 to the financial statements. Company’s portfolio. In light of the additional scrutiny provided by the Valuation Committee, and the reduction in the number and proportion of unquoted investments in the Company's portfolio during the year, the Board considers that the potential impact of this risk on the Company has reduced during the year. COUNTERPARTY RISK (No change) The most significant counterparty to which the Company is exposed isJ.P. Morgan Securities LLC (J.P. Morgan), the Custodian and Prime Broker, which is responsible for the safekeeping of the Company’s assets and provides the loan facility to the Company. As part of the arrangements with J.P. Morgan they may take assets as collateral up to 140% of the value of the loan drawn down. The assets taken as collateral by J.P. Morgan may be used, loaned, sold, rehypothecated or transferred. The level of the Company's gearing is at the discretion of the AIFM and the Board and the loan can be repaid at any time, at which point the assets taken as collateral will be released back to the Company. Any of the Company’s assets taken as collateral are not covered by the custody arrangements provided by J.P. Morgan. The Company is exposed to credit risk J.P. Morgan is a registered arising from the use of counterparties. broker-dealer and is accordingly If a counterparty were to fail, the subject to limits on rehypothecation* Company could be adversely affected imposed by theU.S. Securities and through either a delay in settlement orExchange Commission (SEC). In the event a loss of assets. of J.P. Morgan’s insolvency, the Company may be unable to recover in full assets held by it as Custodian or held as collateral. The risk is managed through the selection of a financially stable counterparty, limitations on the use of gearing and reliance on theSEC's robust regulatory regime. In addition, the Board monitors the credit rating of J.P. Morgan. J.P. Morgan is also subject to regular monitoring byJ.P. Morgan Europe Limited , the Depositary, and the Board receives regular reports from the Depositary. During the year the Company entered into swap transactions with Goldman Sachs International. Further information can be found in note 14 to the financial statements. OPERATIONAL DISRUPTION (No change) To manage these risks, the Board (in some cases meeting as the Audit Committee): · periodically meets representatives from the Company's key service providers to gain a better understanding of their control environment, and the processes in place to mitigate any disruptive events; As an externally managed investment · receives a monthly report from trust, the Company is reliant on the Frostrow, which includes, inter alia, systems of its service providers for confirmation of compliance with dealing, trade processing, applicable laws and regulations; administration, financial and other functions. If such systems were to fail · reviews the internal control reports or be disrupted (including, for and key policies (including disaster example, as a result of a pandemic, recovery procedures and business war, network disruption or simply poor continuity plans) of its service performance/controls) this could providers; prevent accurate reporting of the Company’s financial position or lead to · maintains a risk matrix with details a failure to comply with applicable of risks to which the Company is laws, regulations and governance exposed, the approach to managing those requirements and/or to a financial risks, the key controls and the loss. frequency of the controls operation; · receives updates on pending changes to the regulatory and legal environment and progress towards the Company’s compliance with such changes; and · has considered the increased risk of cyber-attacks and received reports and assurance from its service providers regarding the information security controls in place.
* See glossary.
EMERGING RISKS
The Company has carried out a robust assessment of the Company’s emerging risks and the procedures in place to identify emerging risks are described below.
The Audit Committee reviews a risk schedule at its half-yearly meetings. Emerging risks are discussed in detail as part of this process and also throughout the year to try to ensure that emerging (as well as established) risks are identified and, so far as practicable, mitigated.
During the year, the Audit Committee identified and discussed emerging elements of market risk such as threats to research funding and increased costs in the biotechnology sector which may affect the Company's investee companies and potentially damage the breadth and pace of future development. The Audit Committee also discussed demographic trends in
GOING CONCERN
The financial statements have been prepared on a going concern basis. The Directors consider this is the appropriate basis as the Company has adequate resources to continue in operational existence for at least the next 12 months from the date of approval of this report on
Based on the information available to the Directors at the date of this report, including the results of these stress tests, the conclusions drawn in the Viability Statement below, the Company’s current cash balances, and the liquidity of the Company’s investments, the Directors are satisfied that the Company has adequate financial resources to continue in operation for at least the next 12 months from the date of approval of this report on
VIABILITY STATEMENT
In accordance with the
To make this assessment and in reaching this conclusion, the Audit Committee has considered the Company’s financial position, its ability to liquidate its portfolio and meet its liabilities as they fall due and, in particular, notes the following:
· The portfolio is principally comprised of investments traded on major international stock exchanges. Based on recent market volumes 96.3% of the current portfolio could be liquidated within 30 trading days and 94.5% in seven days. There is no expectation that the nature of the investments held within the portfolio will be materially different in future.
· The Board has considered the viability of the Company under various scenarios, including periods of acute stock market and economic volatility, and concluded that it would expect to be able to ensure the financial stability of the Company through the benefits of having a diversified portfolio of (mostly) listed and realisable assets. As illustrated in note 14 to the financial statements, the Board has considered other price risk (the sensitivity of the value of shareholders' funds to changes in the fair value of the Company's investments), foreign currency sensitivity (the sensitivity to changes in key exchange rates to which the portfolio is exposed) and interest rate sensitivity (the sensitivity to changes in the interest rate charged on the Company's loan facility).
· With an ongoing charges ratio of 1.2%, the expenses of the Company are predictable and modest in comparison with the assets and there are no capital commitments foreseen which would alter that position.
· The Company has a short-term bank facility which can be used to meet its liabilities. Details of the Company’s current liabilities are set out in note 11 to the financial statements.
· The Company has no employees. Consequently it does not have redundancy or other employment related liabilities or responsibilities.
The Audit Committee, as well as considering the potential impact of the Company’s principal risks and various severe but plausible downside scenarios, has made the following assumptions in considering the Company’s longer-term viability:
· There will continue to be demand for investment trusts;
· The Portfolio Manager will continue to adopt a long-term view when making investments;
· The Company invests principally in the securities of listed companies traded on international stock exchanges to which investors will wish to continue to have exposure;
· Shareholders will vote for the continuation of the Company at the Annual General Meeting to be held in 2025. The Company's shareholders are asked every five years to vote for the continuation of the Company. At the current time, the Directors believe they have a reasonable expectation that the next vote will be passed;
· The closed-ended nature of the Company means that, unlike open-ended funds, it does not need to realise investments when shareholders wish to sell their shares;
· The Company will continue to be able to fund share buybacks when required. The Company bought back 5,250,221 ordinary shares in the year under review at a total cost of £43.6 million and experienced no problem with liquidity in doing so. It had shareholders’ funds in excess of £361 million at the year end; and
· The long-term performance of the Company will continue to be satisfactory.
ENVIRONMENTAL, SOCIAL, COMMUNITY AND HUMAN RIGHTS MATTERS
As an externally managed investment trust, the Company does not have any employees or maintain any premises, nor does it undertake any manufacturing or other physical operations itself. All its operational functions are outsourced to third party service providers. Therefore, the Company has no material, direct impact on the environment or any particular community and, as a result, the Company itself has no environmental, human rights, social or community policies.
Under the Listing Rules, the Company is also exempt from reporting against the
The Board believes that consideration of environmental, social and governance (ESG) factors is important and has the potential to protect and enhance investment returns. The Portfolio Manager’s investment criteria ensure that ESG factors are integrated into their investment process and best practice in this area is encouraged by the Board. The Portfolio Manager engages with the Company’s underlying investee companies in relation to their corporate governance practices and the development of their policies on social, community and environmental matters.
