WORLDWIDE HEALTHCARE TRUST PLC
NEWS RELEASE
For immediate release
23 November 2017
Worldwide Healthcare Trust PLC
Unaudited Half Year Results for the six months ended
30 September 2017
This Announcement is not the Company's Half Year report. It is an abridged
version of the Company's full Half Year report for the six months ended 30
September 2017. The full Half Year report, together with a copy of this
announcement, will also be available on the Company's website:
www.worldwidewh.com where up to date information on the Company, including
daily NAV, share prices and fact sheets, can also be found.
The Company's Half Year Report & Accounts for the six months ended 30 September
2017 has been submitted to the UK Listing Authority, and will shortly be
available for inspection on the National Storage Mechanism (NSM):
www.hemscott.com/nsm.do
For further information please contact: Mark Pope, Frostrow Capital LLP 020
3008 4913.
Performance
Six months One year to
to
30 31 March
September
2017 2017
Net asset value per share (total return)# 7.4% 28.9%
Share price (total return)# 10.8% 35.5%
Benchmark (total return)^ 2.6% 24.5%
30 31 March Six months
September
2017 2017 % change
Net asset value per share 2,526.3p 2,367.2p 6.7
Share price 2,536.0p 2,304.0p 10.1
Premium/(discount) of share price to the net asset 0.4% (2.7%) -
value per share
Leverage+ 15.4% 16.9% -
Ongoing charges 0.9% 0.9% -
Ongoing charges (including performance fees 1.1% 1.0% -
crystallised during the period)+
# Source - Morningstar.
^ Benchmark - MSCI World Health Care Index on a net total return,
sterling adjusted basis. (see glossary)
+ See glossary. Leverage calculated under the Commitment Method.
Chairman's Statement
PERFORMANCE
Against a positive backdrop and reduced market volatility, the healthcare
sector produced a satisfactory return, in line with the wider market over the
first six months of the Company's financial year. I am pleased to report that
both the Company's net asset value per share and the share price outperformed
the Company's Benchmark over the period and that, following last year's strong
performance, the current financial year has begun on a similarly positive note.
As can be seen in the chart on the previous page, the Company's net asset value
total return was +7.4% over the last six months, outperforming the Company's
Benchmark, the MSCI World Health Care Index measured on a net total return,
sterling adjusted basis, which returned +2.6%.
The Company's share price did rather better, with a total return of +10.8%, and
the Company's share price is now trading consistently at a premium to the
Company's net asset value per share. The premium of the Company's share price
to the net asset value per share as at 30 September 2017 was 0.4%.
I mentioned at the year-end that sterling's decline against other major
currencies, in particular the U.S. dollar, the currency in which the majority
of the Company's holdings are denominated, had helped the Company's performance
in absolute terms. The first six months of the current financial year saw
something of a recovery in sterling's fortunes, sterling having appreciated
over 7.0% against the U.S. dollar during the period. This relative dollar
weakness inevitably detracted from the Company's absolute performance.
Further information on investment performance and the outlook for the Company
is given in the Review of Investments.
CAPITAL
The Board continues to monitor closely the relationship between the Company's
share price and the net asset value per share. As referred to above, I am
pleased to note that due to the Company's strong performance the Company's
shares have been trading at a small premium to the net asset value per share
for some months. As a result, and also due to investor demand, a total of
1,512,500 new shares were issued during the period, at an average premium of
0.7% to the prevailing cum income net asset value per share, raising £38.4m of
new funds.
PERFORMANCE FEE
I am glad to report that the outperformance generated in this half year has
resulted in a performance fee becoming payable, in accordance with the
provisions of the performance fee arrangements, of £2.4 million. This fee was
shared between the Company's Portfolio Manager, OrbiMed Capital LLC ("OrbiMed")
and the Alternative Investment Fund Manager, Frostrow Capital LLP ("Frostrow")
as described in note 3 to the Financial Statements. Shareholders will be aware
that under new fee arrangements that became effective on 1 April 2017, Frostrow
no longer receives a performance fee. However, they are entitled to receive any
performance fee that crystallises during the year ending 31 March 2018 in
respect of cumulative outperformance attained by 31 March 2017.
REVENUE AND DIVIDENDS
The revenue return for the period was £4.2 million, compared to £4.0 million in
the same period last year; this slight increase comes as a result of a small
rise in the yield from portfolio investments and despite sterling's
appreciation against the U.S. dollar in the period. The Board has declared an
unchanged first interim dividend of 6.5p per share, for the year to 31 March
2018, which will be payable on 9 January 2018 to shareholders on the register
of members on 24 November 2017. The associated ex-dividend date is 23 November
2017. The second interim dividend for the year to 31 March 2018 is expected to
be announced in June 2018.
I remind shareholders that it remains the Company's policy to pay out dividends
to shareholders in the quantum necessary to maintain investment trust status
for each financial year. These dividend payments are paid out of the Company's
net revenue for the year and, in accordance with investment trust rules, only a
maximum of 15% of income arising from the shares and securities making up the
investment portfolio can be retained by the Company in any financial year.
It is the Board's continuing belief that the Company's capital should be fully
deployed rather than paid out as dividends to achieve a particular target
yield.
HALF YEAR REPORT & ACCOUNTS
As I mentioned last year, in order to keep costs to a minimum we will not be
providing a hard copy of this year's Half Year Report & Accounts. This document
is, and will continue to be available on the Company's website at
www.worldwidewh.com. The Company's Annual Report & Accounts will continue to be
available in hard copy, and also on the Company's website.
OUTLOOK
Our Portfolio Manager believes that investors are now focusing more on the
sector's strong fundamentals rather than political uncertainty, with factors
such as strong revenue generation, continued high levels of innovation, a more
benign approval environment at the FDA and expected increased merger and
acquisition activity expected to be key drivers. In addition, anticipated U.S.
tax reforms and cash repatriation are also expected to be positive for the
sector. However, on a cautionary note, volatility remains an issue as evidenced
by the recent correction in the biotechnology sector.
Our Portfolio Manager's focus remains on the selection of stocks with strong
prospects and we reiterate our belief that the long-term investor in the
healthcare sector will be well rewarded.
Sir Martin Smith
Chairman
23 November 2017
Review of Investments
MARKETS
Global equity markets for the six-month period from 1 April to 30 September
2017 advanced with admirable aplomb, reaching multiple new all-time highs
throughout the period. Despite some spikes, volatility also remained relatively
low. Overall, strong corporate earnings and positive economic trends supported
the move higher, with little offsets as political risk in Europe eased and
despite tensions between North Korea and the United States. Emerging markets
also benefitted from a supportive global backdrop.
Perhaps the only sources of volatility during the period were various key
global currencies, notably the euro and to a lesser extent, sterling, which
blunted some of the index returns, compared to a U.S. dollar perspective.
Healthcare stocks followed a similar trend as the broader market, with solid
and mostly consistent advances and the achievement of all-time highs in the
six-month period. Again, solid fundamentals coupled with reduced macro concerns
fueled the move higher, partially diminished by currency moves.
PERFORMANCE
We are pleased to report that the Company outperformed both the broader market
and the Benchmark, with a share price total return of +10.8% and a net asset
value total return of +7.4% in the six-month period. Performance of the
Benchmark for the six-month period ended 30 September 2017 was +2.6%. This
compares to the MSCI World Index return of +2.4% (measured in sterling terms).
