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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Biopharma Credit Plc | LSE:BPCR | London | Ordinary Share | GB00BDGKMY29 | ORD USD0.01 |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 0.876 | 0.874 | 0.876 | 0.878 | 0.874 | 0.874 | 404,511 | 12:14:52 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Finance Services | 135.74M | 108.45M | 0.0833 | 10.56 | 1.15B |
From Apr 2019 to Apr 2024
TIDMBPCR
RNS Number : 0472H
BioPharma Credit PLC
08 March 2018
BIOPHARMA CREDIT PLC
(THE "COMPANY")
ANNUAL REPORT FOR THE PERIOD FROM INCORPORATION
(24 OCTOBER 2016) to 31 DECEMBER 2017
BioPharma Credit PLC (LSE: BPCR), a specialist life sciences debt investment trust, is pleased to present the first annual results of the Company for the period to 31 December 2017.
The full Annual Report and Financial Statements can be accessed via the Company's website at www.bpcruk.com or by contacting the Company Secretary by telephone on 01392 477500.
INVESTMENT HIGHLIGHTS
-- The Company's shares were admitted to trading on the Specialist Fund Segment ("SFS") of the Main Market of the London Stock Exchange and The International Stock Exchange ("TISE") on 30 March 2017, raising gross proceeds of c.$762m. In doing so, the Company became London's first listed specialist debt investor to the life sciences industry.
-- During the period, the Company made three major investments including a landmark deal for the sector:
o Up to $500m loan agreement with oncology focused Tesaro (NASDAQ: TSRO), in conjunction with BioPharma Credit Investments IV ("BioPharma IV"). This was the largest non-convertible life sciences debt issuance by a biotech company with a market capitalisation of less than $10bn since 2007.
o Up to $200m loan agreement with fully integrated biopharmaceutical company Lexicon (NASDAQ: LXRX), in conjunction with BioPharma IV.
o $140m-160m purchase, sale and assignment agreement with a subsidiary of Royalty Pharma Investments ("RPI") for the purchase of a 50 per cent interest in payments acquired by RPI's subsidiary from Bristol-Myers Squibb (NYSE: BMY).
o Post period end, the Company entered a senior secured loan agreement for $150m with commercial stage oncology focused NovoCure Limited (NASDAQ: NVCR).
-- In December 2017, the Company successfully raised c. $154m in a placing of ordinary shares at a premium to NAV to finance future investments in addition to the commitments made to Tesaro, Lexicon, and Bristol-Myers Squibb.
-- During the period, the Company paid or declared interim dividends totalling $0.02 per ordinary share, in line with its initial target dividend of 4 per cent per annum.
-- Additionally, on 1 March 2018, the Company declared an interim dividend in respect of the financial period ending 31 December 2017 of $0.021 per ordinary share, comprising an ordinary dividend of $0.01 and a special dividend of $0.011.
FINANCIAL AND INVESTMENT HIGHLIGHTS
ORDINARY SHARES ASSETS as at 31 December 2017 as at 31 December 2017 Share price Net assets $1.0470 $922.6m (30 March 2017*: $1.0000) +4.7% (30 March 2017: $746.6m) +23.6% NAV per share Leverage $1.0091 0% (30 March 2017*: $0.9800) +3.0% (30 March 2017: 0%) Premium to NAV per share 3.8%** (30 March 2017: 2.0%) Shares in issue 914.3m (30 March 2017: 761.9m)
* The opening share price is the issue price as of 30 March 2017 and the opening net asset value ("NAV") per share is issue price less initial expenses, capped at 2 per cent of the gross issue proceeds, as set out in the IPO Prospectus dated 1 March 2017.
Hot Features
Premium
Portfolio composition
As at
Key statistics 31 December As at
($ in millions) 2017 30 March 2017 % change
------------------------------ ------------- --------------- ---------
Cash and cash equivalents 350.82 423.30 -17.1%
Limited partnership interest
in BioPharma III 123.48 153.50 -19.6%
RPS Note 99.65 185.10 - 46.2%
Tesaro senior secured loan 222.00 - -
Lexicon senior secured loan 124.50 - -
Other 2.12 (15.30) -113.9%
------------------------------ ------------- --------------- ---------
Total net assets 922.57 746.60 23.6%
------------------------------ ------------- --------------- ---------
Pedro Gonzalez de Cosio, CEO and co-founder of Pharmakon Advisors L.P., the Investment Manager of BioPharma Credit Plc said:
"This has been a highly successful first year for BioPharma Credit and we are delighted with the progress since the initial listing in March 2017. Since the IPO, the Company has made five investments, deploying $514 million in corporate and royalty debt secured by cash flows derived from sales of approved life sciences products and a further $339.5m in future commitments subject to certain conditions. BioPharma Credit remains uniquely positioned to generate uncorrelated long-term shareholder returns, predominantly in the form of sustainable income distributions from exposure to the life sciences industry.
Results presentation
As announced on 1 March 2018, a management presentation will be held today at 09:30 at Buchanan, 107 Cheapside, EC2V 6DN. To confirm your attendance, please contact Buchanan.
A conference call facility is also available, please dial 0808 237 0040 and enter participant PIN 42580884#.
Enquiries:
Buchanan
David Rydell / Mark Court / Jamie Hooper / Henry Wilson
+44 (0) 20 7466 5000
Biopharmacredit@buchanan.uk.com
Notes to Editors:
BioPharma Credit PLC is London's only listed specialist debt investor to the life sciences industry and joined the LSE in March 2017. The Company seeks to provide long-term shareholder returns, principally in the form of sustainable income distributions from exposure to the life sciences industry. The Company seeks to achieve this objective primarily through investments in debt assets secured by royalties or other cash flows derived from the sales of approved life sciences products.
Corporate Summary
Investment Objective
The Company aims to generate long-term shareholder returns, predominantly in the form of sustainable income distributions from exposure to the life sciences industry.
Structure
The Company is a closed-ended publicly limited company incorporated in the United Kingdom. It was registered in England and Wales under the Act on 24 October 2016. The Company is listed on the Specialist Fund Segment (SFS) of the London Stock Exchange.
Investment Adviser
Pharmakon Advisors, the Company's Investment Manager, was founded in 2009 and has invested $1.9 billion in 27 transactions across four private funds and BioPharma Credit PLC through 31 December 2017. The first four funds are now fully invested. Drawing upon the expertise and successful track record of Pharmakon Advisors, the Company enjoys access to its extensive, industry-focused knowledge and contacts to source, analyse and structure attractive investment opportunities.
Through a shared services agreement with Royalty Pharma, founded in 1996, the Investment Manager is able to rely on the complementary expertise of the team behind the market leading investor in pharmaceutical royalties.
CHAIRMAN'S STATEMENT
THE BOARD IS PLEASED TO PRESENT THE COMPANY'S FIRST ANNUAL RESULTS FOR THE PERIODED 31 DECEMBER 2017
Introduction
This is the first Annual Report of BioPharma Credit PLC, covering the period from its date of incorporation on 24 October 2016 to 31 December 2017.
The Company successfully listed on the SFS of the Main Market of the London Stock Exchange ("LSE") and TISE on 30 March 2017, raising $761.9 million. This was the largest IPO on the LSE in the first half of 2017.
The proceeds of the IPO included the contribution in exchange for shares of $338.6 million of seed assets. These comprised of a $185.1 million note secured by royalties on sales from 22 biotechnology and pharmaceutical products, including some of the world's largest, (the "RPS Note") together with a $153.5 million interest in BioPharma lll Holdings LP, through which the Company gained exposure to an interest in five loans, also secured by rights to approved life sciences products. The remaining $423.3 million of IPO proceeds was initially held in cash pending investment in new assets.
During the last quarter of 2017 the Company announced three new investment commitments totalling up to a maximum of $713.2 million, available to be drawn over the next two years. As a result of this activity, together with the development of a pipeline of additional investment opportunities, the Board decided to carry out a follow-on issue of new ordinary shares which was successfully placed on 14 December 2017, raising gross proceeds of $154.1 million. Through the combination of these two share issues, the Company raised more proceeds than any other listed investment company in London last year.
Shareholder returns and investment performance
On 31 December 2017 the Company's shares closed at $1.0470, a 4.7 per cent premium to the IPO price of $1.0000. NAV at admission was $746.6 million or 98.00 cents per share and on 31 December 2017 was $922.6 million or 100.91 cents per share. During the period, the Company paid or declared dividends totalling $0.02 per share, in line with our initial target dividend of 4 per cent per annum.
As more fully described in the Investment Manager's Report which follows, the Company made a total of four investment commitments during the period totalling between $693.2 million and $713.2 million, depending on certain conditions. One of these investments was also exited within the period. A total of $363.7 million has already been funded ($344 million net of the exited investment), leaving an additional amount of between $329.5 million and $349.5 million that may be funded by early 2020. In the period ending 31 December 2017 the Company's seed assets declined through capital repayments by $115.5 million to $223.1 million.
As of 31 December 2017, the Company had total assets of $925.5 million, represented by $569.6 million, in investments, $5.1 million in trade receivables and $350.8 million in cash.
Outlook
As demonstrated by the Company's announced investment activity, target debt issuers have been receptive to the forms of debt financing that the Company offers. A leadership position has been established in the market through the execution of highly visible transactions such as the important loan to Tesaro, Inc. (TSRO:NASDAQ), which is reported to have been the largest non-convertible debt issue by a biotech company with a market cap of less than $10 billion, the Company's target market.
Your Board has been encouraged by the deployment of the proceeds raised at the IPO and the development of a most encouraging pipeline of further possible investment opportunities. This has already led to the follow-on issue of ordinary shares referred to above and, as we consider the evolution of these opportunities in the coming months, I expect the Board to be giving further consideration to sources of additional capital which, as envisaged in the IPO Prospectus, may include both equity and debt.
I should like to thank all our shareholders for their support in 2017 and I look forward to updating you on the Company's further progress later this year.
Jeremy Sillem
Chairman
7 March 2018
MARKET OVERVIEW
LIFE SCIENCES IS A LARGE, VITAL INDUSTRY WITH STRONG, CONSISTENT GROWTH
Size and growth dynamics of the industry
The life sciences industry consists of pharmaceutical and biotechnology firms and is a large and vital industry with consistent growth. Worldwide industry revenues today are approximately $1.1 trillion and are expected to reach $1.5 trillion by 2021, reflecting a compounded annual growth rate of six per cent. While medical and scientific advances contribute to a portion of that increase, other growth drivers include more basic demographic and macroeconomic factors such as a growing population, an aging population and increasing prosperity in developing countries which is improving access to healthcare for millions of patients. The increase in spending is expected to be largely driven by brands and increased usage in emerging markets, offset by expiring patents.
Product lifecycle
Pharmaceutical and biotechnology products have a long life cycle, which can provide considerable downside protection for the Company. Worldwide patents can lead to more than 20 years of protection, which frequently translates into as long as 15 years of exclusivity from the time the products are first approved by regulatory agencies such as the FDA. Some governments also provide for regulatory exclusivity which provides for six to ten years of commercial exclusivity independent of an approved patent, if an innovator performs clinical trials. On average, sales growth is very robust for the first 12 years of a product's life cycle, after which some of these products begin to lose exclusivity, and their sales growth slows and starts to decline shortly thereafter. A key driver of initial sales growth is increasing prescriptions from physicians in the early-launch markets, but subsequent commercialisation rates in additional geographic markets, as well as expanding indications, frequently drive attractive growth for more than a decade.
Market dynamics creating fragmentation of the industry and more lending opportunities
Despite growth in the pharmaceutical market, large pharmaceutical companies continue to face mounting pressure on top-line sales from patent expirations on blockbuster products and failures in their R&D pipelines. The internal R&D departments of larger pharmaceutical companies have struggled to replace lost revenue with new products. Dramatically escalating R&D costs have also put pressure on industry participants to adapt their business model and seek partners to reduce risk. The amount of R&D investment per FDA-approved product is now approximately $1.4 billion. As a result of these factors, large pharmaceutical companies have evolved and are increasingly relying on in-licensing and corporate acquisitions for new products.
Over the last 30 to 40 years, the landscape of the pharmaceuticals industry has been transformed from one dominated by fully integrated pharmaceutical companies to a more dynamic and entrepreneurial R&D ecosystem comprised of thousands of participants. As a result of this R&D evolution, smaller companies, investor groups, universities and non-profit research institutes increasingly have rights to royalty streams on products that have been out-licensed to larger pharmaceutical companies. This broader shift in R&D approach provides an expanding landscape of lending opportunities for the Company, as smaller companies are increasingly partnering with large pharmaceutical companies.
The pharmaceutical and biotechnology ecosystem has evolved to one where innovation and commercialisation, which was once centralised in fewer than 100 big pharmaceuticals, has now spread among more than 5,000 academic labs, government-funded entities and more than 5,000 biotech companies. The pool of creditworthy borrowers has increased exponentially.
INTRODUCTION TO THE INVESTMENT MANAGER
PHARMAKON ADVISORS, THE FUND'S INVESTMENT MANAGER, WAS FOUNDED IN 2009 AND HAS INVESTED $1.9 BILLION IN 27 TRANSACTIONS ON BEHALF OF ITS CLIENTS
As of 31 December 2017, Pharmakon clients included four previous BioPharma Funds (I, II, III & IV) and two managed co-investor accounts. The four BioPharma Funds have now reached the end of their investment period and are expected to generate net returns ranging from 7% to 12% with zero defaults:
Historical Performance of Pharmakon-managed funds as of 31
December 2017
BioPharma Fund I II III IV
------------------- --------------- --------------- ---------------- ----------------
Launch date June 2009 March 2011 February December
2013 2015
End of investment May 2010 March 2013 August 2015 December
period 2017
Invested amount $263.7 million $343.0 million $463.0 million $512.0 million
Distributions to
investors $329.2 million $410.1million $423.8 million* $181.7 million*
Net IRR 11.3% 6.8% 10.9%* 10.0%*
------------------- --------------- --------------- ---------------- ----------------
*Reflects historical performance through 31 December 2017 and estimated returns thereafter.