The Board is committed to carrying out the Company’s business in an honest and fair manner with a zero-tolerance approach to bribery, corruption, and tax evasion. As such, policies and procedures are in place to prevent this. In carrying out the Company’s activities, the Board aims to conduct itself responsibly, ethically and fairly. The Board’s expectations are that the Company’s principal service providers have appropriate governance policies in place.
PERFORMANCE AND FUTURE DEVELOPMENTS
A review of the Company’s year, its performance and the outlook for the Company can be found in the Chair’s Statement and in the Portfolio Manager’s Review.
The Company’s overall strategy remains unchanged.
STAKEHOLDER INTERESTS AND BOARD DECISION-MAKING (SECTION 172 OF THE COMPANIES ACT 2006)
The following disclosure, which is required by the Companies Act 2006 and the AIC Code of Corporate Governance, describes how the Directors have had regard to the views of the Company’s stakeholders in their decision-making.
STAKEHOLDER GROUP HOW THE BOARD HAS ENGAGED WITH THE COMPANY’S STAKEHOLDERS The Board’s key mechanisms of engagement with investors include: · The Annual and Half-yearly Reports · The Annual General Meeting · The Company’s website which hosts reports, articles and insights, monthly fact sheets and video interviews with the Portfolio Manager · The Company’s distribution list which is maintained by Frostrow and is used to communicate with shareholders on Investors a regular basis · Online seminars with presentations from the Portfolio Manager · One-to-one investor meetings The AIFM and the Portfolio Manager, on behalf of the Board, completed a programme of investor relations throughout the year, reporting to the Board on the feedback received. The Board aims for at least one Director to attend the in person and online events at which the Portfolio Manager presents to investors. In addition, the Chair has been and remains available to engage with the Company’s shareholders. The Board met regularly with the Portfolio Manager throughout the year, both formally at quarterly Board meetings and informally, as required. The Board engaged primarily with key members of the portfolio management team, discussing the Company’s overall performance as well as developments at individual portfolio companies and wider macroeconomic developments. Portfolio Manager The Board also visited OrbiMed's office inNew York where the Directors met with members of the Portfolio Manager’s risk management, compliance and trading teams to better understand their internal controls and processes. The Management Engagement Committee reviewed the performance of the Portfolio Manager and the terms and conditions on which they are engaged. The Board met regularly with the AIFM, representatives of which attend every quarterly Board meeting to provide updates on risk management, accounting, administration, corporate governance and marketing matters. The Management Engagement Committee reviewed the performance of all the Company’s service providers, receiving feedback from Frostrow in their capacity asAIFM and Company Secretary. The AIFM, which is responsible for the day-to-day operational management of Other Service Providers the Company, meets and interacts with the other service providers including the Depositary, Custodian and Registrar, on behalf of the Board, on a daily basis. This can be through email, one-to-one meetings and/or regular written reporting. The Audit Committee reviewed the quality and effectiveness of the audit and recommended to the Board that it be proposed to shareholders thatBDO LLP (BDO) be re-appointed as Auditor. The Audit Committee also met with BDO to review the audit plan and set their remuneration for the year.
As an externally managed investment trust, the Company has no employees, customers, operations or premises. Therefore, the Company’s key stakeholders (other than its shareholders) are considered to be its service providers. The need to foster good business relationships with the service providers and maintain a reputation for high standards of business conduct are central to the Directors’ decision-making as the Board of an externally managed investment trust.
KEY AREAS OF ENGAGEMENT MAIN DECISIONS AND ACTIONS TAKEN The Board and the Portfolio Manager provided updates via RNS, the Company’s website, the distribution list and the usual financial reports and monthly INVESTORS fact sheets. · Ongoing dialogue with shareholders The Board continued to monitor share concerning the strategy of the Company, price movements closely. When the performance and the portfolio. discount of the share price to the net asset value per share exceeded 6%, the · Share price performance. Company sought to buy back shares in the market. As a result, 5,250,221 shares were bought back during the year. No shares were issued at a premium to the net asset value per share during the year. The Directors were pleased to be able to visit OrbiMed's offices inNew York during the year, to meet with the OrbiMed team in person. While the Board considers the visits to OrbiMed's offices to be valuable, in view of the environmental and cost benefits PORTFOLIO MANAGER associated with reduced long distance travel, the Board has agreed that the · Portfolio composition, performance, frequency of such visits should be outlook and business updates. approximately 18 months. · The Portfolio Manager’s system of The Board concluded that it was in the internal controls and investment risk interests of shareholders for OrbiMed management including their cyber to continue in their role as Portfolio security arrangements. Manager. Following discussion with OrbiMed, the Board resolved to · The terms and conditions of the recommend to shareholders that the Portfolio Management Agreement, total return version of the Nasdaq including performance measurement in Biotechnology Index (net, sterling particular. adjusted) should be used as the benchmark against which to assess the Portfolio Manager’s performance, rather than the capital return version. The Audit Committee concluded that the Portfolio Manager’s internal controls were satisfactory. OTHER SERVICE PROVIDERS The Board concluded that it was in the · The promotion and marketing strategy interests of shareholders for Frostrow of the Company. to continue in their role as AIFM. · Service providers’ internal controls, The Board approved the Audit business continuity plans and cyber Committee’s recommendation that it security provisions. would be in the interests of shareholders for BDO to be re-appointed · The effectiveness of the audit and as the Company’s auditor for a further the Auditor’s reappointment. year. Please refer to the Audit Committee Report and the Notice of AGM · The terms and conditions under which for further information. the Auditor is engaged.
By order of the Board
Company Secretary
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors are required to prepare the financial statements in accordance with
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 they have been prepared in accordance with
· prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business; and
· prepare a directors’ report, a strategic report and directors’ remuneration report which comply with the requirements of the Companies Act 2006.
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 comply with the Companies Act 2006.
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 Directors are responsible for ensuring that the Annual Report and financial statements, taken as a whole, are fair, balanced, and understandable and provide the information necessary for shareholders to assess the Company's position, performance, business model and strategy.
WEBSITE PUBLICATION
The Directors are responsible for ensuring the Annual Report and the f
i
nancial statements are made available on a website. Financial statements are published on the Company’s website in accordance with legislation in the
RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE ANNUAL REPORT
We confirm that to the best of our knowledge:
·
the financial statements have been prepared in accordance with the applicable set of accounting standards and give a true and fair view of the assets, liabilities, financial position and the return of the Company for the year ended 31
· the Annual Report includes a fair review of the development and performance of the business and the financial position of the Company, together with a description of the principal risks and uncertainties that they face.
The Directors consider the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.
On behalf of the Board
Chair
INCOME STATEMENT
FOR THE YEAR ENDED
2024 2023 Revenue Capital Total Revenue Capital Total Notes £’000 £’000 £’000 £’000 £’000 £’000 Income 2 1,203 – 1,203 310 – 310 Gains/(losses) on investments held at fair 8 – 79,143 79,143 – (32,727) (32,727) value through profit or loss Foreign exchange losses – (621) (621) – (3,759) (3,759) AIFM, Portfolio management and 3 (153) (2,917) (3,070) (176) (3,355) (3,531) performance fees Other expenses 4 (742) (39) (781) (692) (51) (743) Profit/(loss) before finance costs and 308 75,566 75,874 (558) (39,892) (40,450) taxation Finance costs 5 (56) (1,059) (1,115) (40) (752) (792) Profit/(loss) before 252 74,507 74,759 (598) (40,644) (41,242) taxation Taxation 6 (159) – (159) (56) – (56) Profit/(loss) for the 93 74,507 74,600 (654) (40,644) (41,298) year Basic and diluted earnings/(loss) per 7 0.3p 206.7p 207.0p (1.6)p (100.9)p (102.5)p share
The Company does not have any income or expenses which are not included in the profit/(loss) for the year. Accordingly the “profit/(loss) for the year” is also the “total comprehensive profit/(loss) for the year”, as defined in IAS 1 (revised) and no separate Statement of Other Comprehensive Income has been presented.