Over a 12-month period, the Company has significantly outperformed its
Benchmark, with a share price total return of +20.7% and a net asset value
total return of +14.5% compared to the Benchmark return of +8.8%.
Sources of absolute and relative contribution were both diverse and numerous.
All sub-sectors contributed to positive returns, with only one exception,
generic pharmaceuticals, primarily due to the degradation of fundamentals in
that sector. Otherwise the strong performance recorded for the interim period
was mostly driven by allocation and stock picking in biotechnology and medical
technology & device stocks. The former was driven by a large rebound in share
prices after the dramatic drawdown observed in 2016 and the latter fueled by an
innovation and growth cycle that had not been seen in years. Otherwise, stock
returns in large capitalisation pharmaceuticals, specialty pharmaceuticals,
life science & services, and managed care/services were all positive.
MAJOR CONTRIBUTORS TO PERFORMANCE
The top individual stock contributors to performance come from a variety of
sub-sectors and geographies, from biotechnology, to pharmaceuticals, and
medical devices, from the United States, to Denmark, and Japan.
Oncology continues to be the hottest therapeutic category for healthcare
investors in 2017. Puma Biotechnology, is an emerging biotechnology company
whose lead asset is an oral once-daily tyrosine kinase inhibitor called Nerlynx
(neratinib), designed to treat a specific form of early stage breast cancer.
The stock rose substantially during the period due to a favourable U.S. Food
and Drug Administration ("FDA") Advisory Committee vote in May 2017, that
recommended approval of Nerlynx. Subsequently, the drug was approved in July
2017 and launched shortly thereafter. Prior to these events, there had been
significant investor scepticism about the asset's approvability due to its
perceived modest survival benefit and significant tolerability issues. As a
result, the successful commercialisation of Nerlynx by Puma has fueled merger
and acquisition ("M&A") speculation, and the share price has more than doubled
during the period.
BeiGene, is a China-based biotechnology company focused on the development of
oncology drugs that serve both local and global markets. The company has
parlayed its expertise in cell biology and chemistry into a pipeline of four
clinical-stage oncology candidates. BeiGene's lead candidate, BGB-3111 which
targets "BTK" (Bruton's tyrosine kinase), was designed to have specificity and
potency advantages over established BTK inhibitors in the treatment of various
blood cancers. The company has commenced late stage clinical development to
demonstrate its superiority, increasing investor enthusiasm about its
blockbuster potential and buoying the share price. BeiGene's other oncology
candidates in earlier phases of development are also directed at validated
oncology targets (such as "PD-1", "PARP", or "BRAF") and also may have
best-in-class properties. As such, the share price also moved higher in the
period after the company announced a strategic collaboration with Celgene for
BeiGene's PD-1 inhibitor, representing BeiGene's entry into the "hot" space of
immuno-oncology.
A true leader in medical device innovation, Intuitive Surgical, develops
robotic systems and associated instrument sets for use in a broad array of
surgical procedures. Shares in the company consistently outperformed during the
six-month period for a number of reasons. Robotic procedure volumes and new
system placements, both leading indicators of sales performance, strongly
outperformed analyst expectations in the period. Additionally, the company
announced and launched a new robotic system, da Vinci X, which is designed to
be more affordable and is positioned favourably against upcoming competitive
robotic systems. Lastly, the company was at the early stages of a new robotic
launch in China for a lung biopsy product which represents a significant market
opportunity and has driven longer-term consensus estimates and valuations
higher for the stock.
Japan, historically, has often been a hidden gem for innovation, and Nippon
Shinyaku is a perfect example. The company developed a best-in-class treatment
for a deadly lung disease known as pulmonary arterial hypertension or PAH.
Uptravi (selexipag) was discovered by Shinyaku and licensed to Swiss-based
leaders in PAH, Actelion, nearly 10 years ago. The drug was successfully
launched by Actelion in 2016, drawing the attention of global drug giant,
Johnson and Johnson, who subsequently acquired Actelion early in 2017. As a
result, Shinyaku began to receive greater recognition by investors for this
potential blockbuster product. Subsequently, Nippon Shinyaku has been one of
the best performing Japanese pharma stocks in 2017.
The worldwide leaders in the treatment of diabetes, Novo Nordisk, came under
pressure in 2016 as pricing, in particular insulin pricing, was squeezed by
payers and competition alike. However, 2017 bore witness to greater pricing
stability and more clarity on the next wave of innovation for the treatment of
one of the most common diseases in the world. While not completely de-risked,
Novo's next generation offering, "semaglutide" is poised to be the most
efficacious treatment ever developed for the treatment of Type II diabetes.
Moreover, the company is developing the compound in both injectable and oral
formulations. If the latter can successfully pass through clinical trials, it
can surely be a mega-blockbuster product. These developments pushed Novo's
stock price higher during the six-month period.
MAJOR DETRACTORS FROM PERFORMANCE
The largest detractors from performance, similar to the top contributors, were
very diverse in nature. Detractors came from many subsectors, including medical
devices, generics, biosimilars, biotechnology, and hospitals. In each case,
however, an unexpected negative catalyst caused the share price decline.
The medical device maker, Wright Medical, one of our major holdings,
manufactures state-of-the-art joint replacements, primarily for shoulder, foot
and ankle, trauma and sports medicine procedures, as well as orthobiologic
products. Earlier this year, the company materially accelerated its plans to
expand its sales force, leading to a brief disruption in the first quarter and
subsequently a shortfall in sales relative to consensus expectations. While the
second quarter showed a reacceleration in sales trends, the positive impact on
the stock was overshadowed by two hurricanes that struck the high-volume
regions of Florida and Texas in September, delaying procedures and leading
investors to question whether management will be able to hit the guidance range
for the full year. The share price fell sharply in the last month of the period
as a result.
Shares of Mylan, a global generic drug manufacturer, plummeted in August in
response to a second-quarter earnings miss and downwardly-revised full-year
financial guidance. Similar to other companies with significant exposure to the
U.S. generic drug market, Mylan's operating performance has been stifled by a
combination of increased competitive pressures on its legacy generic drug
portfolio and delayed U.S. FDA approvals/launches of generics for significant
branded products.
Another hot topic in healthcare investing has been biosimilars: generic
versions of complex, biologic drugs. However, monetising this global
opportunity has proven more difficult. Coherus Biosciences, is developing
biosimilar versions of a number of branded biotechnology drugs, including the
white blood cell stimulator Neulasta (pegfilgrastim) and the rheumatoid
arthritis drugs Humira (adalimumab) and Enbrel (etanercept). The company had
filed an application for their lead asset, a biosimilar version of Neulasta, in
August 2016. However, in June 2017, the stock dropped significantly when the
U.S. FDA rejected the drug, stating that the company needed to re-analyse
certain patient samples with a revised immunogenicity assay. Due to the
setback, the company was forced to reduce its workforce by 30%. The company
also suffered a legal setback, and another share price decline, when its
attempt to invalidate a patent protecting Humira was rejected by the U.S.
Patent & Trademark Office in September of 2017.
Incyte is a Delaware-based biotechnology company. The company markets Jakafi
(ruxolitinib) for myeloproliferative disorders (abnormal growth of blood cells)
and is developing a portfolio of therapeutics for the treatment of cancers.