The Pharmakon team has extensive expertise investing in debt and other cash flows backed by life sciences products.
Through a shared services agreement with Royalty Pharma, Pharmakon has access to the complementary expertise of the team behind the market-leading investor in pharmaceutical royalties. Royalty Pharma, an affiliate of Pharmakon, was established in 1996 and acquires revenue-producing intellectual property, with over $17 billion in royalty assets.
The Pharmakon team prides itself on its ability to identify and structure investments that meet its target returns while minimising risk through its rigorous diligence process and industry expertise.
INVESTMENT MANAGER'S REPORT
BIOPHARMA CREDIT IS WELL ON ITS WAY TO BUILDING AN ATTRACTIVE PORTFOLIO
With the execution of four investments during the period, representing total commitments of $693.2 million - $713.2 million, Biopharma Credit is well on its way to meeting its objective of building an attractive portfolio of life sciences debt investments.
We are delighted with the results of our first nine months as a public company. Pharmakon's engagement with multiple potential counterparties resulted in the execution of four investments on behalf of the Company while continuing to build an attractive pipeline for future investments. BioPharma Credit saw significant investment activity during the last half of the year, having made four investments totalling $363.7 million, with additional commitments ranging between $329.5 - $349.5 million subject to certain conditions, and selling one investment for $19.7 million. Below is a summary of this investment activity together with an update on the seed assets acquired at the time of IPO.
Investments
Depomed, Inc.
Between 13 September 2017 and 31 October 2017, the Company purchased 2.5 per cent senior unsecured convertible notes issued by Depomed Inc. (NASDAQ: DEPO) with a face value of $23.5 million, at an average price of 72.9 cents for a total consideration of $17.2 million. Between 5 December 2017 and 8 December 2017, the Company sold the entire position at an average price of 83.4 cents and received proceeds of $19.7 million including accrued interest, generating a net gain of $2.5 million.
Tesaro, Inc.
On 21 November 2017, the Company and BioPharma Credit Investments IV, S.ár.L. ("BioPharma IV"), another entity managed by Pharmakon, entered into a definitive loan agreement for up to $500 million with Tesaro, Inc. (NASDAQ:TSRO) ("Tesaro"). Under the terms of the transaction, the Company will invest up to $370 million ($222 million in the first tranche and up to an additional $148 million by 20 December 2018 at Tesaro's option) and BioPharma IV will invest up to $130 million in parallel with the Company, which will act as collateral agent. The loan has a term of seven years and is secured by Tesaro's US rights to ZEJULA(R) and VARUBI(R) . The first $300 million tranche bears interest at LIBOR plus 8 per cent, with the second optional tranche bearing interest at LIBOR plus 7.5 per cent. The LIBOR rate is subject to a floor of 1 per cent and certain caps. Each tranche of the loan is interest only for the first two years, amortises over the remaining term, and can be prepaid at Tesaro's discretion at any time, subject to prepayment fees. The
first $300 million tranche was funded on 6 December 2017.
Lexicon Pharmaceuticals, Inc.
On 4 December 2017, the Company and BioPharma IV entered into a definitive term loan agreement for up to $200 million with Lexicon Pharmaceuticals, Inc. (NASDAQ: LXRX) ("Lexicon"), a fully integrated biopharmaceutical company with a market capitalisation of approximately $1.0 billion as of 31 December 2017. The $200 million loan will be available in two tranches, each maturing in December 2022 and bearing interest at 9.0 per cent per annum. The first $150 million is available immediately and an additional tranche of $50 million is available for draw down by March 2019 at Lexicon's option if net XERMELO(R) sales are greater than $25 million in the preceding quarter. Under the terms of the transaction, the Company will invest up to $166 million ($124.5 million in the first tranche and up to an additional $41.5 million by 30 March 2019) and BioPharma IV will invest up to $34 million in parallel with the Company which will act as collateral agent. The loan is secured by substantially all of Lexicon's assets, including its rights to XERMELO and Sotagliflozin. The first $150 million tranche was funded on 18 December 2017.
Bristol-Myers Squibb, Inc.
On 8 December 2017, the Company's wholly-owned subsidiary entered into a purchase, sale and assignment agreement with a wholly-owned subsidiary of Royalty Pharma Investments ("RPI"), an affiliate of the Investment Manager, for the purchase of a 50 per cent interest in a stream of payments (the "Purchased Payments") acquired by RPI's subsidiary from Bristol-Myers Squibb (NYSE: BMY) through a purchase agreement dated 14 November 2017. As a result of the arrangements, RPI's subsidiary and the Company's subsidiary will each be entitled to the benefit of 50 per cent of the Purchased Payments under identical economic terms. The Purchased Payments are linked to tiered worldwide sales of Onglyza and Farxiga, diabetes agents marketed by AstraZeneca, and related products. The Company is expected to fund $140 to $160 million during 2018 and 2019, determined by product sales over that period, and will receive payments from 2020 through 2025. The Purchased Payments are expected to generate attractive risk-adjusted returns in the high single digits per annum.
Update on Seed Assets
The Company acquired $338.6 million in seed assets at the time of the IPO in March 2017, consisting of a $185.1 million investment in the RPS Note and a 46 per cent limited partnership interest in BioPharma III, valued at $153.5 million at the time of the IPO.
BioPharma III
From the time of the IPO in March through 31 December 2017, BioPharma Credit received distributions from BioPharma III totalling $41.8 million, including $30.0 million in capital distributions which reduced the value of the investment from $153.5 million in March to $123.5 million at 31 December 2017. The table below provides the change in the balance of the individual investments held by BioPharma III:
Asset value at Asset value at
Investment 30 March 31 December
Counterparty/ amount 2017 2017
borrower ($ in millons) ($ in millions) ($ in millions)
--------------- --------------- ---------------- ----------------
Vivus $50 $32 $7
Valneva $41 $39 $28
Novocure $100 $102 $100
Depomed $150 $127 $94
iRhythm $30 $33 $30
--------------- --------------- ---------------- ----------------
Total $371 $333 $259
--------------- --------------- ---------------- ----------------
During this period, the investments held by BioPharma III performed as expected. One of these investments, a loan to Depomed, Inc. (NASDAQ: DEPO), was subject to an amendment that allowed it to enter into a commercialisation agreement with a third party, Collegium Pharmaceuticals. The key terms to the amendment provided for: 1) a replacement of a $330 million annual sales covenant with an annual EBITDA covenant of $90 million through the third quarter of 2018 and $125 million thereafter; and 2) a change in the amortisation schedule to allow for quarterly as opposed to annual amortisation.
RPS Note
From the time of the IPO in March 2017 through 31 December 2017, BioPharma Credit received payments from the RPS Note totalling $94.8 million, including $85.5 million in amortisation payments which reduced the value of the investment from $185.1 million in March 2017 to $99.6 million at 31 December 2017.
End of investment period of BioPharma IV
The investment period of BioPharma IV, an entity managed by Pharmakon, expired on 8 December 2017. As a result, in line with our policy outlined at the IPO, the Company will be entitled to participate in a minimum of 50 per cent of any future investment opportunity by value, regardless of its size (subject always to compliance with the investment restrictions applicable to the Company). From the time of the IPO in March 2017 through 8 December 2017, BioPharma IV executed five transactions, investing $211.9 million and committing to invest an additional $80.5 million. In addition to a share of the Tesaro and Lexicon transactions described above, BioPharma IV entered into three transactions ranging in size from $20 to $60 million.
Investment outlook
The life sciences industry has continued to perform well during these past months. Through December 2017, the New York Stock Exchange Biotechnology Index ("BTK Index") had increased by 18.4 per cent since 31 March 2017 and by 37.3 per cent since the start of the year. Beyond reflecting the overall health of the industry, this index is relevant to us because potential borrowers are more inclined to issue equity or convertible bonds at times when equity markets are strong, limiting the number and size of fixed-income investment opportunities for the Company.
Despite recent stock market performance, equity and convertible issuance during this period has been in line with the recent past. Global equity issuance by life sciences companies during 2017 was $58.1 billion, broadly in line with the $61.0 billion issued during 2016. US issuance of life sciences convertible bonds increased 13.4 per cent from $4.8 billion during 2016 to $5.5 billion in 2017.
Acquisition financing is a very important driver of capital needs in the life sciences industry. An active M&A market helps drive opportunities for investors such as the Company, as acquiring companies need to raise finance to fund acquisitions. Global life sciences M&A volume during 2017 was $168.6 billion, 14.4 per cent less than the $196.9 billion witnessed during 2016, reflecting a decline across the broader, all industry, M&A market that saw a 25 per cent reduction. It is widely believed that this decline in M&A activity was caused by uncertainty surrounding US tax reform which was resolved in December 2017, leading to the expectation of increased M&A activity in 2018. While this decline has reduced the number of past investment opportunities, we are encouraged by the number of M&A opportunities that are starting to build up and should lead to a more active market over the next few months.
In conclusion, there is a robust pipeline of investment opportunities but the timing of their execution is not completely within our control. In addition, given the recent pace of investment activities, we will continue to explore additional sources of capital in order to finance new investments and fund existing commitments. We remain focused on our mission of creating the premier dedicated provider of debt capital to the life sciences industry while generating attractive returns and sustainable income to investors. Further, we remain confident of our ability to deliver attractive returns that will enable the Company to pay a robust dividend yield for our investors.
Pedro Gonzalez de Cosio
Co-founder and CEO, Pharmakon
7 March 2018
PORTFOLIO INFORMATION
Counterparty/ Fair value Expected % of
Asset borrower Geography Underlying product ($m) maturity net assets
---------------------- --------------- ---------------- ---------------------- ----------- --------- -----------
Limited partnership
interest in
BioPharma III:
1. Capped royalty Vivus Qsymia 3.05 2018 0%
2. Senior secured
loan Valneva Ixiaro 12.77 2018 1%
3. Senior secured
loan Novocure Optune 46.15 2020 5%
Nucynta, Gralise,
4. Senior secured three
loan Depomed others 43.59 2022 5%
5. Senior secured
loan iRhythm Optune 13.84 2021 2%
6. Other net assets 4.08 0%
--------------------------------------------------------------------------------- ----------- --------- -----------
Limited partnership interest in
BioPharma III Cayman Islands 123.48 various 13%
--------------------------------------- ---------------------------------------- ----------- --------- -----------
RPS Note RPS Cayman Islands 22 products 99.65 2026 11%
Tesaro senior secured loan Tesaro United States ZEJULA 222.00 2024 24% Lexicon senior secured XERMELO and loan Lexicon United States Sotagliflozin 124.50 2022 14% ---------------------- --------------- ---------------- ---------------------- ----------- --------- ----------- Total investments 569.63 62% --------------------------------------------------------------------------------- ----------- --------- ----------- Cash and cash equivalents 350.82 38% Other net assets 2.12 0% --------------------------------------------------------------------------------- ----------- --------- ----------- Net assets 922.57 100% --------------------------------------------------------------------------------- ----------- --------- -----------
The above table excludes maximum unfunded commitments for the following investments:
1) Tesaro senior secured loan: $148.0 milllion.
2) Lexicon senior secured loan: $41.5 million.
3) Bristol-Myers Squibb priority royalty tranche: $140 to $160 million.
See Recent Investments below for additional information on Tesaro and Lexicon senior secured loans.
Performance
Cumulative Performance (%) Since launch 1 month 3 months 6 months ---------------------------- ------------- -------- --------- --------- Share price 4.70% -1.04% -5.93% -4.12% ---------------------------- ------------- -------- --------- --------- NAV per share(1) 2.97% 1.24% 1.94% 2.00% ---------------------------- ------------- -------- --------- ---------
(1) As set out in the IPO Prospectus dated 1 March 2017, the Initial Expenses to be borne by the Company were capped at 2% of the Gross Issue Proceeds. The cumulative NAV performance since launch reflects the Company's performance against the opening NAV per share of 98 cents on the date of IPO.
RECENT INVESTMENTS
TESARO
$500 MILLION SENIOR SECURED LOAN TO TESARO, INC.
Tesaro is an oncology biopharmaceutical company focused on in-licensing and developing oncology-related product candidates, including rolapitant, niraparib, and product candidates under their immuno-oncology platform.
Most recent product sales: Zejula $108.8m 2017 US approval: March 2017 EU approval: November 2017
Pedro Gonzalez de Cosio, Co-founder and CEO, Pharmakon
"We believe that TESARO is well on its way to becoming an oncology leader with an excellent management team, portfolio of commercial products with blockbuster potential in their current indications, and an exciting clinical development program that will one day offer patients additional indications for niraparib as well as new immuno-oncology therapies".
KEY TERMS OF LOAN
Size of facility:
$500 million to be funded in two tranches
> Tranche A: $300 million
> Tranche B: $200 million (prior to 20 December 2018)
> Company's share of Tranche A: $222 million
> Company's share of Tranche B: $148 million
Funding fee:
2% of Tranche A + 2% of Tranche B (draw)
Funding date:
6 December 2017
Interest rate:
> Tranche A: LIBOR +8.0% (subject to a floor and cap)
> Tranche B: LIBOR +7.5% (subject to a floor and cap)
Amortisation:
Two year interest only then 3% quarterly
Maturity:
Seven years
Prepayment:
Two years' interest less interest paid to date plus 3% if prior to the 2nd anniversary, 2% if prior to 3rd anniversary, or 1% if prior to the 4th anniversary.