The “Total” column of this statement represents the Company’s Income Statement, prepared in accordance with
The accompanying notes are an integral part of this statement.
STATEMENT OF FINANCIAL POSITION
AS AT
2024 2023 Notes £’000 £’000 Non current assets Investments held at fair value through profit or loss 8 394,712 357,229 Derivative – OTC equity swaps 8, 9 42 – 394,754 357,229 Current assets Other receivables 10 14,535 508 Cash and cash equivalents 2,131 2,772 16,666 3,280 Total assets 411,420 360,509 Current liabilities Other payables 11 2,575 8,846 Loan 14 47,078 20,170 Derivative – OTC equity swaps 8, 9 460 1,202 50,113 30,218 Net assets 361,307 330,291 Equity attributable to equity holders Ordinary share capital 12 8,371 9,684 Share premium account 79,951 79,951 Capital redemption reserve 15,059 13,746 Capital reserve 16 258,891 227,968 Revenue reserve (965) (1,058) Total equity 361,307 330,291 Net asset value per share 13 1,078.9p 852.6p
The financial statements were approved by the Board on
Chair
The accompanying notes are an integral part of this statement.
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED
Ordinary Share Capital Share premium redemption Capital Revenue capital account reserve reserve reserve Total Notes £’000 £’000 £’000 £’000 £’000 £’000 At 1 April 2023 9,684 79,951 13,746 227,968 (1,058) 330,291 Net profit for the – – – 74,507 93 74,600 year Repurchase of own shares for (1,313) – 1,313 (43,584) – (43,584) cancellation At 31 March 2024 12, 13 8,371 79,951 15,059 258,891 (965) 361,307
FOR THE YEAR ENDED
Ordinary Share Capital Share premium redemption Capital Revenue capital account reserve reserve reserve Total Notes £’000 £’000 £’000 £’000 £’000 £’000 At 1 April 2022 10,289 79,951 13,141 291,231 (404) 394,208 Net loss for the – – – (40,644) (654) (41,298) year Repurchase of own shares for (605) – 605 (22,619) – (22,619) cancellation At 31 March 2023 12, 13 9,684 79,951 13,746 227,968 (1,058) 330,291
The accompanying notes are an integral part of this statement.
See note 16 for details of the amounts of reserves available for distribution.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED
2024 2023 Notes £’000 £’000 Operating activities Profit/(loss) before taxation* 74,759 (41,242) Finance costs 1,115 792 (Gains)/losses on investments held at fair value 8 (80,669) 30,945 through profit or loss Foreign exchange losses 621 3,759 Decrease/(increase) in other receivables (6) 28 Increase/(decrease) in other payables 98 (116) Taxation paid 6 (159) (56) Net cash outflow from operating activities (4,241) (5,890) Investing activities Purchases of investments and derivatives (350,835) (459,606) Sales of investments and derivatives 373,176 505,300 Net cash inflow from investing activities 22,341 45,694 Financing activities Repurchase of own shares for cancellation (43,913) (20,910) Finance costs – interest paid (1,115) (792) Drawdown/(repayment) of the loan facility 26,287 (15,330) Net cash outflow from financing activities (18,741) (37,032) Net (decrease)/increase in cash and cash equivalents (641) 2,772 Cash and cash equivalents at start of year 2,772 – Cash and cash equivalents at end of year† 2,131 2,772
* Includes dividends earned during the year of £1,080,000 (2023: £283,000) and deposit interest of £123,000 (2023: £11,000).
† Collateral cash held at Goldman Sachs £2,131,000 (2023: £2,772,000).
CHANGES IN NET DEBT ARISING FROM FINANCING ACTIVITIES
2024 2023 £’000 £’000 Balance as at 1 April 20,170 31,741 Drawdown/(repayment) of the loan facility 26,287 (15,330) Foreign exchange losses 621 3,759 Loan balance at 31 March 47,078 20,170
The accompanying notes are an integral part of this statement.
NOTES TO THE FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
(A) BASIS OF PREPARATION
The financial statements of the Company have been prepared in accordance with
The principal accounting policies adopted are set out below.
The financial statements have been prepared under the historical cost convention, except for the measurement at fair value of investments. Where presentational guidance is set out in the Statement of Recommended Practice (the SORP) for
The Company adopted Disclosure of Accounting Policies (Amendments to IAS 1 IFRS Practical Statement 2) from 1
Going concern
The Directors are required to make an assessment of the Company’s ability to continue as a going concern and have concluded that the Company has adequate resources to continue in operational existence for at least 12 months from the date these financial statements were approved.
In making this assessment, the Directors have considered a wide variety of emerging and current risks to the Company, as well as the mitigation strategies that are in place. The Board has also reviewed stress-testing and scenario analyses prepared by the AIFM. The stress tests and scenario analyses considered the effect of various downturns, based on historic bear markets, on the asset value and expenses of the Company. The tests modelled the impact of decreases of up to 50% on the value of the investment portfolio and decreases in current market liquidity of up to 50%.
These tests are carried out as an arithmetic exercise, which can apply equally to any set of circumstances in which asset value and income are significantly impaired. It was concluded that even in an extreme downside scenario, the Company would be able to continue to meet its liabilities as they fell due. Whilst the economic future is uncertain, the opinion of the Directors is that there is no foreseeable downside scenario that would threaten the Company’s ability to continue to meet its liabilities as they fall due.
Based on the information available to the Directors at the time of this report, including the results of the stress tests and scenario analyses, and having taken account of the liquidity of the investment portfolio, the Company’s cash flow and borrowing position, the Directors are satisfied that the Company has adequate financial resources to continue in operation for at least 12 months from the date of signing these financial statements and that, accordingly, it is appropriate to adopt the going concern basis.
The Company’s financial statements are presented in sterling and all values are rounded to the nearest thousand pounds (£’000) except when otherwise indicated.
Judgements and key sources of estimation and uncertainty
The preparation of the financial statements requires the Directors to make judgements, estimates and assumptions that affect the amounts reported for assets and liabilities as at the Statement of Financial Position date and the amounts reported for revenues and expenses during the year. However, the nature of estimation means that actual outcomes could differ from those estimates. In the process of applying the Company’s accounting policies, the Directors have made the following estimate:
Fair value of the unquoted investments estimate
The Board has established a Valuation Committee to review the valuations and the valuation methodologies of the Company’s unquoted investments. The Board has approved the valuations of the unquoted investments on the recommendation of the Valuation Committee.