Baricitinib, a next generation JAK inhibitor for rheumatology, was unexpectedly
rejected for approval by the U.S. FDA due to rare safety concerns, despite
earlier European approval, causing the stock to fall. While the stock partially
recovered, investor angst rose in relation to Incyte's first-in-class IDO
inhibitorm epacadostat, a novel cancer treatment in late stage clinical
development. Despite early positive data that suggested epacadostat has the
potential to be a major player in cancer immunotherapy, the stock again
sold-off after many investors decided to de-risk by selling the stock ahead of
the next looming data update for the molecule.
HCA Healthcare, is the largest public hospital provider in the U.S. The past 12
months have proven turbulent for the company's business and share price,
starting with the lead into the U.S. Presidential election in November 2016.
For the six-month period reported here, the company reported weak earnings and
reduced full year 2017 guidance due to decelerating utilisation trends. In
addition, the stock underperformed due to concerns that Republicans would
successfully repeal President Obama's Affordable Care Act (or "Obamacare"),
which would reduce the number of American citizens with health insurance.
SECTOR DEVELOPMENTS
Whilst 2016 was marked primarily by landmark political events such as the
prospective withdrawal of the United Kingdom from the European Union (commonly
known as Brexit) and the unexpected election of Donald Trump as the 45th
President of the United States, 2017 can thus far be characterised as a return
to fundamentals for global healthcare equites; and the fundamentals are good.
Politics are never completely obviated, however, and the current situation has
been quite favourable for therapeutic stocks in the six-month period,
especially in the largest drug market in the world, the United States.
First, with Republicans in power, the concern over a dramatic overhaul to drug
pricing rules in the U.S. has dropped considerably (despite the odd Tweet to
the contrary from constantly combative President Trump). Second, President
Trump has proposed his plans for significant tax reform in the U.S. Of import
to the healthcare industry are twofold: (1) the substantial lowering of the
U.S. corporate tax rate and (2) a "tax holiday" for the repatriation of
overseas cash. If adopted, in whole or in part, it would be a windfall of
earnings and cash flows for all large, U.S. domiciled healthcare companies. In
particular, large capitalisation pharmaceutical and biotechnology companies,
such as Pfizer or Amgen would reap significant rewards given they possess -
cumulatively - hundreds of billions of U.S. dollars of cash overseas. It would
be a boon to the industry and almost assuredly stimulate a M&A frenzy.
Further, whilst the new Commissioner of the U.S. FDA, Scott Gottlieb, has
introduced some new plans to increase competition (with the hope to affect drug
prices) in the U.S. drug market, overall, he is viewed as very aligned with the
drug industry's best interests. Dr. Gottlieb's "Drug Competition Action Plan"
will accelerate generic drug approvals (he inherited an FDA backlog of over
2,600 generic drugs seeking approval), ease generic versions of complex and
biologic drugs onto the market, and seek to reduce the number of older
medicines that lack generic competition by regularly highlighting the nearly
200 off-patent drugs with no generic alternatives available. This approach is
appealing, utilising a market-based, lower regulation approach favoured by
conservatives to deliver the drug price cost containment desired by
progressives. Generic drug competition is an effective and under-appreciated
tool for lowering drug prices over time that, importantly, does not stifle
innovation.
Moreover, what is the FDA's scorecard? It is not a perfect measure, but we note
that as of 30 September 2017, the FDA had approved 34 novel drugs for the U.S.,
already eclipsing the total for all of last year and a 100% increase
year-over-year. This total does not include another 12 new cancer indications
granted to already approved "immuno-oncology" drugs, one of the most innovative
advances in the treatment of cancer over the past three decades.
Finally, a comment on M&A, a secular theme for us and most healthcare
investors, but the modest pace and subdued level of M&A activity seen in 2017
has been a source of frustration. However, we do note the August 2017
blockbuster transaction with Gilead's U.S.$11 billion acquisition of Kite
Pharmaceuticals. Kite is one of the pioneers of CAR-T immunotherapy a next
generation variation of gene therapy that reprograms a patient's own T-cells to
attack malignancies. The large valuation is a compelling validation of
biotechnology innovation considering Kite is still a pre-revenue company with
no approved products. We believe more such transactions will occur, with a
potential feeding frenzy of activity possible if a U.S. tax reform package is
enacted with a repatriation provision for offshore cash balances held by U.S.
companies, as discussed above.
STRATEGY REVIEW
The Company's mandate remains unchanged: to seek innovation and growth in the
healthcare industry on a global level by investing in healthcare companies that
offer the greatest return potential, being mindful of risk. As productivity and
innovation rise, the number of investable ideas also rises, but the scrutiny
and diligence required to isolate them becomes more complex.
Biotechnology
The major biotechnology sub-sector continued its recovery during the six-month
period as macro concerns about the biotechnology sector continued to abate.
Heading into 2017, investors were principally concerned about two issues
overhanging the biotechnology sector: 1) any policy announcement by President
Trump about his plan to lower drug prices, and 2) the potential repeal of
"Obamacare", President Obama's signature healthcare reform bill.
However, despite making public comments about high drug prices on numerous
occasions since the election, President Trump has yet to announce any official
plan to reduce drug prices. Moreover, investors now believe he will no longer
do so and has moved on to other policy priorities.
In addition, despite controlling both the Presidency and Congress, the
Republicans have failed to repeal Obamacare despite multiple attempts. The
biotechnology industry is less sensitive to the fate of Obamacare, but
uncertainty around the future of the healthcare system in the United States hadcaused many investors to avoid the healthcare sector altogether. As the
prospects for a near-term repeal of Obamacare have dimmed, the cloud of
uncertainty surrounding healthcare has lifted somewhat. With these macro
overhangs dissipating, sentiment on the biotechnology sector has improved and
investors have begun to realise the attractive valuation of major biotechnology
relative to other sectors.
Meanwhile, the regulatory environment for the biotechnology and pharmaceutical
sectors has remained extremely favourable, with drug approvals occurring in a
timely manner despite less-than-perfect data sets. Initial product launches
from select large capitisation biotechnology companies have exceeded
expectations, including Biogen's launch of Spinraza (nusinersen), a novel
treatment for spinal muscular atrophy, and Regeneron Pharmaceutical's launch of
Dupixent (dupilumab), a novel antibody for atopic dermatitis. Moreover, these
drugs have launched with significant price tags, costing hundreds of thousands
of dollars and tens of thousands of dollars, respectively.
We would also highlight that this year has been important for the development
of new treatment modalities from small capitalisation biotechnology stocks.
Spark Therapeutics' voretigene neparvovec is poised to be the first gene
therapy approved by the FDA. Alnylam Pharmaceuticals recently reported positive
phase III data for patisiran for hereditary ATTR amyloidosis. This is the first
successful pivotal trial of an RNA-interference based therapy, which is a novel
class of drugs to downregulate expression of genes. Advances with new
therapeutic platforms such as gene therapy, RNA-interference, and CAR-T will
expand the capabilities of the industry to target diseases that were previously
not addressable by conventional drug therapies.
Whilst M&A activity has been relatively quiet, this is likely due to
uncertainty about the specifics of President Trump's corporate tax reform plan.
