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RNS

Annual Financial Report

Released 16:34 02-Nov-2017

RNS Number : 4467V
Intl. Biotechnology Trust PLC
02 November 2017
 
INTERNATIONAL BIOTECHNOLOGY TRUST PLC (IBT or the Company)

Annual Financial Report Announcement of Audited Results for the year ended 31 August 2017

This announcement contains regulated information.

The information contained in this Annual Financial Report Announcement, including the 31 August 2016 comparatives, has been prepared in accordance with International Financial Reporting Standards (IFRS) and those parts of the Companies Act 2006 (the Act) applicable to companies reporting under IFRS. These comprise standards and interpretations approved by the International Accounting Standards Board (IASB) and International Accounting Standards Committee (IASC), as adopted by the European Union (EU).  The results for the year ended 31 August 2017 are audited but do not constitute statutory accounts as defined in Section 434 of the Act.  The statutory accounts have not yet been delivered to the Registrar of Companies. Full statutory accounts for the year ended 31 August 2016 included an unqualified audit report and have been filed with the Registrar of Companies.

 

 

Performance and Financial Highlights

year ended 31 August 2017

 

Performance

 

Net asset value (NAV)

+20.9%

Quoted portfolio (NAV)

+31.2%

Share price

+30.5%

NASDAQ Biotechnology Index (NBI)

+21.7%

FTSE All-Share Index

+14.4%

All sterling-adjusted and on a total return basis.

 

 

 

 

 

31 August

31 August

Financial Highlights

2017

2016

Total equity (£'000)

252,651

216,651

NAV per share

672.9p

575.1p

Share price

624.0p

497.5p

Share price discount

(7.3)%

(13.5)%

Ongoing charges*

1.3%

1.4%

Ongoing charges including performance fee

1.9%

1.7%

* Calculated in accordance with the Association of Investment Companies (the AIC) guidance. Based on total expenses excluding finance costs and performance fee and expressed as a percentage of average daily net assets. The ratio including performance fee has also been provided, in line with the AIC recommendations.

† Includes Management fees paid to SV Health directly from investment in SV Fund VI of £985,000.

 

Chairman's Statement

 

Summary

In the year ended 31 August 2017, the NAV per Ordinary share of the Company rose from 575.1p to 672.9p, including a significant currency gain, equivalent to 14.4 pence per share. The NAV per share returned 20.9%. Over the same period, the Shareholders total return was 30.5%. This compares to a rise in the NBI of 21.7% and a gain in the FTSE All-Share Index of 14.4%. All figures are on a total return basis and are sterling-adjusted. The quoted portfolio has performed very strongly, outperforming the benchmark by 7.7%.

 

Longer-term results

The Company's performance since our lead investment manager, Carl Harald Janson, joined SV Health Managers in September 2013 has been impressive. Over the last four years, the Company has significantly outperformed the NBI on both a NAV and share price basis, with outperformances of 12.1% and 31.5% respectively. Shareholders will also be pleased by our substantial outperformance of the broader UK equity market, as measured by the FTSE All-Share Index. Over the last four years, our NAV is up by 122.0%, versus a return of 37.7% for the UK market as a whole.

 

Unquoted portfolio

Shareholders granted approval at the General Meeting held on 29 September 2016 for the Company to invest directly into unquoted funds, including venture funds. We subsequently made a commitment of $30m into SV Life Sciences Fund VI (SV Fund VI), of which $10.8m (£8.8m) had been invested at the year end. Investing directly into this venture fund allows us access to a wider range of unquoted investments, and to date SV Fund VI has invested in 16 underlying portfolio companies. Our investment in SV Fund VI will increase slowly over the investment period and overlap with the exits of our existing direct holdings in unquoted companies. The Board expects the unquoted portfolio to remain within the guideline range of 10-15% of total investments.

 

The legacy portion of the unquoted companies performed disappointingly over the year ended 31 August 2017, with a return of -22.2%, and now makes up 5.2% of the NAV. The reasons for this are more fully explained in the Investment Manager's Review.

 

Dividends, buybacks and discount

I am pleased to report that our first dividend payment was made to Shareholders on 31 January 2017 at a rate of 11.5p per share. We paid out a dividend equal to 4% of NAV as at 31 August 2016 in two equal tranches on 31 January 2017 and 31 August 2017. As anticipated, the underlying growth of our investments is more than sufficient to support the payment of the dividend out of capital growth.

 

In accordance with the Shareholder Circular dated 13 September 2016 and as a matter of best practice, the Board will be seeking Shareholder approval to continue the payment of dividends, and a resolution will be put to Shareholders at the forthcoming Annual General Meeting (AGM). For the year ended 31 August 2017, we propose a dividend of two equal tranches of 13.5p to be paid on 31 January 2018 (to Shareholders on the Register at the close of business on Friday, 5 January 2018) and 31 August 2018. This represents a 17.4% increase on the previous year's dividend.

 

The Company bought back 125,000 shares at a cost of £0.6m during the year, as part of our discount management activity for the benefit of Shareholders.

 

This enhanced the NAV per share by 0.3p because the shares were bought at a discount to NAV that averaged approximately 13.9%.

 

Since the announcement of our policy changes and the introduction of the dividend in September 2016, no further buybacks have been required for discount management purposes. Indeed, the discount narrowed to 7.3% from 13.5% at the previous year end. It is the Board's long-term intention to continue to reduce the discount as market conditions allow.

 

Performance fee

As noted above, the exceptional outperformance of the quoted portfolio versus the benchmark has given rise to a performance fee of £1,374,000.