The unquoted investment in
The investments in Stemirna Therapeutics and XtalPi have been valued by Kroll, an independent valuer, using the probability – weighted expected returns methodology (PWERM). The valuations have been approved by the Board on the recommendation of the Valuation Committee. Under the PWERM, fair value is determined through consideration of the values of the investment under a range of scenarios. These scenarios range from the “no recovery” to “full recovery” of the amount invested, through to a number of IPO or similar exit scenarios. Each scenario is assigned a probability, with the value of the investment reflecting the sum of each scenario’s valuation weighted by the probability of its occurrence. Examples of the inputs into the valuation models are:
The probability assigned to potential future outcomes;
Likely exit scenarios; and
The discount rate used to calculate the present value of future outcomes.
The investments in Gracell Biotechnologies Contingent Value Rights (CVR) and Lexicon series A convertible preference stock (Lexicon) have also been valued by Kroll. Gracell’s CVRs have been valued using the PWERM and Lexicon using the price of the recent funding, discounted for the lack of marketability.
(B) INVESTMENTS
Investments are recognised and de-recognised on the trade date.
As the entity’s business is investing in financial assets with a view to profiting from their total return in the form of dividends or increases in fair value, investments are classified as fair value through profit or loss (FVTPL) and are initially recognised at fair value. The entity manages and evaluates the performance of these investments on a fair value basis in accordance with its investment strategy, and information about the investments is provided internally on this basis to the Board.
Investments classified at fair value through profit or loss, which are quoted investments, are measured at subsequent reporting dates at fair value which is either the bid or the last trade price, depending on the convention of the exchange on which it is quoted.
In respect of unquoted investments, or where the market for a financial instrument is not active, fair value is established by using valuation techniques which may include using weighted expected returns, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models. Where there is a valuation technique commonly used by market participants to price the instrument and that technique has been demonstrated to provide reliable estimates of prices obtained in actual market transactions, that technique is utilised.
Transfers between levels of fair value hierarchy are deemed to have occurred at the date of the event or change in circumstances that caused the transfer.
Gains and losses on disposal and fair value changes are also recognised in the Income Statement.
(C) PRESENTATION OF INCOME STATEMENT
In order to better reflect the activities of an investment trust company, and in accordance with guidance issued by the AIC, supplementary information which analyses the Income Statement between items of a revenue and capital nature has been presented alongside the Income Statement. Net revenue is the measure the Directors believe appropriate in assessing the Company’s compliance with certain requirements set out in section 1158 of the Corporation Tax Act 2010. The requirements are to distribute net revenue but only so far as there are positive revenue reserves.
(D) INVESTMENT INCOME
Dividends receivable on equity shares are recognised on the ex-dividend date. Where no ex-dividend date is quoted, dividends are recognised when the Company’s right to receive payment is established. Foreign dividends are grossed up at the appropriate rate of withholding tax, with the withholding tax recognised in the taxation charge.
Dividends from investments in unquoted shares and securities are also recognised when the Company’s right to receive payment is established.
Income from fixed interest securities is recognised on a time appointment basis so as to reflect the effective interest rate.
In deciding whether a dividend should be regarded as a capital or revenue receipt, the Company reviews all relevant information as to the reasons for and sources of the dividend on a case by case basis depending upon the nature of the receipt.
Special dividends of a revenue nature are recognised through the revenue column of the Income Statement. Special dividends of a capital nature are recognised through the capital column of the Income Statement.
(E) EXPENSES AND FINANCE COSTS
All expenses are accounted for on an accruals basis. Expenses are charged through the Income Statement as follows:
· transaction costs on the acquisition or disposal of an investment are charged to the capital column of the Income Statement;
· expenses are charged to the capital column of the Income Statement where a connection with the maintenance or enhancement of the value of the investment can be demonstrated, and accordingly:
· during the year, AIFM and Portfolio Management fees are charged 95% to the capital column of the Income Statement as the Directors expect that in the long term virtually all of the Company’s returns will come from capital;
· during the year, loan interest is charged 95% to the capital column of the Income Statement as the Directors expect that in the long term virtually all of the Company’s returns will come from capital.
· performance fees are charged 100% to the capital column of the Income Statement. Performance fees are recognised as a liability of the Company when they crystallise and become due for payment. Details of the performance fee are set out on pages 51 and 52 of the Annual Report; and
· all other expenses are charged to revenue column of the Income Statement.
(F) TAXATION
In line with the recommendations of the SORP, the allocation method used to calculate tax relief on expenses presented against capital returns in the supplementary information in the Income Statement is the “marginal basis”. Under this basis, if taxable income is capable of being offset entirely by expenses presented in the revenue column of the Income Statement, then no tax relief is transferred to the capital column.
Investment trusts which have approval under Section 1158 Corporation Tax Act 2010 are not liable for taxation on capital gains.
Current tax is provided at the amounts expected to be paid or recovered.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the Balance Sheet liability method. Deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the Income Statement, except when it relates to items charged or credited directly to equity, or Other Comprehensive Income (OCI), in which case the deferred tax is also dealt with in equity or OCI respectively.
(G) FUNCTIONAL AND PRESENTATION CURRENCY
The financial information is shown in sterling, being the Company’s presentation currency. In arriving at the functional currency the Directors have considered the following:
(i) the primary economic environment of the Company;
(ii) the currency in which the original capital was raised;
(iii) the currency in which distributions would be made;
(iv) the currency in which performance is evaluated; and
(v) the currency in which the capital would be returned to shareholders on a break up basis.
The Directors have also considered the currency to which the underlying investments are exposed and liquidity is managed. The Directors are of the opinion that sterling best represents the functional currency.
(H) RESERVES
Ordinary share capital
· represents the nominal value of the issued share capital.
Share premium account
· represents the surplus of net proceeds received from the issue of new shares over the nominal value of such shares. The Share premium account is non-distributable.
Capital redemption reserve
· a transfer will be made to this reserve on cancellation of the Company’s own shares purchased, equal to the nominal value of the shares. This reserve is non-distributable.
Capital reserves
The following are credited or charged to the capital column of the Income Statement and then transferred to the Capital Reserve:
· gains or losses on disposal of investments;
· exchange differences of a capital nature;
· expenses allocated to this reserve in accordance with the above policies;
· increases and decreases in the valuation of investments held at year-end; and
· shares which have been bought back by the Company for cancellation.
Realised Capital Reserves are distributable by way of a dividend.
Revenue reserve
· reflects all income and expenditure recognised in the revenue column of the Income Statement. Amounts standing to the credit of the Revenue Reserve are distributable by way of dividend.
(I) LOAN
The Company has a loan facility repayable on demand, provided by
† See glossary.
(J) OPERATING SEGMENTS
IFRS 8 requires entities to define operating segments and segment performance in the financial statements based on information used by the Board of Directors. The Directors are of the opinion that the Company is engaged in a single segment of business, being the investments business. The results published in this report therefore correspond to this sole operating segment.
(K) FINANCIAL INSTRUMENTS INCLUDING DERIVATIVE FINANCIAL INSTRUMENTS
Financial assets and financial liabilities are recognised on the Statement of Financial Position when the Company becomes a party to the contractual provisions of the instrument. Financial assets are derecognised when the Company’s contractual right to the cash flows from the asset expires or substantially all the risks and rewards of ownership are transferred. Financial liabilities are derecognised when the contractual obligation is discharged, with gains and losses recognised in the income statement.
The Company uses derivative financial instruments, namely equity swaps. All derivative instruments are valued initially, and at subsequent reporting dates, at fair value in the Statement of Financial Position.
The equity swaps are accounted for as non-current assets or current liabilities.