ZEJULA
(niraparib)
ZEJULA is a once-daily, oral poly (ADP-ribose) polymerase ("PARP") 1/2 inhibitor approved for the maintenance treatment of women with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy in the US. It is the market-leading PARP inhibitor in the US. PARP inhibition interferes with DNA repair, leading to accumulation of single-strand breaks. Single-strand breaks become double-strand breaks, which are not repaired due to deficient DNA repair pathways present in many ovarian tumours. In the Phase 3 NOVA trial, the median PFS for patients treated with ZEJULA was nearly 4x higher than placebo in the gBRCAmut cohort and more than 2x higher than placebo in the non-gBRCAmut cohort. Treatment with ZEJULA reduced the risk of disease progression or death by 74 per cent in patients with germline BRCA mutations and by 55 per cent in patients without germline BRCA mutations. ZEJULA received US FDA approval in March 2017 and EMEA approval in November 2017. TESARO has ongoing and planned trials for 1st line and recurrent ovarian cancer and expansion into certain other solid tumours.
LEXICON PHARMACEUTICALS
$200 MILLION SENIOR SECURED LOAN TO LEXICON PHARMACEUTICALS, INC.
Lexicon is a biopharmaceutical company developing drugs for cancer, diabetes, and pain including Xermelo for the treatment of Carcinoid Syndrome diarrhoea and Sotagliflozin for Type 1 and Type 2 diabetes.
Most recent product sales: Xermelo $15.9m 2017 US approval: February 2017 EU approval: September 2017 Sotagliflozin US approval: Pending EU approval: Pending
Pablo Legorreta, Co-founder and Principal, Pharmakon
"We are impressed with the LEXICON team and the commercial opportunities for XERMELO and are thrilled to support LEXICON in its ramp up of this product that fills a well-defined unmet patient need."
KEY TERMS OF LOAN
Size of facility:
$200 million to be funded in two tranches
> Tranche A: $150 million
> Tranche B: $50 million (prior to 20 March 2019)
> Company's share of Tranche A: $124.5 million
> Company's share of Tranche B: $41.5 million
Funding date:
18 December 2017
Interest rate:
9.0%
Amortisation:
Principal amount five years post funding date
Maturity:
Five years
Prepayment:
Three years interest less interest paid to date plus 2% if prior to the 4th anniversary or 1% if prior to the 5th
XERMELO
(telotristat ethyl)
XERMELO is the first and only orally administered therapy for the treatment of carcinoid syndrome diarrhoea in combination with somatostatin analog ("SSA") therapy in adults inadequately controlled by SSA therapy. Carcinoid syndrome is a rare and debilitating condition that affects people with metastatic neuroendocrine tumours ("mNETs"). XERMELO targets the overproduction of serotonin inside mNET cells, providing a new treatment option for patients suffering from carcinoid syndrome diarrhoea.
SOTAGLIFLOZIN (LX4211)
An orally-delivered phase 3 compound for Type 1 and Type 2 diabetes that inhibits both sodium-glucose cotransporter type 2, or SGLT2, a transporter responsible for glucose reabsorption performed by the kidney and sodium-glucose cotransporter type 1, or SGLT1, a transporter responsible for glucose and galactose absorption in the gastrointestinal tract.
STRATEGIC OVERVIEW
Investment objective
The Company aims to generate long-term shareholder returns, predominantly in the form of sustainable income distributions from exposure to the life sciences industry.
Investment policy
The Company will seek to achieve its investment objective predominantly through direct or indirect exposure to Debt Assets.
The Company may acquire Debt Assets:
-- directly from the entity issuing the Debt Asset (a "Borrower"), which may be: (i) a company operating in the life sciences industry (a "LifeSci Company"); or (ii) an entity other than a LifeSci Company which directly or indirectly holds an interest in royalty rights to certain Products, including any investment vehicle or special purpose vehicle ("Royalty Owner"); or
-- in the secondary market.
The Company may also invest in equity issued by a LifeSci Company, acquired directly from the LifeSci Company or in the secondary market.
"Debt Assets" will typically comprise:
Royalty debt instruments
Debt issued by a Royalty Owner where the Royalty Owner's obligations in relation to the Debt are secured as to repayment of principal and payment of interest by Royalty Collateral.
Priority royalty tranches
Contract with a Borrower that provides the Company with the right to receive payment of all or a fixed percentage of the future royalty payments receivable in respect of a Product (or Products) that would otherwise belong to the Borrower up to a fixed monetary amount or a pre-set rate of return, with such royalty payment being secured by Royalty Collateral in respect of that Product (or Products).
Senior secured debt
Debt issued by a LifeSci Company, and which is secured as to repayment of principal and payment of interest by a first priority charge over some or all of such LifeSci Company's assets, which may include: (i) Royalty Collateral; or (ii) other intellectual property and marketing rights to the Products of that LifeSci Company.
Unsecured debt
Debt issued by a LifeSci Company which is not secured or is secured by a second lien on assets of the Borrower.
Credit linked notes
Derivative instruments referencing Debt Assets, being a synthetic obligation between the Company and another party where the repayment of principal and/or the payment of interest is based on the performance of the obligations under the underlying Debt Assets.
"Royalty Collateral" means, with respect to a Debt Asset, (i) future payments receivable by the Borrower on a Product (or Products) in the form of royalty payments or other revenue sharing arrangements; or (ii) future distributions receivable by the Borrower based on royalty payments generated from a Product (or Products); or (iii) both limb (i) and limb (ii). "Debt" includes loans, notes, bonds and other debt instruments and securities, including convertible debt, and Priority Royalty Tranches. Borrowers will predominantly be domiciled in the US, Europe and Japan, though the Company may also acquire Debt Assets issued by Borrowers in other jurisdictions.
Investment restrictions and portfolio diversification
The Company will seek to create a diversified portfolio of investments by investing across a range of different forms of Debt Assets issued by a variety of Borrowers. In particular, the Company will observe the following restrictions when making investments in accordance with its investment policy:
-- no more than 30 per cent of the Company's gross assets will be exposed to any single Borrower, other than in the case of the RPS Note;
-- no more than 35 per cent of the Company's gross assets will be invested in Unsecured Debt; and
-- no more than 15 per cent of the Company's gross assets will be invested in equity securities issued by LifeSci Companies.
Each of these investment restrictions will be calculated as at the time of investment. In the event that any of the above limits are breached at any point after the relevant investment has been made (for instance, as a result of any movements in the value of the Company's total assets), there will be no requirement to sell any investment (in whole or in part).
Cash management
The Company's uninvested capital may be invested in cash instruments or bank deposits for cash management purposes.
Hedging
The Company does not propose to enter into any hedging or other derivative arrangements other than as may from time to time be considered appropriate for the purposes of efficient portfolio management. The Company will not enter into such arrangements for investment purposes.
Business and status of the Company
The Company is registered in England as a public limited company and is an investment company in accordance with the provisions of Section 833 of the Companies Act 2006.
The principal activity of the Company is to carry on business as an investment trust. The Company intends at all times to conduct its affairs so as to enable it to qualify as an investment trust for the purposes of Sections 1158/1159 of the Corporation Tax Act 2010 ("S1158/1159"). The Directors do not envisage any change in this activity in the foreseeable future.
The Company has been granted approval from HM Revenue & Customs ("HMRC") as an investment trust under S1158/1159 and will continue to be treated as an investment trust company, subject to there being no serious breaches of the conditions for approval. The Directors are of the opinion that the Company has conducted its affairs for the period ended 31 December 2017 so as to be able to continue to qualify as an investment trust.
The Company has a wholly-owned subsidiary, BPCR Ongdapa Limited, details of which can be found in Note 14 to the financial statements.
Key performance indicators
The Company assesses its performance in meeting its investment objectives using the following Key Performance Indicators ("KPIs"):
NAV performance
The NAV at 31 December 2017 was $1.0091 per share, compared to $0.98 per share upon IPO, an increase of 3.0 per cent.
A full description of the Company's performance for the year ended 31 December 2017 is included in the Investment Manager's Report above.
A full description of the Company's performance for the year ended 31 December 2017 is included in the Investment Manager's Report above.
Share price return
The Company's share price at IPO was $1.00 and increased to $1.0470, for a return since IPO of 4.7 per cent as of 31 December 2017.
Share price premium to NAV per share
The Company's share price was at a premium to the NAV per share consistently throughout the period, ending the period at a premium of 3.8 per cent. The daily closing price of the Company's shares ranged from $1.02 - $1.13 throughout the period.
If the share price declines to a point where the shares trade on average at a discount to NAV per share in excess of 5 per cent in any three-month rolling period, the Company has certain discount control mechanisms in place, one of which requires the Company to repurchase shares until such time the share price discount to NAV per share moves below 1 per cent.
Dividend yield
The Company declared and paid dividends during the period in line with the expected 4 per cent annual yield as disclosed in its IPO Prospectus dated 1 March 2017.
Ongoing Charges
The Company's ongoing charges ratio as at 31 December 2017 was 1.2 per cent.
Dividends
Dividends totalling $15,238,000 per ordinary share have been paid in respect of the period ended 31 December 2017.
Principal risks and uncertainties
The Board of Directors has overall responsibility for risk management and internal control of the Company. The Board recognises that risk is inherent in the operation of the Company and that effective risk management is key to the success of the organisation. The Board has delegated responsibility for the assurance of the risk management process and the review of mitigating controls to the Audit and Risk Committee.
The Board, when setting the risk management strategy, also determines the nature and extent of the significant risks and its risk appetite in implementing this strategy. A formal risk identification and assessment process has been in place since the IPO, resulting in a risk framework document which summarises the key risks and their mitigation.
The Board undertakes a formal risk review with the assistance of the Audit and Risk Committee at least twice a year in order to assess the effectiveness of the Company's risk management and internal control systems. During the course of such review, the Board has not identified, nor been advised of any failings or weaknesses which it has determined to be of a material nature. The principal risks and uncertainties the Company faces are set out below.
The principal risks, the Company's policies for managing these risks and the policy and practice with regard to financial instruments are summarised in Note 16 to the financial statements.
The principal risks and uncertainties that could have a material impact on the Company's performance are set out below. The financial risks faced by the Company include, but are not limited to, market risk, liquidity risk and credit risk.
Failure to achieve target returns
The target returns are targets only and are based on financial projections that are themselves based on assumptions regarding market conditions, economic environment, availability of investment opportunities and investment-specific assumptions that may not be consistent with conditions in the future.
The Company seeks to achieve its investment objective predominantly through direct or indirect exposure to debt assets. Debt assets typically comprise royalty debt instruments, priority royalty tranches, senior secured debt, unsecured debt and credit linked notes. A variety of factors, including lack of attractive investment opportunities, defaults and prepayments under debt assets, inability of the Company to obtain debt at an appropriate rate, changes in the life sciences industry, exchange rates, government regulations, the non-performance (or underperformance) of any life sciences product (or any life sciences company) could adversely impact the Company's ability to achieve its investment objective and deliver the target returns. A failure by the Company to achieve its target returns could adversely impact the value of the shares and lead to a loss of investment.
The Company has an investment policy to achieve a balanced Investment with a diversified asset base and has investment restrictions in place to limit exposure to potential risk factors. These factors enable the Company to build a diversified portfolio that should deliver returns that are in line with its stated target return.
The success of the Company depends on the ability and expertise of the Investment Manager
In accordance with the Investment Management Agreement, the Investment Manager is responsible for the investment management of the Company's assets. The Company does not have its own employees and all of its Directors are appointed on a non-executive basis. All investment and asset management decisions are made by the Investment Manager (or any delegates thereof) and not by the Company or the Directors and, accordingly, the Company is completely reliant upon, and its success depends on, the Investment Manager and its personnel, services and resources. The Investment Manager is required, under the terms of the Investment Management Agreement, to perform in accordance with the Service Standard. The Investment Manager does not submit individual investment decisions to the Board for approval and the Board does not supervise the due diligence performed by the Investment Manager. As part of its asset management decisions, the Investment Manager may from time to time make commitments for future investments for which the Company may need to raise funds in the future by issuing equity and/or debt or by selling all or part of other investments to raise liquidity.
The Company is entitled to terminate the Investment Management Agreement if the Investment Manager has (i) committed fraud, gross negligence or willful misconduct in the performance of its obligations under the Investment Management Agreement, or (ii) breached its obligations under the Investment Management Agreement, and the Company is reasonably likely to suffer a loss arising directly or indirectly out of or in connection with such breach of an amount equal to or greater than 10 per cent of the NAV as at the date of the breach. The Investment Management Agreement may also be terminated at the Company's discretion on not less than six months' notice to the Investment Manager, such notice not to expire earlier than: (i) 36 months following Admission, unless approved by shareholders by ordinary resolution; and (ii) 18 months following Admission, in any event.