 

Board of Directors

It is my intention to retire at the AGM in December this year and John Aston will succeed me. I am pleased to have witnessed the impressive growth of the Company during my time as Chairman and I am confident that the remaining Board members will continue to support the next successful stage of the Company's development. Over the last five years, we have regularly refreshed the composition of the Board and do not feel the need to add an additional Board member at this time.

 

Prospects

Many of the factors which have contributed to relatively flat growth for the sector over the past two years, namely drug pricing and political concerns, appear to be abating. The final two months of the financial year have seen the sector begin to participate in the broader market rally, which I believe gives investors confidence to gain exposure to a sector with exciting growth prospects. Recent interesting developments in scientific innovation offer promise that biotechnology will remain an exciting investment area over the long-term. I am optimistic that exposure to the sector through a Company managed by investment experts with medical and scientific backgrounds can identify such investments and generate good returns for Shareholders.

 

AGM

This year's AGM will be held at 2.30 pm on Tuesday, 12 December 2017 at BNP Paribas Securities Services S.C.A., 10 Harewood Avenue, London, NW1 6AA. In addition to the formal process of voting on various resolutions, the AGM is an opportunity for Shareholders to meet the Board and representatives of the Investment Manager.

 

Our regular biennial continuation vote required by the Company's Articles of Association will be put to Shareholders at the AGM. I and my fellow Directors strongly recommend that Shareholders vote in favour.

 

As in previous years, there will be a presentation from the Investment Manager. If you have any detailed or technical questions, it would be helpful if you could raise these in advance of the Meeting by emailing the Company Secretary at secretarialservice@uk.bnpparibas.com or in writing to BNP Paribas Secretarial Services Limited, 10 Harewood Avenue, London, NW1 6AA. Shareholders who are unable to attend the AGM are encouraged to use their proxy votes.

 

I look forward to welcoming as many of you as possible to the Meeting.

 

Alan Clifton

Chairman

2 November 2017

 
Investment Manager's Review

 

 

Best performing investments

Worst performing investments

Contribution to NAV

(Reduction) in NAV

Exelixis

£7.1m

Shire

£(2.0)m

Vertex

£6.6m

ReShape Medical

£(1.5)m

Ariad

£6.5m

EBR

£(1.3)m

Incyte

£5.9m

OncoEthix

£(1.2)m

Tesaro

£5.5m

Kalvista

£(1.2)m

 

Summary

In the year ended 31 August 2017, the Company's NAV per share rose by 20.9% including the dividend. The Company's share price returned 30.5%. The NBI increased by 21.7%, and the FTSE All-Share Index rose by 14.4%. All figures are on a total return basis and are sterling-adjusted.

 

By subsector, 90% of the portfolio was invested in therapeutics, 9% in specialty pharmaceuticals, 3% in medical devices, 2% in life science tools, diagnostics and services, and 3% in a venture capital fund, SV Fund VI. SV Fund VI makes investments into unquoted companies across three sectors; biotechnology (40%), healthcare services and IT (40%) and medical devices (20%). Cash and other net assets were -7% of NAV.

 

Overview and performance

2017

2016

Total portfolio companies*

83

75

Quoted

69

58

Unquoted

14

17

NAV

£252.7m

£216.7m

Quoted

£241.7m

£192.9m

Unquoted

£27.7m

£28.9m

Other assets/(liabilities)

£(16.7)m

£(5.1)m

Legal commitments to investments in unquoted

£14.9m

£0.0m

Reserved for further investment in unquoted

£2.7m

£2.4m

 

* Excluding unquoted companies fully written off - 2017: 8; (2016: 6)

 

At 31 August 2017, for financial reporting the quoted portfolio represented 92.3% of NAV (excluding cash and other net assets) at £248.6m. The unquoted portfolio represented 8.2% of NAV at £20.8m. Companies that were first invested in from the unquoted pool and have now become quoted but continue to be managed by the unquoted investment managers are included within the unquoted portfolio for the purposes of performance measurement. This mirrors the incentive arrangements and the responsiblities of the Investment Managers regarding the two portfolios. The table above and the analysis of performance reflects this analysis. Based on the classification of the investments as adjusted for performance measurement, the quoted portfolio was 89.0% of the portfolio, whilst the unquoted portfolio represented 11.0%.

 

Quoted portfolio

The return on the quoted portfolio was 31.2%, which outperformed the benchmark Index, the NBI, by 7.7% compared with the NBI total return of 21.7%. This relative geometric performance is used for the purpose of calculating the performance fee. On an arithmetic basis, the quoted portfolio outperformed the NBI by 9.5 percentage points.

 

As noted in our Half Yearly Report for the six months ended 28 February 2017, the biotechnology sector looked relatively good value compared to the broader market. During the second half of our financial year, the sector performed well. In June in the US, a draft Executive Order on drug pricing was leaked to the press.

 

The sector moved up on the news as it appeared the administration might be changing tack from comments made earlier in the year by the President of the US. The draft Order indicated a more industry friendly stance with regards to the pricing of drugs. However, geopolitical concerns triggered a sell-off in late July, which sharply reversed in late August driven by a significant M&A transaction of portfolio holding Kite Pharma by Gilead Sciences for $11.9bn. This reignited belief that M&A is alive and well, with hopes that potential US tax reform could drive more deals in the near to medium-term.

 

M&A deals

Five portfolio holdings were the subjects of successful bids during the year under review Ariad, Actelion, CoLucid, Neuroderm and Kite Pharma.

