TIDMPCGH TIDMPGHZ
RNS Number : 0136L
Polar Capital Global Health Tst PLC
19 December 2018
POLAR CAPITAL GLOBAL HEALTHCARE TRUST PLC
Legal Entity Identifier: 549300YV7J2TWLE7PV84
AUDITED RESULTS ANNOUNCEMENT FOR THE YEARED
30 SEPTEMBER 2018
19 December 2018
FINANCIAL HIGHLIGHTS
For the year to 30 September 2018
Performance
Net asset value per ordinary share (total return) (note
1) 19.80%
Benchmark index
(MSCI ACWI/Healthcare Index (total return in Sterling
with dividends reinvested)) 17.24%
Since restructuring
Net asset value per ordinary share (total return) since
restructuring (note 2) 13.10%
Benchmark index total return since restructuring 13.13%
Expenses 2018 2017
Ongoing charges (note 3) 1.08% 1.02%
---------------------------------------- ------------------ ------------------ ----------
Financials As at As at
30 September 30 September
2018 2017 Change
---------------------------------------- ------------------ ------------------ ----------
Total net assets (Group and
Company) GBP296,263,000 GBP250,129,000 18.4%
Net asset value per ordinary
share 241.91p 203.77p 18.7%
Net asset value per ZDP share 103.87p 100.85p 3.0%
Price per ordinary share 223.00p 198.00p 12.6%
Discount per ordinary share -7.8% -2.8%
Price per ZDP share 104.50p 102.75p 1.7%
Gearing 8.29% 9.98%
Ordinary shares in issue 122,470,000 122,750,000 -0.2%
Ordinary shares held in treasury 1,679,256 1,399,256 20.0%
ZDP shares in issue 32,128,437 32,128,437 -
---------------------------------------- ------------------ ------------------ ----------
Dividends
The Company has paid or declared the following dividends
relating to the financial year ended 30 September 2018:
Amount
per
ordinary
Pay date share Record date Ex-date Declared date
-------------------------------- ------------- ---------------- ---------------- -----------------
First interim: 31 August
2018 1.00p 27 July 2018 26 July 2018 17 July 2018
Second interim: 28 February 8 February 7 February 19 December
2019 1.00p 2019 2019 2018
Total (2017: 3.40p) 2.00p
-------------------------------- ------------- ---------------- ---------------- -----------------
Note 1 - See Alternative Performance Measures
Note 2 - The Company's portfolio was restructured on 20 June
2017. The total return NAV performance since restructuring is
calculated by reinvesting the dividends in the assets of the Group
and Company from the relevant payment date.
Note 3 - See Alternative Performance Measures
For further information please contact:
Ed Gascoigne-Pees Tracey Lago John Regnier-Wilson
Camarco Polar Capital Global Healthcare Polar Capital LLP
Tele. 020 3757 Trust Plc Tele. 020 7227 2725
4984 Tele. 020 7227 2742
STATUS OF ANNOUNCEMENT
The figures and financial information contained in this
announcement are extracted from the Audited Annual Report for the
year ended 30 September 2018 and do not constitute statutory
accounts for the period. The Annual Report and Financial Statements
include the Report of the Independent Auditors which is unqualified
and does not contain a statement under either section 498(2) or
Section 498(3) of the Companies Act 2006. The Annual Report and
Financial Statements for the year ended 30 September 2018 have not
yet been delivered to the Registrar of Companies. The figures and
financial information for the period ended 30 September 2017 are
extracted from the published Annual Report and Financial Statements
for the period ended 30 September 2017 and do not constitute the
statutory accounts for that year. The Annual Report and Financial
Statements for the period ended 30 September 2017 have been
delivered to the Registrar of Companies and included the Report of
the Independent Auditors which was unqualified and did not contain
a statement under either section 498(2) or Section 498(3) of the
Companies Act 2006.
The Directors' Remuneration Report and certain other helpful
shareholder information has not been included in this announcement
but forms part of the Annual Report which will be available on the
Company's website and will be sent to shareholders in January
2019.
(www.polarcapitalhealthcaretrust.co.uk)
CHAIRMAN'S STATEMENT
Performance
The Net Asset Value ('NAV') per share rose by 19.8% over the
period on a total return basis. Although this was usefully ahead of
our benchmark, the MSCI ACWI Healthcare Index, which returned 17.2%
over the same period, a widening in the discount to NAV at which
our shares traded meant that the return to shareholders was
13.7%.
The Board are pleased that our Managers have now made up the
under performance against the benchmark experienced in the first
half of the year since the restructuring on 20 June 2017. We now
need to build on this and our aim is to make sure that the
improvement in performance from the second half of the financial
year is sustained into the future. This remains the Board's top
priority.
Portfolio positioning
Post the restructuring we have moved the portfolio away from its
previous income bias to focus on capital growth. Our managers have
significantly reduced our exposure to pharmaceuticals, switching
the proceeds to other areas of healthcare such as biotechnology,
life sciences tools and services, healthcare equipment and managed
healthcare where they perceive there to be greater growth
prospects. Although our exposure is predominantly to large-cap
stocks, around 9.8% of the portfolio at the year end was invested
in smaller companies with a capitalisation of less than $1bn. It
probably won't surprise you to learn that our biggest geographic
exposure is to the United States which accounts for 69.5% of the
portfolio; it is not our policy to hedge our overseas currency
exposure which means we have significant exposure to the US
dollar.
Brexit
Faced with the chaotic situation over Brexit and the ensuing
level of uncertainty, we can at least take some comfort from the
fact that the portfolio is predominantly invested in large
multi-national companies operating in global markets.
Dividends
A first interim dividend of 1.0p for the year ended 30 September
2018 was paid on 31 August 2018. We are declaring a second interim
dividend of 1.0p which will be payable in February 2019. Total
dividends for the current financial year therefore amount to 2.0p.
Our dividend policy reflects the focus on capital growth.
Board Succession
Our plan is to refresh our entire Board over a two-year period
and to do this in two phases. Phase one is now complete with Neal
Ransome (our new Audit Committee Chair) and Lisa Arnold having
joined the Board during the year. Phase two is expected to complete
at the AGM in early 2020. We believe that phasing it in this way
allows us to manage the transition in a sensible and pragmatic
manner.
Research costs
This time last year we said that actual expenditure on research
in 2018 was likely to be materially less than in previous years. We
estimate that the Company's contribution to specialist healthcare
research for the current calendar year will be substantially below
budget, which had already been set at a lower level than the
previous year. Given that the Company is also benefiting from much
lower brokerage commission on dealing, this must be considered a
satisfactory result.
The Board has taken the view that access to the best healthcare
research is critical in achieving investment outperformance. We are
therefore happy to contribute towards this, especially as our North
American competitors are not subject to the same regime and are
still able to pass on the cost of research to their clients in
full.
Outlook
With stock markets looking particularly fragile, and with many
commentators anticipating the peak of the economic cycle, the
attractions of the healthcare sector stand out more clearly than
ever. The relative valuation of the sector has declined
significantly while the absolute valuation is in line with the
long-term average. This is despite the superior growth prospects,
driven by demographics, innovation and the need for greater
efficiency. The job of our managers is to identify those companies
which are best placed to benefit from these trends, particularly
where this has not yet been reflected in the share price.
Annual General Meeting
The Company's eighth Annual General Meeting will take place at
noon on Wednesday, 27 February 2019 at the offices of our managers,
Polar Capital, 16 Palace Street, London SW1E 5JD. The nearest tube
and main line station is Victoria. A map of the location is
contained in the separate Notice of Annual General Meeting. One of
our fund managers, Dr Daniel Mahony, will be making a presentation
which is typically very illuminating, so I would encourage as many
as possible of you to attend and hear what he has to say.
Attendance at this meeting also provides a good opportunity to meet
members of the Board and to ask any questions you might have,
either of us or the manager.
A buffet lunch will be served at the conclusion of the
meeting.
James Robinson
Chairman
19 December 2018
INVESTMENT MANAGER'S REPORT - FOR THE YEARED 30 SEPTEMBER
2018
Performance review
For the fiscal year to 30 September 2018, the Company delivered
a total return of 19.8%, which was ahead of the benchmark (MSCI
Global Healthcare Index) that recorded a total return of 17.2% over
the same period.
Over the course of the year, there have been some wide gyrations
in foreign exchange rates that can have an impact on the Net Asset
Value (NAV) of the portfolio, which is denominated in sterling.
Over the reporting period, the dollar appreciated by 2.8% compared
to sterling and this had a positive impact on returns, given that
the majority of the Company's portfolio (and its benchmark) are
heavily weighted towards dollar- denominated stocks.
At the beginning of the fiscal year, the stock market was
focused on the potential for tax reform in the United States, which
President Trump signed into law in December 2017. The proposed
reduction in the US corporate tax rate had a significant impact on
earnings expectations for US companies coupled with the prospect of
increased consumer spending. This drove expectations that US
economic growth would accelerate in 2018 and that there would be a
positive impact on global economic growth.
As a result, markets were strong in the first four months of the
fiscal year with risk appetite remaining high. This enthusiasm
evaporated in February 2018 as concerns about inflation and an
overheating US economy contributed to a sharp decline in the stock
market. Stock markets staged a recovery, but the talk of tariffs
and the prospect of a trade war between the US and China served to
dampen enthusiasm. Over the summer, there was a marked change in
tone and investors began to shun higher growth sectors in favour of
more defensive growth segments of the market.
Healthcare's performance over the period largely reflected the
dynamics in the broader market. With risk appetite high, small and
mid-cap growth stocks performed very well up until February. This
was helped by a number of biotechnology company acquisitions by
large pharmaceutical companies at the turn of the year. There was
an expectation that tax reform would drive a further surge in
M&A activity, as the reform removed the disincentives for
repatriating overseas cash, but this did not materialise. Over the
middle of the summer, there was renewed interest in pharmaceutical
stocks as investors began to look for defensive growth.
The major political issue remained drug pricing with President
Trump and members of his administration making a number of speeches
on this topic. After the end of the reporting period, the Trump
administration published a discussion document outlining a plan to
reduce certain US drug prices, using an international pricing index
as a benchmark. The details of how this will work in practice are
still to be determined.
There was a wide dispersion of returns within the healthcare
sub-sectors. The health insurance, life sciences tools and medical
equipment sub-sectors continued their outperformance from last year
with healthcare facilities also very strong. Performance of
pharmaceutical stocks was lacklustre, although returns were strong
in the last three months of the period, while biotechnology,
healthcare distributors and healthcare technology significantly
underperformed.
Review of the portfolio
The investment mandate for the Company is focused on capital
growth by investing in a diversified global portfolio of
investments in healthcare companies with no restriction on
sub-sector weighting. The Company's portfolio comprises a single
pool of investments but for operational purposes we have divided
these investments into a growth portfolio and an innovation
portfolio. The Company also has structural debt in the form of Zero
Dividend Preference (ZDP) shares issued by the subsidiary company
in June 2017. The gearing level at the end of the period, as per
the AIC methodology, was 8.3%.
The majority of the Company's assets are allocated to the growth
portfolio and this comprised 28 large-cap healthcare stocks at the
end of the reporting period. All companies in the growth portfolio
have a market capitalisation greater than $5bn at the time of
investment. The growth portfolio comprised 95.0% of total net
assets at the end of the period.
The innovation portfolio provides exposure to healthcare
companies with a market capitalisation less than $5bn and is
invested in a range of medical device, healthcare services and
biotechnology companies. There were 19 investments in the
innovation portfolio at the end of the investment period that
together comprised 13.0% of total net assets.
Sub-sector allocation contributed to performance.
In terms of sub- sector weightings, we maintained overweight
positions in managed care and healthcare equipment with an
underweight position in pharmaceuticals throughout most of the
financial year. This positioning, coupled with good stock
selection, were positive contributors to performance relative to
the Benchmark. However, both weighting and stock selection within
the healthcare services and biotechnology sub-sectors detracted
from relative performance in the financial year.
We decreased our weighting in managed care towards the end of
the reporting period and have added to our exposure in the large-
cap biotechnology sub-sector. At the end of the financial year, our
major overweight sub-sectors were biotechnology, life sciences
tools and healthcare equipment. The weighting in large-cap
biotechnology offsets the significant underweight in
pharmaceuticals - companies such as Gilead and Amgen are classified
as biotechnology but are more like large pharmaceutical companies,
in our view.
Stock selection is an important driver of performance.
Over the reporting period, we continued to see a wide dispersion
of returns not only across the healthcare sector but also within
its sub-sectors. Our stock selection has improved compared to last
year, with the absolute performance of the top ten contributors
contributing 15.6% to overall returns more than offsetting the
-7.7% contribution from the top ten detractors. On an absolute
basis, the top three contributors in the portfolio were
UnitedHealth, HCA Holdings, and Becton Dickinson with Celgene,
Alnylam and Takeda the biggest detractors.
UnitedHealth is the largest US health insurance company and has
consistently beaten earnings expectations over the last year. We
continue to believe that the revenue opportunity for the company's
Optum division, which is more of a technology company focused on
data and analytics, is underappreciated and we think the company
looks set for a period of continued growth.
HCA Holdings, a leading hospital chain in the US, delivered a
strong performance driven by several factors. The improving US
economy had a positive impact on HCA's volumes, a trend that
started to accelerate in the last quarter of 2017. Furthermore,
HCA's strong cash flow and balance sheet allow for acquisition
opportunities to further strengthen the company's leading position
in the market.
Becton Dickinson was also a positive contributor to performance.
This US medical technology company has consistently delivered on or
beaten market expectations. Importantly, this delivery was executed
during a period of integration following the completion of the CR
Bard acquisition in late 2017.
Celgene delivered a series of negative updates at the beginning
of the reporting period. Questions emerged regarding the strength
of the company's intellectual property for its blockbuster drug,
Revlimid, a Phase III programme for its inflammatory bowel disease
asset, mongersen, was discontinued and management updated its
long-term financial targets that highlighted the dependence on its
maturing haematology franchise. We sold the stock from the
portfolio following the third quarter results.
Alnylam shares have been affected by concerns regarding
competition for the lead drug Onpattro. In addition, investors have
begun to question management's ability to fast track the company's
next drug candidate, givosiran, which should be FDA approved in
2019. We think these are short-term concerns and we continue to be
constructive on Alnylam. The company is just about to move into the
revenue growth phase and we see further pipeline opportunities
emanating from the company's technology platform.
Takeda was the other major disappointment during the reporting
period. In March, the company unexpectedly announced that it
planned to acquire Shire and, given the size of the transaction,
Japanese investors responded very negatively. We have held on to
the shares as we think the deal will be highly accretive to
earnings and on a two-year view will be transformative for
Takeda.
Structural disruption of the healthcare industry continues to
evolve
Our key investment thesis is that the healthcare industry has
embarked on a period of major structural change. Governments and
health insurers are finding ways to improve the efficiency of
healthcare systems so that they can deliver better healthcare to
more people for less money. We see three principal drivers - an
ageing population, new technology and economic pressure.
The baby-boomer generation expects a far healthier and more
active retirement than their parents, largely because of advances
in medicine that are now standard. In addition, increased longevity
means that a significant part of healthcare expenditure is now
devoted to the management of long-term chronic conditions such as
heart disease, diabetes and dementia.
At the same time, recent medical advances in areas such as gene
therapy, cell therapy and immuno- oncology have seen the emergence
of new expensive treatments for hitherto untreatable conditions. As
a result, healthcare spending, both on an absolute basis and as a
percentage of GDP, continues to rise in most countries driven by
increasing demand.
We see information technology as the major catalyst for change.
Advances in information technology, especially data analytics, are
helping governments and health insurers to predict the healthcare
needs of a population and to measure the value of a product or a
service. The way healthcare is managed, delivered and paid for is
already changing and is set for considerable disruption over the
next decade.
In the past 12 months, we have seen continuing evidence of
healthcare disruption and, more importantly, how different
stakeholders are responding. This is an evolving process and while
the ultimate goal seems clear - to improve the efficiency of
healthcare systems - the near-term direction of travel and how we
get there are critical in identifying companies that are
well-positioned to thrive and those that may fall behind.
Value-based care forms the basis of a new reimbursement
system
Most reimbursement systems around the world are based on a
fee-for- service system where a payment is made based on the number
of services provided or the number of procedures ordered. As
healthcare has become more complex over the past few decades, the
deficiencies of this payment model have become more obvious. In
particular, the fee-for- service system creates incentives for
overuse, which drives up healthcare costs, and offers no incentives
for co-ordination of care within the healthcare system, which is
essential when managing patients with multiple chronic
conditions.
Governments and insurers around the world are now determined to
replace fee-for-service with one based on value. The concept of
value is easy to define, it means delivering the best clinical
outcomes at the lowest cost. Fee-for-service encourages activity,
but it does not take the concept of value into account. At the
moment, value occurs only because it is the right thing to do -
there is little accountability beyond ethics. This is not a
sustainable system as it drives up cost with the potential for
delivering worse results over time.
The move to value-based care and reimbursement has ramifications
for every participant across the healthcare value chain. Any
supplier of a product - be it medical device, medical technology or
drug - and any provider of a healthcare service will begin to be
evaluated and paid on the basis of how such products or services
contribute to a clinical outcome. The drivers of this change are
the payers - governments and health insurers - that are now
starting to evaluate and measure best practice and clinical
outcomes at the individual patient level.
While we have accounting systems that are excellent at measuring
costs, the measurement of clinical outcomes is far more difficult,
not least because a clinical outcome is rarely a single measurable
event. This is where the use of IT and data analytics can have such
a profound impact - they are enabling the move towards value-based
healthcare. Measuring outcomes requires data and over the past year
we have seen a step-up in the use of real-world data within the
healthcare sector.
Real world data are driving reimbursement decisions and
redefining best practice.
A randomised clinical trial remains the gold standard for
evaluating the risk/benefit of a new drug or therapy. However,
these controlled clinical studies are less helpful when it comes to
determining the value of a new treatment in a broader patient
population. While the payers initiated the move towards value,
large drug and medical technology companies are becoming more
proactive in their approach to using real-world data to demonstrate
value.