Under the terms of the Investment Management Agreement, the Investment Manager is only liable to the Company (and will only lose its indemnity) if it has committed fraud, gross negligence or willful misconduct or acted in bad faith, or knowingly violated applicable securities' laws. The performance of the Company is dependent on the diligence, skill and judgment of certain key individuals at the Investment Manager, including Pedro Gonzalez de Cosio and other senior investment professionals and the information and investments' pipeline generated through their business development efforts. On the occurrence of a Key Person Event (as defined in the Investment Management Agreement), the Company may be entitled to terminate the Investment Management Agreement with immediate effect (subject to the Investment Manager's right to find an appropriate replacement to be approved by the Board (such approval not to be unreasonably withheld or delayed) within 180 days)). However, if the Company elects to exercise this right, it would be required to pay the Investment Manager a termination fee equal to either 1 per cent or 2 per cent of the invested NAV (depending on the reason for the Key Person Event), as at the date of such termination. If the Company elects not to exercise this right, the precise impact of a Key Person Event on the ability of the Company to achieve its investment objective and target returns cannot be determined and would depend inter alia on the ability of the Investment Manager to recruit individuals of similar experience, expertise and calibre. There can be no guarantee that the Investment Manager would be able to do so and this could adversely affect the ability of the Company to meet its investment objective and target returns and may adversely affect the NAV and shareholder returns and result in a substantial loss of a shareholder's investment.
Pharmakon Advisors, the Investment Manager, has extensive expertise and a track record of successfully investing in debt and other cash flows backed by life sciences products. The Investment Management Agreement provides attractive incentives for the Investment Manager to perform prudently and in the best interests of the Company. In addition, the Investment Manager and its affiliates own approximately 13 per cent of the Company as at 31 December 2017, creating a strong alignment of interests between the Investment Manager and its affiliates and shareholders of the Company.
The Company may from time to time commit to make future investments that exceed its current liquidity
From time to time, the Company may commit to make future investments for which the Company will need to raise funds by issuing equity and/or debt, or by selling all or part of other investments. Investment opportunities may require the Company to fund transactions in two or more tranches, with the later tranches to be funded six or more months in the future. Refusing to offer such later tranches would decrease the attractiveness of the Company's investment proposals and harm the Company's ability to successfully deploy its capital. Requiring the Company to maintain low-yielding cash balances sufficient to fund all such later tranches at the time of the initial commitment would decrease the average yield on the Company's assets, adversely impacting the returns to investors, and may also result in missed investment opportunities. However, in order to fund all such later tranches, the Company could be forced to issue debt, sell assets or renegotiate with the party to which it has committed the funding on unattractive terms. Furthermore, there can be no assurance that the Company will always be able to raise sufficient liquidity (by issuing equity and/or debt, or by selling investments) to meet its funding commitments. If the Company were to fail to meet its funding commitments, the Company could be in breach of its contractual obligations, which could adversely affect the Company's reputation, could result in the Company facing legal action from its counterparty, and could adversely affect the Company's financial results.
Pharmakon Advisors, the Investment Manager, together with its affiliate Royalty Pharma, believes that the risks associated with such unfunded commitment is manageable without undue risk. Pharmakon Advisors has extensive expertise raising debt secured by cash flows from life sciences products and has extensive relationships with banks and other financial institutions who can be called on to provide debt financing to the Company in order to raise liquidity. In addition, Pharmakon Advisors has expertise purchasing and selling life sciences debt assets in the secondary market and has extensive relationships with the major participants in the life-sciences debt market who would be the likely purchasers of any assets offered for sale by the Company in order to raise liquidity.
The Investment Manager's ability to source and advise appropriately on investments
Returns on the shareholders' investments will depend upon the Investment Manager's ability to source and make successful investments on behalf of the Company. There can be no assurance that the Investment Manager will be able to do so on an ongoing basis. Many investment decisions of the Investment Manager will depend upon the ability of its employees and agents to obtain relevant information. There can be no guarantee that such information will be available or, if available, can be obtained by the Investment Manager and its employees and agents. Furthermore, the Investment Manager will often be required to make investment decisions without complete information or in reliance upon information provided by third parties that is impossible or impracticable to verify. For example, the Investment Manager may not have access to records regarding the complaints received regarding a given life science product or the results of R&D related to products. Furthermore, the Company may have to compete for attractive investments with other public or private entities, or persons, some or all of which may have more capital and resources than the Company. These entities may invest in potential investments before the Company is able to do so or their offers may drive up the prices of potential investments, thereby potentially lowering returns and, in some cases, rendering them unsuitable for the Company. An inability to source investments would have a material adverse effect on the Company's profitability, its ability to achieve its target returns and the value of the shares.
The Investment Manager believes that sourcing investments is one of its competitive advantages. The Investment Manager's professionals, together with those at its affiliate Royalty Pharma, accessible through the Shared Services Agreement, have complimentary scientific, medical, licensing, operating, structuring and financial backgrounds which the Investment Manager believes provide a competitive advantage in sourcing, evaluating, executing and managing credit investments in the life sciences industry.
There can be no assurance that the Board will be able to find a replacement investment manager if the Investment Manager resigns
Under the terms of the Investment Management Agreement, the Investment Management Agreement may be terminated by: (A) the Investment Manager on not less than six months' notice to the Company, such notice not to expire earlier than 18 months following Admission; or (B) the Company on not less than six months' notice to the Investment Manager, such notice not to expire earlier than: (i) 36 months following Admission, unless approved by shareholders by ordinary resolution; and (ii) 18 months following Admission, in any event. The Board would, in these circumstances, have to find a replacement investment manager for the Company and there can be no assurance that a replacement with the necessary skills and experience would be available and/or could be appointed on terms acceptable to the Company. In this event, the Board may have to formulate and put forward to shareholders proposals for the future of the Company which may include its merger with another investment company, reconstruction or winding up. It is possible that, following the termination of the Investment Manager's appointment, the Investment Manager will continue to have a role in the investment management of certain assets, where a debt asset is shared with one or more other entity managed by the Investment Manager that continue to retain the Investment Manager's services.
In the event the Investment Manager resigns, the Board will put forward to shareholders proposals for the future of the Company which may include its merger with another investment company, reconstruction or winding up. Entities affiliated with the Investment Manager own approximately 13 per cent of the Company as of 31 December 2017. This affiliate ownership level, coupled with the fact that the Investment Manager is fairly compensated, provide further incentive to remain as Investment Manager to the Company.
Concentration in the Company's portfolio may affect the Company's ability to achieve its investment objective
The Company's published investment policy allows the Company to invest up to 30 per cent of the Company's assets in a single debt asset or in debt assets issued to a single borrower. While the investment limits in the investment policy have been set keeping in mind the debt capital requirements of the life sciences industry and the investment opportunities available to the Investment Manager, it is possible that the Company's portfolio may be significantly concentrated at any given point in time.
Concentration in the Company's portfolio may increase certain risks to which the Company is subject, some or all of which may be related to events outside the Company's control. These would include risks around the creditworthiness of the relevant borrower, the nature of the debt asset and of any life sciences product(s) in question. The occurrence of these situations may result in greater volatility in the Company's investments and, consequently, its NAV, and may materially and adversely affect the performance of the Company and the Company's returns to shareholders. Such increased concentration of the Company's assets could also result in greater losses to the Company in adverse market conditions than would have been the case with a less concentrated portfolio, and have a material adverse effect on the Company's financial condition, business, prospects and results of operations and, consequently, the Company's NAV and/or the market price of the shares.
The Company may be unable to reduce its total exposure to Tesaro (funded and unfunded) to below 30 per cent before it is obligated to fund the second tranche of its senior secured loan to Tesaro
On 21 November 2017, the Company and BioPharma Credit Investments IV, S.àr.L. ("BioPharma-IV") entered into a definitive loan agreement for up to $500 million with Tesaro, Inc. Under the terms of the transaction, the Company will invest up to $370 million ($222 million in the first tranche and up to an additional $148 million by 20 December 2018) and BioPharma-IV will invest up to $130 million in parallel with the Company acting as collateral agent. The first tranche was funded on 6 December 2017. At the time of entering into the transaction, the Company's exposure in relation to the first funded tranche ($222 million) was below 30 per cent, calculated on the basis of 31 October 2017 gross assets of $757.4 million. The Company may be required to fund its $148 million share of the second tranche at any time from 30 June 2018 to 20 December 2018 with 90-day prior notice. The Company plans to undertake efforts to reduce its investment concentration prior to 30 June 2018 and will consider options such as raising additional capital (equity and/or debt), selling a participation in the Tesaro loan, or a combination of the three.
There can be no assurance that the Company will be able to complete a successful equity or debt raise on attractive terms, or at all. There is no liquid market for the Tesaro loan. If the Company is unable to sufficiently increase its assets, it may be unable to sufficiently reduce the size of its Tesaro investment in a timely manner or at a reasonable price.
The Company has various liquidity options which it intends to pursue to decrease its exposure to any one Borrower, including raising equity and/or debt or by selling a portion of the Tesaro loan. If the Company receives a 90-day funding notice from Tesaro prior to increasing its total assets to reduce the exposure below 30 per cent, the Company will endeavour to identify potential solutions and execute a plan to remediate by reducing the investment to a permissible level. Pharmakon Advisors has expertise purchasing and selling life sciences debt assets in the secondary market and has extensive relationships with the major participants in the life-sciences debt market who would be the likely purchasers of a portion of the Tesaro loan if necessary to reduce the concentration. The success of such solutions or plan however, cannot be guaranteed.
An increased concentration of the Company's assets could result in greater losses to the Company in adverse market conditions than would have been the case with a less concentrated portfolio, and could have a material adverse effect on the Company's financial condition, business, prospects and results of operations and, consequently, the Company's NAV and/or the market price of its shares.
Life sciences products are subject to intense competition and various other risks
The biopharmaceutical and pharmaceutical industries are highly competitive and rapidly evolving. The length of any life sciences product's commercial life cannot be predicted. There can be no assurance that the life sciences products will not be rendered obsolete or non-competitive by new products or improvements made to existing products, either by the current marketer of the life sciences products or by another marketer. Adverse competition, obsolescence or governmental and regulatory life sciences policy changes could significantly impact royalty revenues of life sciences products which serve as the collateral or other security for the repayment of obligations outstanding under the Company's investments. If a life sciences product is rendered obsolete or non-competitive by new products or improvements on existing products or governmental or regulatory action, such developments could have a material adverse effect on the ability of the borrower under the relevant debt asset to make payment of interest on, and repayments of the principal of, that debt asset, and consequently could adversely affect the Company's performance. If additional side effects or complications are discovered with respect to a life sciences product, and such life sciences product's market acceptance is impacted or it is withdrawn from the market, continuing payments of interest on, and repayment of the principal of, that debt asset may not be made on time or at all. It is possible that over time side effects or complications from one or more of the life sciences products could be discovered, and, if such a side effect or complication posed a serious safety concern, a life sciences product could be withdrawn from the market, which could adversely affect the ability of the borrower under the relevant debt asset to make continuing payments of interest on, and repayment of the principal of, that debt asset, in which case the Company's ability to make distributions to investors may be materially and adversely affected.
Furthermore, if an additional side effect or complication is discovered that does not pose a serious safety concern, it could nevertheless negatively impact market acceptance and therefore result in decreased net sales of one or more of the life sciences products, which could adversely affect the ability of borrowers under the relevant debt asset(s) to make continuing payments of interest on, and repayment of the principal of, that debt asset(s), in which case the Company's ability to make distributions to investors may be materially and adversely affected.
The Investment Manager engages in a thorough diligence process before entering into any debt instrument with the counterparty and interacts with each counterparty as needed to evaluate the status of its investment on an ongoing basis.
Investments in debt obligations are subject to credit and interest rate risks
Debt instruments are subject to credit and interest rate risks. Credit risk refers to the likelihood that the borrower will default in the payment of principal and/or interest on an instrument. Financial strength and solvency of a borrower are the primary factors influencing credit risk. In addition, lack or inadequacy of collateral or credit enhancement for a debt asset may affect its credit risk. Credit risk may change over the life of an instrument. Interest rate risk refers to the risks associated with market changes in interest rates. Interest rate changes may affect the value of a debt asset indirectly (especially in the case of fixed rate debt assets) and directly (especially in the case of debt assets whose rates are adjustable). In general, rising interest rates will negatively impact the price of a fixed rate debt asset and falling interest rates will have a positive effect on price. Adjustable rate instruments also react to interest rate changes in a similar manner although generally to a lesser degree (depending, however, on the characteristics of the reset terms, including the index chosen, frequency of reset and reset caps or floors, among other factors). Interest rate sensitivity is generally more pronounced and less predictable in instruments with uncertain payment or prepayment schedules. In addition, interest rate increases generally will increase the interest carrying costs to the Company (or any entity through which the Company invests) of leveraged investments.
The Company will often seek to be a secured lender for each Debt Asset. However, there is no guarantee that the relevant borrower will repay the loan or that the collateral will be sufficient to satisfy the amount owed under the relevant Debt Asset. Credit risk will be assessed on an ongoing basis along with interest rate risk, and is further mitigated by the Company's investment policy permitting up to 30 per cent of the Company's assets to be invested in a single Debt Asset or in Debt Assets issued to a single borrower. Interest rate risk can be managed in a variety of ways, including with the use of derivatives.
Counterparty risk
The Company intends to hold Debt Assets that will generate an interest payment. There is no guarantee that any borrower will honour their obligations. The default or insolvency of such borrowers may substantially affect the Company's business, financial condition, results of operations, the NAV and shareholder returns.
The Company will often seek to be a secured lender for each Debt Asset. However, there is no guarantee that the relevant borrower will repay the loan or that the collateral will be sufficient to satisfy the amount owed under the relevant Debt Asset.