(L) ADOPTION OF NEW AND REVISED STANDARDS
Standards and amendments to existing standards effective
The Company has applied the following standards and amendments for the first time for its annual reporting period commencing
· Disclosure of Accounting Policies – Amendments to IAS 1 Presentation of Financial Statements and IFRS Practice Statement 2 ; and
· Definition of Accounting Estimates – Amendments to IAS 8.
These amendments did not have any impact on the amounts recognised in both current and prior years.
New standards, amendments and interpretations effective after
The below new amendment and interpretations will become effective for annual periods beginning after
· Classification of Liabilities as Current or Non-Current – Amendments to IAS 1 Presentation of Financial Statements .
This amendment is not expected to have a material effect on the financial statements of the Company.
2. INCOME
2024 2023 £’000 £’000 Investment income Overseas dividend income 1,080 283 Other income Derivatives – 16 Deposit interest 123 11 Total income 1,203 310
3. AIFM, PORTFOLIO MANAGEMENT AND PERFORMANCE FEES
2024 2023 Revenue Capital Total Revenue Capital Total £’000 £’000 £’000 £’000 £’000 £’000 AIFM fee – Frostrow Capital LLP 47 886 933 53 1,010 1,063 Portfolio management fee 106 2,031 2,137 123 2,345 2,468 –OrbiMed Capital LLC 153 2,917 3,070 176 3,355 3,531
During the financial year ended
As at
Further details of the AIFM, portfolio management fee and the performance fee basis can be found in the Report of the Directors on page 51 and 52 of the Annual Report.
4. OTHER EXPENSES
2024 2023 Total Total £’000 £’000 Directors’ emoluments 177 165 Fees payable to the Company’s auditor for the audit of the Company’s 52 50 financial statements Registrar fees 36 35 Depositary fees 48 58 Marketing and PR costs 71 68 Legal and professional fees^ 61 51 Broker fees 43 39 Listing fees 39 37 Printing costs 33 32 Other costs 182 157 Total expenses charged to Revenue 742 692 Professional fees charged to Capital* 39 51 Total expenses 781 743
^ Includes quarterly valuation fees in relation to the valuation of the unquoted investments.
* Professional fees in respect of acquisition of unquoted and pre-IPO investments.
Details of the amounts paid to Directors are included in the Directors’ Remuneration Report on pages 63 to 66 of the Annual Report.
5. FINANCE COSTS
2024 2023 Revenue Capital Total Revenue Capital Total £’000 £’000 £’000 £’000 £’000 £’000 Loan interest 56 1059 1,115 40 752 792 56 1,059 1,115 40 752 792
6. TAXATION
(A) FACTORS AFFECTING TOTAL TAX CHARGE FOR YEAR
Approved investment trusts are exempt from tax on capital gains made within the company.
The tax assessed for the year is higher than the standard rate of corporation tax in the
2024 2023 Revenue Capital Total Revenue Capital Total £’000 £’000 £’000 £’000 £’000 £’000 Net profit/(loss) before 252 74,507 74,759 (598) (40,644) (41,242) taxation Corporation tax at 25% 63 18,627 18,690 (114) (7,722) (7,836) (2023: 19%) Effects of: Non-taxable (gains)/losses – (19,631) (19,631) – 6,932 6,932 on investments Non-taxable overseas (270) – (270) (54) – (54) dividends Overseas tax suffered 159 – 159 39 – 39 Expenses charged to capital (14) – (14) – – – available to be utilised Excess expenses unused 221 1,004 1,225 168 790 958 Corporation tax charge – – – 17 – 17 Total taxation for the year 159 – 159 56 – 56 (see note 6(b))
(B) ANALYSIS OF CHARGE IN THE YEAR:
2024 2023 Revenue Capital Total Revenue Capital Total £’000 £’000 £’000 £’000 £’000 £’000 Overseas tax suffered 159 – 159 39 – 39 Corporation tax charge† – – – 17 – 17 Total taxation for the year 159 – 159 56 – 56
†
Corporation tax was paid during the financial year ended
(C) PROVISION FOR DEFERRED TAX
No provision for deferred taxation has been made in the current or prior year.
The Company has not provided for deferred tax on capital profit or losses arising on the revaluation or disposal of investments, as it is exempt from tax on these items because of its status as an investment trust company.
At
A deferred tax asset of £22,111,000 (25% tax rate) (2023: £20,907,000 (25% tax rate)) arising as a result of these excess management expenses and other losses has not been recognised because the Company is not expected to generate sufficient taxable income in future periods in excess of the available deductible expenses. Given the composition of the Company’s portfolio, it is not likely that this asset will be used in the foreseeable future and therefore no asset has been recognised in the financial statements.
7. BASIC AND DILUTED EARNINGS/(LOSS) PER SHARE
2024 2023 Revenue Capital Total Revenue Capital Total pence pence pence pence pence pence Earnings/(loss)/per share 0.3p 206.7p 207.0p (1.6) (100.9)p (102.5)p
The total earnings per share of 207.0p (2023: loss of 102.5p) is based on the total earnings attributable to equity shareholders of £74,600,000 (2023: loss £41,298,000).
The revenue profit per share 0.3p (2023: loss of 1.6p) is based on the revenue profit attributable to equity shareholders of £93,000 (2023: loss of £654,000). The capital profit per share of 206.7p (2023: loss of 100.9p) is based on the capital profit attributable to equity shareholders of £74,507,000 (2023: loss of £40,644,000).
The total profit per share is based on the weighted average number of shares in issue during the year of 36,041,496 (2023: 40,287,724).
There are no dilutive instruments issued by the Company (2023: none).
8. INVESTMENTS
As at
2024 2023 Derivative Derivative Financial Financial Quoted Instruments Quoted Instruments Investments Unquoted – Net Total Investments Unquoted – Net Total £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 Opening book 392,482 14,341 – 406,823 512,894 22,943 – 535,837 cost Opening investment (55,520) 5,926 (1,202) (50,796) (119,725) 11,287 – (108,438) holding (losses)/gains Valuation at 1 336,962 20,267 (1,202) 356,027 393,169 34,230 – 427,399 April Movement in – – – the year Purchases at 342,843 1,952 – 344,795 465,360 – – 465,360 cost Sales proceeds (388,521) (71) 1,395* (387,197) (505,787) – – (505,787) Transfer – – – – 9,887 (9,887) – – between levels Net movement in investment 88,290 (7,010) (611) 80,669 (25,667) (4,076) (1,202) (30,945) holding gains/ (losses) Valuation at 379,574 15,138 (418) 394,294 336,962 20,267 (1,202) 356,027 31 March Closing book cost at 31 354,597 16,268 – 370,865 392,482 14,341 – 406,823 March Investment holding gains/ 24,977 (1,130) (418) 23,429 (55,520) 5,926 (1,202) (50,796) (losses) at 31 March Valuation at 379,574 15,138 (418) 394,294 336,962 20,267 (1,202) 356,027 31 March
The sales proceeds of £387,197,000 (2023: £505,787,000) includes transaction costs of £814,000 (2023: £991,000). The book cost of these investments when they were purchased was £380,753,000 (2023: £594,374,000).
These investments have been revalued over time and until they were sold any unrealised gains/loss were included in the fair value of these investments.
* Sale of financed equity swap.