 

Ariad Pharmaceuticals was acquired by Takeda on 9 January for $24 per share, a 75% premium to the share price at the close of the previous day. Ariad Pharmaceuticals had been identified as a potential M&A target and the Company held a 3.6% position, resulting in a gain of £6.5m on our holding.

 

Eli Lilly announced the acquisition of a portfolio company CoLucid for $960m in an all cash transaction. CoLucid is a neurology company that had a late-stage acute migraine drug in development and Lilly paid a 30% premium to the previous closing share price.

 

In late January, Actelion, a Swiss biotechnology company and a long-term holding of the Company, was acquired by Johnson and Johnson for $30.0bn, a 23% premium to the previous closing share price.

 

Neuroderm, a clinical-stage company developing drug-device combinations for the central nervous system, was acquired by Mitsubishi Tanabe Pharma for a 17% premium to previous closing share prices and a total of $1.1bn in July.

 

On 28 August, Gilead announced it had agreed to buy Kite Pharmaceuticals for $11.9bn in a deal, a 29% premium to the previous share price, in a move that was welcomed by investors. Kite Pharmaceuticals is a leader in the emerging field of cell therapy, CAR-T.

 

Positive contributors

Exelixis is in the launch phase of its kidney cancer drug Cabometyx. The launch performance has been stronger than expected, beating analyst estimates. We took some profits during the year as the company had reached its price target.

 

Vertex's share price rose after announcing positive clinical data for its triple drug therapy in late-stage trials to treat Cystic Fibrosis.

 

Incyte, a biopharmaceutical company specialising in oncology product development, increased by £6.2m after upping the guidance on sales of its lead product, Jakafi, and on M&A speculation.

 

The Company had a significant position in Tesaro, another oncology company, whose drug niraparib was approved by the FDA on 27 March 2017. Niraparib is a PARP inhibitor which is a potential new treatment for ovarian cancer. Due to the exciting data that has been generated in late-stage trials, Tesaro was in discussions with acquirers. News of the bid speculation helped boost the share price and we chose to lock in profits at that point in time.

 

FX gains also added to the value of the quoted portfolio, with a gain of £5.6m, or 15.0 pence per share in the year.

 

Negative contributors

The Company's investment in Shire Pharmaceuticals was the negative contributor to performance. This has been due to investor concerns over competition of its haemophilia franchise from Roche's drug ACE910 and fears that the company would not deleverage its debt post the acquisition of Baxalta. The other top four negative contributors are discussed in the unquoted portfolio review.

 

Unquoted portfolio

The return for the unquoted portfolio over the year ended 31 August 2017 was a negative return of 25.7%. The combined effect of gains and losses on the unquoted investments was to decrease NAV by 20.1 pence per share. This is due to several factors, which are explained below. The previous unquoted investments experience higher volatility, as larger investments are made in fewer companies. Our change in the strategy of investing through a more diversified venture capital fund should reduce the volatility of the unquoted portfolio in future periods.

 

As at 31 August 2017, the Company held investments in ten unquoted portfolio companies, one investment in a venture fund, SV Fund VI, and interests in four further companies that have been sold, but where there are further receipts dependent on reaching drug development or financial milestones set at the point when those companies were sold. The Company also holds investments in three previously unquoted companies that are now listed, but which, as described previously, are still reported for performance purposes within the unquoted portfolio.

 

Following the approval of the change to the investment policy at the General Meeting on 29 September 2016, a new investment was made into SV Fund VI. The draw down to date on the commitment of $30m is £8.8m ($10.8m), with further amounts due to be drawn down over the investment period. SV Fund VI's investee companies continue to be diversified between biotechnology, healthcare services & IT and medical devices similar to our existing unquoted investments, but with smaller allocations to each individual company, allowing for greater diversification.

 

Valuation adjustments

ReShape Medical was written down by £1.1m in August based on a term sheet received from a potential acquirer. After the year end, on 2 October 2017, the company completed a merger with EnteroMedics, a publicly listed entity traded on the NASDAQ exchange. The shares in the combined company will be valued as a quoted stock, however, the investment will remain in the unquoted portfolio for performance measurement purposes.

 

EBR Systems was written down by £1.3m based on the latest financing term sheet. A significant financing round is required to finance the clinical trial for the wireless heart pacemaker, which is resulting in earlier investments being down valued.

 

Kalvista Pharmaceuticals completed a reverse merger in the period into Carbalyn Therapeutics on 23 November 2016 and is now listed on the NASDAQ Stock Market. The valuation of Kalvista fell by £1.2m following the listing while the company establishes itself. Following the year end, on 10 October 2017, Kalvista and Merck announced a collaboration for the Company's investigational intravitrealy (IVT) injection candidate currently in development for potential treatment of diabetic macular edema. The share price has risen significantly following the announcement and as at 1 November 2017, the investment was valued at £2.9m. For performance measurement purposes, it remains in the unquoted portfolio, as do Entellus and Transenterix.

 

In January 2017, Merck notified us that it would be discontinuing development of the assets acquired with OncoEthix due to toxicity concerns. The contingent milestones relating to this investment were written off in full, with an impact on the NAV of £1.2m. Although no further proceeds will be received relating to this investment, the overall return was a multiple of 2.4x.

 

Sale of unquoted investments in the year

Atopix was sold to Chiesi Farmaceuticals in November 2016, and we received upfront proceeds of £0.6m. Contingent milestones relating to the commercialisation of the CRTH2 antagonist are currently valued at £0.4m.

 

A recapitalisation of NCP Holdings led to a sale of 47.5% of our holding for proceeds of £1.2m.