Sales of life sciences products are subject to regulatory actions that could harm the Company's ability to make distributions to investors
There can be no assurance that any regulatory approvals for indications granted to one or more life sciences products will not be subsequently revoked or restricted. Such revocation or restriction may have a material adverse effect on the sales of such products and on the ability of borrowers under the relevant Debt Asset to make continuing payments of interest on, and repayment of the principal of, that Debt Asset, in which case the Company's ability to make distributions to investors may be materially and adversely affected. Changes in legislation are monitored with the use of third-party legal advisors and the Investment Manager will maintain awareness of new approvals or revoked approvals.
Net asset values published will be estimates only and may differ materially from actual results
Generally, there will be no readily available market for a significant number of the Company's investments and hence, the majority of the Company's investments are not valued based on market-observable inputs.
The valuations used to calculate the NAV on a monthly basis will be based on the Investment Manager's unaudited estimated fair market values of the Company's investments. It should be noted any such estimates may vary (in some cases materially) from the results published in the Company's financial statements (as the figures are published at different times) and that they, and any NAV figure published, may vary (in some cases materially) from realised or realisable values.
The Investment Manager sends valuations on a monthly basis to the administrator for calculation of the NAV. The NAV is prepared by the administrator on the basis of information received from the Investment Manager and, once finalised, is reviewed and approved by a representative of the Investment Manager. Once approved, the Investment Manager notifies the Board and the NAV is released to the market.
Changes in taxation legislation or practice may adversely affect the Company and the tax treatment for shareholders investing in the Company
Any change in the Company's tax status, or in taxation legislation or practice in the UK or elsewhere, could affect the value of the Company's investments and the Company's ability to achieve its investment objective, or alter the post-tax returns to shareholders. It is the intention of the Directors to conduct the affairs of the Company so as to satisfy the conditions for approval of the Company by HMRC as an investment trust under Section 1158 of the Corporation Tax Act 2010 (as amended) and pursuant to regulations made under Section 1159 of the Corporation Tax Act 2010. However, although the approval has been obtained, neither the Investment Manager nor the Directors can guarantee that this approval will be maintained at all times. The Company was granted approval from HMRC as an investment trust during the accounting period and will continue to have investment trust status in each subsequent accounting period, unless the Company fails to meet the requirements to maintain investment trust status, pursuant to the regulations. For example, it is not possible to guarantee that the Company will remain a non-close company, which is a requirement to maintain investment trust status, as the shares are freely transferable. Failure to maintain investment trust status could, as a result, (inter alia) lead to the Company being subject to UK tax on its chargeable gains. Existing and potential investors should consult their tax advisers with respect to their particular tax situations and the tax effects of an investment in the Company.
Environmental, human rights, employee, social and community issues
The Board recognises the requirement under the Companies Act 2006 to detail information about employees, human rights and community issues, including information about any policies it has in relation to these matters and the effectiveness of these policies. These requirements do not apply to the Company as it has no employees, all the Directors are non-executive and it has outsourced all its functions to third-party service providers. The Company has therefore not reported further in respect of these provisions.
The Company is not within the scope of the Modern Slavery Act 2015 because it has not exceeded the turnover threshold and therefore, no further disclosure is required in this regard.
Board diversity
The Directors acknowledge the benefits of greater diversity on the Board and will consider this as part of a future appointment of an additional Director, which is expected to take place in 2018. The Company's diversity policy is set out in the full Annual Report.
The Strategic Report has been approved by the Board and signed on its behalf.
Jeremy Sillem
Chairman
7 March 2018
EXTRACT FROM THE DIRECTORS REPORT
The Directors are pleased to present the Annual Report and financial statements for the period ended 31 December 2017.
Directors
The Directors in office during the period and at the date of this report are listed below:
Jeremy Sillem - Chairman
Colin Bond - Chairman of the Audit and Risk Committee
Duncan Budge - Director
Harry Hyman - Senior Independent Director
Share Capital
The Company was incorporated with 1 ordinary share issued at $0.01 and 5,000,000 redeemable preference shares issued at GBP0.01.
At the general meeting held on 28 February 2017, the Company was granted authority to allot shares up to an aggregate nominal amount of $20 million on a non pre-emptive basis.
On 27 March 2017, 526,747,199 ordinary shares were issued at $0.01 each fully paid, pursuant to a placing and offer for subscription as part of the Initial Admission. As a result of Subsequent Admission on 30 March 2017, 235,130,160 ordinary shares were issued at $0.01 each fully paid.
On 29 June 2017, the Company's share premium account of $739,021,000 was cancelled in order to create distributable reserves for the payment of dividends. Simultaneously, the redeemable preference shares were cancelled in accordance with the Company's Articles of Association (the "Articles")
Following the result of a placing by the Company announced on 14 December 2017, the Company issued 152,375,471 ordinary shares. These shares were admitted to trading on the SFS of the LSE and to listing and trading on the Official List of the TISE on 18 December 2017. Following the issue of new shares in December 2017 and as at the date of this report, the Company may allot shares up to an aggregate nominal amount of $10,857,471.
At 31 December 2017, and as at the date of this report, there are 914,252,831 ordinary shares in issue, none of which are held in treasury. At general meetings of the Company, shareholders are entitled to one vote on a show of hands and on a poll, to one vote for every share held. The total voting rights of the Company at 31 December 2017 were 914,252,831.
As set out in the Company's Prospectus dated 1 March 2017, BioPharma III investors and RPS investors who purchased shares at IPO, together with Pablo Legorreta have agreed not to transfer, dispose or grant any options over any shares held by them without the prior written consent of the Company until one year after the date on which their shares were issued. These arrangements are subject to certain exceptions customary for an agreement of this nature.
Dividends
Dividends paid or payable in respect of the period ended 31 December 2017 are set out in Note 6 to the financial statements.
Dividend policy
The Company pays dividends in US Dollars or GBP Sterling on a quarterly basis. The Company may, where the Directors consider it appropriate, use the reserve created by the cancellation of its share premium account to pay dividends.
The Company's target dividend for the first financial year following IPO was 4 per cent (calculated by reference to the issue price at IPO) and, once substantially invested, the Company will target an annual dividend yield of 7 per cent on the ordinary shares (calculated by reference to the issue price at IPO), together with a net total return on NAV of 8 to 9 per cent per annum on the ordinary shares, in the medium term.
Going concern
The Directors consider that it is appropriate to adopt the going concern basis in preparing the financial statements. After making enquiries, and bearing in mind the nature of the Company's business and assets, the Directors consider that the Company has adequate resources to continue in operational existence for the foreseeable future. In arriving at this conclusion, the Directors have considered the liquidity of the portfolio and the Company's ability to meet obligations as they fall due for a period of at least 12 months from the date that these financial statements were approved.
Viability statement
The Board has assessed the principal risks facing the Company over a five-year period, including those that would threaten its business model, future performance, solvency or liquidity. The five-year period was selected to align with the average duration of the Company's investments and the timing for the Company's continuation vote, which will be held on the fifth anniversary of its IPO. The Board has developed a matrix of risks facing the Company and has put in place certain investment restrictions which are in line with the Company's investment objective and policy in order to mitigate these risks as far as practicable. The principal risks which have been identified, and the steps taken by the Board to mitigate these risks are presented above.
The Company believes its borrowing capabilities provide further flexibility and help ensure it is in a position to finance its funding obligations in the event that internally generated cash flow in the period is insufficient to finance the unfunded portion of a lending commitment. The Board reviews the Company's financing arrangements quarterly to ensure that the Company is in a strong position to fund all outstanding commitments on existing investments as well as being able to finance new investments. In addition, the Board regularly reviews the prospects for the Company's portfolio and the pipeline of potential investment opportunities which provide comfort that the Company is able to continue to finance its activities for the medium-term future.
Based on this assessment, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next five-year period.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
In respect of the Annual Report and financial statements
The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulation.
Company law requires the Directors to prepare financial statements for each financial period. Under that law, the Directors have prepared the financial statements in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union. Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing the financial statements, the Directors are required to:
-- select suitable accounting policies and then apply them consistently;
-- 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;
-- make judgements and accounting estimates that are reasonable and prudent; 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 Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006.
The Directors are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
The Directors consider that the Annual Report and financial statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy.
Each of the Directors, whose names and functions are listed above confirm that, to the best of their knowledge:
-- the Company Financial Statements, which have been prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Company; and
-- the Directors' Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.
On behalf of the Board
Jeremy Sillem
Chairman
7 March 2018
NON-STATUTORY ACCOUNTS
The financial information set out below does not constitute the Company's Annual financial statements for the period ended 31 December 2017. The Annual Report, including the Annual financial statements, for the period ended 31 December 2017 was approved by the Board on 7 March 2018. The Auditor has reviewed those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the Auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006.
STATEMENT OF COMPREHENSIVE INCOME
For the period from 24 October 2016 (Date of Incorporation) to 31 December 2017
(In US dollars $000s except per share amounts)
Period ended 31 December 2017
----------------------------------
Note Revenue Capital Total
------------------------------- ----- ---------- ---------- ----------
Income
Investment income 3 33,218 - 33,218
Other income 3 3,774 - 3,774
Net gains on investments
at fair value 7 - 2,265 2,265
Currency exchange gains - 51 51
------------------------------- -----
Total income 36,992 2,316 39,308
Expenses
Management fee 4 (5,830) - (5,830)
Directors' fees 4 (250) - (250)
Other expenses 4 (1,062) (471) (1,533)
------------------------------- -----
Total expenses 4 (7,142) (471) (7,613)
------------------------------- ----- ---------- ---------- ----------
Return on ordinary activities
before finance costs
and taxation 29,850 1,845 31,695
Finance costs 4 (4) - (4)
------------------------------- ----- ---------- ---------- ----------
Return on ordinary activities
after finance costs and
before taxation 29,846 1,845 31,691
Taxation on ordinary
activities 5 - - -
------------------------------- -----
Return on ordinary activities
after finance costs and
taxation 29,846 1,845 31,691
------------------------------- ----- ---------- ---------- ----------
Net revenue and capital
return per ordinary share
(basic and diluted) 11 $0.0389 $0.0024 $0.0413
------------------------------- ----- ---------- ---------- ----------
The total column of this statement is the Company's Statement of Comprehensive Income prepared in accordance with IFRS as endorsed by the EU. The supplementary revenue and capital columns are presented for information purposes as recommended by the Statement of Recommended Practice ("SORP") issued by the Association of Investment Companies ("AIC").
All items in the above Statement derive from continuing operations.
There is no other comprehensive income, and therefore the return on ordinary activities after finance costs and taxation is also the total comprehensive income.
The Notes below form part of these financial statements.
STATEMENT OF CHANGES IN EQUITY
For the period from 24 October 2016 (Date of Incorporation) to 31 December 2017
(In US dollars $000s)
Total equity
attributable
Share Special to
Share premium distributable Capital Revenue shareholders
Note capital account reserve* reserve reserve* of the Company
Net assets attributable
to shareholders at 24 October
2016 - - - - - -
Gross proceeds of share
issue 9,143 906,847 - - - 915,990
Share issue costs - (17,447) - - - (17,447)
Transfer to special
distributable
reserve 13 - (739,021) 739,021 - - -
Share premium cancellation
costs 13 - - (41) - - (41)
Return on ordinary activities
after finance costs and
taxation - - - 1,845 29,846 31,691
Dividends paid 6 - - (4,624) - (2,995) (7,619)
------------------------------ -----
Net assets attributable
to shareholders at 31
December
2017 9,143 150,379 734,356 1,845 26,851 922,574
------------------------------ ----- --------- ---------- --------------- --------- ---------- ----------------
* The special distributable and revenue reserves can be distributed in the form of dividends.
The Notes below form part of these financial statements.
STATEMENT OF FINANCIAL POSITION
As at 31 December 2017
(In US dollars $000s except per share amounts)
31 December
Note 2017
------------------------------------------- ----- ------------
Non-current assets
Investments at fair value through
profit or loss 7 569,630
------------------------------------------- -----
Current assets
Trade and other receivables 8 5,038
Cash and cash equivalents 9 350,822
------------------------------------------- -----
355,860
------------------------------------------- -----
Total assets 925,490
------------------------------------------- -----
Current liabilities
Trade and other payables 10 2,916
------------------------------------------- -----
Total liabilities 2,916
------------------------------------------- ----- ------------
Total assets less current liabilities 922,574
Net assets 922,574
------------------------------------------- ----- ------------
Represented by:
Share capital 13 9,143
Share premium account 13 150,379
Special distributable reserve 13 734,356
Capital reserve 1,845
Revenue reserve 26,851
------------------------------------------- -----
Total equity attributable to shareholders
of the Company 922,574
------------------------------------------- ----- ------------
Net asset value per ordinary share
(basic and diluted) 12 $1.0091
------------------------------------------- ----- ------------
The financial statements of BioPharma Credit PLC registered number 10443190 were approved and authorised for issue by the Board of Directors on 7 March 2018 and signed on its behalf by:
Jeremy Sillem
Chairman
The Notes below form part of these financial statements.