We would expect activity to reaccelerate once there is more clarity on tax
reform, which is expected at the end of 2017 or perhaps early in 2018. Even so,
M&A activity has not been completely absent given the "innovation engine" of
emerging biotechnology stocks discussed above,
Pharmaceuticals
Pharmaceutical stocks, like their biotechnology brethren, have enjoyed a
renaissance in 2017 as the political overhang has vastly diminished, allowing
investors to look past the rhetoric and focus on fundamentals; in the case of
large capitalisation pharmaceutical stocks, those fundamentals are arguably
mixed.
Perhaps most important is that innovation in drug discovery and development
appears to be at or near all-time highs, and nothing drives value and accretion
like new product flow. However, we do note the inherent heterogeneity within
the companies who comprise this universe. In other words, innovation is not
spread equally across them all, and thus we believe stock selection is key.
Whilst "patent cliffs" are currently at a low level, looming losses of
exclusivity across this sector are not de minimis. Once again, patent
expirations are not spread equally across the group, hence the growth outlook
can be quite variable amongst these peers. In addition, a new "cliff" is on the
horizon with respect to biosimilars. A host of blockbuster antibody drugs are
poised to lose patent protection over the next three to five years. However,
the approval, uptake, utilisation, and interchangeability of the biosimilar
product to replace the incumbent brand remains a source of investor debate and
thus a source of market uncertainty.
In the U.S., whilst angst over drug pricing from a political perspective has
subsided, payers and managed care players have become much more savvy with
trading patient access for increased rebates and this has become a hot button
topic for drug companies and investors alike. While generic drug prices
continue to decline, branded drug prices continue to rise, and are even
accelerating given the increased approval rate of higher priced "specialty"
drugs (such as biologics across many therapeutic areas including oncology,
rheumatology, immunology, dermatology, etc.). The payer's response to this is
to manage patient access to new drugs with tight controls such as step therapy,
prior authorisation, restricted drug lists, high deductibles, and increased
co-pays. The result can dramatically impact the uptake of a new drug launch. Of
course, truly innovative new drugs with real value propositions - such as an
increase in patient survival - can overcome such hurdles.
For small capitalisation pharmaceutical stocks, the performance of U.S.-focused
specialty and generic pharmaceutical companies has disappointed, as companies
continued to struggle with the multiple challenges facing the sector,
including: reduced pricing power, heavy debt burdens, heightened competitive
pressures, underperforming assets, increasingly restrictive third-party payer
formularies - including reduced coverage of new product introductions - and,
unsurprisingly, senior management changes.
Although valuations remain depressed for many companies in the specialty and
generic pharmaceutical sector, we see opportunities in a handful of
reasonably-leveraged companies with important upcoming clinical and regulatory
events and differentiated new product introductions benefitting from a lesser
degree of third-party payer management. We anticipate that increased M&A
activity, including greater participation from private investors, could improve
sentiment for this group of beleaguered stocks and drive valuation recoveries
over the next 12 months.
Medical Technology and Devices
A number of factors for the medical technology and devices spaces remain
favourable and thus we have a positive view on a forward-looking basis. First,
organic growth rates are tracking at healthy levels whilst reported growth
rates are benefitting from small and mid-size acquisitions. Undeniably,
absolute valuations remain high, but relative valuations against the S&P 500
Index are now roughly in line with historical averages despite relatively
superior earnings per share growth in the "MedTech" sector.
Importantly, we view current earnings growth rates as sustainable through the
end of the decade, at least. Though there has been some investor consternation
surrounding U.S. hurricane-related adverse impacts to sector volumes for the
third quarter earnings period, we believe that these are one-time events. In
our view, procedures are more likely to be delayed into the fourth quarter than
cancelled outright and underlying procurement volume trends remain strong.
Lastly, U.S. tax reform remains a key catalyst for almost all MedTech
companies, as does the potential delay or repeal of the medical device excise
tax. Turning to stock selection, we continue to prefer (1) cardiology - where
innovation remains industry leading, (2) surgical robotics - where technology
advances have been and will continue to be disruptive to historical surgical
paradigms, and (3) extremities implants/biologics - which remain at the very
early stages of the adoption curve.
Life Sciences Tools and Services
We remain somewhat guarded for the prospects of the life science tools space.
Certainly valuation continues to be demanding in both relative and absolute
sense. Nevertheless, outperformance in the past six months was driven by a
perceived political and regulatory shield from an unpredictable administration
and healthy end markets.
Federal funding environments in bio-pharma and academic research institutions
remains buoyant driven by excitement around developments in oncology. Despite
healthy end markets, valuation and sub-sector rotation dynamics will play even
more of a critical role in positioning as we look ahead into 2018. Major U.S.
corporate tax reform and subsequent repatriation of overseas cash could
catalyse material M&A, especially in bio-pharma. However, the consolidation of
bio-pharma could pressure the life sciences tools sector as pharmaceutical
companies rationalise their research and development ("R&D") programmes.
Coupled with this potential headwind and aforementioned valuation, we remain
selective in life sciences tools.
The diagnostics industry, as has been the case for the last several years,
remains an industry beholden to reimbursement policies set by both private
payers and U.S. Medicare. Utilisation has seen both ups and downs during this
period with "Obamacare" backed tailwinds offset by severe weather-related
headwinds.
More importantly, the industry hit a major fundamental set back this year when
the Protecting Access to Medicare Act enacted legislative reimbursement cuts
for Medicare lab fee services that were more draconian than expected. Set to
take effect from January 2018, if finalised, Medicare reimbursement for high
volume lab tests could be reduced by up to 10%.
The remainder of 2017 could be quite volatile as the lab industry awaits the
final ruling after a contentious public hearing period. Given the expected
reimbursement cuts and potential reduction in insured lives under the new
administration's political efforts, we remain cautious on the sector until
further clarity can be observed.
Healthcare Services
In healthcare services, payers have outperformed providers due to weaker than
expected utilisation of healthcare. Specifically, payers such as health
maintenance organisations (also known as HMOs, a type of health insurance plan
that usually limits coverage to care from doctors who work for or contract with
that HMO), reported strong earnings upside and raised full year 2017 guidance.
In contrast, providers such as hospitals experienced decelerating volumes and
reduced their financial outlooks for the year. (Severe hurricanes that plagued
the southern United States in September 2017 were also disruptive, although
generally viewed as one-time non-recurring impacts.)
Macroeconomic trends have also favoured payers over providers. For example,
payers stand to benefit most from corporate tax reform because all of their
business is conducted in the U.S. and from rising interest rates because they
would generate higher income on investment portfolios. Rising interest rates is
bad for levered hospitals.
Going forward we remain bullish on HMOs with a view that utilisation will
remain modest, the macroeconomic environment benign, and the regulatory
environment under the Trump administration favouring the private sector over
Obamacare. We remain bearish on provider stocks including hospitals because
they are negatively impacted by these conditions. Separately, we are bearish on
Pharmacy Benefit Managers ("PBM"s) (who serve as the middlemen between
insurance companies, pharmacies and manufacturers to secure lower drug costs
for insurers and insurance companies) as this industry transitions from a
disciplined duopoly to an increasingly competitive and more transparent market
due to new entrants.
Emerging Markets
Throughout 2017, the Chinese government has continued to enact reforms to raise
drug quality, improve regulatory speed and efficiency, and promote innovation.