 

Entellus completed a secondary equity offering in January 2017 and we sold 15.3% of our holding for £0.8m. Following the secondary offering, earnings missed analyst expectations and the share price fell, decreasing our valuation by £0.3m at the year end. We believe the fundamentals of the company remain strong with commercial activities ramping up.

 

FX also made a small negative contribution to performance in the year, with an FX loss of £205,000, or 0.6p per share recorded. More of the unquoted investments are in the UK and Europe, leading to a smaller impact of the FX rates on the portfolio.

 

Summary of unquoted investments

 

Number of investments as at 31 August 2017

Fair value at 31 August 2017 (£'m)

Percentage of NAV

Unquoted

10

9.1

3.6%

Exited with contingent milestones

3

3.9

1.5%

SV Fund VI

16*

7.7

3.0%

Total unquoted

29

20.7

8.1%

Previously unquoted, now listed

3

6.9

2.7%

Total unquoted for performance measurement

32

27.6

10.8%

 

* The number of investments listed within SV Fund VI represents the number of investments into underlying individual portfolio companies.

 

Outlook

As mentioned above, we saw a return to performance for biotechnology stocks during the second half of our financial year. Names like Gilead, Celgene, Biogen and Amgen moved up off a relatively low valuation base. We believe that the value of the sector is being recognised by the investment community and generalist investors are moving back after a quiet period during the uncertainties of the US election. Our expectation is for the growth in large cap companies to continue, and for the mid to smaller names to follow suit. Three main drivers are influencing the return to growth of the sector:

 

Executive Order on drug pricing

Drug pricing concerns abated as a result of the administration's leaked draft Executive Order on the matter in July 2017. Based on President Trump's comments on the campaign trail, a more negative stance on drug pricing was expected. However, the draft Order focused on increasing competition between pharmaceutical companies by reducing FDA regulations on bringing drugs to market. The draft Executive Order also contained comments around value-based pricing, which links drug pricing explicitly to the benefit received by patients. This could be favourable to highly innovative therapies with significant impact on patients' lives and fits with the Company's strategy of investing in companies with these types of products.

 

Tax reform & M&A

Towards the end of the year under review, it became clear that the potential for real tax reform was back on the agenda, despite failure to unite the Senate to overhaul the Affordable Care Act. The US administration appears to be making inroads by negotiating with all parties to push a new bill through to modernise the taxation structure. One of the goals within tax reform is to allow the 'repatriation' of cash from corporate profits held overseas. Currently the US tax regime is such that companies would rather keep their cash abroad and not bring it back into the US. One idea to change this is to allow a lower one-off rate to encourage corporations to bring the money back into the US, giving a one-off injection of tax revenue to the US administration, which can then be used for investment. A side effect of such a ruling is that the US corporations themselves will have cash to invest again whereas this cash was previously tied up abroad. Such investments may include M&A. Many larger biotechnology and pharmaceutical companies hold tens of billions of dollars abroad. These companies are all actively looking for growth to replenish their pipelines and therefore we believe the prospects for the sector are even more interesting with this proposal on the horizon.

 

Changes at FDA

In May of this year, the Senate voted to confirm Dr. Scott Gottlieb as commissioner of the FDA. This was positively received by investors as Gottlieb was considered to be industry friendly and pragmatic. So far Gottlieb has been very vocal about his views on drug pricing and how to address rising costs. His goals are to increase competition in order to bring down costs, rather than through any changes in legislation. This is pleasing to the healthcare industry as the changes required to bring more competition should benefit drug companies. One such idea is to reduce the time taken to get drugs approved. Over the past decade, drug approval times have shortened dramatically. Typically, drugs undergo three stages of clinical trials, Phase 1 (safety), Phase 2 (dosing regimen establishment) and Phase 3 (proof of efficacy and safety). Today however, in areas of great unmet medical need, companies can jump from early Phase 1 trials straight into pivotal trials, after which the drug may be considered by the FDA. Gottlieb is in favour of continuing this trend. These steps should benefit companies with innovative therapeutics in development that we invest in at International Biotechnology Trust.

 

Innovation remains a key driver of value

The above three factors are addressing short to medium-term trends that are influencing the sector. However, over the longer-term, we firmly believe the main positive attribute of the biotechnology sector is its ability to innovate (See Fig 2, page 1 of the Annual Report). There are no signs of the rate of innovation slowing, in fact the opposite is true. Scientific advancements continue apace and new drugs are being discovered each year, which will generate further growth for the companies that own those assets.

 

SV Health Managers LLP

Investment Manager

2 November 2017

 

Principal risks and uncertainties

The Board uses a framework of key risks which affect its business, and related internal controls designed to enable the Directors to take steps to mitigate these risks as appropriate. The Directors have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. A full analysis of the Directors' review of internal control is set out in the Corporate Governance Statement on pages 27 and 28 of the Annual Report.

 

The Company's key risks include:

 

Strategic/Performance risk

The Company's returns are affected by changes in economic, financial and corporate conditions which can cause market fluctuations; a significant fall in equity markets is likely to affect adversely the value of the Company's portfolio. SV Health Managers LLP provides the Board with information on the market at each Board meeting and the Board discusses appropriate strategies to manage the impact of any significant change in circumstances. The biotechnology sector has its own specific risks leading to higher volatility than broad equity market indices. While the Company seeks to maintain a diversified portfolio within the confines of the current investment policy, biotechnology sector-specific or equity market risks cannot be eliminated by a diversified exposure to global biotechnology.