CASH FLOW STATEMENT
For the period from 24 October 2016 (Date of Incorporation) to 31 December 2017
(In US dollars $000s)
Period ended
31 December
Note 2017
-------------------------------------------- ----- -------------
Cash flows from operating activities
Investment income received 28,872
Other income received 3,384
Investment management fee paid (3,826)
Finance costs paid (2)
Other expenses paid (1,515)
-------------------------------------------- ----- -------------
Cash generated from operations 15 26,913
Taxation paid -
-------------------------------------------- ----- -------------
Net cash flow generated from operating
activities 26,913
-------------------------------------------- ----- -------------
Cash flow from investing activities
Purchase of investments (548,728)
Redemptions of investments 115,474
Sales of investments 19,385
-------------------------------------------- ----- -------------
Net cash flow used in investing activities (413,869)
-------------------------------------------- ----- -------------
Cash flow from financing activities
Gross proceeds of share issue 13 762,508
Share issue costs (17,121)
Dividends paid 6 (7,619)
Share premium cancellation costs (41)
-------------------------------------------- ----- -------------
Net cash flow generated from financing
activities 737,727
-------------------------------------------- ----- -------------
Increase in cash and cash equivalents
for the period 350,771
-------------------------------------------- ----- -------------
Cash and cash equivalents at start
of period -
Revaluation of foreign currency balances 51
-------------------------------------------- ----- -------------
Cash and cash equivalents at end
of period 9 350,822
-------------------------------------------- ----- -------------
The Notes below form part of these financial statements.
NOTES TO THE FINANCIAL STATEMENTS
For the period from 24 October 2016 (Date of Incorporation) to 31 December 2017
1. GENERAL INFORMATION
BioPharma Credit PLC is a closed-ended investment company incorporated and domiciled in England and Wales on 24 October 2016 with registered number 10443190. The registered office of the Company is Beaufort House, 51 New North Road, Exeter, EX4 4EP. On 6 February 2017 the Company changed its name from PRECIS (2772) PLC.
The Company carries on business as an investment trust company within the meaning of Sections 1158/1159 of the Corporation Tax Act 2010.
The Company's Investment Manager is Pharmakon Advisors L.P. ("Pharmakon"). Pharmakon is a limited partnership established under the laws of the State of Delaware. It is registered as an investment adviser with the SEC under the United States Investment Advisers Act of 1940, as amended.
Pharmakon is authorised as an AIFM under the Alternative Investment Fund Managers Directive ("AIFMD").
2. ACCOUNTING POLICIES
a) Basis of preparation
The Company's annual financial statements covers the period from incorporation on 24 October 2016 to 31 December 2017 and have been prepared in conformity with IFRS as adopted by the EU, which comprise standards and interpretations approved by the International Accounting Standards Board ("IASB"), and as applied in accordance with the AIC SORP (issued in November 2014, updated in January 2017 with consequential amendments) for the financial statements of investment trust companies and venture capital trusts, except to any extent where it is not consistent with the requirements of IFRS. The financial statements have adopted the following accounting policies in their preparation. As this is the first reporting period since the Company was incorporated, no comparative figures have been shown.
The financial statements are presented in US dollars, being the functional currency of the Company. The financial statements have been prepared on a going concern basis under historical cost convention, except for the measurement at fair value of investments designated at fair value through profit or loss.
Assessment as an investment entity
Entities that meet the definition of an investment entity within IFRS 10 Consolidated Financial Statements are required to measure their subsidiaries at fair value through profit or loss rather than consolidate the entities. The criteria which define an investment entity are as follows:
-- an entity that obtains funds from one or more investors for the purpose of providing those investors with investment services;
-- an entity that commits to its investors that its business purpose is to invest funds solely for returns from capital appreciation, investment income or both; and
-- an entity that measures and evaluates the performance of substantially all of its investments on a fair value basis.
The Directors have concluded that the Company meets the characteristics of an investment entity, in that it has more than one investor and its investors are not related parties; holds a portfolio of investments, predominantly in the form of loans which generates returns through interest income. All investments, including its subsidiary BPCR Ongdapa Limited, are reported at fair value to the extent allowed by IFRS.
b) Presentation of Statement of Comprehensive Income
In order to better reflect the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the Statement of Comprehensive Income between items of a revenue and capital nature has been prepared alongside the Income Statement.
c) Segmental reporting
The Directors are of the opinion that the Company has one operating and reportable segment being the investment in debt assets secured by royalties or other cash flows derived from the sales of approved life sciences products.
d) Investments at fair value through profit or loss
The principal activity of the Company is to invest in interest-bearing debt assets with a contractual right to future cash flows derived from royalties or sales of approved life sciences products. In accordance with IFRS, the assets are measured at fair value through profit or loss. They are accounted for on their trade date at fair value, which is the cost of the investment. The fair value of the asset reflects any contractual amortising balance and accrued interest.
For unlisted investments where the market for a financial instrument is not active, fair value is established using valuation techniques which may include recent arm's length market transactions between knowledgeable, willing parties, if available; reference to the current fair value of another instrument that is substantially the same; and discounted cash flow analysis and option pricing models. Where there is a valuation technique commonly used by market participants to price the instrument and that technique has proved reliable from estimates of prices obtained in actual market transactions, that technique is utilised.
The fair value is either bid price or the last traded price on the exchange where the investment is listed.
Changes in the fair value of investments held at fair value through profit or loss and gains or losses on disposal are recognised in the Statement of Comprehensive Income as gains or losses from investments held at fair value through profit or loss. Transaction costs incurred on the purchase and disposal of investments are included within the cost or deducted from the proceeds of the investments. All purchases and sales are accounted for on trade date.
e) Foreign currency
Transactions denominated in currencies other than US dollars are recorded at the rates of exchange prevailing on the date of the transaction. Items which are denominated in foreign currencies are translated at the rates prevailing on the balance sheet date. Any gain or loss arising from a change in exchange rate subsequent to the date of the transaction is included as an exchange gain or loss in the Statement of Comprehensive Income.
f) Income
There are three main sources of revenue for the Company: dividends, interest income and royalty revenue. Dividends are receivable on equity shares and recognised on the ex-dividend date. Where no ex-dividend date is quoted, dividends are recognised when the Company's right to receive payment is established. Dividends from investments in unquoted shares and securities are recognised when they become receivable.
Interest income is recognised when it is probable that the economic benefits will flow to the Company. Interest is accrued on a time basis, by reference to the principal outstanding and the effective interest rate that is applicable. Accrued interest is included within trade and other receivables on the Statement of Financial Position.
Any accrued income is reflected in the fair value of the Company's limited partnership interest, and is allocated to capital within the Statement of Comprehensive Income until the Company's right to receive the income is established, when it is transferred to revenue within the Statement of Comprehensive Income.
Royalty revenue is recognised on an accrual basis in accordance with the substance of the relevant agreement (provided that it is probable that the economic benefits will flow to the Company and the amount of revenue can be measured reliably). Royalty arrangements that are based on production, sales and other measures are recognised by reference to the underlying arrangement.
Some investments include additional consideration in the form of structuring fees, which are paid on completion of the transaction. Such fees are recognised up front and are allocated to revenue within the Statement of Comprehensive Income.
Bank interest and other interest receivable are accounted for on an accruals basis.
g) Dividends paid to shareholders
Dividends to shareholders are recognised as a liability in the period which they are paid or approved by the Board and are taken to the Statement of Changes in Equity. Dividends declared and approved after the balance sheet date are not recognised as a liability of the Company at the balance sheet date.
The Company may, if it so chooses, designate as an "interest distribution" all or part of the amount it distributes to shareholders as dividends, to the extent that it has "qualifying interest income" for the accounting period. Were the Company to designate any dividend it pays in this manner, it should be able to deduct such interest distributions from its income in calculating its taxable profit for the relevant accounting period. The Company intends to elect for the "streaming" regime to apply to the dividend payments it makes to the extent that it has such "qualifying interest income". Shareholders in receipt of such a dividend will be treated for UK tax purposes as though they had received a payment of interest, which results in a reduction of the corporation tax payable by the Company.
h) Expenses
All expenses are accounted for on an accruals basis. Expenses, including investment management fees, performance fees and finance costs, are charged through the revenue account except as follows:
-- expenses which are incidental to the acquisition or disposal of an investment are treated as capital costs and separately identified and disclosed in Note 4; and
-- expenses of a capital nature are accounted for through the capital account.
i) Trade and other receivables
Trade and other receivables do not carry any interest and are measured at fair value through profit and loss and reduced by appropriate allowances for estimated unrecoverable amounts, where necessary.
j) Cash and cash equivalents
Cash and cash equivalents are defined as cash in hand, demand deposits and short-term, highly liquid investments readily convertible to known amounts of cash and subject to insignificant risk of changes in value.
k) Trade and other payables
Trade and other payables do not carry any interest and are measured at fair value through profit and loss.
l) Taxation
Tax on the profit or loss for the period comprises current and deferred tax. Corporation tax is recognised in the Statement of Comprehensive Income.
Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted or substantively enacted at the balance sheet date and any adjustment to tax payable in respect of previous periods. The tax effect of different items of expenditure is allocated between revenue and capital on the same basis as the particular item to which it relates, using the Company's marginal method of tax, as applied to those items allocated to revenue, for the accounting period.
Deferred tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax basis of assets and liabilities and their carrying amount for financial reporting purposes. Deferred tax liabilities are measured at the tax rates that are expected to apply to the period when the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.
m) Share capital and reserves
The share capital represents the nominal value of the Company's equity shares.
The share premium account represents the excess over nominal value of the fair value of consideration received for the Company's equity shares, net of expenses of the share issue.
The special distributable reserve was created on 30 June 2017 to enable the Company to buy back its own shares and pay dividends out of such distributable reserve, in each case when the Directors consider it appropriate to do so, and for other corporate purposes.
The capital reserve represents realised and unrealised capital and exchange gains and losses on the disposal and revaluation of investments and of foreign currency items. The realised capital reserve can be used for the repurchase of shares.
The revenue reserve represents retained profits from the income derived from holding investment assets less the costs and interest on cash balances associated with running the Company. This reserve can be distributed.
n) Critical accounting estimates and assumptions
The preparation of these financial statements in conformity with IFRS requires the Directors to make judgements, estimates and assumptions that affect the application of accounting policies and therefore, the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.
These estimates and assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised prospectively.
In particular, estimates and assumptions made in the valuation of unquoted investments for which there is no observable market may cause material adjustments to the carrying value of those investments. These are valued in accordance with Note 2(d) above.
o) Accounting standards not yet effective
The IASB have issued and endorsed the following standards and interpretations, applicable to the Company, which are not yet effective for the period ended 31 December 2017 and have therefore not been applied in preparing these financial statements.
The Company does not expect the adoption of IFRS 9 to have a material impact on its financial statements as all investments are measured at fair value through profit or loss. In addition, IFRS 15 does not apply to financial instruments, which comprise the business of the Company as an investment trust. The Company will continue to monitor future standards.
Effective date
for reporting
periods
New/Revised IFRSs Issued beginning on
or after
--------------------- ----------------------- ------------- ----------------
IFRS 9 Financial Instruments 24 July 2014 1 January 2018
IFRS 15 Revenue from Contracts
with Customers 28 May 2014 1 January 2018
Amendments to
IFRSs
IAS 7 Disclosure Initiative 1 January 1 January 2017*
2016
IFRS 1 Annual Improvements
to IFRS Standards 1 December
2014-2016 Cycle 2016 1 January 2018*
IFRIC Interpretation Foreign Currency
22 Transactions and 1 December
Advance Consideration 2016 1 January 2018*
--------------------- ----------------------- ------------- ----------------
* Not yet endorsed by the EU.
Other future developments include the IASB undertaking a comprehensive review of existing IFRSs. The Company will consider the financial impact of these new standards as they are finalised.
3. INCOME
Period ended
31 December
2017
$000
----------------------------------------------- -------------
Income from investments
US unfranked investment income from BioPharma
III 11,758
US fixed interest investment income 12,439
US floating interest investment income 1,468
Additional considerations received* 7,553
----------------------------------------------- -------------
33,218
Other income
Interest from liquidity/money market funds 3,600
Fixed term deposit interest 172
Other interest 2
----------------------------------------------- -------------
3,774
Total income 36,992
----------------------------------------------- -------------
* The Company's senior secured loans to Tesaro, Inc. and Lexicon Pharmaceuticals, Inc. included additional consideration in the form of structuring fees of $4,440,000 and $3,112,500, respectively, which were paid upon the completion of the transaction and are recognised as income in the period. Refer to Note 2(f).
4. FEES AND EXPENSES
EXPENSES
Period ended 31 December 2017
----------------------------------
Revenue Capital Total
$000 $000 $000
------------------------------------- ----------- ----------- --------
Management fee (Note 4a) 5,830 - 5,830
------------------------------------- ----------- ----------- --------
Directors' fees (Note 4c) 250 - 250
------------------------------------- ----------- ----------- --------
Other expenses
Company Secretarial fee 59 - 59
Administration fee 66 - 66
Legal & professional fees 12 471 483
Public relations fees 255 - 255
Auditor's remuneration - Statutory
audit 256 - 256
Auditor's remuneration - Other
audit related services - Half-year
review 122 - 122
Auditor's remuneration - Other
audit related services - Initial
accounts 28 - 28
Other expenses 264 - 264
------------------------------------- ----------- ----------- --------
1,062 471 1,533
------------------------------------- ----------- ----------- --------
Total expenses 7,142 471 7,613
------------------------------------- ----------- ----------- --------
The Directors' were also paid $162,500, as detailed in Note 4(c). This amount is not included within the Directors' fees figure above. The Auditors were also paid $176,000 for services performed in connection with the IPO. This amount is not included within the Auditor's remuneration figures above. Both these amounts were recognised as part of share issue costs in the Statement of Changes in Equity.
a) Investment management fee
With effect from the Initial Admission, the Investment Manager is entitled to a management fee ("Management Fee") calculated on the following basis: (1/12 of 1 per cent of the NAV on the last business day of the month in respect of which the Management Fee is to be paid (calculated before deducting any accrued Management Fee in respect of such month)) minus (1/12 of $100,000).