To improve overall drug quality in China, the government has been enforcing
bioequivalence standards for generic drugs, forcing companies to certify the
quality of their clinical trial data, and allowing more foreign high-quality
drugs into the Chinese market. These reforms have led to a dramatic drop in the
backlog of drugs pending review at the China Food and Drug Administration
("CFDA"), as lower-quality pharmaceutical companies with deficient data
packages have pulled their applications.
To improve regulatory speed and efficiency, the CFDA has been approving
clinical trial initiations more quickly, adding more drug reviewers, and
improving the frequency and quality of communication between the sponsor and
the agency. To promote innovation, the Chinese government has been accelerating
the regulatory review of innovative drugs, increasing reimbursement of
innovative drugs, and decreasing reimbursement of drugs with questionable
clinical data. These reforms have occurred while implementing regulations to
discourage over-prescribing of drugs and enacting rules to simplify the drug
distribution chain to remove cost.
In the short-term, all of these policies have led to a fall in prescription
drug sales. Over the long-term, we believe these policies are positive for the
innovative drug industry and will remove many of the low-quality companies that
have historically pressured prices. Indeed, the regular drug price cuts that
have characterised the industry have been more moderate recently than in the
past. We continue to favour Chinese players with innovative pipelines in light
of these policies.
The Indian pharmaceutical industry has recently experienced several regulatory
headwinds and policy changes, but despite these challenges the underlying
demand in the sector remains robust. The industry's growth rate has declined to
c.3.0% during the reported period, down from c.10.0% the previous year. The
reasons behind this slowdown are multifactorial, including the introduction of
the Goods and Services Tax (GST) that triggered trade inventory corrections,
and the impact of the new draft pharmaceutical policy aimed at controlling
costs and stoking competition. We anticipate continued volume growth for the
industry due to strong underlying demand owing to rising disposable income,
increasing insurance penetration, improving medical infrastructure, and
increasing incidence of chronic diseases. That said, we are closely monitoring
industry pricing dynamics, with a keen eye on the potential negative impact of
additional government cost control initiatives. This could emerge as an
important near-to-intermediate-term risk.
Indian companies with significant exposure to the U.S. generic drug market have
also faced additional challenges, similar to their U.S.-based competitors.
These challenges include: (1) increasing regulatory scrutiny on both
manufacturing and marketing operations, (2) customer consolidation, and (3)
higher than expected base business price erosion. Despite these challenges, the
U.S. market remains an important contributor of revenues and profits to most
Indian pharmaceutical companies. Such challenges should help well-run Indian
companies become more compliant and cost efficient, allowing management to
strengthen and re-focus product pipelines toward differentiated generics.
Additionally, Indian pharmaceutical companies have benefited from the high
double-digit growth rates witnessed in emerging markets such as South East
Asia, Middle East, Africa, and Eastern Europe. Currency dynamics in some of
these geographies have become more favourable allowing Indian companies to reap
the benefits of widely diversified product baskets via leverage of supply
agreements and acquisitions reached in quarters past.
Our strategy in India is multifold. We strive to invest in (1) high quality
companies with a focus on high growth chronic segments in the domestic market,
(2) companies that prioritise compliant manufacturing and have a significant
and growing U.S. exposure with a focus on a differentiated generics pipeline,
and (3) companies with high growth and profitable emerging market exposure.
OUTLOOK FOR 2018
Despite recent volatility in the biotechnology sector our collective optimism
is high for 2018. Global healthcare stocks are clearly now trading on
fundamentals again rather than retreating on political rhetoric. Importantly,
our view on the fundamentals of healthcare is decidedly positive, and we expect
continued moves higher as secular demand and consumption of healthcare goods
and services should continue unabated.
Therapeutic stocks, pharmaceuticals and biotechnology, will continue to prosper
during this golden era of innovation. While the fruits of genomics were not
ripe enough to pick at the turn of the century, today's discoveries are turning
into real drugs with real benefits to patients and the entirety of the
healthcare system. Political risk for the sector is perhaps at an all-time
modern low. In fact in the U.S., politics may turn into a tailwind in 2018 if
tax reform can be enacted, creating even more cash flow into a system which
notably benefits from such circumstances.
Overall, with technical and macro pressures fading, company-specific events
that are central to our investment process should return to prominence, with
clinical, regulatory and M&A catalysts driving individual stock price
performance.
Samuel D. Isaly
OrbiMed Capital LLC
Portfolio Manager
23 November 2017
PRINCIPAL CONTRIBUTORS TO AND DETRACTORS FROM NET ASSET VALUE PERFORMANCE
For the six months to 30 September 2017
Contribution
Contribution per
share (p)*
Top Five Contributors
£'000
Puma Biotechnology 18,307 39.2
Beigene 15,998 34.2
Intuitive Surgical 8,744 18.7
Nippon Shinyaku 8,672 18.6
Novo Nordisk 7,808 16.7
Top Five Detractors
Wright Medical (13,219) (28.3)
Mylan (7,562) (16.2)
Coherus Biosciences (7,148) (15.3)
Incyte (6,527) (14.0)
HCA Healthcare (5,885) (12.6)
* based on 46,719,666 shares being the weighted average number of
shares in issue during the six months ended 30 September 2017.