GAINS/(LOSSES) ON INVESTMENTS
2024 2023 £’000 £’000 Gains/(losses) on investments 80,669 (30,945) Transaction costs (1,526) (1,782) Gains/(losses) on investments held at fair value through profit 79,143 (32,727) or loss
The total transaction costs for the year were £1,526,000 (
9. DERIVATIVE FINANCIAL INSTRUMENTS
2024 2023 £’000 £’000 Fair value of OTC equity swaps (assets) 42 – Fair value of OTC equity swaps (liabilities) (460) (1,202) (418) (1,202)
(See note 1(k) for further details).
10. OTHER RECEIVABLES
2024 2023 £’000 £’000 Future settlements – sales 14,508 487 Prepayments and accrued income 27 21 14,535 508
11. OTHER PAYABLES
2024 2023 £’000 £’000 Future settlements – purchases 167 6,206 Amounts due to brokers in respect of shares repurchased by the 1,379 1,695 Company for cancellation Other creditors and accruals 1,029 945 2,575 8,846
12. ORDINARY SHARE CAPITAL
2024 2023 Number of Number of Shares Shares Allotted, issued and fully paid at1 April 2023 38,737,419 41,158,682 Shares bought back for cancellation during the year (5,250,221) (2,421,263) At31 March 2024 33,487,198 38,737,419
2024 2023 £’000 £’000 Allotted, issued and fully paid shares of 25p 8,371 9,684
During the year no new ordinary shares were issued (2023: nil). 5,250,221 shares were bought back for cancellation for a consideration of £43,584,000 (2023: 2,421,263 shares were bought back for a consideration of £22,619,000).
13. NET ASSET VALUE PER SHARE
2024 2023 Net asset value per share 1,078.9p 852.6p
The net asset value per share is based on the net assets attributable to equity shareholders of £361,307,000 (2023:
£330,291,000) and on 33,487,198 (2023: 38,737,419) shares in issue at
14. RISK MANAGEMENT POLICIES AND PROCEDURES
As an investment trust, the Company invests in equities and other investments for the long term in order to achieve its investment objective. In pursuing its investment objective, the Company is exposed to a variety of risks that could result in either a reduction or increase in the Company’s net assets or profits.
The Company’s financial instruments comprise securities and other investments, cash balances, debtors and creditors and a loan facility that arise directly from its operations (for example, in respect of sales and purchases awaiting settlement).
The main risks the Company faces from its financial instruments are (i) market price risk (comprising currency risk, interest rate risk and other price risk (i.e. changes in market prices other than those arising from interest rate or currency risk)), (ii) liquidity risk and (iii) credit risk. The Board also considers (iv) fair value measurement and (v) capital management.
The Board reviews and agrees policies regularly for managing and monitoring each of these risks.
OTC EQUITY SWAPS
The Company uses OTC equity swap positions to gain access to Chinese markets where the Company is not locally registered to trade directly. During the year the Company entered into an OTC equity swap contracts related to Brightgene Bio-Medical, Mabwell Shanghai Bioscience and Shanghai Runda Medical, with Goldman Sachs as the counterparty. See glossary for further details.
1. MARKET PRICE RISK:
The Company’s portfolio is exposed to fluctuations in market prices in the biotechnology sector and the regions in which it invests. Market-wide uncertainties which have recently caused increased volatility in the markets include the war in
The Company’s portfolio is exposed to market price fluctuations which are monitored by the AIFM and the Portfolio Manager in pursuance of the investment objective.
This market risk comprises three elements – foreign currency risk, interest rate risk and other price risk.
(a) Foreign currency risk:
The Company’s portfolio is denominated in currencies other than sterling (the Company’s functional currency, and in which it reports its results). As a result, movements in exchange rates can significantly affect the sterling value of those items.
Management of the risk
The AIFM and the Portfolio Manager monitor the Company’s exposure to foreign currencies on a continuous basis and report to the Board regularly. The Company does not hedge against foreign currency movements to manage market price risk.
The Company does not use financial instruments to mitigate the currency exposure in the period between the time that the income is included in the financial statements and its receipt.
Foreign currency exposure
At the date of the Statement of Financial Position the Company held £379,359,000 (2023: £345,049,000) of investments denominated in
Foreign currency sensitivity
The fair value of the Company’s monetary items that have foreign currency exposure at
Where the Company’s equity investments (which are not monetary items) are priced in a foreign currency they are shown separately in the analysis as to show the overall level of exposure.
2024 2023 £’000 £’000 Sterling equivalent of U.S.$ and other non-sterling exposure Current assets 16,640 3,257 Creditors (167) (6,206) Spot currency contracts (1,406) (1,692) Loan (non-sterling) (47,063) (20,167) Foreign currency exposure on net monetary items (31,996) (24,808) Investments held at fair value through profit or loss 394,294 356,027 including derivative equity swap Total net foreign currency exposure 362,298 331,219
The table on page 92 of the Annual Report details the sensitivity of the Company’s profit or loss after taxation for the year (investment values) to a 10% increase and decrease in the value of sterling compared with the
The above percentages have been determined based on market volatility in exchange rates over the previous twelve months. The analysis is based on the Company’s foreign currency financial instruments held at each Statement of Financial Position date, after adjusting for an increase/decrease in the AIFM and portfolio management fees.
If sterling had weakened against the
2024 2023 £’000 £’000 Impact on revenue return – – Impact on capital return 46,816 43,302 Total return after tax/effect on shareholders’ funds 46,816 43,302
If sterling had strengthened against the
2024 2023 £’000 £’000 Impact on revenue return – – Impact on capital return (26,943) (24,220) Total return after tax/effect on shareholders’ funds (26,943) (24,220)
(b) Interest rate risk:
Interest rate risk is the risk that the fair value of a financial instrument will fluctuate because of changes in market interest rates.
Interest rate exposure
The Company’s main exposure to interest rate risk is through its loan facility with
At the year-end financial assets and liabilities subject to interest rate risk were as follows:
Fixed Floating Floating rate rate rate 2024 2024 2023 £’000 £’000 £’000 Loan facility with J.P. Morgan Securities LLC – 47,078 20,170 Gross exposure on OTC equity swaps – 6,308 6,224 Total liabilities subject to interest rate risk – 53,386 26,394 Less cash held at Goldman Sachs – 2,131 2,772 Total net liabilities subject to interest rate risk – 51,255 23,622
Management of the risk
The level of borrowings is approved and monitored by the Board and the AIFM on a regular basis.
Interest rate sensitivity
The majority of the Company’s financial assets are equity shares and other investments which neither pay interest nor have a maturity date. The amount subject to interest risk as at
(c) Other price risk
Other price risk may affect the value of the quoted investments.
If market prices at the date of the Statement of Financial Position had been 20% higher or lower (2023: 20% higher or lower) while all other variables had remained constant, the return and net assets attributable to shareholders for the year ended
Other price risk exposure
2024 2023 Net Net Assets Liabilities Fair Value Assets Liabilities Fair Value £’000 £’000 £’000 £’000 £’000 £’000 Investments 394,712 – 394,712 357,229 – 357,229 OTC equity swaps 42 (460) (418) – (1,202) (1,202) 394,754 (460) 394,294 357,229 (1,202) 356,027
The notional exposure of the OTC equity swaps calculated in accordance with AIFMD requirements, is £5,890,000 (2023: £5,022,000) see glossary for further details.
2. LIQUIDITY RISK:
This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities.