The first area where we have seen real-world data being used is
in cardiovascular disease, which is still the leading cause of
death and chronic disease burden globally. In 2015, Novartis
launched Entresto, one of the most significant new treatments for
heart failure patients in at least a decade, on the basis of very
strong clinical data. However, despite strong endorsements from
major clinical societies, such as the American Heart Association
and the American College of Cardiology, uptake of the drug was
initially slow.
Payers were reluctant to provide reimbursement for the drug in
the absence of any cost/benefit data showing the value of the new
medication. In 2016, Novartis announced its FortiHFy programme - a
series of at least 40 clinical studies to evaluate the efficacy,
safety, quality of life and cost of using Entresto in the real
world. These data have begun to convince payers of the drug's value
and use of the drug has increased meaningfully with $1.5bn in sales
projected for 2019. Entresto is a key growth driver for Novartis
and one of the reasons we hold a large position in the
portfolio.
We have also seen real-world data change the competitive
dynamics of an existing therapeutic market. Blood thinners are a
standard chronic medication for many patients with different types
of cardiovascular disease. Bristol-Myers Squibb's blood thinner,
Eliquis, is a twice-daily oral drug that competes in this market
with Bayer's/Johnson & Johnson's once-daily oral drug,
Xarelto.
Historically, a once-a-day therapy has been seen as a major
selling advantage by the drug industry - it was no surprise that
Xarelto gained traction in the market much more quickly. However,
the collection of real-world safety and efficacy data for Eliquis
has changed the market dynamics in Eliquis' favour quite
significantly. Global sales of Eliquis are now on track to reach
$10bn by 2021 compared to $9bn for Xarelto in the same year.
The use of real-world data is not confined to the pharmaceutical
industry. Medtronic and UnitedHealth have been collaborating in the
field of diabetes. Data collected from an analysis of over 6,000
diabetics on Medtronic's MiniMed 630G and prior-generation insulin
pumps demonstrated 27% fewer preventable hospital admissions
compared to plan participants with diabetes who were using daily
injections of insulin.
Roche's acquisition of Flatiron Health moves real-world data
into drug development.
In February of this year, Roche paid $1.9bn to acquire Flatiron
Health, a healthcare technology company focused on the oncology
market. Flatiron has established partnerships with over 265
community cancer clinics, 14 oncology companies and 6 academic
centres, and compiled a database that covers 30% of the cancer
patients in the US.
Flatiron has over 600 employees who collect, curate and validate
the clinical data from each patient treated in these centres. This
provides a unique insight into the treatment regimens, side
effects, outcomes and survival rates of each of these patients. In
a rapidly evolving field such as oncology, this information is
invaluable when designing new clinical trials to evaluate novel
therapies.
As a result, Flatiron has partnered with the Food and Drug
Administration (FDA) in the US to expand the role of real-world
evidence in drug development. The 21st Century Cures Act requires
the FDA to establish a draft framework for combining real- world
data and regulatory science.
Roche has already begun to use the data from Flatiron to help in
reimbursement discussions. In particular, Roche has managed to
secure reimbursement for its new lung cancer treatment, Alecensa,
in 20 countries around the world far sooner than might have been
expected. Roche even managed to persuade the UK's National
Institute for Clinical Excellence (NICE) to back the use of the
drug in the NHS, overturning a prior decision to reject it.
Value-based care will continue to evolve but is here to
stay.
The shift towards value-based reimbursement seems inevitable and
is the basis for our view that the management of healthcare will
change significantly over the next 10 years. We expect to see
greater use of real-world or in-market data to justify the use of
certain products or services and ultimately this should help to
drive more rapid adoption of best clinical practice.
From an investor perspective, it is important to understand that
there is now a different alignment of incentives along the value
chain between the government, payers, providers and product
suppliers. The focus is moving to what can drive improved patient
outcomes and, ultimately, greater efficiency.
The battle for the front door of healthcare
For most people, the entry point into healthcare is the General
Practitioner (GP) or primary care physician. In the UK, at least
90% of patients have their first NHS contact with a GP but almost
one in four people have to wait at least a week for that first
appointment. This situation is not unique to the UK as access to
primary care is a rate-limiting step in most parts of the
world.
Primary care physicians are usually the lynchpin of healthcare
systems in developed markets. Any referral to specialist care is
generally made by a primary care physician and the burden of
managing patients with multiple chronic conditions usually takes
place in the primary care setting. As a result, the way that
primary care is accessed and managed has a huge impact on the
overall cost and efficiency of a healthcare system.
In many ways, the workflow of the GP visit has barely changed
over the past 70 years. While GP surgeries now have computer
systems, and some of the primary care is delivered by nurses or
other healthcare professionals, the initial contact is generally a
face-to- face meeting with the GP.
We think that this is now beginning to be disrupted - we see an
emerging battle for the control of the front door of healthcare.
The drivers are new technology, the need to improve efficiency and
also a change in consumer expectations towards on- demand access to
healthcare.
Telehealth is approaching an inflection point.
While telehealth is not a new idea, we see a group of companies
emerging in a number of geographies that are trying to make this a
mainstream approach for accessing healthcare.
In simple terms, telehealth technology enables a patient to book
an appointment with a primary care physician online and then
conduct a virtual visit using what is effectively a
video-conferencing capability. This service can be provided in a
matter of minutes - meeting the consumer desire for on-demand
healthcare. Moreover, for the patient, this is far more convenient
and cheaper than a physical visit to their primary care
physician.
While there are a number of private companies in this area,
which may look to list on the public markets over the next year or
so, the market leader from a stock market perspective is US-based
Teledoc. Teledoc publishes the number of physician visits it
facilitates each quarter. Over the past five years, this has
increased from fewer than 100,000 visits per quarter in 2014 to
over 500,000 visits per quarter in 2018. We think that telehealth
is passing through an inflection point - especially in the US - and
is becoming a standard way of accessing primary care for less
serious medical conditions.
M&A activity in the US is also driving change in primary
care.
While telehealth is providing a new entry point to primary care,
the existing primary care infrastructure is also beginning to
change. Over the past few years, there has been a race to acquire
independent primary care practices, both by health insurers and
hospital systems. For example, the largest US health insurance
company, UnitedHealth, now has one of the largest primary care
networks in the country.
We are also seeing the emergence of large integrated care
systems - especially in urban areas - where the hospital system is
taking on more of the financial risk of patient care.
Interestingly, as providers become more exposed to financial risk
they become more focused on value-based care. The management teams
of these large integrated networks realise that primary care
practices are a critical part of the network. Controlling primary
care means that there can be oversight of how patients are referred
through the system and ensures that they are sent down the best
clinical pathway - from both a quality and cost perspective.
For us, the most intriguing acquisition over the past year has
been the announcement that CVS Health, a leading pharmacy store
chain, will acquire Aetna, one of the biggest US health insurers.
This is a vertical integration that would have been unimaginable
five years ago. CVS sees this transaction as a way to transform
healthcare delivery, especially in primary care provision. A key
part of this transformation will be the use of data and analytics
to drive better clinical decision-making.
However, the front door to healthcare at CVS will be both
physical and virtual. The company is already using telehealth - it
is a large customer for Teledoc - but CVS sees the pharmacy store
as an alternative physical location for delivering primary
care.
While the success of this strategy will not be clear for at
least a couple of years, we think it shows that the future
disruption of healthcare will not be entirely digital. There will
continue to be a need for people and physical infrastructure. The
long-term winners will be those organisations that are able to use
technology to augment their human capabilities and physical assets
to build a far more efficient healthcare system.
Transforming healthcare delivery creates near and long-term
investment opportunities.
While changes in healthcare delivery have clearly begun in the
US, we would expect similar technologies to be embraced across the
world. A combination of telehealth and a local pharmacy provides an
efficient way of delivering high quality primary care at a lower
cost. For investors, there are obvious near- term investment
opportunities in the companies developing this technology as well
as companies that benefit from the improvements in efficiency.
In the long term, the emergence of new delivery systems will
accelerate the demand for new types of healthcare products and
services, especially in the areas of wellness and preventative
care. Current healthcare systems have been set up to provide care
for those who are sick, but the systems of the future will also
maintain the health of the well. With consumer expectations already
beginning to change, these new markets and investment opportunities
may emerge more rapidly than currently anticipated.
The rising power of the consumer
The technological disruption of many industries has driven a
major change in consumer expectations. Companies such as Amazon and
Netflix have set new standards in the delivery of products and
services. We think expectations of healthcare systems are changing
and the power of the consumer in healthcare is on the rise.
In general, consumers and patients still find medicine and
healthcare systems very complicated and they are looking for
simplicity. Moreover, they want healthcare to be affordable, which
is a big issue in the US, accessible, which is behind the rise of
telehealth, and, in many cases, they want the option to take
control of their own health. These are important trends that are
not only affecting the political landscape but also having an
impact on the end markets for products and services.
Drug pricing in the US is an affordability issue for
consumers.
Over the past 10 years, US health insurers have tried to change
consumer behaviour through the use of financial incentives. For
example, we estimate that one-third of commercially insured
individuals now have a high deductible plan, where the patient is
directly responsible for a large proportion of initial medical
costs.
Following President Obama's introduction of the Affordable Care
Act, often referred to as Obamacare, many middle class Americans
have seen their health insurance premiums soar despite wider
penetration of high deductible plans. Affordability is now the key
issue for the average American - the current political discussion
over drug pricing needs to be seen in this context.
List prices for pharmaceuticals are set by the manufacturers who
then negotiate rebates and discounts with middlemen in the supply
chain, such as the prescription benefit managers (PBMs). PBMs work
for insurance plans and the size of the rebate often depends on the
volume of plan enrolees who use the drug. The problem is that the
discount does not necessarily get passed on to the patient -
individuals without insurance or those who are on high deductible
plans often get charged the higher list price and so never see the
lower, rebated net price.
The Trump administration has responded to consumer concerns and
is looking to make disruptive changes to the system but the exact
path forward remains uncertain at this stage. It is reasonable to
argue that the rebate system will garner
close attention, with the possibility of offering discounts
directly to patients at the pharmacy counter. Two things are clear,
however, and that is the administration will not rely on the
altruism of the pharmaceutical sector (despite the recent price
freezes) and that there is no simple, overnight solution.
Empowering patients creates new market opportunities.
The recent announcement that the new Apple watch series will
incorporate an electrocardiogram (ECG) capability is an example of
a growing trend that we refer to as democratised health. This is a
new market opportunity that sits between the consumer health market
and the traditional professional medical market. We are beginning
to see devices with capabilities that are medical grade being made
available to consumers.
An ECG is a standard technique used in medicine to monitor and
diagnose common cardiovascular conditions. The Apple watch is not
intended to provide a firm diagnosis, but it is more of a screening
tool that may be able to detect an irregularity in an individual's
heart rhythm. If there is a problem, then the software will suggest
that a visit to the doctor is necessary so that a formal diagnosis
can be made.
While a new product from Apple always creates excitement, we are
more intrigued by Abbott's successful launch of its continuous
glucose monitoring system, Freestyle Libre. Libre is a patch
product that can be used by diabetics to measure their blood sugar
levels - replacing the need for pin-prick blood tests. It was
launched in Europe in 2014 but reimbursement for the product has
only started to be put in place over the past year. However, Libre
sales in Europe have surpassed all expectations as diabetic
patients have been paying for it out of their own pocket. Libre is
on track to
generate more than $1bn in sales for Abbott in 2018 with only a
modest contribution from the US market given the US launch was at
the end of 2017.
The other area where we see growing consumer engagement is in
the area of genetics. Companies such as 23andMe and ancestry.com
offer individuals an opportunity to have their own DNA sequenced
and analysed to provide information on genealogy, health traits and
potential genetic risks. We are seeing increased interest in these
services, especially in the US.
At the same time, there are a number of government programmes
focused on the use of genomics in medicine. The UK is probably
leading the world in this respect. The Secretary of State for
Health recently announced a plan to sequence five million genomes
over the next five years and has initiated a genomic medicine
service targeting rare diseases.
As the cost of DNA sequencing comes down, it will be interesting
to see how this market opportunity evolves. It is worth remembering
the nature versus nurture debate - environmental factors are as
important as genes in determining the observable differences in
characteristics or traits of different individuals. The combination
of genetic data with environmental or behavioural data (collected
from wearables or a mobile phone) could prove to be a powerful
approach for predicting the health status of an individual.
Nudging doctors and patients towards better decisions.
As new technology empowers individuals to take more control of
their health, we have seen a change in the types of product
offering emerging from health insurance companies. These go beyond
simply offering an insurance premium discount for members who use a
wearable device or go to the gym regularly.
Health insurance plans are now offering a range of different
types of wellness options for enrolees. This covers services
including exercise plans, diet plans, gym memberships, pregnancy
care, stress counselling and online mental health services. In
addition, there may be more specialist online services for patients
with chronic conditions such as diabetes or asthma. Employers, who
are paying for these plans, view them as a way of offering benefits
to employees that will keep the work-force healthier and
happier.
One of the leaders in this area is UnitedHealth. In 2014, it
bought a majority stake in Rally Health, and has rolled out a
series of products that 'nudge' members towards healthier
lifestyles. In addition, the Rally platform can be used to schedule
appointments, provide cost estimates for procedures and attempts to
demystify the healthcare system. Rally Health now has more than 20
million users on its platform.
For insurers, the data gleaned from these types of programme is
helping them to identify which plan enrolees are at high risk of
generating significant medical costs. In general, 5% of the
patients in an insurance plan generate the vast majority of the
costs - these are often patients with chronic conditions that are
poorly managed. Identifying who these patients might be enables the
insurer to intervene proactively and offer services that improve
quality of life, manage or prevent more serious complications and
defer significant medical costs over the long term.
In addition to services that can be used to change consumer
behaviour, we are also seeing new tools to help physicians deliver
more affordable care and employ best clinical practice. For
example, at the primary care level, there are now software tools
that will highlight to a physician the cost of a selected drug
therapy for a particular patient based on their insurance plan. The
system can then show cheaper alternatives that the doctor may
decide to prescribe instead - the doctor still has control, but
patient affordability becomes part of the decision-making
process.
We also see new software tools emerging, again mainly targeted
at primary care, which will recommend that a doctor may want to
order certain diagnostic tests or recommend a particular clinical
pathway or specialist referral based on the test results. The goal
of this software is not to replace doctors but to augment their
capabilities so they can make the best clinical decisions for the
patient sitting in front of them.
Democratised health market is nascent but set to grow
rapidly.
The issue of affordability has served to accelerate the change
in consumer expectations in the US. We think similar trends are
occurring elsewhere in the world although the financial impetus may
not be the same. Consumers and patients want to start taking more
control of their health and are being empowered to do so. Even in
countries where medical care is free at the point of service, such
as the UK, people are prepared to pay for products and services
that they believe can improve or help manage their health.
For investors, this may mean looking beyond traditional
healthcare companies and expecting new entrants from other
industries to enter and grow this market.
Large companies with a proactive mind-set are innovating
Structural change in any industry has the potential to create
winners and losers and we think the healthcare sector will be no
different. Last year, we articulated a two-pronged investment
strategy for investing in healthcare during this period: (a) focus
on the large-cap consolidators that are adjusting to change, and
(b) identify the small/mid-cap innovators that are disrupting the
industry.
Over the past year, we have seen a significant change at some of
the larger companies that has begun to blur these two trends
together. We are now seeing healthcare management teams that are
becoming more proactive, developing innovative business strategies,
disrupting healthcare value chains and building new competitive
barriers to entry.
From an investment perspective, these large companies generally
offer the potential of steady earnings growth, strong cash
generation and, ultimately, compounding returns for investors.
Moreover, we think that valuations remain attractive in large cap
healthcare and we can find stocks with double-digit earnings growth
at a reasonable price.
Changing complex value chains requires collaboration.
We believe we are entering a new phase of structural disruption
that is not just about a new therapy - be it drug or device - or
developing a new technology to address a problem (such as GP
visits). While all of these are still important, and can be good
investments at the right price, the next phase of disruption
requires a realignment of interests across the value range and
relies on collaboration.
Dealing with this type of complexity is more the preserve of
large companies - all of the stakeholders need to be engaged and
this means nudging patients, persuading doctors, corralling
politicians and influencing payers. We are beginning to see certain
management teams adopt a more proactive strategy where they are
trying to be the agents of change. This may be driven partly by
their own vested interest, but we think it also reflects a
recognition that healthcare disruption is inevitable.
Not all large companies are capable or willing to drive such
change - certainly some will get left behind in this fluctuating
environment. There are still many companies that have more of a
reactive approach, often reeling from the new regulations or
procedures that are being forced upon them either by a regulator or
by a payer.
We recognise that not all proactive strategies will succeed and
creating an alignment of a diverse set of stakeholders is never an
easy feat, even for an industry leader. Nevertheless, there are a
few themes we see emerging that are a useful guide to which
companies may be successful.
Pharmaceutical companies are responding to the value-based
environment.
Drug pricing continues to be a hot issue for investors given the
political sensitivity around the affordability of drugs. We are now
seeing some pragmatic approaches to pricing that are a significant
diversion from what has been standard industry practice. The
migraine and hepatitis C markets in the US are great examples of
how quickly the pricing landscape is changing.
Amgen and Novartis launched their novel migraine drug, Aimovig,
in May with a list price of $6,900pa. This was at a significant
discount to the $8,500pa recommended by the Institute for Clinical
and Economic Review based on its independent pharmacoeconomic
analysis. In response, Eli Lilly launched its competitor drug,
Emgality, in September at a similar price point. Moreover, both
drugs are available to new patients on a patient access programme
that initially provides drugs for free. With new competitors set to
launch over the next year, we think the companies are trying to
exploit their first-mover advantage and avoid any pushback on
reimbursement from insurers.
Another interesting move has been Gilead's announcement in
September that it plans to launch authorised generic versions of
its hepatitis C medications, Epclusa and Harvoni, via a subsidiary
in January 2019. Even though Gilead has offered rebates of up to
60% compared to the list price for its hepatitis C drugs, the
complexities of the US healthcare system have meant that the price
reductions have not necessarily translated into lower costs for
patients.