 

Discount to NAV: Failure to meet investment objectives and/or poor sector-specific or general equity sentiment can affect the Company's share price, resulting in shares trading at a relatively large discount to the underlying NAV. The Board continually reviews the Company's investment performance, taking into account changes in the market, and regularly reviews the position of the NAV per share compared to the share price. Further information on the Company's discount is provided in the Chairman's Statement above.

 

Investment-related risks

Alignment of the investment strategy with the Company's investment objective is essential and an inappropriate approach by SV Health Managers LLP towards stock selection and asset allocation may lead to loss and/or underperformance and failure to achieve the Company's objective of long-term capital growth, resulting in a widening of the discount. The Board manages these risks through its framework of investment restrictions and regular monitoring of SV Health Managers LLP's adherence to the agreed investment strategy.

 

SV Health Managers LLP provides regular reports to the Board on portfolio activity, strategy and performance, as well as risk monitoring. The reports are discussed in detail at Board meetings, which are all attended by the Investment Manager, to allow the Board to monitor the implementation of investment strategy and process.

 

Currency risk: The Financial Statements and performance of the Company are denominated in sterling because it is the currency of most relevance to the Company's investors. However, the majority of the Company's assets are denominated in US dollars. Accordingly, the total return and capital value of the Company's investments can be significantly affected by movements in foreign exchange rates. It is not the Board's policy to hedge against foreign currency movements.

 

Operational risks

As the Company's main functions are delegated to third party service providers, operational risk arises from insufficient processes of internal control which would include compliance with statutes and regulations governing the functions of the Company.

 

Tax, legal and regulatory risks

To qualify as an investment trust, the Company must comply with Section 1158 Corporation Tax Act 2010 (CTA). Further details of the Company's approval under Section 1158 CTA are set out in the Directors' Report in "Principal activities" in the Annual Report.

 

A breach of Section 1158 CTA could result in the Company being subject to Capital Gains Tax on the sale of investments. Consequently, pre-trade compliance checks are embedded into the investment procedures of SV Health Managers LLP. Reports confirming the Company's compliance with the provisions of Section 1158 CTA are submitted by SV Health Managers LLP to each Board meeting together with relevant portfolio and financial information.

 

The Company is also subject to other laws and regulations, including the Act, Financial Conduct Authority (FCA) Listing, Prospectus and Disclosure Guidance and Transparency Rules and the Alternative Investment Fund Manager's Directive (AIFMD). Breaches of these laws and regulations could lead to criminal action being taken against Directors or suspension of the Company's shares from trading. SV Health Managers LLP and the Company Secretary provide regular reports to the Board on compliance with relevant provisions and report breaches without delay. The Board also relies on the services of its other professional advisers to minimise these risks.

 

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

 

Related party transactions

The Directors of the Company are key management personnel. The total remuneration payable to Directors in respect of the year ended 31 August 2017 was £159,000 (2016: £160,916) of which £79,500 (2016: £38,375) was outstanding at the year end.

 

Management report

Listed companies are required by the FCA's Disclosure Guidance and Transparency Rules (the Rules) to include a management report in their Financial Statements. The information required to be in the management report for the purposes of the Rules is included in the Strategic Report on pages 3 to 18 inclusive (together with the sections of the Annual Report incorporated by reference) and the Director's Report on pages 20 to 28 of the Annual Report. Therefore, a separate management report has not been included.

 

Directors' responsibilities statement

The Directors are responsible for preparing the Annual Report, the Report on Directors' Remuneration and the Financial Statements in accordance with applicable law and regulations.

 

Company law requires the Directors to prepare Financial Statements for each financial year. Under that law the Directors have prepared the Financial Statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). Under company law the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these Financial Statements, the Directors are required to:

 

• Select suitable accounting policies and then apply them consistently;

• Make judgements and accounting estimates that are reasonable and prudent;

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

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

 

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the Financial Statements and the Report on Directors' Remuneration comply with the Act. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

 

The Annual Report is published on the following website:

 

www.ibtplc.com 

 

which is a website maintained by SV Health Managers LLP. The maintenance and integrity of the website is, so far as it relates to the Company, the responsibility of SV Health Managers LLP. The work carried out by the Auditors does not involve consideration of the maintenance and integrity of this website and accordingly, the Auditors accept no responsibility for any changes that have occurred to the Annual Report since it was initially presented on the website. Visitors to the website need to be aware that legislation in the UK governing the preparation and dissemination of the Annual Report may differ from legislation in their home jurisdiction.

 

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

 

Pursuant to Rule 4.1.12 of the Rules, each of the Directors, whose names and functions are listed on page 19 of the Annual Report, confirms that, to the best of his or her knowledge:

 

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

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

• As outlined on pages 22 and 23 of the Annual Report, the Directors have undertaken all necessary reviews to provide a going concern recommendation.