Management of the risk
Liquidity risk is not significant as the majority of the Company’s assets are investments in quoted equities that are readily realisable within one week, in normal market conditions. Stress tests have been performed to understand how long the portfolio would take to realise in such situations. The Board is comfortable that in such situations the Company would be able to meet its liabilities as they fall due. Short-term funding flexibility can be achieved through the use of the bank loan facility. The maximum amount of gearing permitted by the Board is 20% of net assets which equated to £72,261,000 at the year end.
The Board gives guidance to the Portfolio Manager as to the maximum amount of the Company’s resources that should be invested in any one company.
Liquidity exposure and maturity
Contractual maturities of the financial liabilities as at
2024 2024 2023 2023 3 months 3 to 3 months 3 to or less 12 months or less 12 months £’000 £’000 £’000 £’000 Loan facility (repayable on demand) 47,078 – 20,170 – Future settlements 167 – 6,206 – Derivative – OTC equity swaps – 460 – 1,202 Other creditors and accruals 2,408 – 2,640 – 49,653 460 29,016 1,202
3. CREDIT RISK:
Credit risk is the risk of failure of a counterparty to discharge its obligations resulting in the Company suffering a loss.
As at
See page 35 of the Annual Report for further details on the loan facility and the associated credit risk.
† See glossary.
Management of the risk
The risk is not significant and is managed as follows:
J.P. Morgan
· by receiving and reviewing regular updates from the Custodian and Prime Broker and Depository.
· by reviewing their Internal Control reports and regularly monitor J.P. Morgan’s credit rating. J.P. Morgan has a credit rating of Aa3 (Moody’s), A+ (S&P) and AA (Fitch).
· by reviewing on a monthly basis assets which are available for rehypothecation.
Other counterparties
·
by only dealing with brokers which have been approved by
· by investing in markets that mainly operate DVP (delivery versus payment) settlement.
· all cash balances are held with approved counterparties. J.P. Morgan is the Custodian of the Company’s assets and all assets are segregated from J.P. Morgan’s own assets.
At
4. FAIR VALUE MEASUREMENT
Hierarchy of investments
As required under IFRS 13 “Fair Value Measurement”, the Company has classified its financial assets designated at fair value through profit or loss using a fair value hierarchy that reflects the significance of the inputs used in making the fair value measurements. The hierarchy has the following levels:
· Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities;
· Level 2 – inputs other than quoted prices included with Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
· Level 3 – inputs for the asset or liability that are not based on observable market data (unobservable inputs).
Level 1 Level 2 Level 3 Total As of31 March 2024 £’000 £’000 £’000 £’000 Assets 379,574 – 15,138 394,712 Derivatives: equity swap (assets) – 42 – 42 Derivatives: equity swap (liabilities) – (460) – (460) Financial investments held at fair value through 379,574 (418) 15,138 394,294 profit or loss
Level 1 Level 2 Level 3 Total As at31 March 2023 £’000 £’000 £’000 £’000 Assets 336,962 – 20,267 357,229 Financial investments held at fair value through – (1,202) – (1,202) profit or loss 336,962 (1,202) 20,267 356,027
As at
The following two investments have been valued by the Board, following recommendations received from the Valuation Committee which has reviewed in detail both the valuation and the methodologies provided by Kroll, an independent valuer. Stemirna and XtalPi have been valued using the probability-weighted expected returns methodology (PWERM) and are classified as Level 3.
These Level 3 investments include assumptions based on non-observable market data such as:
(i) the probability of certain scenarios;
(ii) the expected time to the date of sale or realisation opportunity; and
(iii) discount rates.
Stemirna
As at
(i) No recovery – probability 10%
(ii) Restructuring scenario 1, where the proposed financing closes as expected, with no additional shares issued – probability 70%
(iii) Restructuring scenario 2, where the proposed financing closes as expected with a proportion of additional shares – probability 20%
If the probabilities of scenario were to change by 10%, while all other variables remain constant, the return to shareholders would have increased/decreased by £22,000 (2023: £515,000).
XtalPi
As at
(i) Partial Recovery – probability 2.5%
(ii) Full Recovery Scenario – probability 2.5%
(iii) IPO Scenario 1 (30/6/2024) – probability-37.5%
(iv) IPO Scenario 2 (30/9/2024) – probability-37.5%
(v) IPO Scenario 3 (30/9/2024) – probability-20.0%
If the probabilities of scenario were to change by 10%, while all other variables remain constant, the return to shareholders would have increased/decreased by £1,162,000 (2023: £1,271,000).
The tables below set out the range of inputs applied in arriving at the fair value of the Level 3 investments valued by Kroll.
Probability of Scenario – (Stemirna and XtalPi)
The probability assigned to certain scenarios is determined by the independent valuer following consultation with the Portfolio Manager. The probability assigned to any scenario reflects a number of factors including the operating performance and prospects of the investee company and market receptivity for IPOs or other realisation routes.
2024 Probability of scenario 2.5%-70% Weighted average probability of scenario 36.25% 2023 Probability of scenario 5%-35% Weighted average probability of scenario 20%
Expected time to date of sale or realisation opportunity (XtalPi)
The expected time to a sale or realisation opportunity is determined by the independent valuer following consultation with the Portfolio Manager and reflects a number of factors including the operating performance and prospects of the investee company and the current and expected market receptivity for IPOs and other realisation routes.
2024 Expected time to sale or realisation opportunity 0.2 years - 0.8 years Weighted average expected time to sale or realisation 0.5 years opportunity 2023 Expected time to sale or realisation opportunity 1-2.5 years Weighted average expected time to sale or realisation 1.75 years opportunity
If the expected average time to date of sale or realisation was extended by three months, while all other variables remain constant, the return to shareholders would have decreased by £544,000 (2023: £656,000).
Discount rate (XtalPi)
The discount rates assigned to certain scenarios are determined by the independent valuer using market surveys of discount rates used in a range of private equity and unquoted investment transactions.
2024 Discount rate 23.5% Discount rate weighted average 23.5% 2023 Discount rate 22.5% Discount rate weighted average 22.5%
If the discount rate was to increase by 5%, while all other variables remain constant, the return to shareholders would have decreased by £159,000 (2023: £382,000).
The valuations of Gracell Biotechnologies CVR and Lexicon Series A Convertible Preferred Stock (Lexicon) as at 31
Level 3 Reconciliation
Please see below a reconciliation disclosing the changes during the year for the financial assets and liabilities designated at fair value through profit or loss classified as being Level 3. There has been no transfer between fair value hierarchy levels.
2024 2023 £’000 £’000 Assets As at 1 April 20,267 33,927 Purchase of unquoted investments 1,952 – Repayment of capital – unquoted investment (71) – Net movement in investment holding gains during the year (7,010) (3,773) Transfer from level 3 to level 1 – (9,887)* Assets as at 31 March 15,138 20,267
*
FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES:
Financial assets and financial liabilities are either carried in the Statement of Financial Position at their fair value or at a reasonable approximation of fair value.
5. CAPITAL MANAGEMENT
The Company’s capital management objectives are:
· to ensure that it will be able to continue as a going concern; and
· to maximise the total return to its equity shareholders.
The Board’s policy is to limit gearing to a maximum of 20% of the Company’s net assets.
As at
The capital structure of the Company consists of the equity share capital, retained earnings and other reserves shown in the Statement of Financial Position.
Shares may be repurchased by the Company as explained on pages 30 and 31 of the Annual Report.
The Company’s objectives, policies and processes for managing capital are unchanged from the preceding accounting period. As at
15. TRANSACTIONS WITH RELATED PARTIES AND THE MANAGERS
Related Parties
The Directors of the Company are considered to be related parties.