Source: Frostrow Capital LLP
Portfolio
as at 30 September 2017
Market value % of
Investments Country/ £'000 investments
region
Alexion Pharmaceuticals USA 51,840 4.0
Boston Scientific USA 49,222 3.8
Novo Nordisk* Denmark 49,059 3.8
Eli Lilly USA 45,271 3.5
Intuitive Surgical USA 43,943 3.4
Wright Medical Netherlands 43,773 3.4
Merck USA 41,681 3.2
Regeneron Pharmaceuticals USA 40,317 3.1
Cigna USA 34,246 2.7
Anthem USA 34,229 2.7
Top 10 investments 433,581 33.6
Chugai Pharmaceutical Japan 29,759 2.3
Celgene USA 29,714 2.3
Edwards Lifesciences USA 29,143 2.3
Nippon Shinyaku Japan 28,923 2.2
Incyte USA 27,607 2.1
Vertex Pharmaceuticals USA 26,435 2.1
BeiGene Cayman Island 26,260 2.0
Mylan Netherlands 25,588 2.0
Illumina USA 24,701 1.9
Puma Biotechnology USA 23,369 1.8
Top 20 investments 705,080 54.6
Amgen USA 23,206 1.8
Novartis Switzerland 22,528 1.7
Eisai Japan 22,377 1.7
Stryker USA 22,124 1.7
Aetna USA 21,889 1.7
Galapagos** Belgium 21,653 1.7
Biogen USA 21,342 1.6
Unitedhealth Group USA 20,168 1.6
Clovis Oncology USA 19,365 1.5
Allergan*** Ireland 19,174 1.5
Top 30 investments 918,906 71.1
Genmab Denmark 18,427 1.4
Array BioPharma USA 18,136 1.4
Radius Health USA 17,146 1.3
Alnylam Pharmaceuticals USA 16,464 1.3
Bristol-Myers Squibb USA 16,264 1.2
Xencor USA 12,765 1.0
Thermo Fisher Scientific USA 12,732 1.0
Nevro USA 12,399 1.0
Agilent Technologies USA 12,360 1.0
Juno Therapeutics USA 11,323 0.9
Top 40 investments 1,066,922 82.6
Celltrion South Korea 11,130 0.9
Integra Lifesciences USA 10,981 0.9
Coherus Biosciences USA 10,743 0.8
Santen Pharmaceutical Japan 10,485 0.8
Wright Medical Contingent Value Rights USA 10,299 0.8
Momenta Pharmaceuticals USA 10,098 0.8
Celltrion Healthcare South Korea 9,734 0.8
Takeda Pharmaceutical Japan 9,578 0.7
Luye Pharma China 9,191 0.7
Nuvasive USA 9,123 0.7
Top 50 investments 1,168,284 90.5
Sino Biopharmaceuticals China 8,276 0.6
Biomarin Pharmaceutical USA 7,150 0.5
Spark Therapeutics USA 6,515 0.5
Magellan Health USA 6,281 0.5
Aerie Pharmaceuticals USA 6,107 0.5
Genoa A QOL Healthcare FRN 28/10/2024 USA 5,927 0.5
(unquoted)
Bioventus FRN 21/11/2021 (unquoted) USA 5,888 0.5
Medical Depot Holdings FRN 03/01/2024 USA 5,583 0.4
(unquoted)
Ironwood Pharmaceuticals USA 5,273 0.4
Yestar Healthcare China 5,147 0.4
Top 60 investments 1,230,431 95.3
ImmunoGen USA 4,387 0.3
Bluebird Bio USA 4,237 0.3
IHH Healthcare Malaysia 4,060 0.3
Teva Pharmaceutical USA 3,860 0.3
Fluidigm USA 3,148 0.3
Wenzhou Kangning Hospital China 2,826 0.2
Vectura UK 2,440 0.2
Aegerion Pharmaceuticals 2% 15/08/2019 USA 2,160 0.2
(unquoted)
Innoviva USA 1,502 0.1
NewLink Genetics USA 981 0.1
Top 70 investments 1,260,032 97.6
Deciphera Pharmaceuticals USA 564 0.0
Ono Pharmaceutical Japan 471 0.0
Novelion Therapeutics Canada 131 0.0
Alimera Sciences USA 63 0.0
Total equities and fixed interest investments 1,261,261 97.6
OTC Equity Swaps - Financed
Emerging markets Healthcare (Basket) Emerging 19,097 1.5
Markets
Jiangsu Hengrui Medicine China 16,074 1.2
JP China HC A-Share (Basket) China 13,824 1.1
India Health Care (Basket) India 10,923 0.8
M&A (Basket) USA 9,791 0.8
Aier Eye Hospital Group China 8,492 0.7
Jiangsu Nhwa Pharmaceutical China 8,489 0.6
China O ACK (Basket) China 4,579 0.4
Less: Gross exposure on financed swaps (86,054) (6.7)
OTC Equity Swaps - Funded
Aurobindo Pharma India 14,471 1.1
Strides Shasun China 8,951 0.7
Ajanta Pharma India 1,800 0.2
Total OTC Swaps 30,437 2.4
Total investments including OTC Swaps 1,291,698 100.0
Put Options (Long) 602 0.0
Put Options (Short) (437) 0.0
Call Options (Long) 132 0.0
Call Options (Short) (4) 0.0
Total investments including OTC Swaps and 1,291,991 100.0
Options
* includes Novo Nordisk ADR equating to 0.9% of investments.
** includes Galapagos ADR equating to 1% of investments.
*** includes Allergan 5.5% Preference equating to 0.5% of investments.
See note 1 for further details in relation to the OTC Swaps and Options.
Interim Management Report
PRINCIPAL RISKS AND UNCERTAINTIES
The principal risks and uncertainties associated with the Company are set out
on pages 22 to 24 of the Annual Report & Accounts for the year ended 31 March
2017, which is published on the Company's website. Such risks and uncertainties
are as applicable for the remaining six months of the Company's financial year
as they have been for the period under review. The risks can be summarised
under the following headings: Investment (including leverage risks);
Operational (including financial, corporate governance, accounting, legal,
cyber security and regulatory risks); and, Strategic (including shareholder
relations and share price performance).
The Board acknowledges the continued uncertainty surrounding the UK's decision
to leave the EU. However, the Board does not consider that this decision has
significantly altered the risk profile of the Company as the vast majority of
the Company's investments are based outside the EU.
RELATED PARTY TRANSACTIONS
During the first six months of the current financial year no material
transactions with related parties have taken place which have affected the
financial position or the performance of the Company during the period.
GOING CONCERN
The Directors believe, having considered the Company's investment objectives,
risk management policies, capital management policies and procedures, nature of
the portfolio and expenditure projections, that the Company has adequate
resources, an appropriate financial structure and suitable management
arrangements in place to continue in operational existence for the foreseeable
future and, more specifically, that there are no material uncertainties
relating to the Company that would prevent its ability to continue in such
operational existence for at least twelve months from the date of the approval
of this half yearly financial report. For these reasons, they consider there is
reasonable evidence to continue to adopt the going concern basis in preparing
the accounts.
DIRECTORS' RESPONSIBILITIES
The Board of Directors confirms that, to the best of its knowledge:
(i) the condensed set of financial statements contained within the Half
Year Report and Accounts has been prepared in accordance with the Financial
Reporting Standard 104 (Interim Financial Reporting); and
(ii) the interim management report includes a fair review of the
information required by 4.2.7R and 4.2.8R of the UK Listing Authority
Disclosure Guidance and Transparency Rules.
In order to provide these confirmations, and in preparing these financial
statements, the Directors are required to:
- select suitable accounting policies and then apply them consistently;
- make judgments and accounting estimates that are reasonable and
prudent;
- state whether applicable UK Accounting Standards have been followed,
subject to any material departures disclosed and explained in the financial
statements; and
- prepare the financial statements on the going concern basis unless it
is inappropriate to presume that the Company will continue in business;
and the Directors confirm that they have done so.
The Half Year Report has not been reviewed or audited by the Company's auditor.
For and on behalf of the Board
Sir Martin Smith
Chairman
23 November 2017
Income Statement
for the six months ended 30 September 2017
(Unaudited) (Unaudited)
Six months ended Six months ended
30 September 2017 30 September 2016
Revenue Capital Revenue Capital
Return Return Total Return Return Total
£'000 £'000 £'000 £'000 £'000 £'000
Gains on investments - 84,691 84,691 - 190,434 190,434
Exchange gains/(losses) - 7,618 7,618 - (5,806) (5,806)
on overdraft
Income from investments 5,573 - 5,573 5,016 - 5,016
(note 2)
AIFM, portfolio
management,
and performance fees (244) (14,001) (14,245) (207) (7,696) (7,903)
(note 3)
Other expenses (365) - (365) (342) - (342)
Net return before finance
charges and taxation 4,964 78,308 83,272 4,467 176,932 181,399
Finance charges (42) (792) (834) (21) (368) (389)
Net return before 4,922 77,516 82,438 4,446 176,564 181,010
taxation
Taxation (758) - (758) (406) - (406)
Net return after taxation 4,164 77,516 81,680 4,040 176,564 180,604
Return per share (note 4) 8.9p 165.9p 174.8p 8.6p 376.2p 384.8p
The "Total" column of this statement is the Income Statement of the Company.