 

On behalf of the Board

 

Alan Clifton

Chairman

2 November 2017

 
Statement of Comprehensive Income

 

 

 

For the year ended

31 August 2017

For the year ended

31 August 2016

 

 

Revenue

Capital

Total

Revenue

Capital

Total

 

Notes

£'000

£'000

£'000

£'000

£'000

£'000

Gains/(losses) on investments held at fair value

2

-

48,532

48,532

-

(1,725)

(1,725)

Exchange losses on currency balances

2

-

(4)

(4)

-

(2,333)

(2,333)

Income

3

505

-

505

676

-

676

Expenses

 

 

 

 

 

 

 

Management fee

 

(1,105)

-

(1,105)

(1,894)

-

(1,894)

Performance fee

 

-

(1,374)

(1,374)

-

(575)

(575)

Administrative expenses

 

(1,029)

-

(1,029)

(1,047)

-

(1,047)

Profit/(loss) before finance costs and tax

 

(1,629)

47,154

45,525

(2,265)

(4,633)

(6,898)

Finance costs

 

 

 

 

 

 

 

Interest payable

 

(204)

-

(204)

(212)

-

(212)

Profit/(loss) on ordinary activities before tax

 

(1,833)

47,154

45,321

(2,477)

(4,633)

(7,110)

Taxation

 

(69)

-

(69)

(105)

-

(105)

Profit/(loss) for the year attributable to Shareholders

 

(1,902)

47,154

45,252

(2,582)

(4,633)

(7,215)

Basic and diluted (loss)/earnings per Ordinary share

4

(5.07)p

125.58p

120.51p

(6.63)p

(11.89)p

(18.52)p

                 

The total column of this statement represents the Company's Statement of Comprehensive Income, prepared in accordance with IFRS as adopted by the EU.

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

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

The accompanying notes form part of these Financial Statements.

 

Statement of Changes in Equity

 

 

Called up

Share

Capital

 

 

 

 

share

premium

redemption

Capital

Revenue

Total

 

capital

account

reserve

reserves

reserve

equity

For the year ended 31 August 2017

£'000

£'000

£'000

£'000

£'000

£'000

Balance at 1 September 2016

10,409

18,805

31,408

188,183

(32,154)

216,651

Total Comprehensive Income:

 

 

 

 

 

 

Profit/(loss) for the year

-

-

-

47,154

(1,902)

45,252

Dividend paid in the year

-

-

-

(8,636)

-

(8,636)

Transactions with owners, recorded directly to equity:

 

 

 

 

 

 

Shares bought back and held in treasury

-

-

-

(616)

-

(616)

Shares cancelled from treasury

(74)

-

74

-

-

-

Balance at 31 August 2017

10,335

18,805

31,482

226,085

(34,056)

252,651

 

 

Called up

Share

Capital

 

 

 

 

share

premium

redemption

Capital

Revenue

Total

 

capital

account

reserve

reserves

reserve

equity

For the year ended 31 August 2016

£'000

£'000

£'000

£'000

£'000

£'000

Balance at 1 September 2015

11,116

18,805

30,701

204,440

(29,572)

235,490

Total Comprehensive Income:

 

 

 

 

 

 

Loss for the year

-

-

-

(4,633)

(2,582)

(7,215)

Transactions with owners, recorded directly to equity:

 

 

 

 

 

 

Shares bought back and held in treasury

-

-

-

(11,624)

-

(11,624)

Shares cancelled from treasury

(707)

-

707

-

-

-

Balance at 31 August 2016

10,409

18,805

31,408

188,183

(32,154)

216,651

 

The accompanying notes form part of these Financial Statements.
 
Balance Sheet

 

 

 

At 31 August

At 31 August

 

 

2017

2016

 

Notes

£'000

£'000

Non-current assets

 

 

 

Investments held at fair value through profit or loss

 

269,373

221,788

 

 

269,373

221,788

Current assets

 

 

 

Receivables

 

2,836

9,242

Cash and cash equivalents

 

128

90

 

 

2,964

9,332

Total assets

 

272,337

231,120

Current liabilities

 

 

 

Borrowings

 

(6,392)

(11,813)

Payables

 

(13,294)

(2,656)

 

 

(19,686)

(14,469)

Net assets

 

252,651

216,651

Equity attributable to equity holders

 

 

 

Called up share capital

 

10,336

10,409

Share premium account

 

18,805

18,805

Capital redemption reserve

 

31,481

31,408

Capital reserves

 

226,085

188,183

Revenue reserve

 

(34,056)

(32,154)

Total equity

 

252,651

216,651

NAV per Ordinary share

5

672.88p

575.09p

 

The Financial Statements as contained within the Annual Report were approved by the Board on 2 November 2017 and signed on its behalf by Alan Clifton, Chairman and Caroline Gulliver, Chair of the Audit Committee.

 

The accompanying notes form part of these Financial Statements.

 

 

Cash Flow Statement

 

 

 

 

For the

For the

 

 

year ended

year ended

 

 

31 August

31 August

 

 

2017

2016

 

 

£'000

£'000

Cash flows from operating activities

 

 

 

Profit/(loss) before tax

 

45,321

(7,110)

Adjustments for:

 

 

 

(Increase)/decrease in investments

 

(47,585)

25,141

Decrease in receivables

 

6,406

5,214

Increase/(decrease) in payables

 

10,638

(1,671)

Taxation

 

(69)

(105)

Net cash flows generated from operating activities

 

14,711

21,469

Cash flows used in financing activities

 

 

 

Share repurchase costs

 

(616)

(11,624)

Dividends paid

 

(8,636)

-

Net cash used in financing activities

 

(9,252)

(11,624)

Net increase in cash and cash equivalents

 

5,459

9,845

Cash and cash equivalents at 1 September

 

(11,723)

(21,568)

Cash and cash equivalents at 31 August

 

(6,264)

(11,723)

 

The accompanying notes form part of these Financial Statements.

 

 
Notes to the Financial Statements

 

1. Accounting policies

The nature of the Company's operations and its principal activities are set out in the Strategic Report and Director's Report contained within the Annual Report.