Details of the remuneration of the Directors of the Company can be found on page 64 of the Annual Report.
Transactions with the Managers
·
·
Details of the relationship between the Company and
The Company holds an interest in
Three current and two former partners at
16. CAPITAL RESERVE
2024 2023 Capital Capital Reserves Reserves Investment Investment holdings holdings gains/ gains/ Other (losses) Total Other (losses) Total £’000 £’000 £’000 £’000 £’000 £’000 At 1 April 278,564 (50,596) 227,968 399,416 (108,185) 291,231 Net gains/ (losses) on 5,014 74,129 79,143 (90,316) 57,589 (32,727) investments Foreign (621) – (621) (3,759) – (3,759) exchange losses Expenses charged to (4,015) – (4,015) (4,158) – (4,158) capital Repurchase of own shares for (43,584) – (43,584) (22,619) – (22,619) cancellation At 31 March 235,358 23,533 258,891 278,564 (50,596) 227,968
Sums within the Total Capital Reserve less unrealised gains (those on investments not readily convertible to cash) are available for distribution. Investment holding gains in the table above are unrealised.
17. CONTINGENT LIABILITIES AND CAPITAL COMMITMENTS
As at
The figures and financial information for 2023 are extracted from the published Annual Report for the year ended
The figures and financial information for 2024 are extracted from the Annual Report for the year ended
GLOSSARY OF TERMS AND ALTERNATIVE PERFORMANCE MEASURES
ACTIVE SHARE
Active Share is expressed as a percentage and shows the extent to which a fund’s holdings and their weightings differ from those of the fund’s benchmark index. A fund that closely tracks its index might have a low Active Share of less than 20% and be considered passive, while a fund with an Active Share of 60% or higher is generally considered to be actively managed.
ADR
An American depositary receipt (ADR) is a negotiable security that represents securities of a foreign company and allows that company’s shares to trade in the
AIC
ALTERNATIVE INVESTMENT FUND MANAGERS DIRECTIVE (AIFMD)
Agreed by the
ALTERNATIVE PERFORMANCE MEASURE (APM)
An APM is a numerical measure of the Company’s current, historical or future financial performance, financial position or cash flows, other than a financial measure defined or specified in the applicable financial framework. In selecting these Alternative Performance Measures, the Directors considered the key objectives and expectations of typical investors in an investment trust such as the Company.
DISCOUNT OR PREMIUM^
A description of the difference between the share price and the net asset value per share. The size of the discount or premium is calculated by subtracting the share price from the net asset value per share and is usually expressed as a percentage (%) of the net asset value per share. If the share price is higher than the net asset value per share the result is a premium. If the share price is lower than the net asset value per share, the shares are trading at a discount.
As at 31 As at 31 March 2024 March 2023 (pence) (pence) Share price 995.0 783.0 Net asset value per share (see note 13 for further 1,078.9 852.6 information) Discount of share price to net asset value per share 7.8% 8.2%
^ Alternative Performance Measure
GEARING^
Gearing represents prior charges, adjusted for net current liabilities, expressed as a percentage of net assets (AIC methodology). Prior charges includes all loans and overdrafts for investment purposes.
31 March 31 March 2024 2023 £’000 £’000 Loan 47,078 20,170 Net current (assets)/liabilities (excluding loan and (14,091) 5,566 derivatives)* 32,987 25,736 Net assets 361,307 330,291 Gearing 9.1% 7.8%
* Current liabilities less current assets
IPO
An Initial Public Offering (IPO) is the process by which the shares of a previously private company are listed on a stock exchange for the first time. Through this process a company can raise new capital, offer an exit opportunity for private investors and founders, and enable the trading of its shares.
IPO LOCK-IN
When a company offers shares in an IPO, investors sometimes enter into a lock-in agreement preventing them from selling their shares for a specified period after the IPO.
LEVERAGE
The AIFMD leverage definition is slightly different from the Association of Investment Companies’ method of calculating gearing and is defined as follows: any method by which the AIFM increases the exposure of an AIF it manages whether through borrowing of cash or securities, or leverage embedded in derivative positions.
For the purposes of the AIFMD, leverage is any method which increases the Company’s exposure, including the borrowing of cash and the use of derivatives. It is expressed as a ratio between the Company’s exposure and its net asset value and can be calculated on a gross and a commitment method. Under the gross method, exposure represents the sum of the Company’s positions after the deduction of sterling cash balances, without taking into account any hedging and netting arrangements. Under the commitment method, exposure is calculated without the deduction of sterling cash balances and after certain hedging and netting positions are offset against each other.
Gross Commitment Method Method Maximum limit 130.0% 130.0% Actual as at31 March 2024 110.5% 109.7%
MARGINABLE SECURITIES
Marginable securities are stocks, bonds, futures or other securities capable of being traded on a Margin Account and are available for rehypothecation*.
NET ASSET VALUE (NAV)
The net asset value of the Company’s assets, principally investments made in other companies and cash held, less any liabilities. The NAV is also described as “shareholders’ funds”. The NAV is often expressed in pence per share after being divided by the number of shares which have been issued. The NAV per share is unlikely to be the same as the share price, which is the price at which the Company’s shares can be bought or sold by an investor. The share price is determined by the relationship between the demand and supply of the shares in the secondary market.
* See glossary.
NET ASSET VALUE PER SHARE TOTAL RETURN^
The net asset value per share return for the year ended
ONGOING CHARGES^
Ongoing charges are calculated by taking the Company’s annualised operating expenses expressed as a proportion of the average daily net asset value of the Company over the year.
The costs of buying and selling investments are excluded, as are interest costs, taxation, performance fees, cost of buying back or issuing ordinary shares and other non-recurring costs.
31 March 31 March 2024 2023 £’000 £’000 AIFM & portfolio management fees (note 3) 3,070 3,531 Other re-occurring expenses (note 4) 742 692 Total ongoing charges 3,812 4,223 Average daily net assets for the year 323,811 394,525 Ongoing charges 1.2% 1.1%
OTC EQUITY SWAPS
Over-the-Counter (OTC) refers to the process of how securities are traded via a broker - dealer network, as opposed to on a centralised exchange.
An equity swap is an agreement where one party (counterparty) transfers the total return of an underlying equity position to the other party (swap holder) in exchange for a payment of the principal, and interest for financed swaps, at a set date. Total return includes dividend income and gains or losses from market movements. The exposure of the holder is the market value of the underlying equity position.
There are two main types of equity swaps:
· Funded – where payment is made on acquisition. They are equivalent to holding the underlying equity position with the exception of additional counterparty risk and not possessing voting rights in the underlying security; and
· Financed – where payment is made on maturity. As there is no initial outlay, financed swaps increase exposure by the value of the underlying equity position with no initial increase in the investments value – there is therefore embedded leverage within a financed swap due to the deferral of payment to maturity.
REHYPOTHECATION
Rehypothecation is the practice by banks and brokers of using collateral posted as security for loans as regulated by the
The
SHARE PRICE TOTAL RETURN^
The share price total return represents the theoretical return to a shareholder, on a closing market price basis. The share price total return is calculated by taking the percentage movement from the share price as at
VARIABLE INTEREST ENTITY (VIE)
A corporate structure through which an investor can own the economic interests of shares in a company through a contractual relationship. This structure is common in
ANNOUNCEMENT ENDS
Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.
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