With the launch of authorised generics, at a materially reduced
list price, Gilead projects that Medicare part D patients (ie US
seniors) could save up to $2,500 in out-of-pocket costs per course
of therapy, making the treatment more affordable for the average
American.
We have also observed another new dynamic related to the change
in priorities when it comes to negotiating a product label with the
regulators. One of the strict regulations for drug companies is
that they can only promote medical data and indications that are
contained on the product label. Historically, the industry's
approach has been to apply for as broad a label as possible with a
view to using sales and marketing muscle to drive wide adoption by
the prescribing community.
We are now seeing companies looking for narrow labels that
target very specific populations where a drug candidate can show
strong efficacy. This improves product differentiation,
demonstrates value when it comes to reimbursement discussions, and
should drive high levels of adoption within the defined patient
populations. Novartis' BAF312 for secondary progressive multiple
sclerosis and AstraZeneca's Imfinzi for early-stage lung cancer
(so-called stage III) are two good examples of this strategy. The
filing for BAF312 has only recently been accepted by FDA, so the
commercial success has yet to be assessed, but Imfinzi's rapid
uptake underpins the value of this targeted strategy.
Medical technology companies are moving along the value
chain.
While drugs are separately reimbursed, medical devices are
generally purchased by a healthcare provider (ie a hospital) for
use in a specific medical procedure. It is the procedure that is
reimbursed, leading to a supplier/vendor mentality where a hospital
views a medical device as an input cost.
In a value-based reimbursement environment, this needs to move
to a more collaborative relationship where a medical technology
company develops new products that provide true and measurable
value to a healthcare provider and system. It is not about just
proving to a surgeon or an individual doctor that it has developed
a great new device - companies need to persuade patients, doctors
and payers that the new product provides value in terms of quality
of life, clinical outcomes and reduced overall cost to the
system.
In some cases, this may require companies to develop a solution
rather than selling a single product. A great example of this is
Medtronic's new strategy in spine surgery - an area where it had
been losing market share for a number of years. Medtronic no longer
just sells implants or consumables used in spine surgery. It has
invested in developing an integrated platform that includes
robotics and a navigation system that is designed to not only drive
better outcomes but also reduce operating room time, ensuring that
it is an attractive offering to providers. Medtronic is now winning
market share, increasing its consumable pull-through, growing
faster than the market in spine surgery and driving improvements in
clinical practice.
Healthcare providers and insurers are investing in data and
analytics.
We have already discussed some of the ways that health insurers
are looking for ways to change the behaviour of consumers, patients
and providers. We think the use of data and analytics are now a
'must have' for any health insurer
UnitedHealth is leading the field, in our view, but Aetna is not
far behind. We also think that Centene, which specialises in
Medicaid (the US state-run programme for people on low incomes), is
pioneering the use of diverse data sets to manage the intersection
of health and social care.
For healthcare providers, the leading companies are investing in
systems that help them manage patient populations more effectively.
The payers are demanding better data output and so the providers
need to show they are delivering best-in-class care in order to
attract volume and maximise profitability. Also, with more provider
systems taking on patient populations at risk, they need to develop
new tools to understand how to manage an entire patient
population.
We are positive on the outlook for large cap healthcare
stocks.
Since the beginning of 2017, small market capitalisation
healthcare stocks have significantly outperformed the larger market
capitalisation end of the investment universe. While the level of
innovation we are seeing in small companies remains impressive, and
while we continue to see them as key disrupters of the industry, we
do think some of the valuations of smaller companies are beginning
to get a little stretched.
Valuations of large healthcare companies, on the other hand,
continue to look attractive on both a relative and absolute basis.
The healthcare sector's price-to-earnings ratio is currently lower
than the broader stock market and is close to the long-term average
over the past 25 years.
Given the potential uncertainties going into 2019 - Brexit,
trade wars, rising interest rates, geopolitical uncertainty etc -
we think there is a strong case to be made for investing in large
healthcare stocks given they offer investors defensive growth. Our
focus is on the large companies that are adopting proactive
business strategies to embrace and drive change.
Daniel Mahony
Gareth Powell
James Douglas
Fund Managers
19 December 2018
Portfolio as at 30 September 2018 (Figures in brackets denote
the comparative ranking as at 30 September 2017)
Ranking Stock Sector Country Market Value % of total
GBP'000 net assets
2018 2017 2018 2017 2018 2017
----- ------------------------ ------------------ ------------ --------- --------- --------- ---------
Johnson & United
1 (1) Johnson Pharmaceuticals States 21,718 19,862 7.3% 7.9%
----- ------------------------ ------------------ ------------ --------- --------- --------- ---------
Healthcare
2 (8) Medtronic Equipment Ireland 17,538 10,430 5.9% 4.2%
----- ------------------------ ------------------ ------------ --------- --------- --------- ---------
Managed United
3 (7) UnitedHealth Healthcare States 16,195 10,945 5.5% 4.4%
----- ------------------------ ------------------ ------------ --------- --------- --------- ---------
4 (2) Novartis Pharmaceuticals Switzerland 14,728 14,040 5.0% 5.6%
----- ------------------------ ------------------ ------------ --------- --------- --------- ---------
United
5 (4) Merck & Co Pharmaceuticals States 13,677 11,929 4.6% 4.7%
----- ------------------------ ------------------ ------------ --------- --------- --------- ---------
United
6 (20) Amgen Biotechnology States 13,225 7,638 4.5% 3.1%
----- ------------------------ ------------------ ------------ --------- --------- --------- ---------
Agilent Life Sciences United
7 (-) Technologies Tools & Services States 12,331 - 4.2% -
----- ------------------------ ------------------ ------------ --------- --------- --------- ---------
Healthcare United
8 (12) HCA Facilities States 11,419 9,490 3.9% 3.8%
----- ------------------------ ------------------ ------------ --------- --------- --------- ---------
United
9 (-) AstraZeneca Pharmaceuticals Kingdom 10,895 - 3.7% -
----- ------------------------ ------------------ ------------ --------- --------- --------- ---------
Healthcare United
10 (-) Quest Diagnostics Services States 10,074 - 3.4% -
----- ------------------------ ------------------ ------------ --------- --------- --------- ---------
Top 10 investments 141,800 48.0%
------------------ ------------ --------- --------- --------- ---------
United
11 (-) Gilead Sciences Biotechnology States 9,716 - 3.3% -
----- ------------------------ ------------------ ------------ --------- --------- --------- ---------
United
12 (14) Alexion Pharmaceuticals Biotechnology States 9,698 9,410 3.3% 3.8%
----- ------------------------ ------------------ ------------ --------- --------- --------- ---------
13 (-) Grifols Biotechnology Spain 9,505 - 3.2% -
----- ------------------------ ------------------ ------------ --------- --------- --------- ---------
14 (26) Jazz Pharmaceuticals Pharmaceuticals Ireland 9,476 4,906 3.2% 1.9%
----- ------------------------ ------------------ ------------ --------- --------- --------- ---------
Managed United
15 (19) Humana Healthcare States 9,446 8,170 3.1% 3.2%
----- ------------------------ ------------------ ------------ --------- --------- --------- ---------
16 (-) Novo Nordisk Pharmaceuticals Denmark 9,093 - 3.1% -
----- ------------------------ ------------------ ------------ --------- --------- --------- ---------
Healthcare United
17 (16) Abbott Equipment States 9,001 8,352 3.0% 3.3%
----- ------------------------ ------------------ ------------ --------- --------- --------- ---------
18 (18) Takeda Pharmaceutical Pharmaceuticals Japan 8,807 8,225 3.0% 3.3%
----- ------------------------ ------------------ ------------ --------- --------- --------- ---------
PRA Health Life Sciences United
19 (-) Sciences Tools & Services States 8,409 - 2.8% -
----- ------------------------ ------------------ ------------ --------- --------- --------- ---------
Healthcare United
20 (6) Becton Dickinson Equipment States 8,208 10,953 2.8% 4.4%
----- ------------------------ ------------------ ------------ --------- --------- --------- ---------
Top 20 investments 233,159 78.8%
------------------ ------------ --------- --------- --------- ---------
Managed United
21 (22) Centene Healthcare States 8,199 7,213 2.8% 2.8%
----- ------------------------ ------------------ ------------ --------- --------- --------- ---------
United
22 (-) Incyte Genomics Biotechnology States 7,010 - 2.3% -
----- ------------------------ ------------------ ------------ --------- --------- --------- ---------
Healthcare United
23 (11) Danaher Equipment States 6,615 9,590 2.2% 3.8%
----- ------------------------ ------------------ ------------ --------- --------- --------- ---------
Life Sciences United
24 (-) Bio-Rad Laboratories Tools & Services States 6,359 - 2.1% -
----- ------------------------ ------------------ ------------ --------- --------- --------- ---------
Healthcare United
25 (37) Quotient Supplies Kingdom 5,823 1,434 2.0% 0.6%
----- ------------------------ ------------------ ------------ --------- --------- --------- ---------
Healthcare United
26 (25) Consort Medical Equipment Kingdom 5,555 5,143 1.9% 2.1%
United
27 (-) Eli Lilly Pharmaceuticals States 5,430 - 1.8% -
----- ------------------------ ------------------ ---------- --------- ------ ------- -----
Healthcare
28 (-) Terumo Equipment Japan 5,399 - 1.8% -
----- ------------------------ ------------------ ---------- --------- ------ ------- -----
United
29 (-) Alnylan Pharmaceuticals Biotechnology States 5,186 - 1.8% -
----- ------------------------ ------------------ ---------- --------- ------ ------- -----
Biomarin United
30 (17) Pharmaceutical Biotechnology States 3,384 8,322 1.1% 3.3%
----- ------------------------ ------------------ ---------- --------- ------ ------- -----
Top 30 investments 292,119 98.6%
------------------ ---------- --------- ------ ------- -----
Healthcare United
31 (-) C4X Discovery Technology Kingdom 2,526 - 0.9% -
----- ------------------------ ------------------ ---------- --------- ------ ------- -----
Healthcare United
32 (33) Oxford Immunotec Equipment Kingdom 2,483 1,753 0.8% 0.7%
----- ------------------------ ------------------ ---------- --------- ------ ------- -----
United
33 (-) Zogenix Pharmaceuticals States 2,396 - 0.8% -
----- ------------------------ ------------------ ---------- --------- ------ ------- -----
Life Sciences United
34 (29) Horizon Discovery Tools & Services Kingdom 2,250 2,128 0.8% 0.9%
----- ------------------------ ------------------ ---------- --------- ------ ------- -----
35 (-) Hansa Medical Biotechnology Sweden 2,227 - 0.8% -
----- ------------------------ ------------------ ---------- --------- ------ ------- -----
Healthcare United
36 (-) Nevro Equipment States 2,185 - 0.8% -
----- ------------------------ ------------------ ---------- --------- ------ ------- -----
37 (34) Newron Pharmaceuticals Biotechnology Italy 2,002 1,699 0.6% 0.7%
----- ------------------------ ------------------ ---------- --------- ------ ------- -----
Healthcare United
38 (-) Viveve Medical Equipment States 1,832 - 0.6% -
----- ------------------------ ------------------ ---------- --------- ------ ------- -----
Stemline United
39 (-) Therapeutics Biotechnology States 1,652 - 0.6% -
----- ------------------------ ------------------ ---------- --------- ------ ------- -----
Healthcare United
40 (40) Teladoc Equipment States 1,596 988 0.5% 0.4%
----- ------------------------ ------------------ ---------- --------- ------ ------- -----
Top 40 investments 313,268 105.8%
------------------ ---------- --------- ------ ------- -----
41 (41) Photocure Pharmaceuticals Norway 1,347 643 0.4% 0.3%
----- ------------------------ ------------------ ---------- --------- ------ ------- -----
United
42 (-) Diurnal Biotechnology Kingdom 1,235 - 0.4% -
----- ------------------------ ------------------ ---------- --------- ------ ------- -----
United
43 (-) Loxo Oncology Biotechnology States 1,231 - 0.4% -
----- ------------------------ ------------------ ---------- --------- ------ ------- -----
United
44 (-) Autolus Therapeutics Biotechnology Kingdom 1,130 - 0.4% -
----- ------------------------ ------------------ ---------- --------- ------ ------- -----
Education United
45 (-) MedaPhor Services Kingdom 827 - 0.3% -
----- ------------------------ ------------------ ---------- --------- ------ ------- -----
United
46 (-) Verona Pharmaceuticals Pharmaceuticals Kingdom 825 - 0.3% -
----- ------------------------ ------------------ ---------- --------- ------ ------- -----
United
47 (38) Summit Therapeutics Biotechnology Kingdom 458 1,434 0.1% 0.6%
----- ------------------------ ------------------ ---------- --------- ------ ------- -----
Total Equities 320,321 108.1%
------------------ ---------- --------- ------ ------- -----
Other Net Liabilities (24,058) (8.1%)
------------------ ---------- --------- ------ ------- -----
Net Assets 296,263 100.0%
------------------ ---------- --------- ------ ------- -----
Note - Sectors are from the GICS (Global Industry Classification
Standard).
30 September 30 September
Geographical Exposure at 2018 2017
------------------------------------ ---------------- ----------------
United States 69.5% 72.8%
United Kingdom 11.6% 5.1%
Ireland 9.1% 6.1%
Switzerland 5.0% 6.3%
Japan 4.8% 3.3%
Spain 3.2% -
Denmark 3.1% -
Sweden 0.8% -
Italy 0.6% 0.7%
Norway 0.4% -
Other - 15.4%
Other net liabilities (8.1%) (9.7%)
Total 100.0% 100.0%
================ ================
30 September 30 September
Sector Exposure at 2018 2017
------------------------------------ ---------------- ----------------
Pharmaceuticals 33.2% 35.0%
Biotechnology 22.8% 18.2%
Healthcare Equipment 20.3% 20.7%
Managed Healthcare 11.4% 17.8%
Life Sciences Tools & Services 9.9% 3.2%
Healthcare Facilities 3.9% 4.3%
Healthcare Services 3.4% 7.4%
Healthcare Supplies 2.0% 1.3%
Healthcare Technology 0.9% 0.9%
Education Services 0.3% -
Life & Health Insurance - 0.7%
Specialised Healthcare REITs - 0.2%
Other net liabilities (8.1%) (9.7%)
Total 100.0% 100.0%
================ ================
30 September 30 September
Market Cap at 2018 2017
----------------------------- ---------------- ----------------
Large (>US$5bn) 95.1% 98.0%
Medium (US$1bn - US$5bn) 3.2% 3.0%
Small (<US$1bn) 9.8% 8.7%
Other net liabilities (8.1%) (9.7%)
100.0% 100.0%
================ ================
STRATEGIC REPORT
The information provided in the Chairman's Statement, the
Investment Manager's Report, including information on the portfolio
and this report comprise the Strategic Report.
The Strategic Report has been prepared solely to provide
information to shareholders on the Company's strategies and
potential for those strategies to succeed, including a fair review
of the strategy and performance of the Company during the year
ended 30 September 2018, including a description of the principal
risks and uncertainties. Throughout the Strategic Report there are
certain forward-looking statements; these statements are made by
the Directors in good faith based on the information available to
them at the time of their approval of this report. Such statements
should be treated with caution due to inherent uncertainties,
including both economic and business risk factors, underlying any
such forward- looking information.
History
In June 2017 a reconstruction of the Company and change in
investment mandate was implemented having been approved by
shareholders. Further information is provided within the
Shareholder Information in the Annual Report and on the Company's
website www.polarcapitalhealthcaretrust.co.uk
Following the reconstruction, the Articles of Association
require the Directors to put forward at the first Annual General
Meeting to be held after 1 March 2025, a resolution for the
voluntary winding up of the Company and the appointment of a
liquidator. Members voting in favour, whether in person or by
proxy, shall collectively have sufficient votes, irrespective of
number, to pass the resolution.
The Board remains positive on the outlook for healthcare and the
Company will continue to pursue its investment objective in
accordance with the stated investment policy and strategy. Future
performance is dependent to a significant degree on the world's
financial markets and their reactions to economic events and other
geo-political forces. The Chairman's Statement and the Investment
Manager's Report comment on the business, outlook and threats.
Business Model and Regulatory Arrangements
The business model of the Company follows that of an externally
managed, London Stock Exchange listed investment trust, and its
investment objective is set out below. The Company is designated an
Alternative Investment Fund ('AIF') under the Alternative
Investment Fund Management Directive ('AIFMD') and, as required by
the Directive, has contracted with Polar Capital LLP to act as the
Alternative Investment Fund Manager ('AIFM') and HSBC Bank Plc to
act as the Depositary.
Both the AIFM and the Depositary have responsibilities under
AIFMD for ensuring that the assets of the Company are managed in
accordance with the investment policy and are held in safe custody.
The Board remains responsible for setting the investment strategy
and operational guidelines as well as meeting the requirements of
the applicable UK and European legislation including the Financial
Conduct Authority (FCA) Listing Rules. Statements from the AIFM and
the Depositary can be found within the Annual Report.
The Company seeks to manage its portfolio in such a way as to
meet the tests set down in Section 1158 and 1159 of the Corporation
Tax Act 2010 (as amended by Section 49(2) of the Finance Act 2011)
and continue to qualify as an investment trust. This qualification
permits the accumulation of capital within the portfolio without
any liability to UK Capital Gains Tax. Further information is
provided in the Directors' Report.
The Company has no employees or premises and the Board is
comprised of Non-executive Directors. The day to day operations and
functions of the Group and Company have been delegated to third
parties.
Investment Objective
The Company's investment objective is to generate capital growth
by investing in a global portfolio of healthcare stocks across all
four healthcare sub- sectors, being pharmaceuticals, biotechnology,
medical technology and healthcare services.