 

The Company's Financial Statements have been prepared in accordance with IFRS and those parts of the Companies Act 2006 (the Act) applicable to companies reporting under IFRS. These comprise standards and interpretations approved by the International Accounting Standards Board (IASB) and International Accounting Standards Committee (IASC), as adopted by the EU.

 

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

 

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

 

(a) Basis of preparation

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

 

Where presentational guidance set out in the Statement of Recommended Practice (the SORP) for investment trusts issued by The Association of Investment Companies (the AIC) in November 2014 and updated in January 2017 is consistent with the requirements of IFRS, the Directors have sought to prepare the Financial Statements on a basis compliant with the recommendations of the SORP.

 

(b) Presentation of Statement of Comprehensive Income

In order to better reflect the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the Statement of Comprehensive Income between items of a revenue and capital nature has been presented alongside the Statement of Comprehensive Income.

 

The net loss after taxation in the revenue column is the measure the Directors believe appropriate in assessing the Company's compliance with certain requirements set out in Section 1158 Corporation Tax Act 2010 (CTA).

 

(c) Income

Dividends receivable on equity shares are recognised as revenue for the year on an ex-dividend basis. Special dividends are treated as revenue return or as capital return, depending on the facts of each individual case. Income from current asset investments is included in the revenue for the year on an accruals basis and is recognised on a time apportionment basis. Where the Company has elected to receive its dividends in the form of additional shares rather than cash, the amount of cash dividend foregone is recognised as income in the revenue column of the Statement of Comprehensive Income. Any excess in the value of shares over the amount of cash dividend foregone is recognised as a gain in the capital column of the Statement of Comprehensive Income.

 

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

 

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

 

(d) Expenses and interest payable

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

 

All expenses and interest payable have been presented as revenue items except as follows:

 

• Any performance fee payable is allocated wholly to capital, as it is primarily attributable to the capital performance of the Company's assets; and

• Transaction costs incurred on the acquisition or disposal of investments are expensed and included in the costs of acquisition or deducted from the proceeds of sale as appropriate.

 

(e) Taxation

Deferred tax is calculated in full, using the liability method, on all taxable and deductible temporary differences at the Balance Sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability settled, based on tax rates and tax laws that have been enacted or substantively enacted at the Balance Sheet date.

 

Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the deductible temporary differences can be utilised.

 

In line with recommendations of the SORP, the allocation method used to calculate tax relief on expenses presented in the capital column of the Statement of Comprehensive Income is the marginal basis. Under this basis, if taxable income is capable of being offset entirely by expenses presented in the revenue column of the Statement of Comprehensive Income, then no tax relief is transferred to the capital column.

 

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

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

 

Investments are recognised or derecognised on the trade date where a purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned.

 

On initial recognition all non-current asset investments are designated as held at fair value through profit or loss as defined by IFRS. They are further categorised into the following fair value hierarchy:

 

• Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.

• Level 2: Having inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

• Level 3: Having inputs for the asset or liability that are not based on observable market data.

 

All non-current investments (including those over which the Company has significant influence) are measured at fair value with gains and losses arising from changes in their fair value being included in net profit or loss for the year as a capital item.

 

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

 

Quoted investments

The fair value for quoted investments is either the bid price or the last traded price, depending on the convention of the exchange on which the investment is quoted.

 

Unquoted investments

In respect of unquoted investments, or where the market for a financial instrument is not active, fair value is established by using various valuation techniques, in accordance with the International Private Equity and Venture Capital (IPEVC) Valuation Guidelines (December 2015). These may include using recent arm's length market transactions between knowledgeable, willing parties, if available, reference to recent rounds of re-financing undertaken by investee companies involving knowledgeable parties, reference to the current fair value of another instrument that is substantially the same or an earnings multiple.

 

As many of the unquoted investments are early-stage investments, without revenue, valuation is also assessed up or down with reference to a range of factors among which are: ability of portfolio company management to keep cash and operating budgets, clinical developments towards management and/or investor milestone targets, clinical trial data, progress of competitor products, performance and quality of the management team, litigation brought by or against the portfolio company, patent approval or challenge, the market for the product being developed and the broad climate of the economies of the countries in which they will likely be sold by reference to public stock market performance.

 

Investments in Funds

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

 

During the period between quarterly reports, the Company may be advised of a sale of a portfolio company (or its securities) held within one of the funds at a different price from the last reported value in that fund's quarterly report. As soon as the Company is informed of the completion of any such transaction establishing a new value for the investment, the new NAV of that investment to the SV Fund VI is reflected in the NAV on the next NAV date.

 

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

 

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

 

(g) Foreign currencies

Transactions involving currencies other than sterling are recorded at the exchange rate ruling on the transaction date.

 

At each Balance Sheet date, monetary items and non-monetary assets and liabilities that are fair valued, which are denominated in foreign currencies, are retranslated at the closing rates of exchange. Foreign currency exchange differences arising on translation are recognised in the Statement of Comprehensive Income. Exchange gains and losses on investments held at fair value through profit or loss are included within "Gains/(losses) on investments held at fair value".

 

(h) Critical accounting estimates and judgements

The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources.

 

The critical estimates and assumptions relate, in particular, to the valuation of unquoted investments, as summarised in (g) above.

 

Actual results may differ from these estimates.

 

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

 

(i) Cash and cash equivalents

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

 

(j) Receivables

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

 

(k) Other payables

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

 

(l) Repurchase of Ordinary shares (including those held in treasury)

The costs of repurchasing Ordinary shares including related stamp duty and transaction costs are taken directly to equity and reported through the Statement of Changes in Equity as a charge on the capital reserves. Share purchase transactions are accounted for on a trade date basis. The nominal value of Ordinary share capital repurchased and cancelled is transferred out of called up share capital and into the capital redemption reserve. Where shares are repurchased and held in treasury, the transfer to capital redemption reserve is made if and when such shares are subsequently cancelled.