The "Revenue" and "Capital" columns are supplementary to this and are prepared
under guidance published by the Association of Investment Companies. All
revenue and capital items in the above statement derive from continuing
operations and the net return/(loss) after taxation is attributable to the
owners of the Company.
The Company has no recognised gains and losses other than those shown above and
therefore no separate statement of Total Comprehensive Income has been
presented.
Statement of Changes in Equity
for the six months ended 30 September 2017
(Unaudited) (Unaudited)
Six months Six months
ended ended
30 September 30 September
2017 2016
£'000 £'000
Opening shareholders' funds 1,100,903 881,758
Shares purchased for treasury - (21,381)
Issue of new shares 23,482 -
Return for the period 81,680 180,604
Dividends paid - revenue (7,447) (4,702)
Closing shareholders' funds 1,198,618 1,036,279
Statement of Financial Position
as at 30 September 2017
(Unaudited) (Unaudited)
30 September 30 September
2017 2016
£'000 £'000
Fixed assets
Investments 1,261,261 1,078,761
Derivatives - OTC swaps 30,437 35,232
1,291,698 1,113,993
Current assets
Debtors 5,125 8,433
Derivatives - put and call options 734 561
Cash 10,384 16,892
16,243 25,886
Current liabilities
Creditors: amounts falling due within one year (108,882) (102,989)
Derivatives - put and call options (441) (611)
(109,323) (103,600)
Net current liabilities (93,080) (77,714)
Total net assets 1,198,618 1,036,279
Capital and reserves
Ordinary share capital 11,862 11,627
Share premium account 256,786 233,537
Capital reserve 911,006 772,497
Capital redemption reserve 8,221 8,221
Revenue reserve 10,743 10,397
Total shareholders' funds 1,198,618 1,036,279
Net asset value per share - basic (note 5) 2,526.3p 2,228.3p
Notes to the Financial Statements
1. ACCOUNTING POLICIES
The condensed Financial Statements for the six months to 30 September 2017
comprise the statements set out on the previous pages with the related notes
below. They have been prepared in accordance with FRS 104 'Interim Financial
Reporting', the AIC's Statement of Recommended Practice issued in November 2014
('New SORP') and using the same accounting policies as set out in the Company's
Annual Report and Financial Statements at 31 March 2017.
Going concern
After making enquiries, and having reviewed the Investments, Statement of
Financial Position and projected income and expenditure for the next 12 months,
the Directors have a reasonable expectation that the Company has adequate
resources to continue in operation for the foreseeable future. The Directors
have therefore adopted the going concern basis in preparing these condensed
financial statements.
Fair value
Under FRS 102 and FRS 104 investments have been classified using the following
fair value hierarchy:
Level 1 - Quoted market prices in active markets
Level 2 - Prices of a recent transaction for identical instruments
Level 3 - Valuation techniques that use:
(i) observable market data; or
(ii) non-observable data
As of 30 September 2017
Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
Investments held at fair value through 1,240,201 - 21,060 1,261,261
profit or loss
Derivatives: OTC Swaps - 30,437 - 30,437
Derivatives: put and call options (long) - 734 - 734
Derivatives: put and call options (short) - (441) - (441)
Total 1,240,201 30,730 21,060 1,291,991
As of 31 March 2017
Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
Investments held at fair value through 1,127,087 - 30,475 1,157,562
profit or loss
Derivatives: OTC Swaps - 34,410 - 34,410
Derivatives: put and call options (long) - 1,191 - 1,191
Derivatives: put and call options (short) - (282) - (282)
Total 1,127,087 35,319 30,475 1,192,881
2. INCOME
(Unaudited) (Unaudited)
Six months ended Six months ended
30 September 30 September
2017 2016
£'000 £'000
Investment income 5,573 5,016
Total 5,573 5,016
3. AIFM, PORTFOLIO MANAGEMENT AND PERFORMANCE FEES
(Unaudited) (Unaudited)
Six months ended Six months ended
30 September 2017 30 September 2016
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
AIFM fee (54) (1,019) (1,073) (43) (821) (864)
Portfolio management fee (190) (3,611) (3,801) (164) (3,117) (3,281)
Performance fee charge
for the period* - (9,371) (9,371) - (3,758) (3,758)
(244) (14,001) (14,245) (207) (7,696) (7,903)
* During the six months ended 30 September 2017, due to outperformance
against the Benchmark, a charge of £9,371,000 occurred (six months ended 30
September 2016: a charge of £3,758,000). In addition, performance fees, accrued
in previous periods, totaling £2,427,000 (six months ended 30 September 2016: £
1,331,000) crystallised and became payable.
As at 30 September 2017 total performance fees of £12,758,000 were accrued (31
March 2017: £3,387,000). This amount consists of £2,427,000 (31 March 2017:
nil) that has crystallised and is payable of which £2,205,000 was payable to
OrbiMed and £222,000 was payable to Frostrow, and a provision of £10,331,000
(31 March 2017: £3,387,000). This provision, relating to outperformance
generated at 30 September 2017, will only become payable at future performance
fee calculation dates in the event that the current outperformance is
maintained. The maximum amount that could become payable by 30 September 2018,
in the event that outperformance is maintained is £10,331,000.
See glossary
With effect from 1 April 2017 the AIFM fee was amended to 0.30% of the market
capitalisation up to £150 million, 0.20% in excess of £150 million and up to £
500 million, 0.15% in excess of £500 million and up to £1 billion, 0.125% in
excess of £1 billion to £1.5 billion, and over £1.5 billion 0.075%, plus a
fixed amount equal to £57,500 per annum. The Portfolio Management fee remained
unchanged at 0.65% per annum of the Company's NAV.
The performance fee provision is calculated quarterly by comparing the
cumulative performance of the Company's NAV with the cumulative performance of
the Benchmark since the launch of the Company in 1995. For performance fees
payable to 31 March 2018 relating to outperformance attained by 31 March 2017,
the performance fee is 16.5% of any outperformance over the Benchmark, with
OrbiMed receiving 15% and Frostrow receiving 1.5%. For outperformance generated
from 1 April 2017 the performance fee is 15% of any outperformance over the
Benchmark payable to OrbiMed.
4. RETURN PER SHARE
(Unaudited) (Unaudited)
Six months ended Six months ended
30 September 30 September
2017 2016
£'000 £'000
The return per share is based on the following
figures:
Revenue return 4,164 4,040
Capital return 77,516 176,564
Total return/(loss) 81,680 180,604
Weighted average number of shares in issue for the 46,719,666 46,937,714
period
Revenue return per share 8.9p 8.6p
Capital return per share 165.9p 376.2p
Total return per share 174.8p 384.8p
The calculation of the total, revenue and capital returns per ordinary share is
carried out in accordance with IAS 33, "Earnings per Share (as adopted in the
EU)".
5. NET ASSET VALUE PER SHARE
The net asset value per share is based on the assets attributable to equity
shareholders of £1,198,618,000 (31 March 2017: £1,100,903,000) and on the
number of shares in issue at the period end of 47,446,278 (31 March 2017:
46,506,278).
6. TRANSACTION COSTS
Purchase transaction costs for the six months ended 30 September 2017 were £
366,000 (six months ended 30 September 2016: £249,000).
Sales transaction costs for the six months ended 30 September 2017 were £
266,000 (six months ended 30 September 2016: £192,000).
These costs comprise mainly commission.