Investment Policy
The Company will seek to achieve its objective by investing in a
diversified global portfolio consisting primarily of listed
equities. The portfolio is diversified by factors such as
geography, industry sub-sector and investment size. The portfolio
will comprise a single pool of investments, but for operational
purposes, the Investment Manager will maintain a growth portfolio
and an innovation portfolio. Innovation companies are broadly
defined by the Investment Manager as small/mid cap innovators that
are driving disruptive change, giving rise not only to new drugs
and surgical treatments but also to a transformation in the
management and delivery of healthcare. The growth portfolio is
expected to comprise a majority of the Company's assets; for this
purpose, once an innovation stock's market capitalisation has risen
above US $5bn, it will ordinarily then be treated as a growth
stock.
The relative ratio between the two portfolios may vary over the
life of the Company due to factors such as asset growth and the
Investment Manager's views as to the risks and opportunities
offered by investments in each pool and across the combined
portfolio. While there is no restriction on geographical exposure,
it is expected that the majority of the companies in the initial
growth portfolio will be US listed or traded and/or headquartered
in the US, although this may change over the life of the
Company.
It was originally anticipated that the number of investments
would be limited to 50 however, to enhance fund management
flexibility the Board has authorised an increase to a maximum of 65
investments. The combined portfolio will therefore be made up of
interests in up to 65 companies, with no single investment
accounting for more than 10% (or 15% in the case of an investment
in another fund managed by the Investment Manager) of the Gross
Assets at the time of investment. The innovation portfolio may
include stocks which are neither quoted nor listed on any stock
exchange but the exposure to such stocks, in aggregate, will not
exceed 5% of Gross Assets at the time of investment. In the event
that the Investment Manager launches a dedicated healthcare
innovation fund, the Company's exposure to innovation stocks may be
achieved in whole or in part by an investment in that fund. In any
event, the Company will not, without the prior consent of the
Board, acquire more than 15% of any such healthcare innovation
fund's issued share capital.
Strategy
As the day to day management of the Company is outsourced to
service providers the Board focuses at each meeting on investment
performance including the outlook and strategy and considers the
management and provision of services received from the third-party
service providers and the risks inherent in the various matters
reviewed and discussed.
The Investment Manager's investment process is primarily based
on bottom-up fundamental analysis. The Investment Manager uses a
qualitative filter consisting of six key criteria to build up a
watch- list of securities that is monitored on a regular basis. Due
diligence is then carried out on the individual securities on the
watch-list.
Each individual holding is assessed on its own merits in terms
of risk/ reward. While the Company expects normally to be fully or
substantially invested, the Company may hold cash or money market
instruments pending deployment in the portfolio. In addition, it
will have the flexibility, when the Investment Manager perceives
there to be actual or expected adverse equity market conditions, to
maintain cash holdings as it deems appropriate.
Service Providers
Polar Capital LLP has been appointed to act as the Investment
Manager and AIFM as well as to provide or procure company
secretarial services and administrative services, including
accounting, portfolio valuation and trade settlement which it has
arranged to deliver through HSBC Securities Services.
The Company also contracts directly, on terms agreed
periodically, with a number of third parties for the provision of
specialist services:
- Panmure Gordon & Co as corporate broker;
- Herbert Smith Freehills LLP as solicitors;
- Equiniti Limited as the share registrars;
- PricewaterhouseCoopers LLP as independent Auditors; and
- Emperor as internet service provider including website design,
designers and printers for shareholder communications.
Gearing
Following the restructure of the Company in June 2017, the
Company maintains long-term structural gearing in the form of a
loan from the wholly owned subsidiary PCGH ZDP Plc. No short-term
borrowings have been made and there are no arrangements made for
any bank loans. The Articles of Association provide that the
Company may borrow up to 15% of its Net Asset Value at the time of
drawdown, for tactical deployment when the Board believes that
gearing will enhance returns to shareholders.
Benchmark
The Company will measure the Investment Manager's performance
against the MSCI ACWI Healthcare Index total return, in Sterling
with dividends reinvested. The portfolio may diverge substantially
from the constituents of this index. Although the Company has a
benchmark, this is neither a target nor an ideal investment
strategy. The purpose of the Benchmark is to set a reasonable
return for shareholders above which the Investment Manager is
entitled to a share of the extra performance it has delivered.
Performance and Key Performance Objectives
The Board appraises the performance of the Company and the
Investment Manager as the key supplier of services to the Company
against key performance indicators (KPIs). The objectives comprise
both specific financial and shareholder related measures:
KPI Control Process Outcome
The provision of investment The Board reviews at The Company's NAV total
returns to shareholders each meeting the performance return, over the year
measured by long-term of the portfolio and ended 30 September 2018,
NAV total return relative considers the views was 19.8% while the
to the Benchmark Index. of the Investment Manager. Benchmark Index over
The Board also considers the same period increased
the value delivered by 17.2%. The outperformance
to shareholders through is explained in the
NAV growth and dividends Investment Manager's
paid. Report.
Since restructuring
on 20 June 2017, the
total return of both
the NAV and the benchmark
was 13.1%.
------------------------------- ------------------------------
The achievement of Financial forecasts Two dividends have been
the dividend policy. are paid or are payable
reviewed to track income in respect of the year
and distributions. ended 30 September 2018
totalling 2.0p per share
(2017: 3 dividends totalling
3.4p per share) representing
a decrease reflecting
the change of investment
mandate.
------------------------------- ------------------------------
Monitoring and reacting The Board receives The discount of the
to issues regular ordinary share price
created by the discount information on the to the NAV per ordinary
or premium of the ordinary composition of the share at the year ended
share price to the share register including 30 September 2018 was
NAV per ordinary share trading patterns and -7.8% (2017: -2.8%).
with the aim of reduced discount/ premium levels
discount volatility of the Company's ordinary During the year ended
for shareholders. shares. The Board discusses 30 September 2018, the
and authorises the Company bought back
issue or buy back of 280,000 ordinary shares
shares when appropriate. into treasury, no shares
were issued. The number
A daily NAV per share, of shares in issue,
calculated in at the year end was
accordance with the 124,149,256 of which
AIC guidelines is issued 1,679,256 were held
to the London Stock in treasury.
Exchange.
------------------------------- ------------------------------
To continue to meet The Board receives The Company was granted
the regular financial information investment trust status
requirements for Sections which discloses the annually up to 1 October
1158 and 1159 of the current and projected 2014 and is deemed to
Corporation Tax Act financial position be granted for each
2010. of the Company against subsequent year subject
each of the tests set to the Company continuing
out in Sections 1158 to satisfy the conditions
and 1159. of Section 1158 of the
Corporation Taxes Act
2010 and other associated
ongoing requirements.
------------------------------- ------------------------------
To control and monitor The Board received Ongoing charges for
ongoing charges. regular financial information the year ended 30 September
which discloses expenses 2018 were 1.08%, compared
against budget. to 1.02% the previous
year.
From 3 January 2018
the research costs borne
by the Company are included
in the ongoing charges.
------------------------------- ------------------------------
Principal Risks and Uncertainties
The Board is responsible for the management of risks faced by
the Company in delivering long-term returns to shareholders. The
identification, monitoring and appraisal of the risks, any
mitigation factors and control systems is crucial.
The Board maintains a Risk Map which seeks to record the
principal risks in four main risk categories, Business, Portfolio
Management, Infrastructure and External. The Risk Map details each
identified risk and any factors, both internal and external, that
could provide mitigation, as well as recording a reporting
structure to monitor and mitigate as far as practical such
risks.
The Risk Map is regularly considered to monitor existing
principal risks and identify new risks or developments and
additions to the controls and reporting environment.
Principal Business Risks and Uncertainties Management of Risks through Mitigation
& Controls
Business
--------------------------------------------
The Board seeks to mitigate the
* Failure to achieve investment objective. impact of such risks through the
regular reporting and monitoring
of the investment performance against
* Investment performance below agreed benchmark its peer group, benchmark and other
objective or market/industry average. agreed indicators of relative performance.
For months when the Board is not
scheduled to meet they receive
Such failures could lead to: a monthly report containing financial
information on the Company including
* Possible loss of liquidity in shares and shrinkage in gearing and cash balances.
assets. Performance and strategy are reviewed
throughout the year at regular
Board meetings where the Board
* Loss of portfolio manager or other key staff. can challenge the Investment Manager.
They also receive a monthly commentary
from the Investment Manager published
* Persistent excessive share price discount to NAV. in the factsheets for all the Polar
Capital managed healthcare funds.
The Management Engagement Committee
undertakes the year-end consideration
of suitability of Investment Manager
on the basis of performance and
other services provided.
In consultation with its advisors,
including the corporate stock broker,
the Board regularly considers the
level of premium and discount of
the share price to the NAV and
the Board reviews ways to enhance
shareholder value including share
issuance and buy backs. The windup
date in 2025 should help to limit
discount volatility.
The Board is committed to a clear
communication programme to ensure
shareholders understand the investment
strategy. This is maintained through
the use of monthly factsheets which
have a market commentary from the
Investment Manager as well as portfolio
data, an informative website as
well as annual and half year reports.
The Chairman regularly engages
with the senior management of the
Investment Manager.
--------------------------------------------
Principal Business Risks and Uncertainties Management of Risks through Mitigation
& Controls
Portfolio Management
--------------------------------------------
The Board has set appropriate guidelines
* While the portfolio is diversified across a number of and monitors the position of the
stock markets worldwide, the investment mandate is portfolio against exposures to
focused on healthcare and thus the portfolio will be certain investment markets and
more sensitive to investor sentiment and the sectors. The Board discusses with
commercial acceptance of healthcare developments than the Investment Manager at each
a general investment portfolio. Board meeting developments in healthcare
and drug pipelines.
At each Board meeting the composition
* As the Company's assets comprise mainly listed and diversification of the portfolio
equities the portfolio is exposed to risks such as by geographies, sectors and capitalisation
market price, credit, liquidity, foreign currency and are considered along with sales
interest rates. and purchases of investments. Individual
investments are discussed with
the Investment Manager as well
* The portfolio is actively managed. The Investment as the Investment Manager's general
Manager's style focuses primarily on the investment views on the various investment
opportunity of individual stocks and, accordingly, markets and the healthcare sector
may not follow the makeup of the Benchmark. This may in particular.
result in returns which are not in line with the Analytical performance data and
Benchmark. attribution analysis is presented
by the Investment Manager.
The policies for managing the risks
* The Investment Manager incurs a degree of risk in posed by exposure to market prices,
order to generate the investment returns. interest rates, foreign currency
exchange rates, credit and liquidity
are set out in note 26 to the financial
statements.
--------------------------------------------
* Gearing, either structural gearing through the issue The Board considered the benefits
of ZDP shares by the wholly owned subsidiary, PCGH and drawbacks of the
ZDP Plc, or through bank debt or the use of structural debt at the time of
derivatives may be utilised from time to time. Whilst restructuring and concluded that
the use of gearing is intended to enhance the NAV the ability to lock-in an effective
total return, it will have the opposite effect when interest rate of 3% pa for the
the return on the Company's investment portfolio is 7-year life would be beneficial
negative. to investment returns, the Board
remains of the same belief. The
asset cover necessary to repay
the ZDP shares is reviewed at each
Board meeting.
If any flexible gearing is contemplated
the Board would agree the overall
levels of gearing with the AIFM.
The arrangement of bank facilities
and drawing of funds under such
arrangements are controlled by
the Board. Derivatives are considered
as being a form of gearing and
a policy for their use has been
agreed by the Board. The deployment
of any borrowed funds is based
on the Investment Manager's assessment
of risk and reward.
--------------------------------------------
Such failures could lead to: The Board monitors exposure through
* The ability to fund dividends is impaired due to monthly management accounts and
exposure to currency risk. discussion and currency hedging
takes place if appropriate.
Investors have sight of the entire
* Income is less than expected due to currency exposure portfolio and geographic exposure
underlying the portfolio. to investments.
* Level of dividend is lower than intended.
--------------------------------------------
Principal Business Risks and Uncertainties Management of Risks through Mitigation
& Controls
Infrastructure
-----------------------------------------
At each Board meeting there is
* There are risks, including those stemming from an administration report which
breaches of cyber security, resulting in the failure provides details on general corporate
of, or disruption to, operational and accounting matters including legislative
systems and processes provided by the Investment and regulatory developments, changes
Manager including any subcontractors to which the in substantial shareholdings and
Investment Manager has delegated a task as well as within the share register.
directly appointed suppliers. There is an annual review of suppliers
and their internal control reports
which includes the disaster recovery
* The misvaluation of investments or the loss of assets procedures of the Investment Manager.
from the custodian or sub custodians which impact the The Investment Manager reports
NAV per share or lead to a loss of shareholder value. on cyber security for its own
systems and comments where appropriate
on third party suppliers.
* The Company may fail to continue as an investment Regular reporting from the Depositary
trust and suffer Capital Gains tax or fail to recover on the safe custody of the Company's
as fully as possible withholding taxes on overseas assets and the operation of control
investments. systems related to the portfolio
reconciliation are monitored.
Specialist advice is sought on
* The legal and regulatory risks include failure to taxation issues as and when required.
comply with the FCA's Prospectus Rules, Listing Rules The Audit Committee has oversight
and Transparency and Disclosure Rules; not meeting on such work.
the provisions of the Companies Act 2006 and other UK, Information and guidance on legal
European and overseas legislation affecting UK and regulatory risks is managed
companies and not complying with accounting by using the Investment Manager
standards. Further risks arise from not keeping or professional advisers where
abreast of changes in legislation and regulations necessary and the submission of
which have in recent years been substantial. reports to the Board for discussion
and, if required, any remedial
action or changes considered necessary.
* As an investment company, the Company is dependent on The Board monitors new developments
a framework of tax laws, regulation (both UK and EU) and changes in the regulatory
and Company law. environment and seeks to ensure
that their impact on the Company
is understood and complied with.
-----------------------------------------
External
-----------------------------------------
The Board regularly discusses
* There is significant exposure to the economic cycles the general economic conditions
of the markets in which the underlying investments and developments.
conduct their business operations as well as the The impact on the portfolio from
economic impact on investment markets where such Brexit and other geopolitical
investments are listed. The fluctuations of exchange changes including the trade war
rates can also have a material impact on Shareholder between the US and China are reviewed
returns. and discussed. While it is difficult
to quantify the impact of such
changes, it is not anticipated
that they will fundamentally affect
the business of the Company or
make healthcare investing any
less desirable. Note 26 describes
the impact of changes in foreign
exchange rates.
-----------------------------------------
Management Company and Management of the Portfolio
As the Company is an investment vehicle for shareholders, the
Directors have sought to ensure that the business of the Company is
managed by a leading specialist investment management team and that
the investment strategy remains attractive to shareholders. The
Directors believe that a strong working relationship with Polar
Capital LLP (the Investment Manager) will achieve the optimum
return for shareholders and the Board and Investment Manager
operate in a supportive, co-operative and open environment.
The Company has an Investment Management Contract (IMC) with the
Investment Manager to act as Investment Manager and AIFM of the
Company. The Investment Manager has responsibility for the
discretionary management of the Company's assets (including
uninvested cash) and sole responsibility to take decisions as to
the purchase and sale of individual investments. The Investment
Manager also has responsibility for asset allocation and sector
selection within the limits of the investment policy and guidelines
established and regularly reviewed by the Board. The activities of
the Investment Manager are subject to the overall control and
supervision of the Board.
The Investment Manager has other investment resources which
support the investment team and has experience in managing and
administering other investment trust companies. The Investment
Manager also provides or procures accountancy services, company
secretarial and day to day administrative services including the
monitoring of third-party suppliers which are directly appointed by
the Company. The Investment Manager has, with the consent of the
Directors, delegated the provision of certain of these
administrative functions to HSBC Securities Services and to Polar
Capital Secretarial Services Limited.
The fees of HSBC Securities Services in providing such services,
are for the account of the Company.
Information is provided to the Directors in a timely manner
covering all relevant management, regulatory and financial
information. The Board has a report from the investment team at
each meeting and also may ask representatives of the Investment
Manager to attend Board meetings, enabling the Directors to probe
further on matters of concern or seek clarification on certain
issues.
While the Board reviews the performance of the Investment
Manager at each Board meeting and the Company's performance against
the Benchmark and the investment objectives, the Management
Engagement Committee formally carries out the annual review of the
IMC and the continued appointment of the Investment Manager.
Investment Team
The Investment Manager provides a team of healthcare specialists
and the portfolio is managed by Dr. Daniel Mahony, the lead
manager, Mr. Gareth Powell and Dr. James Douglas.
Termination Arrangements
The IMC is terminable by either the Investment Manager or the
Company giving to the other not less than 12 months' written
notice. The IMC may be terminated earlier by the Company with
immediate effect on the occurrence of certain events, including:
(i) if an order has been made or an effective resolution passed for
the liquidation of the Investment Manager; (ii) if the Investment
Manager ceases or threatens to cease to carry on its business;
(iii) where the Company is required to do so by a relevant
regulatory authority; (iv) on the liquidation of the Company; or
(v) subject to certain conditions, where the Investment Manager
commits a material breach of the IMC.
In the event the IMC is terminated before the expiry of the
Company's fixed life then, except in the event of termination by
the Company for certain specified causes, the base fee and the
performance fee will be calculated pro rata for the period up to
and including the date of termination.
Fee Arrangements Management Fee
Under the terms of the IMC, the Investment Manager will be
entitled to a management fee together with reimbursement of
reasonable expenses incurred by it in the performance of its
duties. The management fee is payable monthly in arrears and will
be at the rate of 0.85% per annum of the lower of the Group's
market capitalisation and the Company's adjusted Net Asset Value on
the relevant day.
In accordance with the Directors' policy on the allocation of
expenses between income and capital, in each financial year 80% of
the management fee payable is charged to capital and the remaining
20% to income.
Performance Fee
The Investment Manager may be entitled to a performance fee. The
performance fee was reset at the date of reconstruction of the
Company and will be paid in cash at the end of the Company's
expected life (except in the case of an earlier termination of the
IMC). The performance fee will be an amount equal to 10% of the
excess total return (based on the Adjusted Net Asset Value per
ordinary share at that time) over the total return of the benchmark
plus 1.5% compounded annually on each anniversary of share
admission and adjusted for periods of less than 12 months.