 

(m) Reserves

(i) Capital redemption reserve

The capital redemption reserve, which is non-distributable, holds the amount by which the nominal value of the Company's issued share capital is diminished when shares redeemed or purchased out of the Company's distributable reserves are subsequently cancelled.

 

(ii) Share premium account

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

 

(iii) Capital reserves

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

• Gains and losses on the realisation of investments;

• Unrealised investment holding gains and losses;

• Foreign exchange gains and losses;

• Performance fee; and

• Repurchase of shares in issue.

 

Note: Unrealised unquoted holding gains are not distributable.

 

(iv) Revenue reserve

Comprises accumulated undistributed revenue profits and losses.

 

(n) New and revised accounting Standards

No new IFRS, or amendments to IFRS, became applicable in the year which had any impact on the Company's Financial Statements.

 

At the date of authorisation of these Financial Statements, the following new IFRS that potentially impacts the Company is in issue but is not yet effective and has not been applied in these Financial Statements:

 

• IFRS 9 (2014) Financial Instruments, effective for periods beginning on or after 1 January 2018.

 

The requirements of IFRS 9 and its application to the investments held by the Company were considered ahead of its adoption on 1 January 2018. All assets held by the Company are currently recorded as fair value through profit and loss. The classification of all assets remains unchanged under IFRS 9, and all figures will be directly comparable to the existing basis of valuation. All other IFRS which are in issue but which are not yet effective, have been considered and will not have a significant effect on the Company's Financial Statements.

 

2. Gains/(losses) on investments held at fair value

 

 

For the year ended

For the year ended

 

31 August

31 August

 

2017

2016

 

£'000

£'000

Net gains on disposal of investments at historic cost

48,824

10,811

Less fair value adjustments in earlier years

(17,454)

(23,170)

Gains/(losses) based on carrying value at previous Balance Sheet date

31,370

(12,359)

Investment holding gains during the year

17,162

10,634

 

48,532

(1,725)

Attributable to:

 

 

Quoted investments

51,823

(4,939)

Unquoted investments

(3,291)

3,214

 

48,532

(1,725)

Exchange losses on currency balances

(4)

(2,333)

Exchange losses on currency balances arise on the retranslation of foreign currency balances held by the Company.

 

3. Income

 

 

For the year ended

For the year ended

 

31 August

31 August

 

2017

2016

 

£'000

£'000

Income from investments held at fair value through profit or loss:

 

 

Unfranked dividends

505

676

 

505

676

 

4. Net earning/(loss) per Ordinary share

 

 

For the year ended

For the year ended

 

 

31 August

31 August

 

 

2017

2016

 

 

£'000

£'000

 

Net revenue loss

(1,902)

(2,582)

 

Net capital profit/(loss)

47,154

(4,633)

 

 

45,252

(7,215)

 

 

Weighted average number of Ordinary shares in issue during the year*

 

37,548,348

 

38,959,794

 

Pence

Pence

Revenue loss per Ordinary share

(5.07)

(6.63)

Capital profit/(loss) per Ordinary share

125.58

(11.89)

Total earning/(loss) per Ordinary share

120.51

(18.52)

 

*Excluding those held in treasury.

 

5. NAV per Ordinary share

The calculation of the NAV per Ordinary share is based on the following:

 

 

At 31 August

At 31 August

 

2017

2016

NAV (£'000)

252,651

216,651

Number of Ordinary shares in issue

37,547,663

37,672,663

Basic NAV per Ordinary share (pence)

672.88

575.09

 

 

The increase in the NAV per share from 575.09p (31 August 2016) to 672.88p (31 August 2017) includes the total earnings per share as disclosed above and the effect of the Company repurchasing shares during the year, at a discount to the prevailing NAV per share.

 

6.
The figures and financial information for the year ended 31 August 2016 have been extracted from the latest published Financial Statements and do not constitute the statutory accounts for that year as defined in Section 434 of the Act.  Those Financial Statements have been delivered to the Registrar of Companies and included the Report of the Auditors which was unqualified and did not contain a statement under Section 498 of the Act.
 

This Annual Report Announcement does not constitute statutory accounts for the year ended 31 August 2017 as defined in Section 434 of the Act.

 

7.

The Annual Report for the year ended 31 August 2017 will be posted to Shareholders in November 2017 and thereafter copies will be available upon request at the Company's Registered Office: 10 Harewood Avenue, London NW1 6AA.  The Annual Report will also be available on the Company's website, www.ibtplc.com, shortly.  A copy of the Annual Report for the year ended 31 August 2017 has been submitted to the National Storage Mechanism of the UK Listing Authority and will shortly be available for inspection at: www.Hemscott.com/nsm.do. The Company's AGM will be held at 2.30 pm on Tuesday, 12 December 2017 at the offices of BNP Paribas Securities Services S.C.A, 10 Harewood Avenue, London NW1 6AA.

 
 

For further information, please contact:

 

Ailsa Craig

Telephone: 020 7421 7070

SV Health Managers LLP

Investment Manager

 

Susan Gledhill

Telephone: 020 7410 5971

BNP Paribas Secretarial Services Limited

Company Secretary

 

 

2 NOVEMBER 2017

 

This information is provided by RNS
The company news service from the London Stock Exchange
 
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Annual Financial Report - RNS