The Management Fee payable in respect of any quarter will be reduced by an amount equal to the Company's pro rata share of any transaction fees, topping fees, break-up fees, investment banking fees, closing fees, consulting fees or other similar fees which the Investment Manager (or an affiliate) receives in connection with transactions involving investments of the Company ("Transaction Fees"). The Company's pro rata share of any Transaction Fees will be in proportion to the Company's economic interest in the investment(s) to which such Transaction Fees relate.
b) Performance fee
Subject to (i) the total return on NAV (calculated per ordinary share) exceeding 6 per cent over such performance period, (ii) the total return on NAV (calculated per ordinary share) as at the end of a performance period representing an increase of at least 6 per cent per annum compounded on the Company's IPO ordinary share issue price, and (iii) to high watermark (which is the total return on NAV (calculated per ordinary share) as at the end of the last performance period in respect of which a performance fee was payable to the Investment Manager), the Investment Manager will be entitled to receive a performance fee equating to 10 per cent of the total return over such performance period, on the basis of catch up arrangements whereby the Investment Manager will receive 50 per cent of the total return above 6 per cent (the "Excess Total Return") up to the point at which it has received 10 per cent of the overall total return allocated to itself and shareholders in this manner, and thereafter 10 per cent of the remaining Excess Total Return; provided always that the amount of any performance fee payable to the Investment Manager will be reduced to the extent necessary to ensure that, after account is taken of such fee, conditions (i), (ii) and (iii) above are still satisfied.
The Performance Fee for a Performance Period shall be paid as soon as practicable after the end of the relevant Performance Period and, in any event, within three calendar months as of the end of such Performance Period.
If, during the last month of a Performance Period, the shares have, on average, traded at a discount of 1 per cent or more to the NAV per share (calculated by comparing the middle market quotation of the shares at the end of each business day in the month to the prevailing published NAV per share (exclusive of any dividend declared) as at the end of such business day and averaging this comparative figure over the month), the Investment Manager shall (or shall procure that its Associate does) apply 50 per cent of any Performance Fee paid by the Company to the Investment Manager (or its Associate) in respect of that Performance Period (net of all taxes and charges applicable to such portion of the Performance Fee) to make market acquisitions of shares (the "Performance Shares") as soon as practicable following the payment of the Performance Fee by the Company to the Investment Manager (or its Associate) and at least until such time as the shares have, on average, traded at a discount of less than 1 per cent to the NAV per share over a period of five business days (calculated by comparing the middle market quotation of the shares at the end of each such business day to the prevailing published NAV per share (exclusive of any dividend declared) and averaging this comparative figure over the period of five business days). The Investment Manager's obligation:
1) shall not apply to the extent that the acquisition of the Performance Shares would require the Investment Manager to make a mandatory bid under Rule 9 of the Takeover Code; and
2) shall expire at the end of the Performance Period which immediately follows the Performance Period to which the obligation relates.
c) Directors
Each of the Directors is entitled to receive a fee from the Company at such rate as may be determined in accordance with the Articles. The Directors' remuneration is $70,000 per annum for each Director other than:
-- the Chairman, who will receive an additional $30,000 per annum; and
-- the Chairman of the Audit and Risk Committee, who will receive an additional $15,000 per annum.
In addition, in consideration for the work done between Incorporation and Admission, for the period up to 31 December 2017, each Director will be entitled to an additional $35,000 other than:
-- the Chairman, who will receive an additional $50,000 for this period; and
-- the Chairman of the Audit and Risk Committee, who will receive an additional $42,500 for this period.
Fees owed to Directors will be paid to each Director in three equal quarterly instalments for 2017.
A breakdown of Directors' fees is provided in the Remuneration Report in the full Annual Report.
d) Finance costs
Period ended
31 December 2017
$000
--------------- -----------------
Interest paid 4
--------------- -----------------
4
--------------- -----------------
5. TAXATION
It is the intention of the Directors to conduct the affairs of the Company so as to satisfy the conditions for approval of the Company by HMRC as an investment trust under Section 1158 of the Corporation Tax Act 2010 (as amended) and pursuant to regulations made under Section 1159 of the Corporation Tax Act 2010. As an investment trust, the Company is exempt from corporation tax on capital gains.
The current taxation charge for the period is different from the standard rate of corporation tax in the UK of 19.00 per cent, the effective tax rate was 0.00 per cent. The differences are explained below.
Period ended 31 December
2017
-----------------------------
Revenue Capital Total
$000 $000 $000
--------------------------------------- --------- -------- --------
Total return on ordinary activities
before taxation 29,846 1,845 31,691
--------------------------------------- --------- -------- --------
Theoretical tax at UK Corporation
tax rate of 19.36%* 5,778 357 6,135
Effects of:
Capital items that are not taxable - (357) (357)
Tax deductible interest distributions (5,778) - (5,778)
Actual tax charge - - -
--------------------------------------- --------- -------- --------
* The theoretical tax rate is calculated using a blended tax rate over the period.
At 31 December 2017, the Company had no unprovided deferred tax liabilities. At that date, based on current estimates and including the accumulation of net allowable losses, the Company had no unrelieved losses.
Deferred tax is not provided on capital gains and losses arising on the revaluation or disposal of investments because the Company meets (and intends to continue for the foreseeable future to meet) the conditions for approval as an Investment Trust company.
6. DIVIDS
Dividend paid in the period
Revenue Capital Total
$000 $000 $000
----------------------------------------- -------- -------- ------
First interim dividend for the period
ended 31 December 2017 in reference to
the period ended 30 June 2017: $0.01
per ordinary share 2,995 4,624 7,619
----------------------------------------- -------- -------- ------
Dividends declared but not yet paid
Revenue Capital Total
$000 $000 $000
Second interim dividend for the period
ended 31 December 2017 in reference to
the period ended 30 September 2017: $0.01
per ordinary share* 7,572 47 7,619
Third interim dividend for the period
ended 31 December 2017 in reference to
the period ended 31 December 2017: $0.01
per ordinary share 9,143 - 9,143
Special dividend for the period ended
31 December 2017 in reference to the
period ended 31 December 2017: $0.011
per ordinary share 10,136 - 10,136
-------------------------------------------- --------- -------- ---------
26,851 47 26,898
-------------------------------------------- --------- -------- ---------
Set out below are the interim dividends paid or proposed on ordinary shares in respect of the financial period, which is the basis on which the requirements of Section 1159 of the Corporation Tax Act 2010 are considered.
Revenue Capital Total
$000 $000 $000
--------------------------------------------- -------- -------- --------
First interim dividend for the period
ended 31 December 2017 in reference to
the period ended 31 December 2017: $0.01
per ordinary share 2,995 4,624 7,619
Second interim dividend for the period
ended 31 December 2017 in reference to
the period ended 31 December 2017: $0.01
per ordinary share* 7,572 47 7,619
Third interim dividend for the period
ended 31 December 2017: $0.01 per ordinary
share 9,143 - 9,143
--------------------------------------------- -------- -------- --------
Special dividend for the period ended
31 December 2017: $0.011 per ordinary
share 10,136 - 10,136
--------------------------------------------- -------- -------- --------
29,846 4,671 34,517
--------------------------------------------- -------- -------- --------
* This dividend is not included in the financial statements and was paid on 31 January 2018.
7. INVESTMENTS AT FAIR VALUE THROUGH PROFIT AND LOSS
Period ended
31 December 2017
$000
--------------------------------------------- -----------------
Investment portfolio summary
Unlisted investments at fair value through
profit and loss 123,479
Unlisted fixed interest investment at fair
value through profit and loss 224,151
Unlisted floating interest investments
at fair value through profit and loss 222,000
--------------------------------------------- -----------------
Closing fair value at the end of the period 569,630
--------------------------------------------- -----------------
Period ended 31 December 2017
----------------------------------------------------------------------------
Unlisted fixed Unlisted floating Listed fixed
Unlisted interest interest interest
investments investments investments investments Total
$000 $000 $000 $000 $000
---------------------------------------- ------------ --------------- ------------------ ------------- ----------
Investment portfolio summary
Opening cost at beginning of period - - - - -
Opening unrealised
appreciation/(depreciation)
at beginning of period - - - - -
Opening fair value at beginning of - - - - -
period
Movements in the period:
Purchases at cost 153,482 309,630 222,000 17,112 702,224
Redemption proceeds (29,995) (85,479) - - (115,474)
Sales - proceeds - - - (19,385) (19,385)
- realised gains on sales - - - 2,273 2,273
Unrealised appreciation/(depreciation) (8) - - - (8)
---------------------------------------- ------------ --------------- ------------------ ------------- ----------
Closing fair value at the end of
the period 123,479 224,151 222,000 - 569,630
---------------------------------------- ------------ --------------- ------------------ ------------- ----------
Closing cost at end of period 123,487 224,151 222,000 - 569,638
Closing unrealised
appreciation/(depreciation)
at end of period (8) - - - (8)
---------------------------------------- ------------ --------------- ------------------ ------------- ----------
Closing fair value at the end of
the period 123,479 224,151 222,000 - 569,630
---------------------------------------- ------------ --------------- ------------------ ------------- ----------
Analysis of investment gains/(losses)
Period ended
31 December 2017
$000
---------------------------------------------------- -----------------
Realised gains on sale of investments 2,273
Unrealised movement in appreciation/(depreciation) (8)
2,265
---------------------------------------------------- -----------------
Transaction costs, (incurred at the point of the transaction) incidental to the acquisition of investments totalled $303,000 and the disposals of investments totalled $Nil for the period. In addition, legal fees incidental to the acquisition of investments totalled $471,000 as disclosed in Note 4, have been taken to the capital column in the Statement of Comprehensive Income since they are capital in nature.
The Company is required to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy consists of the following three levels:
-- Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.
-- Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices).
-- Level 3 - Inputs for the asset or liability that are not based on observable market data (unobservable inputs).
The level of the fair value hierarchy, within which the fair value measurement is categorised, is determined on the basis of the lowest level input that is significant to the fair value of the investment.
The following table analyses the Company's investments and liquidity/money market funds at 31 December 2017:
Total Level Level Level
1 2 3
$000 $000 $000 $000
-------------------------------- -------- -------- ------- --------
Investment portfolio summary
Unlisted investments at fair
value through profit and loss 123,479 - - 123,479
Unlisted fixed interest at
fair value through profit
and loss 224,151 - 99,651 124,500
Unlisted floating interest
investments at fair value
through profit and loss 222,000 - - 222,000
-------------------------------- -------- -------- ------- --------
569,630 - 99,651 469,979
Liquidity/money market funds 346,767 346,767 - -
-------------------------------- -------- -------- ------- --------
Total 916,397 346,767 99,651 469,979
-------------------------------- -------- -------- ------- --------
A reconciliation of fair value measurements in Level 3 is set out below.
Level 3 financial assets at fair value through profit or loss
Unlisted Unlisted floating
fixed
Unlisted interest interest
investments investments investments Total
31 December 2017 $000 $000 $000 $000
------------------------------ ------------ ------------ ------------------ ---------
Opening balance - - - -
Purchases 153,482 124,500 222,000 499,982
Redemptions* (29,995) - - (29,995)
Change in unrealised
appreciation/(depreciation) (8) - - (8)
------------------------------ ------------ ------------ ------------------ ---------
Closing balance at 31
December 2017 123,479 124,500 222,000 469,979
------------------------------ ------------ ------------ ------------------ ---------
* Redemptions are the proceeds received from the repayment of investments.
There were no transfers between levels during the period.
Valuation techniques
Unrealised gains and losses recorded on Level 2 and 3 financial instruments are reported in unrealised gain/(loss) on investments on the Statement of Compressive Income. At the time the investments are made, the Investment Manager calculates an expected rate of return based on the purchase price and the cash flows as projected at that time. The projected cash flows are calculated at the time of the investment by estimating future product sales and applying the corresponding royalty rate for capped royalty investments. Estimates of future product sales are generated through models driven by several factors that include the potential size of the market (disease incidence and prevalence), the product's market share over time and the price of the product.
During the periods following the initial investment of assets classified as Level 3 investments, the Investment Manager reviews and, if appropriate, revises the assumptions in the sales models and calculates the net present value of the remaining cash flows using the expected rate of return. Inputs reflect management's best estimate of what market participants would use in pricing the assets or liabilities at the measurement date. Consideration is given to the risk inherent in the valuation techniques and the risk inherent in the inputs of the model. All investments are valued at fair value using a discounted cash flow methodology. For capped royalty investments, discount rates are applied to the consensus forecasts for sales of the underlying products to determine fair value.
The RPS Note, which is a Level 2 investment, is valued using the stated 12 per cent interest rate and Wall Street analyst consensus forecasts for products underlying the Note.