For the purposes of calculating the performance fee, the
Company's Adjusted Net Asset Value will be based on the Net Asset
Value adjusted by the amount of any dividends paid by the Company
deemed to have been reinvested on the date of payment in ordinary
shares at their Net Asset Value (on such date) and the resulting
amount added to the Company's Net Asset Value.
If at the end of the Company's expected life the amount
available for distribution to shareholders is less than 215.9 pence
per ordinary share, no performance fee will be payable. If the
amount is more than 215.9 pence per ordinary share but payment of
the performance fee in full would reduce it below that level, then
the performance fee will be reduced such that shareholders receive
exactly 215.9p per share.
No performance fee has been paid or accrued since inception and
up to 30 September 2018.
Corporate Responsibility
Socially Responsible Investing and Exercising of Voting
Powers
The Board has instructed the Investment Manager to take into
account the published corporate governance policies of the
companies in which they invest. The Board has also considered the
Investment Manager's Stewardship Code and Proxy Voting Policy. The
Voting Policy is for the Investment Manager to vote at all general
meetings of companies in favour of resolutions proposed by the
management where it believes that the proposals are in the
interests of shareholders. However, in exceptional cases, where it
believes that a resolution could be detrimental to the interests of
shareholders or the financial performance of the Company,
appropriate notification will be given and abstentions or a vote
against will be lodged.
The Investment Manager has voted at 49 company meetings over the
year ended 30 September 2018 in each case following the
recommendations of the management of that company on the casting of
votes.
The Investment Manager reports to the Board, when requested, on
the application of the Stewardship Code and Voting Policy. The
Investment Manager's Stewardship Code and Voting Policy can be
found on the Investment Manager's website
(www.polarcapital.co.uk).
Environment and Greenhouse Gas Emissions
The Company's core activities are undertaken by its Investment
Manager which seeks to limit the use of non-renewable resources and
reduce waste where possible.
The Companies Act 2006 (Strategic Report and Directors' Reports)
Regulations 2013 require companies listed on the Main Market of the
London Stock Exchange to report on the greenhouse gas (GHG)
emissions for which they are responsible. The Company is an
investment trust, with neither employees nor premises, nor has it
any financial or operational control of the assets which it owns.
Consequently, it has no GHG emissions to report from its operations
nor does it have responsibility for any other emissions.
Diversity and gender reporting
The Company has no employees and the Board is comprised of one
female and three male non-executive Directors. If any new
appointments are made to the Board, the Board will continue to have
regard to the benefits of diversity, including gender, when seeking
to make any such appointments. The Company has not adopted a policy
on human rights as it has no employees or operational control of
its assets.
Modern Slavery Act
As an investment company, the Company does not provide goods or
services in the normal course of business and does not have any
customers. Accordingly, it is considered that the Company is not
required to make any slavery or human trafficking statements under
the Modern Slavery Act 2015.
Anti-bribery, Corruption and Tax Evasion
The Board has adopted a zero- tolerance policy, which is
available on the Company's website to bribery, corruption and the
facilitation of tax evasion in its business activities and uses the
principles of the policies formulated and implemented by the
Investment Manager and expects the same standard of zero-tolerance
to be adopted by third party service providers.
The Company has implemented a Conflicts of Interest policy to
which the Directors must adhere, in the event of divergence between
the Investment Manager's policy and the Company's policy the
Company's policy shall prevail. The Company is committed to acting
with integrity and in the interests of shareholders and will seek
to ensure that the law is enforced should such a need arise.
Approved by the Board on 19 December 2018
By order of the Board
T A Lago
Polar Capital Secretarial Services Limited
Company Secretary
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report,
the Directors' Remuneration Report and the Group and Company
Financial Statements in accordance with applicable law and
regulations.
Company law requires the Directors to prepare the Group and
Company Financial Statements for each financial year. Under that
law the Directors have prepared the Group and Company Financial
Statements in accordance with International Financial Reporting
Standards (IFRSs) as adopted by the European Union.
Under company law, the Directors must not approve the Group and
Company Financial Statements unless they are satisfied that they
give a true and fair view of the state of affairs of the Group and
Company and of the profit or loss of the Group and 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 IFRSs as adopted by the European
Union have been followed, subject to any material departures
disclosed and explained in the Financial Statements; and
- assess the Company's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern;
and
- prepare the Financial Statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group and
Company's transactions and disclose with reasonable accuracy at any
time the financial position of the Group and Company and enable
them to ensure that the Group and Company Financial Statements and
the Directors' Remuneration Report comply with the Companies Act
2006 and, as regards the Group and Company Financial Statements,
Article 4 of the IAS Regulations.
They are also responsible for safeguarding the assets of the
Group and Company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities. The
Directors are responsible for such internal control as they
determine necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to
fraud or error.
The Directors consider that the Annual Report including the
Group and Company Financial Statements taken as a whole, is fair,
balanced and understandable and provides the information necessary
for shareholders to assess the Group and Company's performance,
business model and strategy. Under applicable law and regulations,
the Directors are responsible for preparing a Strategic Report,
Report of the Directors, Directors' Remuneration Report and a
Corporate Governance Statement that are each compliant with the
associated laws and regulations.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website although day to day maintenance has been
delegated to Polar Capital LLP. Legislation in the United Kingdom
governing the preparation and dissemination of Financial Statements
may differ from legislation in other jurisdictions.
The work carried out by the Auditors does not involve
consideration of these matters and, accordingly, the Auditors
accept no responsibility for any changes that may have occurred to
the Financial Statements since they were initially presented on the
website.
Disclosure of Information to the Auditors
As far as the Directors are aware and to the best of their
knowledge, having made enquiries, there is no relevant audit
information of which the Auditors are unaware and the Directors
have taken steps to make themselves aware of any relevant audit
information and to establish that the Auditors are aware of such
information.
Going Concern
The Board has, through the Audit Committee, considered the Group
and Company's position as at 30 September 2018 and the factors
impacting the forthcoming year are set out in the Chairman's
Statement and the Investment Manager's Report within the Annual
Report and in the Strategic Review and in the Report of the
Directors which incorporates the corporate governance
statement.
The financial position of the Group and Company, their cash
flows, and their liquidity position are described in the Strategic
Report section of the Annual Report. Note 26 to the Financial
Statements includes the Group and Company's policies and process
for managing their capital; their financial risk management
objectives and details of financial instruments and hedging
activities. Exposure to credit risk and liquidity risk are also
disclosed.
The Group has a portfolio of investments listed and traded on
stock exchanges around the world, the great majority of which can
be sold within seven working days, providing considerable financial
resources. After making enquiries, the Directors have a reasonable
expectation that the Group and Company have adequate resources to
continue in operational existence for the foreseeable future.
Accordingly, the Directors continue to adopt the going concern
basis in preparing the Annual Report and Financial Statements.
Longer-Term Viability
The Board through the Audit Committee considered and addressed
the ability of the Company to continue to operate over a longer
period. The work of the Audit Committee in looking at the
longer-term viability is described within the Annual Report.
As an investment company with a liquid portfolio, the majority
of which can be sold within seven working days, limited expenses
which are modest in relation to the asset base of the Company, and
no employees the Directors are of the opinion that the Company can
continue in operation up to its wind-up date expected to be in
March 2025.
Responsibility Statement Under the Disclosure and Transparency
Rules
Each of the Directors in office for the period under review of
Polar Capital Global Healthcare Trust plc, confirm that, to the
best of their knowledge:
- the Financial Statements, which have been prepared in
accordance with IFRSs as adopted by the EU, give a true and fair
view of the assets, liabilities, financial position and profit of
the Company; and
- the Chairman's Statement, Investment Manager's Report,
Strategic Review and Report of the Directors (together constituting
the Management Report) include 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.
The Financial Statements were approved by the Board on 19
December 2018 and the responsibility statements were signed on its
behalf by James Robinson, Chairman of the Board.
James Robinson
Chairman
19 December 2018
STATEMENTS OF COMPREHENSIVE INCOME - FOR THE YEARED 30 SEPTEMBER
2018
Group Company
---------------------------------- ---- ---------------------------- ----------------------------
Year ended Year ended
30 September 2018 30 September 2017
---------------------------- ----------------------------
Revenue Capital Total Revenue Capital Total
return return return return return return
Note GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
---------------------------------- ---- -------- -------- -------- -------- -------- --------
Investment income 3 3,877 102 3,979 5,796 813 6,609
---------------------------------- ---- -------- -------- -------- -------- -------- --------
Other operating income 4 459 - 459 3 - 3
---------------------------------- ---- -------- -------- -------- -------- -------- --------
Gains on investments
held at fair value 5 - 49,559 49,559 - 1,030 1,030
---------------------------------- ---- -------- -------- -------- -------- -------- --------
Losses on derivatives - (19) (19) - - -
---------------------------------- ---- -------- -------- -------- -------- -------- --------
Other currency losses 6 - (259) (259) - (1,192) (1,192)
---------------------------------- ---- -------- -------- -------- -------- -------- --------
Total income 4,336 49,383 53,719 5,799 651 6,450
---------------------------------- ---- -------- -------- -------- -------- -------- --------
Expenses
---------------------------------- ---- -------- -------- -------- -------- -------- --------
Investment management
fee 7 (478) (1,910) (2,388) (428) (1,713) (2,141)
---------------------------------- ---- -------- -------- -------- -------- -------- --------
Other administrative
expenses 8 (607) (182) (789) (1,351) - (1,351)
---------------------------------- ---- -------- -------- -------- -------- -------- --------
Total expenses (1,085) (2,092) (3,177) (1,779) (1,713) (3,492)
---------------------------------- ---- -------- -------- -------- -------- -------- --------
Profit/(loss) before
finance costs and tax 3,251 47,291 50,542 4,020 (1,062) 2,958
---------------------------------- ---- -------- -------- -------- -------- -------- --------
Finance costs 9 (3) (983) (986) (1) (277) (278)
---------------------------------- ---- -------- -------- -------- -------- -------- --------
Profit/(loss) before
tax 3,248 46,308 49,556 4,019 (1,339) 2,680
---------------------------------- ---- -------- -------- -------- -------- -------- --------
Tax 10 (437) (3) (440) (709) (7) (716)
---------------------------------- ---- -------- -------- -------- -------- -------- --------
Net profit/(loss) for
the year and total comprehensive
income 2,811 46,305 49,116 3,310 (1,346) 1,964
---------------------------------- ---- -------- -------- -------- -------- -------- --------
Earnings/(loss) per
ordinary share (pence) 12 2.29 37.77 40.06 2.74 (1.11) 1.63
---------------------------------- ---- -------- -------- -------- -------- -------- --------
The total column of this statement represents the Group's
Statement of Comprehensive Income, prepared in accordance with IFRS
as adopted by the European Union.
The revenue return and capital return columns are supplementary
to this and are prepared under guidance published by the
Association of Investment Companies.
The Group does not have any other income or expense that is not
included in net profit for the year. The net profit/(loss) for the
year disclosed above represents the Group's total comprehensive
income.
There are no dilutive securities and therefore the Earnings per
Share and the Diluted Earnings per Share are the same.
All revenue and capital items in the above statement derive from
continuing operations. No operations were acquired or discontinued
in the year.
STATEMENTS OF CHANGES IN EQUITY - FOR THE YEARED 30 SEPTEMBER
2018
Group and Company
Year ended 30 September 2018
--------------------- ---- -------------------------------------------------------------------------------
Called Capital Share Special
up share redemption premium distributable Capital Revenue Total
capital reserve reserve reserve reserves reserve Equity
Note GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------------- ---- --------- ----------- -------- -------------- --------- -------- --------
Total equity at
1 October 2017 31,037 6,575 80,685 6,754 122,754 2,324 250,129
--------------------------- --------- ----------- -------- -------------- --------- -------- --------
Total comprehensive
income:
--------------------------- --------- ----------- -------- -------------- --------- -------- --------
Profit for the
year ended 30 September
2018 - - - - 46,305 2,811 49,116
--------------------------- --------- ----------- -------- -------------- --------- -------- --------
Transactions with
owners, recorded
directly to equity:
--------------------------- --------- ----------- -------- -------------- --------- -------- --------
Shares bought
back and held
in treasury 20 - - - (529) - - (529)
--------------------- ---- --------- ----------- -------- -------------- --------- -------- --------
Equity dividends
paid 11 - - - - - (2,453) (2,453)
--------------------- ---- --------- ----------- -------- -------------- --------- -------- --------
Total equity at
30 September 2018 31,037 6,575 80,685 6,225 169,059 2,682 296,263
--------------------------- --------- ----------- -------- -------------- --------- -------- --------
Group and Company
Year ended 30 September 2017
------------------ -------- -------------------------------------------------------------------------------
Called Capital Share Special
up share redemption premium distributable Capital Revenue Total
capital reserve reserve reserve reserves reserve Equity
Note GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------ -------- --------- ----------- -------- -------------- --------- -------- --------
Total equity at
1 October 2016 30,663 - 28,916 61,337 124,100 2,809 247,825
---------------------------- --------- ----------- -------- -------------- --------- -------- --------
Total comprehensive
(expense)/ income:
---------------------------- --------- ----------- -------- -------------- --------- -------- --------
(Loss)/profit for
the year ended
30 September 2017 - - - - (1,346) 3,310 1,964
---------------------------- --------- ----------- -------- -------------- --------- -------- --------
Transactions with
owners, recorded
directly to equity:
---------------------------- --------- ----------- -------- -------------- --------- -------- --------
Issue of ordinary
shares 17,1920 6,949 - 51,769 1,229 - - 59,947
------------------ -------- --------- ----------- -------- -------------- --------- -------- --------
Shares bought
back from tender
offer 17,18,20 (6,575) 6,575 - (55,812) - - (55,812)
------------------ -------- --------- ----------- -------- -------------- --------- -------- --------
Equity dividends
paid 11 - - - - - (3,795) (3,795)
------------------ -------- --------- ----------- -------- -------------- --------- -------- --------
Total equity at
30 September 2017 31,037 6,575 80,685 6,754 122,754 2,324 250,129
---------------------------- --------- ----------- -------- -------------- --------- -------- --------
BALANCE SHEETS - AS AT 30 SEPTEMBER 2018
Group Company
----- -------------------------- --------------------------
30 September 30 September 30 September 30 September
2018 2017 2018 2017
Notes GBP'000 GBP'000 GBP'000 GBP'000
----- ------------ ------------ ------------ ------------
Non current assets
Investments held at fair
value 13 320,321 274,516 320,321 274,516
Investment in subsidiary 13 - - 50 50
------------------------------ ----- ------------ ------------ ------------ ------------
Current assets
Receivables 14 459 8,967 459 8,967
Overseas tax recoverable 557 433 557 433
Cash and cash equivalents 24 13,851 856 13,801 806
------------------------------ ----- ------------ ------------ ------------ ------------
14,867 10,256 14,817 10,206
Total assets 335,188 284,772 335,188 284,772
------------------------------ ----- ------------ ------------ ------------ ------------
Current liabilities
Payables 15 (3,841) (2,218) (3,841) (2,218)
Bank overdraft 24 (1,712) (25) (1,712) (25)
------------------------------ ----- ------------ ------------ ------------ ------------
(5,553) (2,243) (5,553) (2,243)
------------------------------ ----- ------------ ------------ ------------ ------------
Non-current liabilities
Zero dividend preference
shares 16 (33,372) (32,400) - -
Loan from subsidiary - - (33,372) (32,400)
------------------------------ ----- ------------ ------------ ------------ ------------
Total liabilities (38,925) (34,643) (38,925) (34,643)
------------------------------ ----- ------------ ------------ ------------ ------------
Net assets 296,263 250,129 296,263 250,129
------------------------------ ----- ------------ ------------ ------------ ------------
Equity attributable to equity
shareholders
Called up share capital 17 31,037 31,037 31,037 31,037
Share premium reserve 19 80,685 80,685 80,685 80,685
Capital Redemption reserve 18 6,575 6,575 6,575 6,575
Special distributable reserve 20 6,225 6,754 6,225 6,754
Capital reserves 21 169,059 122,754 169,059 122,754
Revenue reserve 22 2,682 2,324 2,682 2,324
------------------------------ ----- ------------ ------------ ------------ ------------
Total equity 296,263 250,129 296,263 250,129
------------------------------ ----- ------------ ------------ ------------ ------------
Net asset value per ordinary
share (pence) 23 241.91 203.77 241.91 203.77
Net asset value per ZDP share
(pence) 23 103.87 100.85 - -
------------------------------ ----- ------------ ------------ ------------ ------------
The parent company has taken advantage of section 408 of the
Companies Act 2006 and has not included its own income statement in
the financial statements. The parent company's profit for the year
was GBP2,811k (2017: GBP3,310k).
The financial statements were approved and authorised for issue
by the Board of Directors on 19 December 2018 and signed on its
behalf by
James Robinson
Chairman.
CASH FLOW STATEMENTS - FOR THE YEARED 30 SEPTEMBER 2018
Group and Company
----------------------------
Year ended Year ended
30 September 30 September
2018 2017
Note GBP'000 GBP'000
------------------------------------- ---- ------------- -------------
Cash flows from operating activities
Profit before finance costs and
tax 50,542 2,958
Adjustment for non-cash items:
Gain on investments held at fair
value through profit or loss (49,559) (1,030)
------------------------------------- ---- ------------- -------------
Adjusted profit before tax 983 1,928
Adjustments for:
Purchases of investments, including
transaction costs (329,500) (226,076)
Sales of investments, including
transaction costs 343,187 185,763
(Increase)/decrease in receivables (4) 210
Increase in payables 202 62
Overseas tax deducted at source (564) (875)
------------------------------------- ---- ------------- -------------
Net cash generated from/(used
in) operating activities 14,304 (38,988)
------------------------------------- ---- ------------- -------------
Cash flows from financing activities
Proceeds from issue of share capital
(net of issue costs) - 59,947
Proceeds from ZDP share issue* - 32,128
Shares bought back from tender
offer - (55,812)
Cost of shares repurchased (529) -
Interest paid (14) (6)
Equity dividends paid 11 (2,453) (3,795)
------------------------------------- ---- ------------- -------------
Net cash (used in)/generated from
financing activities (2,996) 32,462
------------------------------------- ---- ------------- -------------
Net increase/(decrease) in cash
and cash equivalents 11,308 (6,526)
Cash and cash equivalents at the
beginning of the year 831 7,357
------------------------------------- ---- ------------- -------------
Cash and cash equivalents at the
end of the year 24 12,139 831
------------------------------------- ---- ------------- -------------
* Within the Company accounts this balance represents proceeds
from the loan from its subsidiary.