7. PRINCIPAL RISKS AND UNCERTAINTIES
The principal risks facing the Company are listed in the Interim Management
Report. An explanation of these risks and how they are managed is contained in
the Strategic Report and note 16 of the Company's Annual Report & Accounts for
the year ended 31 March 2017.
8. COMPARATIVE INFORMATION
The condensed financial statements contained in this half year report do not
constitute statutory accounts as defined in section 434 of the Companies Act
2006. The financial information for the half years ended 30 September 2017 and
30 September 2016 has not been audited, or reviewed by the Company's auditor.
The information for the year ended 31 March 2017 has been extracted from the
latest published audited financial statements of the Company. Those financial
statements have been filed with the Registrar of Companies. The report of the
auditor on those financial statements was unqualified, did not include a
reference to any matters to which the auditors drew attention by way of
emphasis without qualifying the report, and did not contain statements under
either section 498 (2) or 498 (3) of the Companies Act 2006.
Earnings for the first six months should not be taken as a guide to the results
for the full year.
Glossary
Alternative Investment Fund Managers Directive (AIFMD)
Agreed by the European Parliament and the Council of the European Union and
transported into UK legislation, the AIFMD classifies certain investment
vehicles, including investment companies, as Alternative Investment Funds
(AIFs) and requires them to appoint an Alternative Investment Fund Manager
(AIFM) and depositary to manage and oversee the operations of the investment
vehicle. The Board of the Company retains responsibility for strategy,
operations and compliance and the Directors retain a fiduciary duty to
shareholders.
Benchmark
The performance of the Company is measured against the MSCI World Health Care
Index on a net total return, sterling adjusted basis. Prior to 1 October 2010
performance was measured against the Datastream World Pharmaceutical &
Biotechnology Index (total return, sterling adjusted).
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.
Equity Swaps
An equity swap is an agreement in which one party (counterparty) transfers the
total return of an underlying equity position to the other party (swap holder)
in exchange for a one off payment 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.
Your Company uses two types of equity swap:
- funded, where payment is made on acquisition. They are equivalent to
holding the underlying equity position with the exception of additional
counterparty risk and not possessing voting rights in the underlying; and,
- financed, where payment is made on maturity. As there is no initial
outlay, financed swaps increase economic 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.
Gearing
Gearing is calculated as borrowings, less net current assets, divided by
Shareholders' Funds, expressed as a percentage.
Leverage
Leverage is defined in the AIFMD as any method by which the AIFM increases the
exposure of an AIF. Therefore, the Company has to comply with the AIFMD
leverage requirements. For these purposes the Board has set a maximum leverage
limit of 40% for both methods. Under AIFMD this limit is expressed as 140%,
where 100% represents no leverage or gearing in the Company. There are two
methods of calculating leverage as follows:
The Gross Method is calculated as total exposure divided by Shareholders Funds.
Total exposure is calculated as net assets, less cash and cash equivalents,
adding back cash borrowing plus derivatives converted into the equivalent
position in their underlying assets.
The Commitment Method is calculated as total exposure divided by Shareholders
Funds. In this instance total exposure is calculated as net assets, less cash
and cash equivalents, adding back cash borrowing plus derivatives converted
into the equivalent position in their underlying assets, adjusted for netting
and hedging arrangements.
See the definition of Options and Equity Swaps for more details on how exposure
through derivatives is calculated.
MSCI World Health Care Index
The MSCI information (relating to the Benchmark) may only be used for your
internal use, may not be reproduced or redisseminated in any form and may not
be used as a basis for or a component of any financial instruments or products
or indices. None of the MSCI information is intended to constitute investment
advice or a recommendation to make (or refrain from making) any kind of
investment decision and may not be relied on as such. Historical data and
analysis should not be taken as an indication or guarantee of any future
performance analysis, forecast or prediction. The MSCI information is provided
on an "as is" basis and the user of this information assumes the entire risk of
any use made of this information. MSCI, each of its affiliates and each other
person involved in or related to compiling, computing or creating any MSCI
information (collectively, the "MSCI Parties") expressly disclaims all
warranties (including, without limitation, any warranties of originality,
accuracy, completeness, timeliness, non-infringement, merchantability and
fitness for a particular purpose) with respect to this information. Without
limiting any of the foregoing, in no event shall any MSCI Party have any
liability for any direct, indirect, special, incidental, punitive,
consequential (including, without limitation lost profits) or any other
damages. (www.msci.com)
NAV Total Return
The theoretical total return on shareholders' funds per share, including the
assumed £100 original investment at the beginning of the period specified,
reflecting the change in NAV assuming that dividends paid to shareholders were
reinvested at NAV at the time the shares were quoted ex-dividend. A way of
measuring investment management performance of investment trusts which is not
affected by movements in discounts/premiums.
Ongoing Charges
Ongoing charges are calculated by taking the Company's annualised ongoing
charges, excluding finance costs, taxation, performance fees and exceptional
items, and expressing them as a percentage of the average daily net asset value
of the Company over the year.
Options
An option is an agreement that gives the buyer, who pays a fee (premium), the
right - but not the obligation - to buy or sell a specified amount of an
underlying asset at an agreed price (strike or exercise price) on or until the
expiration of the contract (expiry). A call option is an option to buy, and a
put option an option to sell.
The potential loss of the buyer is limited to the higher of the premium paid or
the market value of the bought option. On the other side for the seller of a
covered call option (your company does not sell uncovered options) any loss
would be offset by gains in the covering position, and for sold puts the
potential loss is the strike price times the number of option contracts held.
The exposure, used in calculating the AIFMD leverage limits, is determined as
the delta (an options delta measures the sensitivity of an option's price
solely to a change in the price of the underlying asset) adjusted equivalent of
the underlying position.
Performance Fee
Dependent on the level of long-term outperformance of the Company, a
performance fee can be become payable. The performance fee is calculated by
reference to the amount by which the Company's net asset value ('NAV')
performance has outperformed the Benchmark.
The fee is calculated quarterly by comparing the cumulative performance of the
Company's NAV with the cumulative performance of the Benchmark since the launch
of the Company in 1995. Provision is also made within the daily NAV per share
calculation as required and in accordance with generally accepted accounting
standards. Up to 31 March 2017, the performance fee amounted to 16.5% of any
outperformance over the Benchmark, the Portfolio Manager receiving 15% and the
AIFM receiving 1.5%, respectively. With effect from 1 April 2017 the Company's
AIFM no longer receives a performance fee (see page 27 and also page 28 of the
Company's Annual Report & Accounts for the year ended 31 March 2017 for further
information).
In order to ensure that only sustained outperformance is rewarded, at each
quarterly calculation date any performance fee payable is based on the lower
of:
i) The cumulative outperformance of the investment portfolio over the
Benchmark as at the quarter end date; and
ii) The cumulative outperformance of the investment portfolio over the
Benchmark as at the corresponding quarter end date in the previous year.
The effect of this is that outperformance has to be maintained for a twelve
month period before the related fee is paid.
In addition, a performance fee only becomes payable to the extent that the
cumulative outperformance gives rise to a total fee greater than the total of
all performance fees paid to date.
For and on behalf of
Frostrow Capital LLP, Secretary
23 November 2017
- ENDS -
Worldwide Healthcare Trust : Half-year Report
November 23, 2017 at 04:57 am EST
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© PRNewswire - 2017