NOTES TO THE FINANCIAL STATEMENTS - FOR THE YEARED 30 SEPTEMBER
2018
1. General Information
The consolidated financial statements for the year ended 30
September 2018 comprise the financial statements of the Company and
it's wholly-owned subsidiary PCGH ZDP plc (together referred to as
the 'Group').
The Group and Company financial statements have been prepared in
accordance with International Financial Reporting Standards (IFRS),
which comprise standards and interpretations approved by the
International Accounting Standards Board (IASB) and International
Accounting Standards Committee (IASC), as adopted by the European
Union, and with those parts of the Companies Act 2006 applicable to
companies under IFRS.
The Group and Company's presentational currency is pounds
sterling (rounded to the nearest GBP'000). Pounds sterling is also
the functional currency of the Group and Company because it is the
currency which is most relevant to the majority of the Group and
Company's shareholders and creditors and the currency in which the
majority of the Group and Company's operating expenses are
paid.
2. Accounting Policies
The principal accounting policies which have been applied
consistently for all years presented are set out below:
(a) Basis of Preparation
The financial statements have been prepared on a going concern
basis under the historical cost convention, as modified by the
revaluation of investments and derivative financial instruments at
fair value through profit or loss.
Where presentational guidance set out in the Statement of
Recommended Practice (SORP) for investment trusts issued by the
Association of Investment Companies (AIC) in November 2014 and
updated in February 2018, is consistent with the requirements of
IFRS, in so far as those requirements are applicable to the
financial statements, the Directors have sought to prepare the
financial statements on a basis compliant with the recommendations
of the SORP.
Basis of consolidation - The Group financial statements
consolidate the Financial Statements of the Company and its wholly
owned subsidiary, PCGH ZDP plc, drawn up to the same accounting
date. The subsidiary is consolidated from the date of its
incorporation.
The company has taken advantage of the exemption under section
408 of the Companies Act 2006 and accordingly has not presented a
separate parent company income statement.
(b) Presentation of the Statement of Comprehensive Income
In order to better reflect the activities of an investment trust
company and in accordance with the guidance set out 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 results presented in the revenue return column is the measure
the directors believe appropriate in assessing the Group and
Company's compliance with certain requirements set out in section
1158 of the Corporation Tax Act 2010.
(c) Income
Dividends receivable from equity shares are recognised and taken
to the revenue return column of the Statement of Comprehensive
Income on an ex-dividend basis.
Special dividends are recognised on an ex-dividend basis and may
be considered to be either revenue or capital items. The facts and
circumstances are considered on a case by case basis before a
conclusion on appropriate allocation is reached.
Income from US/Canadian REITs is initially taken to the revenue
return column of the Statement of Comprehensive Income on an
ex-dividend basis. An adjustment may then be made to reallocate a
proportion of this income to capital, depending on the information
announced by the REITs.
Where the Group and Company has received dividends in the form
of additional shares rather than in cash, the amount of the cash
dividend foregone is recognised in the revenue return column of the
Statement of Comprehensive Income. Any excess in value of shares
received over the amount of the cash dividend foregone is
recognised in the capital return column of the Statement of
Comprehensive Income.
Bank interest is accounted for on an accruals basis. Interest
outstanding at the year-end is calculated on a time apportionment
basis using market rates of interest.
(d) Written Options
The Group and Company may write exchange-traded options with a
view to generating income. This involves writing short-dated
covered-call options and put options. The use of financial
derivatives is governed by the Group and Company's policies, as
approved by the Board.
These options are recorded initially at fair value, based on the
premium income received, and are then measured at subsequent
reporting dates at fair value. Changes in the fair value of the
options are recognised in the capital return for the period.
The option premiums are recognised evenly over the life of the
option and shown in the revenue return, with an appropriate amount
shown in the capital return to ensure the total return reflects the
overall change in the fair value of the options.
Where an option is exercised, any balance of the premium is
recognised immediately in the revenue return with a corresponding
adjustment in the capital return based on the amount of the loss
arising on exercise of the option.
(e) Expenses
All expenses, including the management fee, are accounted for on
an accruals basis and are recognised when they fall due.
All expenses have been presented as revenue items except as
follows:
Expenses are charged to the capital column of the Statement of
Comprehensive Income where a connection with the maintenance or
enhancement of the value of investments can be demonstrated. In
this respect the investment management fees have been charged to
the Statement of Comprehensive Income in line with the Board's
expected long-term split of returns, in the form of capital gains
and income from the Group and Company's portfolio. As a result 20%
of the investment management fees are charged to the revenue
account and 80% charged to the capital account of the Statement of
Comprehensive Income.
The performance fee (when payable) is charged entirely to
capital as the fee is based on the out- performance of the
Benchmark and is expected to be attributable largely, if not
wholly, to capital performance.
The research costs relate solely to specialist healthcare
research and are accounted for on an accrual basis and, are
allocated 20% to revenue and 80% to capital in line with the
Board's expected long-term split of revenue and capital return from
the Company's investment portfolio.
Finance costs
The ZDP shares are designed to provide a pre- determined capital
growth from their original issue price of 100p on 16 June 2017 to a
final capital repayment of 122.99p on 19 June 2024. The initial
capital will increase at a compound interest rate of 3% per
annum.
No dividends are payable on the ZDP shares. The provision for
the capital growth entitlement of the ZDP shares is included as a
finance cost and charged 100% to capital within the Statement of
Comprehensive Income (AIC SORP paragraph 53 issued in November 2014
and updated in February 2018).
Overdraft interest costs are allocated 20% to revenue and 80% to
capital in line with the Board's expected long-term split of
revenue and capital return from the Company's investment
portfolio.
Share issue costs
Costs incurred directly in relation to the issue of shares in
the subsidiary are borne by the Company and taken 100% to capital.
Share issue costs relating to ordinary share issues by the Company
are taken 100% to the share premium account.
Zero Dividend Preference (ZDP) shares
Shares issued by the subsidiary are treated as a liability of
the Group, and are shown in the Balance Sheet at their redemption
value at the Balance Sheet date. The appropriations in respect of
the ZDP shares necessary to increase the subsidiary's liabilities
to the redemption values are allocated to capital in the Statement
of Comprehensive Income. This treatment reflects the Board's
long-term expectations that the entitlements of the ZDP
shareholders will be satisfied out of gains arising on investments
held primarily for capital growth.
(f) Taxation
The tax expense represents the sum of the overseas withholding
tax deducted from investment income, tax currently payable and
deferred tax.
The tax currently payable is based on the taxable profits for
the year ended 30 September 2018. Taxable profit differs from net
profit as reported in the Statement of Comprehensive Income because
it excludes items of income or expense that are taxable or
deductible in other years and it further excludes items that are
never taxable or deductible. The Group and Company's liability for
current tax is calculated using tax rates that have been enacted or
substantively enacted at the balance sheet date.
In line with the recommendations of the SORP, the allocation
method used to calculate tax relief on expenses presented against
capital returns in the supplementary information in the 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 return column of the Statement of
Comprehensive Income, then no tax relief is transferred to the
capital return column.
Deferred tax is the tax expected to be payable or recoverable on
temporary differences between the carrying amounts of assets and
liabilities in the financial statements and the corresponding tax
bases used in the computation of taxable profit, and is accounted
for using the balance sheet liability method. Deferred tax
liabilities are recognised for all taxable temporary differences
and deferred tax assets are recognised to the extent that it is
probable that taxable profits will be available against which
deductible temporary differences can be utilised.
Investment trusts which have approval as such under section 1158
of the Corporation Taxes Act 2010 are not liable for taxation on
capital gains.
The carrying amount of deferred tax assets is reviewed at each
balance sheet date and reduced to the extent that it is no longer
probable that sufficient taxable profits will be available to allow
all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to
apply in the period when the liability is settled or the asset is
realised based on tax rates that have been enacted or substantively
enacted at the balance sheet date.
Deferred tax is charged or credited in the Statement of
Comprehensive Income, except when it relates to items charged or
credited directly to equity, in which case the deferred tax is also
dealt with in equity.
(g) Investments Held at Fair Value Through Profit or Loss
When a purchase or sale is made under contract, the terms of
which require delivery within the timeframe of the relevant market,
the investments concerned are recognised or derecognised on the
trade date and are initially measured at fair value.
On initial recognition the Group and Company has designated all
of its investments as held at fair value through profit or loss as
defined by IFRS. All investments are measured at subsequent
reporting dates at fair value, which is either the bid price or the
last traded price, depending on the convention of the exchange on
which the investment is quoted.
All investments, classified as fair value through profit or
loss, are further categorised into the following fair value
hierarchy:
Level 1: Unadjusted prices quoted in active markets for
identical assets and liabilities.
Level 2: Having inputs other than quoted prices included within
Level 1 that are observable for the asset or liability, either
directly (ie as prices) or indirectly (ie derived from prices).
Level 3: Having inputs for the asset or liability that are not
based on observable market data.
Changes in fair value of all investments held at fair value and
realised gains and losses on disposal are recognised in the capital
return column of the Statement of Comprehensive Income.
In the event a security held within the portfolio is suspended
then judgement is applied in the valuation of that security.
(h) Receivables
Receivables are initially recognised at fair value and
subsequently measured at amortised cost. Receivables do not carry
any interest and are short-term in nature and are accordingly
stated at their nominal value (amortised cost) as reduced by
appropriate allowances for estimated irrecoverable amounts.
(i) Cash and Cash Equivalents
Cash comprises cash on hand and demand deposits. Cash
equivalents are short-term, maturity of 3 months or less, highly
liquid investments that are readily convertible to known amounts of
cash.
(j) Dividends Payable
Dividends payable to shareholders are recognised in the
financial statements when they are paid or, in the case of final
dividends, when they are approved by the shareholders.
(k) Payables
Other payables are not interest-bearing and are initially valued
at fair value and subsequently stated at their nominal value
(amortised cost).
(l) Foreign Currency Translation
Transactions in foreign currencies are translated into sterling
at the rate of exchange ruling on the date of each transaction.
Monetary assets, monetary liabilities and equity investments in
foreign currencies at the balance sheet date are translated into
sterling at the rates of exchange ruling on that date. Realised
profits or losses on exchange, together with differences arising on
the translation of foreign currency assets or liabilities, are
taken to the capital return column of the Statement of
Comprehensive Income.
Foreign exchange gains and losses arising on investments held at
fair value are included within changes in fair value.
(m) Capital Reserves
Capital reserve arising on investments sold includes:
- gains/losses on disposal of investments
- exchange differences on currency balances
- transfer to subsidiary in relation to ZDP funding
requirement
- other capital charges and credits charged to this account in
accordance with the accounting policies above.
Capital reserve arising on investments held includes:
- increases and decreases in the valuation of investments held
at the balance sheet date.
All of the above are accounted for in the Statement of
Comprehensive Income.
(n) 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 special distributable reserve. Share repurchase transactions
are accounted for on a trade date basis.
The nominal value of Ordinary share capital repurchased and
cancelled is transferred out of called up share capital and into
the capital redemption reserve.
Where shares are repurchased and held in treasury, the transfer
to capital redemption reserve is made if and when such shares are
subsequently cancelled.
(o) New and revised accounting Standards
There were no new IFRSs or amendments to IFRSs applicable to the
current year which had any significant impact on the Group and
Company's accounts. At the date of authorisation of these financial
statements, the following new and amended IFRSs are in issue but
are not yet effective and have not been applied in these
accounts:
Effective for periods commencing on or after 1 January 2018:
IFRS9 (2014) Financial Instruments.
The requirement of IFRS9 and its application to the assets and
liabilities held by the Group and Company were considered ahead of
its adoption on 1 January 2018. The classification of all assets
and liabilities remains unchanged under IFRS9 and all figures will
be directly comparable to the existing basis of valuation.
IFRS15, Revenue with Contracts with Customers.
IFRS 15 sets out the requirements for revenue recognition. The
Company's only revenue streams are dividend income and gains and
losses from sale of investments. Given the nature of the Company's
revenue streams from financial instruments, the provisions of this
standard are not expected to have a material impact.
IFRS2 (amended) Classification and Measurement of Share-based
payment transactions.
IFRIC22 Foreign currency transactions and advance
consideration.
Annual Improvement Cycles 2015-2017.
Effective for periods commencing on or after 1 January 2019:
IFRS 16 Leases.
IFRIC 23 Uncertainty over Income Tax Treatments.
IAS 19 (amended) Employee Benefits.
IAS 28 (amended) Investments in Associates and Joint
Ventures.
The Directors expect that the adoption of the standards listed
above will have either no impact or that any impact will not be
material on the Financial Statements of the Company in future
periods.
(p) Segmental Reporting
Under IFRS 8, 'Operating Segments', operating segments are
considered to be the components of an entity about which separate
financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate
resources and in assessing performance. The chief operating
decision maker has been identified as the Investment Manager (with
oversight from the board).
The Directors are of the opinion that the Group and Company has
only one operating segment and as such no distinct segmental
reporting is required.
3 Investment Income
Year ended Year ended
30 September 30 September
2018 2017
GBP'000 GBP'000
------------------------------------------ ------------- -------------
Revenue:
Franked: Listed investments
Dividend income 491 750
------------------------------------------ ------------- -------------
Unfranked: Listed investments
Dividend income 3,386 5,046
------------------------------------------ ------------- -------------
Total investment income allocated to
revenue 3,877 5,796
------------------------------------------ ------------- -------------
Capital:
Special dividends allocated to capital - 509
Dividends from REITs allocated to capital 102 304
------------------------------------------ ------------- -------------
Total investment income allocated to
capital 102 813
------------------------------------------ ------------- -------------
4 Other Operating Income
Year ended Year ended
30 September 30 September
2018 2017
GBP'000 GBP'000
----------------------------- ------------- -------------
Option premium income 437 -
Bank interest 22 3
----------------------------- ------------- -------------
Total other operating income 459 3
----------------------------- ------------- -------------
Option premium income for the year arises from writing
short-dated covered-call options and put options in the expectation
that the options will not be exercised or, in overall terms, any
losses that may arise following exercise will be outweighed by the
premiums received.
5 Gains on Investments Held at Fair Value
Year ended Year ended
30 September 30 September
2018 2017
GBP'000 GBP'000
------------------------------------------- ------------- -------------
Net gains on disposal of investments
at historic cost 30,676 41,149
Less fair value adjustments in earlier
years (13,268) (42,619)
Gains/(losses) based on carrying value
at previous balance sheet date 17,408 (1,470)
Valuation gains on investments held during
the year 32,151 2,500
------------------------------------------- ------------- -------------
49,559 1,030
------------------------------------------- ------------- -------------
6 Other Currency losses
Year ended Year ended
30 September 30 September
2018 2017
GBP'000 GBP'000
------------------------------------- ------------- -------------
Exchange losses on currency balances (259) (1,192)
------------------------------------- ------------- -------------
7 Investment Management Fee
Year ended Year ended
30 September 30 September
2018 2017
GBP'000 GBP'000
------------------------------------- ------------- -------------
Management fee
- charged to revenue 478 428
- charged to capital 1,910 1,713
------------------------------------- ------------- -------------
Investment management fee payable to
Polar Capital LLP 2,388 2,141
------------------------------------- ------------- -------------
Management fees are allocated 20% to revenue and 80% to
capital.
8 Other Administrative Expenses (Including VAT where appropriate)
Year ended Year ended
30 September 30 September
2018 2017
GBP'000 GBP'000
--------------------------------------------- ------------- -------------
Directors' fees 130 115
Directors' NIC 13 11
Auditors' remuneration*:
For audit of the Group and Company financial
statements 30 24
Depositary fee 23 30
Registrar fee 20 32
Custody and other bank charges 28 32
UKLA and LSE listing fees 48 23
Legal & professional fees* 4 838
AIC fees 19 20
Directors' and officers' liability insurance 9 7
Corporate broker's fee 29 28
Marketing expenses** 28 21
Research costs*** 45 -
Shareholder communications 31 22
HSBC administration fee 143 129
Other expenses 7 19
--------------------------------------------- ------------- -------------
607 1,351
--------------------------------------------- ------------- -------------
Transaction charges - allocated to capital 1 -
--------------------------------------------- ------------- -------------
Research cost - allocated to capital** 181 -
--------------------------------------------- ------------- -------------
789 1,351
--------------------------------------------- ------------- -------------
* 2018 includes GBP4,500 paid to the Auditor for the audit of
PCGH ZDP Plc.
** Includes marketing expenses payable to Polar Capital LLP of
GBP22,500. This is based on an annual marketing budget of GBP30,000
agreed with the Board and applied from 1 January 2018.
*** Research costs (which applied from 3 January 2018) payable
by the Company relate solely to specialist healthcare research and
are capped at US $394,867 (GBP303,000) with the cost of general
non-specialist research and any amounts exceeding the agreed cap
being absorbed by Polar Capital. These costs are allocated 20% to
revenue and 80% to capital and are included in the ongoing charges
calculation.
Research costs were previously wrapped up in trade commission.
Under MIFID II which applied from 3rd January 2018, changes were
made to how investment managers pay for their research. This new
regime requires investment managers to budget separately for
research and trading costs.
Ongoing charges represents the total expenses of the fund,
excluding finance costs and tax, expressed as a percentage of the
average daily net asset value, in accordance with AIC guidance
issued in May 2012.
The ongoing charges ratio for the year ended 30 September 2018
was 1.08% (2017: 1.02%). See Alternative Performance Measures.
9 Finance Costs
Year ended 30 September Year ended 30 September
2018 2017
--------------------------- ---------------------------
Revenue Capital Total Revenue Capital Total
return return return return return return
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
----------------------- -------- -------- ------- -------- -------- -------
Interest on overdrafts 3 11 14 1 5 6
Appropriation to
ZDP shares - 972 972 - 272 272
----------------------- -------- -------- ------- -------- -------- -------
Total finance costs 3 983 986 1 277 278
----------------------- -------- -------- ------- -------- -------- -------
10 Taxation
Year ended Year ended
30 September 2018 30 September 2017
---------------------------- ----------------------------
Revenue Capital Total Revenue Capital Total
return return return return return return
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------- -------- -------- -------- -------- --------
a) Analysis of tax charge
for the year:
Overseas tax 437 3 440 709 7 716
---------------------------- -------- -------- -------- -------- -------- --------
Total tax for the year
(see note 10b) 437 3 440 709 7 716
---------------------------- -------- -------- -------- -------- -------- --------
b) Factors affecting tax
charge for the year:
The charge for the year
can be reconciled to the
profit per the Statement
of Comprehensive Income
as follows:
Profit/(loss) before tax 3,248 46,308 49,556 4,019 (1,339) 2,680
---------------------------- -------- -------- -------- -------- -------- --------
Tax at the UK corporation
tax rate of 19% (2017:
19%)* 617 8,799 9,416 382 (127) 255
Tax at the UK corporation
tax rate of 20% (2017:
20%)* - - - 402 (134) 268
Tax effect of non-taxable
dividends (756) (20) (776) (1,055) (159) (1,214)
(Gains)/loss on investments
that are not taxable - (9,363) (9,363) - 32 32
Unrelieved current period
expenses
and deficits 139 399 538 116 335 451
Overseas tax suffered 437 3 440 709 7 716
Expenses not allowable - 185 185 163 53 216
Tax relief on overseas
tax suffered - - - (8) - (8)
---------------------------- -------- -------- -------- -------- -------- --------
Total tax for the year
(see note 10a) 437 3 440 709 7 716
---------------------------- -------- -------- -------- -------- -------- --------
* Under the Finance Act 2015, the rate of corporation tax was
lowered to 19% from 1 April 2017.
c) Factors that may affect future tax charges:
The Company has an unrecognised deferred tax asset of
GBP2,018,000 (2017: GBP1,377,000) based on a prospective
corporation tax rate of 17% (2017: 17%).
The deferred tax asset has arisen due to the cumulative excess
of deductible expenses over taxable income. Given the composition
of the Company's portfolio, it is not likely that this asset will
be utilised in the foreseeable future and therefore no asset has
been recognised in the accounts.
Given the Company's intention to meet the conditions required to
retain its status as an Investment Trust Company, no provision has
been made for deferred tax on any capital gains or losses arising
on the revaluation or disposal of investments.
11 Amounts Recognised as Distributions to Ordinary Shareholders in the Year
Dividends paid in the year ended 30 September 2018
Year ended
30 September
Pence per 2018
Payment date No of shares share GBP'000
----------------- ------------ --------- -------------
28 February 2018 122,750,000 1.00p 1,228
31 August 2018 122,470,000 1.00p 1,225
-------------
2,453
-------------
The revenue available for distribution by way of dividend for
the year is GBP2,811,000 (2017: GBP3,310,000).
The total dividends payable in respect of the financial year
ended 30 September 2018 which is the basis on which the
requirements of Section 1158 Corporation Tax Act 2010 are
considered, is set out below:
Year ended
30 September
Pence per 2018
Payment date No of shares share GBP'000
----------------- ------------ --------- -------------
31 August 2018 120,470,000 1.00p 1,225
28 February 2019 120,470,000 1.00p 1,225
2,450
-------------
Dividends paid in the year ended 30 September 2017
Year ended
30 September
Pence per 2017
Payment date No of shares share GBP'000
----------------- ------------ --------- -------------
30 November 2016 120,475,000 0.75p 904
28 February 2017 120,475,000 0.75p 904
9 June 2017 120,475,000 1.65p 1,987
3,795
-------------
The total dividends payable in respect of the financial year
ended 30 September 2017 which is the basis on which the
requirements of Section 1158 Corporation Tax Act 2010 are
considered, is set out below:
Year ended
30 September
Pence per 2017
Payment date No of shares share GBP'000
----------------- ------------ --------- -------------
28 February 2017 120,475,000 0.75p 904
9 June 2017 120,475,000 1.65p 1,987
28 February 2018 122,750,000 1.00p 1,228
4,119
-------------
All dividends are paid as interim dividends.
The dividends paid in February each year relate to a dividend
declared in respect of the previous financial year but paid in the
current accounting year.
12 Earnings per Ordinary Share
Year ended Year ended
30 September 2018 30 September 2017
----------------------------------------- -------------------------------------------
Capital Capital
Revenue return return Total return Revenue return return Total return
-------------- ----------- ------------ -------------- ----------- ------------
The calculation of
basic earnings per
share is based
on the following
data:
Net profit/(loss)
for the year (GBP'000) 2,811 46,305 49,116 3,310 (1,346) 1,964
Weighted average
ordinary
shares in issue
during the year 122,602,712 122,602,712 120,602,712 120,996,259 120,996,259 120,996,259
Basic - ordinary
shares (pence) 2.29 37.77 40.06 2.74 (1.11) 1.63
------------------------ -------------- ----------- ------------ -------------- ----------- ------------
As at 30 September 2018 there were no potentially dilutive
shares in issue.
13 Investments Held at Fair Value
(a) Movements on investments
30 September 30 September
2018 2017
GBP'000 GBP'000
------------------------------ ------------ ------------
Cost brought forward 249,824 181,570
Valuation gains 24,692 64,811
------------------------------ ------------ ------------
Valuation brought forward 274,516 246,381
Additions at cost 330,921 221,380
Proceeds on disposal (334,675) (194,275)
Gains/(losses) on disposal 17,408 (1,470)
Valuation gains 32,151 2,500
------------------------------ ------------ ------------
Valuation at 30 September 320,321 274,516
------------------------------ ------------ ------------
Cost at 30 September 276,747 249,824
Closing fair value adjustment 43,574 24,692
------------------------------ ------------ ------------
Valuation at 30 September 320,321 274,516
------------------------------ ------------ ------------
The following transaction costs, including stamp duty and broker
commissions were incurred during the year:
30 September 30 September
2018 2017
GBP'000 GBP'000
--------------- ------------ ------------
On acquisition 197 350
On disposal 151 251
--------------- ------------ ------------
348 601
--------------- ------------ ------------
(b) Fair value hierarchy
30 September 30 September
2018 2017
GBP'000 GBP'000
-------------------------- ------------ ------------
Level 1 assets 320,321 274,516
-------------------------- ------------ ------------
Valuation at 30 September 320,321 274,516
-------------------------- ------------ ------------
All Level 1 assets are traded on a recognised Stock
Exchange.
(c) Subsidiary undertaking
Country of registration, Number and class
incorporation and of shares held by
Company and business operation the Company Holding
--------------------- ------------------------- ----------------------- -------
50,000 Ordinary shares
PCGH ZDP Plc England and Wales of GBP1 100%
--------------------- ------------------------- ----------------------- -------
The Company is a public limited company with the sole purpose of
issuing Zero Dividend Preference (ZDP) shares. The registered
office is at Polar Capital, 16 Palace Street, London SW1E 5JD.
The investment is stated in the Company's Financial Statements
at cost, which is considered by the Directors to equate to fair
value.
The subsidiary is non-trading and the value of the net assets
have not changed since the acquisition of the ordinary share
capital by the Company. The cost is therefore considered to equate
to the fair value of the shares held.
14 Receivables
30 September 30 September
2018 2017
GBP'000 GBP'000
---------------------------- ------------ ------------
Sales for future settlement - 8,512
Accrued income 436 368
VAT recoverable - 74
Prepayments 23 13
---------------------------- ------------ ------------
459 8,967
---------------------------- ------------ ------------
15 Payables
30 September 30 September
2018 2017
GBP'000 GBP'000
-------------------------------- ------------ ------------
Purchases for future settlement 3,338 1,917
Accruals 503 301
-------------------------------- ------------ ------------
3,841 2,218
-------------------------------- ------------ ------------
16 Zero Dividend Preference Shares ("ZDP Shares")
30 September 30 September
2018 2017
GBP'000 GBP'000
------------------------------------- ------------ ------------
At 1 October 32,400 -
ZDP shares - initial placing at 100p
on 16 June 2017 - 32,128
Capital growth of ZDP shares 972 272
------------------------------------- ------------ ------------
At 30 September 33,372 32,400
------------------------------------- ------------ ------------
17 Called up Share Capital
30 September 30 September
(i) Ordinary shares - Allotted, Called 2018 2017
up and Fully paid: GBP'000 GBP'000
------------------------------------------------ ------------ ------------
Ordinary shares of nominal value 25p
each:
Opening balance of 122,750,000 (30 September
2017: 120,475,000) 30,687 30,119
Issue of nil (2017: 27,798,298) ordinary
shares from open offer - 6,949
Issue of nil (2017: 775,744) ordinary
shares from treasury - 194
Repurchase and cancellation of nil (2017:
26,299,042)
ordinary shares from tender offer - (6,575)
Repurchase of 280,000 (2017: nil) ordinary
shares, into treasury (70) -
------------------------------------------------ ------------ ------------
Allotted, Called up and Fully paid: 122,470,000
(30 September 2017: 122,750,000) ordinary
shares of 25p 30,617 30,687
1,679,256 (2017: 1,399,256) ordinary
shares, held in treasury 420 350
------------------------------------------------ ------------ ------------
At 30 September 31,037 31,037
------------------------------------------------ ------------ ------------
280,000 ordinary shares were repurchased into treasury at a cost
of GBP529,000.
The ordinary shares held in treasury have no voting rights and
are not entitled to dividends.
30 September 30 September
(ii) ZDP shares - Allotted, Called up 2018 2017
and Fully paid: GBP'000 GBP'000
----------------------------------------------- ------------ ------------
ZDP shares of nominal value 1p each:
Opening balance of 32,128,437 ZDP shares
(30 September 2017: nil) 32,128 -
Issue of nil (30 September 2017: 32,128,437
issued from initial placing on 16 June
2017) ZDP shares - 32,128
Allotted, Called up and Fully paid: 32,128,437
(30 September 2017: 32,128,437) ZDP shares
of 1p 32,128 32,128
----------------------------------------------- ------------ ------------
At 30 September 32,128 32,128
----------------------------------------------- ------------ ------------
18 Capital Redemption Reserve
30 September 30 September
2018 2017
GBP'000 GBP'000
------------------------------------------ ------------ ------------
At 1 October 6,575 -
Repurchase and cancellation of nil (2017:
26,299,042)
ordinary shares from tender offer - 6,575
------------------------------------------ ------------ ------------
At 30 September 6,575 6,575
------------------------------------------ ------------ ------------
This reserve is not distributable.
19 Share Premium Reserve
30 September 30 September
2018 2017
GBP'000 GBP'000
------------------------------------------ ------------ ------------
At 1 October 80,685 28,916
Issue of nil (2017: 27,798,298 at 213.80p
each) ordinary shares - 52,483
Issue of nil (2017: 150,744 at 212.00p
each) ordinary shares - 80
Issue of nil (2017: 100,000 at 213.25p
each) ordinary shares - 54
Issue of nil (2017: 225,000 at 212.50p
each) ordinary shares - 121
Issue of nil (2017: 100,000 at 210.50p
each) ordinary shares - 52
Issue of nil (2017: 200,000 at 209.00p
each) ordinary shares - 100
Issue costs - (1,121)
------------------------------------------ ------------ ------------
At 30 September 80,685 80,685
------------------------------------------ ------------ ------------
This reserve is not distributable.
20 Special Distributable Reserve
30 September 30 September
2018 2017
GBP'000 GBP'000
------------------------------------------- ------------ ------------
At 1 October 6,754 61,337
Repurchase and cancellation of nil
(2017: 26,299,042) ordinary shares - (55,812)
Issue of nil (2017: 775,744) ordinary
shares from treasury - 1,229
Repurchase of 280,000 (2017: nil) ordinary
shares into treasury (529) -
------------------------------------------- ------------ ------------
At 30 September 6,225 6,754
------------------------------------------- ------------ ------------
Surpluses to the credit of the special distributable reserve can
be used to purchase the Group and Company's own shares. In addition
the Group and Company may use this reserve for the payment of
dividends.
21 Capital Reserves
30 September 30 September
2018 2017
GBP'000 GBP'000
---------------------------------------------- ------------ ------------
At 1 October 122,754 124,100
Net gains/(losses) on disposal of investments 17,408 (1,470)
Valuation gains on investments held during
the year 32,151 2,500
Exchange losses on currency balances (259) (1,192)
Derivatives realised loss (19) -
Capital dividends 102 813
Irrecoverable tax on special capital
dividends (3) (7)
Overdraft interest allocated to capital (11) (5)
Transaction charges allocated to capital (1) -
Research costs to capital (181) -
Investment management fee allocated to
capital (1,910) (1,713)
Capital contribution to ZDP entitlement (163) (45)
ZDP appropriation (809) (227)
---------------------------------------------- ------------ ------------
At 30 September 169,059 122,754
---------------------------------------------- ------------ ------------
The balance on the capital reserve represents a profit of
GBP43,574,000 (2017: GBP24,692,000) on investments held and a
profit of GBP125,485,000 (2017: GBP98,062,000) on investments
sold.
The balance on investments held comprises holding gains on
investments (which maybe deemed to be realised and other amounts,
which are unrealised. An analysis has not been made between the
amounts that are realised (and may be distributed or used to
repurchase the Group and Company's shares) and those that are
unrealised.
The balance on investments sold are realised distributable
capital reserves which may be used to repurchase the Group and
Company's shares or be distributed as dividends.
22 Revenue Reserve
30 September 30 September
2018 2017
GBP'000 GBP'000
----------------------- ------------ ------------
At 1 October 2,324 2,809
Revenue profit 2,811 3,310
Interim dividends paid (2,453) (3,795)
----------------------- ------------ ------------
At 30 September 2,682 2,324
----------------------- ------------ ------------
The revenue reserve may be distributed or used to repurchase the
Group and Company's shares (subject to being a positive
balance).
23 Net Asset Value Per Share
30 September 30 September
(i) Ordinary shares 2018 2017
------------------------------------------------- ------------ ------------
Net assets attributable to ordinary shareholders
(GBP'000) 296,263 250,129
Ordinary shares in issue at end of year 122,470,000 122,750,000
------------------------------------------------- ------------ ------------
Net asset value per ordinary share (pence) 241.91 203.77
------------------------------------------------- ------------ ------------
Total issued ordinary shares 124,149,256 124,149,256
Ordinary shares held in treasury 1,679,256 1,399,256
Ordinary shares in issue 122,470,000 122,750,000
------------------------------------------------- ------------ ------------
As at 30 September 2018 there were no potentially dilutive
shares in issue.
30 September 30 September
(ii) ZDP shares 2018 2017
------------------------------------------- ------------ ------------
Calculated entitlement of ZDP shareholders
(GBP) 33,372,440 32,400,428
ZDP shares in issue at the end of the
year 32,128,437 32,128,437
------------------------------------------- ------------ ------------
Net asset value per ZDP share (pence) 103.87 100.85
------------------------------------------- ------------ ------------
24 Cash and Cash Equivalents
30 September 30 September
2018 2017
GBP'000 GBP'000
---------------------------------------- ------------ ------------
Cash at bank 12,777 264
Cash held at derivative clearing houses 1,024 542
Bank overdraft (1,712) (25)
Cash held at subsidiary 50 50
---------------------------------------- ------------ ------------
12,139 831
---------------------------------------- ------------ ------------
25 Transactions with the Investment Manager and Related Party Transactions
(a) Transactions with the Manager
Under the terms of an agreement dated 26 May 2010 the Group has
appointed Polar Capital LLP ('Polar Capital') to provide investment
management, accounting, secretarial and administrative services.
Details of the fee arrangement for these services are given in the
Strategic Report. The total fees, paid under this agreement to
Polar Capital in respect of the year ended 30 September 2018 were
GBP2,388,000 (2017: GBP2,141,000) of which GBP212,000 (2017:
GBP198,000) was outstanding at the year-end.
In addition, the total research costs in respect of the period
from 1 January 2018 to the year ended 30 September 2018 were
GBP226,000 (2017: GBPnil) of which GBP168,000 (2017: GBPnil) was
outstanding at the year-end.
(b) Related party transactions
The Group and Company has no employees and therefore no key
management personnel other than the Directors. The Group and
Company paid GBP130,000 (2017: GBP115,000) to the Directors and the
Remuneration Report is set out within the Annual Report.
26 Derivatives and Other Financial Instruments
Risk management policies and procedures for the Group and
Company
The Group and Company invests in equities and other financial
instruments for the long term to further the investment objective
set out in the Annual Report.
This exposes the Group and Company to a range of financial risks
that could impact on the assets or performance of the Group and
Company.
The main risks arising from the Group and Company's pursuit of
its investment objective are market risk, liquidity risk and credit
risk and the Directors' approach to the management of them is set
out below. The Group and Company's exposure to financial
instruments can comprise:
o Equity and non-equity shares and fixed interest securities
which may be held in the investment portfolio in accordance with
the investment objective.
o Bank overdrafts, the main purpose of which is to raise finance
for the Group and Company's operations.
o Cash, liquid resources and short-term receivables and payables
that arise directly from the Group and Company's operations.
o Derivative transactions which the Group and Company enters
into may include equity or index options, index futures contracts,
and forward foreign exchange contracts.
The purpose of these is to manage the market price risks and
foreign exchange risks arising from the Group and Company's
investment activities.
The overall management of the risks is determined by the Board
and its approach to each risk identified is set out below. The
Board and the Investment Manager co-ordinate the risk management
and the Investment Manager assesses the exposure to market risk
when making each investment decision.
(a) Market Risk
Market risk comprises three types of risk: market price risk
(see note 26(a)(i)), currency risk (see note 26(a)(ii)), and
interest rate risk (see note 26(a)(iii)).
(i) Market Price Risk
The Group and Company is an investment company and as such its
performance is dependent on its valuation of its investments.
Consequently, market price risk is the most significant risk that
the Group and Company faces.
Market price risk arises mainly from uncertainty about future
prices of financial instruments used in the Group and Company's
operations.
It represents the potential loss the Group and Company might
suffer through holding market positions in the face of price
movements.
A detailed breakdown of the investment portfolio is given above.
Investments are valued in accordance with the accounting policies
as stated in Note 2(g).
At the year end, the Group and Company did not hold any
derivative instruments (2017: nil).
Management of the risk
In order to manage this risk it is the Board's policy to hold an
appropriate spread of investments in the portfolio in order to
reduce both the statistical risk and the risk arising from factors
specific to a particular healthcare sub sector. The allocation of
assets to international markets, together with stock selection
covering small, medium and large companies, and the use of index
options, are other factors which act to reduce price risk. The
Investment Manager actively monitors market prices throughout the
year and reports to the Board which meets regularly in order to
consider investment strategy.
Market price risks exposure
The Group and Company's exposure to changes in market prices at
30 September on its investments was as follows:
Year ended Year ended
30 September 30 September
2018 2017
GBP'000 GBP'000
-------------------------------------- ------------- -------------
Non-current asset investments at fair
value through profit or loss 320,321 274,516
-------------------------------------- ------------- -------------
320,321 274,516
-------------------------------------- ------------- -------------
Market price risk sensitivity
The following table illustrates the sensitivity of the return
after taxation for the year and the value of shareholders' funds to
an increase or decrease of 15% in the fair values of the Group and
Company's investments. This level of change is considered to be
reasonably possible based on observation of current market
conditions and historic trends.
The sensitivity analysis is based on the Group and Company's
investments at each balance sheet date, with all other variables
held constant.
Year ended Year ended
30 September 2018 30 September 2017
---------------------------------- ----------------------------- ------------------------
Increase Decrease Increase Decrease
in in in in
fair value fair value fair value fair value
GBP'000 GBP'000 GBP'000 GBP'000
---------------------------------- ---------------- ----------- ----------- -----------
Statement of Comprehensive Income
-
profit after tax
Revenue return (81) 81 (70) 70
Capital return 47,721 (47,721) 40,897 (40,897)
---------------------------------- ---------------- ----------- ----------- -----------
Change to the profit after tax
for the year 47,640 (47,640) 40,827 (40,827)
---------------------------------- ---------------- ----------- ----------- -----------
Change to equity attributable
to shareholders 47,640 (47,640) 40,827 (40,827)
---------------------------------- ---------------- ----------- ----------- -----------
(ii) Currency Risk
The Group and Company's total return and net assets can be
significantly affected by currency translation movements as the
majority of the Group and Company's assets and revenue are
denominated in currencies other than sterling.
Management of the risk
The Investment Manager mitigates risks through an international
spread of investments.
Settlement risk on investment trades is managed through short
term hedging.
Foreign currency exposure
The table below shows, by currency, the split of the Group and
Company's monetary assets, liabilities and investments that are
priced in currencies other than sterling.
Year ended Year ended
30 September 30 September
2018 2017
GBP'000 GBP'000
------------------------------------------ ------------- -------------
Monetary Assets:
Cash and short term receivables
Swiss francs 725 537
Danish krone 448 2
Japanese yen 166 107
Euros 135 137
US dollars 69 9,125
Singapore dollars - 44
Australian dollars - 31
Canadian dollars - 7
Monetary Liabilities:
Other payables
US dollars (733) (7,892)
Danish krone (422) -
------------------------------------------ ------------- -------------
Foreign currency exposure on net monetary
items 388 2,098
Non-Monetary Items:
Investments at fair value through profit
or loss that are equities
US dollars 252,232 201,015
Swiss francs 16,730 17,547
Japanese yen 14,206 8,225
Danish krone 9,093 -
Swedish krona 2,227 -
Norwegian krona 1,347 643
Euros - 33,710
Australian dollars - 2,292
Canadian dollars - 1,318
Singapore dollars - 598
------------------------------------------ ------------- -------------
Total net foreign currency exposure 296,223 267,446
------------------------------------------ ------------- -------------
During the financial year, movements against sterling in the
four major currencies noted above were:
US dollar appreciated by 2.8% (2017: depreciated by 3.3%),
Swiss franc appreciated by 1.9% (2017: depreciated by 3.1%),
Japanese yen appreciated by 1.9% (2017: depreciated by
14.8%),
Danish Krone appreciated by 0.9% (2017: appreciated by
1.9%).
Foreign currency sensitivity
The following table illustrates the sensitivity of the profit
after tax for the year and the value of equity attributable to
shareholders in regard to the financial assets and financial
liabilities and the exchange rates for the GBP/US dollar, GBP/Swiss
francs, GBP/Japanese yen and GBP/Euro.
Based on the year end position, if sterling had depreciated by a
further 15% (2017: 15%) against the currencies shown, this would
have the following effect:
Year ended 30 September 2018
GBP'000
-----------------------------------
US Swiss Japanese Danish
Dollars Francs Yen Krone
-------- ------- -------- ------
Statement of Comprehensive Income
- profit after tax
Revenue return 12 128 29 79
Capital return 44,512 2,952 2,507 1,605
---------------------------------- -------- ------- -------- ------
Change to the profit after tax
for the year
and to equity attributable
to shareholders 44,524 3,080 2,536 1,684
---------------------------------- -------- ------- -------- ------
Year ended 30 September 2017
GBP'000
---------------------------------- ----------------------------------
US Swiss Japanese
Dollars Francs Yen Euros
---------------------------------- -------- ------- -------- -----
Statement of Comprehensive Income
- profit after tax
Revenue return 1,610 95 19 24
Capital return 35,473 3,097 1,451 5,949
---------------------------------- -------- ------- -------- -----
Change to the profit after tax
for the year
and to equity attributable
to shareholders 37,083 3,192 1,470 5,973
---------------------------------- -------- ------- -------- -----
Based on the year end position, if sterling had appreciated by a
further 15% (2017: 15%) against the currencies shown, this would
have the following effect:
Year ended 30 September 2018
GBP'000
---------------------------------- ------------------------------------
US Swiss Japanese Danish
Dollars Francs Yen Krone
---------------------------------- -------- ------- -------- -------
Statement of Comprehensive Income
- profit after tax
Revenue return (9) (95) (22) (58)
Capital return (32,900) (2,182) (1,853) (1,186)
---------------------------------- -------- ------- -------- -------
Change to the profit after tax
for the year
and to equity attributable
to shareholders (32,909) (2,277) (1,875) (1,244)
---------------------------------- -------- ------- -------- -------
Year ended 30 September 2017
GBP'000
---------------------------------- ------------------------------------
US Swiss Japanese
Dollars Francs Yen Euros
---------------------------------- -------- ------- -------- -------
Statement of Comprehensive Income
- profit after tax
Revenue return (1,190) (70) (14) (18)
Capital return (26,219) (2,746) (1,073) (4,397)
---------------------------------- -------- ------- -------- -------
Change to the profit after tax
for the year
and to equity attributable
to shareholders (27,409) (2,816) (1,087) (4,415)
---------------------------------- -------- ------- -------- -------
In the opinion of the Directors, while these are regarded as
reasonable estimates, neither of the above sensitivity analyses are
representative of the year as a whole since the level of exposure
changes frequently as part of the currency risk management process
used to meet the Group's objectives.
(iii) Interest Rate Risk
Although the majority of the Group and Company's financial
assets are equity shares which pay dividends, not interest, the
Group and Company will be affected by interest rate changes as
interest is earned on any cash balances and paid on any overdrawn
balances.
Given the interest rate risk exposure noted below, the impact of
any interest rate change is not considered to be significant and as
such, no sensitivity analysis has been provided. Interest rate
changes will also have an impact on the valuation of equities,
although this forms part of price risk, which has already been
considered separately above.
Management of the risk
The possible effects on fair value and cash flows that could
arise as a result of changes in interest rates are taken into
account when making investment decisions.
Derivative contracts are not used to hedge against the exposure
to interest rate risk.
Interest rate exposure
At the year-end, financial assets and liabilities exposed to
floating interest rates were as follows:
Year ended Year ended
30 September 30 September
2018 2017
GBP'000 GBP'000
---------------------------------------- ------------- -------------
Cash at bank and at derivative clearing
houses 13,801 806
Cash held at subsidiary 50 50
Bank overdraft (1,712) (25)
---------------------------------------- ------------- -------------
12,139 831
---------------------------------------- ------------- -------------
The above year-end amounts may not be representative of the
exposure to interest rates in the year ahead since the level of
cash held during the year will be affected by the strategy being
followed in response to the Board's and Manager's perception of
market prospects and the investment opportunities available at any
particular time.
(b) Liquidity Risk
Liquidity risk is the possibility of failure of the Group and
Company to realise sufficient assets to meet its financial
liabilities.
Management of the risk
The Group and Company's assets mainly comprise readily
realisable securities which may be sold to meet funding
requirements as necessary.
Liquidity risk exposure
At 30 September the financial liabilities comprised:
30 September 30 September
2018 2017
GBP'000 GBP'000
----------------------------- ------------ ------------
Due within 1 month:
Other creditors and accruals 3,841 2,218
Bank overdraft 1,712 25
Due in more than 1 year
ZDP's entitlement 33,372 32,400
----------------------------- ------------ ------------
38,925 34,643
----------------------------- ------------ ------------
The ZDP shares have a planned repayment date of 19 June 2024 in
the amount of GBP39,514,000.
(c) Credit Risk
Credit risk is the exposure to loss from failure of a
counterparty to deliver securities or cash for acquisitions or
disposals of investments or to repay deposits.
Management of the risk
The Group and Company manages credit risk by using brokers from
a database of approved brokers
and by dealing through Polar Capital. All cash balances are held
with approved counterparties.
HSBC Bank plc is the custodian of the Group and Company's
assets. The Group and Company's assets are segregated from HSBC's
own trading assets and are therefore protected in the event that
HSBC were to cease trading.
These arrangements were in place throughout the current and
prior year.
Credit risk exposure
The maximum exposure to credit risk at 30 September 2018 was
GBP14,287,000 (2017: GBP1,224,000) comprising:
30 September 30 September
2018 2017
GBP'000 GBP'000
--------------- ------------ ------------
Accrued Income 436 368
Cash at bank 13,851 856
--------------- ------------ ------------
14,287 1,224
--------------- ------------ ------------
All of the above financial assets are current, their fair values
are considered to be the same as the values shown and the
likelihood of a material credit default is considered low. None of
the Group and Company's assets are past due or impaired. All
deposits were placed with banks that had a rating of A or
higher.
(d) Capital Management Policies and Procedures
The Group and Company's capital, or equity, is represented by
its net assets which amounted to GBP296,263,000 for the year ended
30 September 2018 (2017: GBP250,129,000), which are managed to
achieve the Group's and Company's investment objective.
The Board monitors and reviews the broad structure of the
Group's and Company's capital on an ongoing basis. This review
includes:
(i) the need to issue or buy back equity shares for
cancellation, which takes account of the difference between the net
asset value per share and the share price (i.e. the level of share
price discount or premium); and
(ii) the determination of dividend payments.
The Group and Company is subject to externally imposed capital
requirements through the Companies Act with respect to its status
as a public company. In addition, in order to pay dividends out of
profits available for distribution by way of dividend, the Group
and Company has to be able to meet one of two capital restriction
tests imposed on investments by company law.
These requirements are unchanged since the previous year end and
the Group and Company has complied with them.
Alternative Performance Measures (APMs)
In assessing the perfomance of the Company and Group the
Investment Manager and the Directors use the following APMs which
are considered to be known industry metrics:
Net Asset Value (NAV)
The NAV is the value attributed to the underlying assets of the
Company less the liabilities, presented either on a per share or
total basis.
The value of the Company's assets, principally investments made
in other companies and cash being held, minus any liabilities. The
NAV is also described as 'Shareholders' funds' per share. The NAV
is often expressed in pence per share after being divided by the
number of shares which have been issued. The NAV per share is
unlikely to be the same as the share price which is the price at
which the Company's shares can be bought or sold by an
investor.
As at 30 September 2018, the Group's total equity was
GBP296,263,000 and there were 122,470,000 ordinary shares in issue.
The Group's NAV per share was therefore 241.91p
(GBP296,263,000/122,470,000). At 30 September 2018, the value of
the ZDP shares was GBP33,372,000 (note 16 of the notes to the
financial statements on page xx) and the number of ZDP shares in
issue was 32,128,437. The NAV per ZDP share was therefore 103.87p
(GBP33,372,000/32,128,437).
Total Net Assets (Group and Company)
The value of the Group's and Company's assets, principally
investments made in other companies and cash being held, minus any
liabilities.
At 30 September 2018, the total assets were GBP335,188,000 and
the total liabilities were GBP38,925,000, the total net assets
therefore were GBP296,263,000 (GBP335,188,000 - GBP38,925,000=
GBP296,263,000)
NAV Total Return
The NAV total return shows how the net asset value has performed
over a period of time taking into account both capital returns and
dividends paid to shareholders. NAV total return is calculated as
the change in NAV from the start of the period, assuming that
dividends paid to shareholders are reinvested on the payment date
in ordinary shares at their net asset value. The NAV at the start
of the period was 203.77p.
As at 30 September 2018, the Group's NAV per share was 241.91p,
the impact of the dividend reinvestment in NAV was 2.21p, and the
adjusted NAV per share was therefore 244.12p
(241.91p+2.21p=244.12p). The NAV total return over the year was
19.80% ((244.12p-203.77p)/203.77p).
Share Price Total Return
Share price total return shows how the share price has performed
over a period of time. It assumes that dividends paid to
shareholders are reinvested in the shares at the time the shares
are quoted ex dividend.
As at 30 September 2018, the Company's share price was 223.00p
and the opening share price as at 30 September 2017 was 198.00p; a
reinvestment factor of 1.009678, relating to the impact of the
reinvested dividends during the year, was applied to reach a
closing adjusted share price for the purposes of the calculation of
share price performance with income reinvested of 225.16p. The
share price total return is (225.16p-198.0p)/198.0p=13.72%.
Discount /Premium
A description of the difference between the share price and the
net asset value per share usually expressed as a percentage (%) of
the net asset value per share. If the share price is higher than
the NAV per share the result is a premium. If the share price is
lower than the NAV per share, the shares are trading at a
discount.
The share price at 30 September 2018 was 223.00p and NAV was
241.91p; the discount was therefore 7.8%,
(223.00p-241.91p)/241.91p.
Total Expenses (Group and Company)
Comprising all the operating expenses, which includes research
costs, of the Group and Company plus those expenses which are
excluded from the ongoing charges calculation, including
transaction costs, finance costs, tax and non-recurring expenses.
Costs in relation to share issues and share buybacks are excluded
from the calculation.
At 30 September 2018, the total operating expenses including
management fees were GBP3,177,000, finance costs were GBP986,000
and taxes were GBP440,000; the total expenses therefore were
GBP4,603,000 (GBP3,177,000 + GBP986,000 +
GBP440,000=GBP4,603,000).
Ongoing Charges
Ongoing charges are calculated in accordance with AIC guidance
by taking the Company's annual ongoing charges, excluding
performance fees and exceptional items, if any, and expressing them
as a percentage of the average daily net asset value of the Company
over the year. Ongoing charges include all regular operating
expenses of the Company. Transaction costs, interest payments, tax
and non-recurring expenses are excluded from the calculation as are
the costs incurred in relation to share issues and share buybacks.
Where a performance fee is paid or is payable, a second ongoing
charge is provided, calculated on the same basis as the above but
incorporating the amount of performance fee due or paid.
Ongoing charges for the year equals the management fee of
GBP2,388,000 plus other operating expenses of GBP788,000 divided by
the Group's average NAV in the period.
(GBP3,176,000/GBP294,392,064=1.08%). Since there was no performance
fee paid or payable for the year the ongoing charges including
performance fee is the same as the ongoing charges.
Gearing
Gearing is calculated in line with AIC guidelines and represents
net gearing. This is defined as total assets less cash and cash
equivalents divided by net assets. The total assets are calculated
by adding back the structural gearing which is the ZDP value. Cash
and cash equivalents are cash and purchases and sales for future
settlement outstanding at year end.
As at 30 September 2018 the net assets were GBP296,263,000, ZDP
value was GBP33,372,000 and cash and cash equivalents (including
amounts for future settlement) were GBP8,801,000, and the gearing
was therefore 8.29%, (((GBP296,263,000+GBP33,372,000- GBP8,801,000)
/ GBP296,263,000) -1).
AGM
The Annual Report and separate Notice of Meeting for the Annual
General Meeting will be posted to shareholders in January 2019 and
will be available thereafter from the company secretary at the
Registered Office, 16 Palace Street London SW1E 5JD or from the
Company's website. The AGM will be held at 16 Palace Street, London
SW1E 5JD at 12 noon on 27 February 2019.
FORWARD LOOKING STATEMENTS
Certain statements included in the Annual Report and Financial
Statements contain forward-looking information concerning the
Company's strategy, operations, financial performance or condition,
outlook, growth opportunities or circumstances in the countries,
sectors or markets in which the Company operates. By their nature,
forward-looking statements involve uncertainty because they depend
on future circumstances, and relate to events, not all of which are
within the Company's control or can be predicted by the Company.
Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, no assurance can be
given that such expectations will prove to have been correct.
Actual results could differ materially from those set out in the
forward-looking statements. For a detailed analysis of the factors
that may affect our business, financial performance or results of
operations, we urge you to look at the principal risks and
uncertainties included in the Strategic Report Section the Annual
Report and Financial Statements.
No part of these results constitutes, or shall be taken to
constitute, an invitation or inducement to invest in Polar Capital
Global Healthcare Trust plc or any other entity, and must not be
relied upon in any way in connection with any investment
decision.
The Company undertakes no obligation to update any
forward-looking statements.
Neither the contents of the company's website nor the contents
of any website accessible from hyperlinks on the company's website
(or any other website) is incorporated into, or forms part of, this
announcement.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR FFWFLUFASEEE
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December 19, 2018 09:58 ET (14:58 GMT)
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