The Company's unlisted investments, with the exception of the RPS Note, are all classified as Level 3 investments. The fair values of the unlisted investments have been determined principally by reference to discounted cash flows. The significant unobservable input used is detailed below:
Fair value
at level
3 financial Fair value
assets sensitivity Fair value
at fair to a 100bps sensitivity
value increase to a 100bps
through in the decrease
profit discount in the
or loss Valuation Unobservable rate discount
Assets $000 technique input Range $000 $000
-------------------------- -------------- ------------- --------------- ---------- -------------- --------------
Limited partnership
interest in
BioPharma Discounted Discount 9.3%
III 123,479 cash flow rate - 12.1% 653 (3,126)
Lexicon
Pharmaceuticals, Discounted Discount
Inc. 124,500 cash flow rate 10.0% 4,500 (4,500)
Discounted Discount
Tesaro, Inc. 222,000 cash flow rate 10.4% 7,000 (8,000)
-------------------------- -------------- ------------- --------------- ---------- -------------- --------------
8. TRADE AND OTHER RECEIVABLES
31 December 2017
$000
---------------------------------------------- -----------------
Unlisted fixed interest income receivable 2,863
Unlisted floating interest income receivable 1,468
Interest accrued on liquidity/money market
funds 390
Other debtors 317
---------------------------------------------- -----------------
5,038
---------------------------------------------- -----------------
9. CASH AND CASH EQUIVALENTS
31 December 2017
$000
------------------------------ -----------------
Cash at bank 4,055
Liquidity/money market funds 346,767
------------------------------ -----------------
350,822
------------------------------ -----------------
10. TRADE AND OTHER PAYABLES
31 December 2017
$000
------------------------- -----------------
Management fees accrual 2,004
Share issue costs 326
Accruals 586
2,916
------------------------- -----------------
11. RETURN PER ORDINARY SHARE
Revenue return per ordinary share is based on the net revenue after taxation of $29,846,000 and 766,976,882 ordinary shares, being the weighted average number of ordinary shares for the period.
Capital return per ordinary share is based on net capital gains for the period of $1,845,000 and on 766,976,882 ordinary shares, being the weighted average number of ordinary shares for the period.
Basic and diluted return per share are the same as there are no arrangements in place which could have a dilutive effect on the Company's ordinary shares.
The Company's weighted average number of ordinary shares for the period has been calculated from 27 March 2017, being the date the initial shares were listed for trading.
12. NET ASSET VALUE PER ORDINARY SHARE
The basic total net assets per ordinary share is based on the net assets attributable to equity shareholders at 31 December 2017 of $922,574,000 and ordinary shares of 914,252,831, being the number of ordinary shares in issue at 31 December 2017.
There is no dilution effect and therefore there is no difference between the diluted total net assets per ordinary share and the basic total net assets per ordinary share.
The NAV per share differs from the NAV prepared under AIC guidelines by $0.0076. This is due to the second interim dividend of $0.01, payable on 761,877,360 shares, which went ex-dividend on 14 December 2017 being included in the NAV in accordance with AIC guidelines but excluded from the financial statements until paid, in accordance with the Companies Act 2006.
13. SHARE CAPITAL
Period ended 31 December
2017
---------------------------
Number of shares $000
------------------------------------ ------------------- ------
Issued and fully paid:
Ordinary shares of $0.01:
Balance at beginning of the period 1 -
Initial share issue 526,747,199 5,268
Subsequent share issue 235,130,160 2,351
Further share issue 152,375,471 1,524
------------------------------------ ------------------- ------
Balance at end of the period 914,252,831 9,143
------------------------------------ ------------------- ------
Total voting rights at 31 December 2017 was 914,252,831.
The Company was incorporated with 1 ordinary share issued at $0.01 and 5,000,000 redeemable preference shares issued at GBP0.01.
The initial placing of 526,747,199 ordinary shares took place on 27 March 2017, with a subsequent issue of 235,130,160 ordinary shares on 30 March 2017, raising gross proceeds of $761,877,000. The Company commenced business on 27 March 2017 when the ordinary shares in issue were admitted to the Official List of TISE and to trading on the Specialist Fund Segment of the LSE.
A further issue of 152,375,471 ordinary shares made on a non pre-emptive basis, took place on 18 December 2017, raising gross proceeds of $154,113,000.
Following approval of the Court on 29 June 2017 and the filing of the court order with the Registrar of Companies on 30 June 2017, the share premium account cancellation was effective. The share premium account of $739,021,000 at 29 June 2017 was transferred to a special distributable reserve. The issue costs of $15,237,000 relating to the initial and subsequent listings were offset against the share premium account. At 31 December 2017, the special distributable reserve was $734,356,000 after costs of $41,000 relating to the cancellation and a $4,624,000 dividend paid to shareholders.
Following approval of the Court on 29 June 2017 and the filing of the court order with the Registrar of Companies on 30 June 2017, 5,000,000 redeemable preference shares with an aggregate nominal value of GBP50,000 were cancelled. At 31 December 2017, the Company held no redeemable preference shares.
14. SUBSIDIARY
The Company formed a wholly-owned subsidiary, BPCR Ongdapa Limited ("BPCR Ongdapa"), incorporated in Ireland on 5 October 2017 for the purpose of entering into a purchase, sale and assignment agreement with a wholly-owned subsidiary of Royalty Pharma for the purchase of a 50 per cent interest in a stream of payments acquired by Royalty Pharma from Bristol-Myers Squibb. BPCR Ongdapa has had no activity since inception other than entering into the above referenced agreement. In accordance with IFRS 10, the Company is exempted from consolidating a controlled investee as it is an investment trust. Therefore, the Company's investment in BPCR Ongdapa, when funded, will be recognised at fair value through profit and loss.
15. RECONCILIATION OF TOTAL RETURN FOR THE PERIOD BEFORE TAXATION TO CASH GENERATED FROM OPERATIONS
Period ended
31 December 2017
Revenue
$000
--------------------------------------------- -----------------
Total return for the period before taxation 31,691
Capital gains (2,316)
Increase in trade receivables (5,038)
Increase in trade payables* 2,590
Effective yield adjustment* (14)
--------------------------------------------- -----------------
Cash generated from operations 26,913
--------------------------------------------- -----------------
* The increase differs from trade and other payables due to $326,000 of share issue costs forming part of financing activities.
Analysis of net cash and net debt
At 24 October Exchange At 31 December
2016 Cash flow movement 2017
Net cash $000 $000 $000 $000
--------------------------- -------------- ---------- --------- ---------------
Cash and cash equivalents - 350,771 51 350,822
--------------------------- -------------- ---------- --------- ---------------
16. FINANCIAL INSTRUMENTS
The Company's financial instruments include its investment portfolio, cash balances, trade receivables and trade payables that arise directly from its operations. Adherence to the Company's investment policy is key in managing risk. Refer to the Strategic Overview above for a full description of the Company's investment objective and policy.
The Investment Manager monitors the financial risks affecting the Company on an ongoing basis and the Directors regularly receive financial information, which is used to identify and monitor risk. All risks are actively reviewed and monitored by the Board. Details of the Company's principal risks can be found in the Strategic Report above.
The main risks arising from the Company's financial instruments are:
i) market risk, including market price risk, currency risk and interest rate risk;
ii) liquidity risk; and
iii) credit risk.
(i) Market risk
Market risk is the risk of loss arising from movements in observable market variables. The fair value of future cash flows of a financial instrument held by the Company may fluctuate because of changes in market prices. The Investment Manager assesses the exposure to market risk when making each investment decision and these risks are monitored by the Investment Manager on a regular basis and the Board at quarterly meetings with the Investment Manager.
Market price risk
The Company is exposed to price risk arising from its investments whose future prices are uncertain. The Company's exposure to market price risk comprises movements in the value of the Company's investments. See Note 7 above for investments that fall into Level 3 of the fair value hierarchy and refer to the description of valuation policies in Note 2(d). The nature of the Company's investments, with a high proportion of the portfolio invested in unlisted debt instruments, means that the investments are valued by the Company after consideration of the most recent available information from the underlying investments. The Company's portfolio is diversified among counterparties and by the sectors in which the underlying companies operate, minimising the impact of any negative industry-specific trends.
A 10 per cent increase in the market value of the limited partnership interest in BioPharma III would have increased net assets by $12.3 million. A 10 per cent increase in the market value of the RPS Note would have increased net assets by $10.0 million. A 10 per cent increase in the market value of the Lexicon Note would have increased net assets by $12.5 million. A 10 per cent increase in the market value of the Tesaro Note would have increased net assets by $22.2 million. An equal change in the opposite direction would have decreased the net assets by an equal and opposite amount. The analysis is based on closing balances only and is not representative of the period as a whole.
The Board manages the risks inherent in the investment portfolio by ensuring full and timely reporting of relevant information from the Investment Manager. Investment performance and exposure are reviewed at each Board meeting.
Currency Risk
Currency risk is the risk that fair values of future cash flows of a financial instrument fluctuate because of changes in foreign exchange rates.
At 31 December 2017, the Company held cash balances in GBP Sterling of GBP276,000 ($374,000).
The currency exposures (including non-financial assets) of the Company as at 31 December 2017 are set out below:
Other net
assets/
Cash Investments (liabilities) Total
$000 $000 $000 $000
----------- -------- ------------ -------------- --------
Sterling 374 - (823) (449)
US dollar 350,448 569,630 2,945 923,023
----------- -------- ------------ -------------- --------
350,822 569,630 2,122 922,574
----------- -------- ------------ -------------- --------
A 10 per cent increase in the Sterling exchange rate would have increased net assets by $45,000. A 10 per cent decrease would have decreased net assets by the same amount.
Interest rate risk
Interest rate risk is the risk that fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Interest rate movements may potentially affect future cash flows from:
-- investments in fixed interest rate securities and unquoted loans; and
-- the level of income receivable on cash deposits and liquidity funds.
The RPS Note and the Lexicon Loan have a fixed interest rate and therefore are not subject to interest rate risk. At 31 December 2017, the RPS Note and the Lexicon Loan represented 10.80 per cent and 13.49 per cent of the Company's net assets, respectively.
The Tranche A loan of Tesaro and cash and cash equivalents, including investments in liquidity funds, have a floating rate of interest. At 31 December 2017, these represented 24.06 per cent and 38.03 per cent of the Company's net assets, respectively.
A 100 basis point increase or decrease in interest rates associated with the limited partnership interest in BioPharma III would not have materially impacted net income for the period ended 31 December 2017.
(ii) Liquidity risk
This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. At 31 December 2017, the Company had cash and cash equivalents, including investments in liquidity/money market funds with balances of $350,822,000 and maximum unfunded commitments of $329,500,000-$349,500,000.
The Company maintains sufficient liquid investments through its cash and cash equivalents to pay accounts payable, accrued expenses and ongoing expenses of the Company. Liquidity risk is manageable through a number of options, including the Company's ability to issue debt and/or equity and by selling all or a portion of an investment in the secondary market.
(iii) Credit risk
This is the risk the Company's trade and other receivables will not meet their obligations to the Company. While the Company will often seek to be a secured lender for each debt asset, there is no guarantee that the relevant borrower will repay the loan or that the collateral will be sufficient to satisfy the amount owed. All of the Company's investments are senior secured investments as detailed in the Portfolio Information above.
When the Investment Manager makes an investment, the creditworthiness of the counterparty is taken into account so as to minimise the risk to the Company of default. Creditworthiness is assessed on an ongoing basis and changes to counterparty's risk profile are monitored by the Investment Manager on a regular basis, and discussed with the Board at quarterly meetings.
The Company's maximum exposure to credit risk at any given time is the fair value of its investment portfolio. At 31 December 2017, the Company's maximum exposure to credit risk was $569,630,000. The Company's concentration of credit risk by counterparty can be found in the Portfolio Information above.
Capital Management
The Company's primary objectives in relation to the management of capital are:
-- to ensure its ability to continue as a going concern;
-- to ensure that the Company conducts its affairs to enable it to continue to meet the criteria to qualify as an investment trust; and
-- to maximise the long-term shareholder returns in the form of sustainable income distributions through an appropriate balance of equity capital and debt.
The Company is subject to externally imposed capital requirements:
-- as a public company, the Company has a minimum share capital of GBP50,000;
The Company has complied with all the above requirements during this financial period.
17. RELATED PARTY TRANSACTIONS
The amounts incurred in respect of management fees during the period to 31 December 2017 was $5,830,000, of which $2,004,000 was outstanding at 31 December 2017. The amount due to the Investment Manager for performance fees at 31 December 2017 was $Nil.
The amount incurred in respect of Directors' fees during the period to 31 December 2017 was $413,000 ($163,000 of this figure has been included within share issue costs) of which $Nil was outstanding at 31 December 2017.
The Shared Services Agreement was entered into by and between Royalty Pharma, an affiliate of Pharmakon Advisors, L.P., and the Investment Manager on 30 November 2016 and deemed effective as of 1 January 2016. Under the terms of the Shared Services Agreement, the Investment Manager will have access to the expertise of certain Royalty Pharma employees, including its research, legal and compliance, and finance teams.
On 8 December 2017, the Company's wholly owned subsidiary entered into a purchase, sale and assignment agreement with RPI Acquisitions (Ireland) ("RPI Acquisitions"), an affiliate of Royalty Pharma, for the purchase of a 50 per cent interest in a stream of payments acquired by RPI Acquisitions from Bristol-Myers Squibb through a purchase agreement dated 14 November 2017. The Purchased Payments are linked to tiered worldwide sales of Onglyza and Farxiga, diabetes agents marketed by AstraZeneca, and related products. The Company is expected to fund $140,000,000 to $160,000,000 during 2018 and 2020, determined by product sales and will receive payments from 2020 through 2025. Based on current sell-side analyst estimates for the products, the Investment Manager estimates that the rate of return on the transaction will be in the high single-digits per annum. The first advance to RPI Acquisitions is expected to be made in May 2018.
On 4 December 2017, the Company and BioPharma Credit Investments IV, S.àr.L. ("BioPharma IV"), a fund managed by the Investment Manager, entered into a definitive term loan agreement for up to $200,000,000 with Lexicon Pharmaceuticals, Inc. (NASDAQ: LXRX), a fully integrated biopharmaceutical company ("Lexicon"). The loan is secured by substantially all of Lexicon's assets, including its rights to XERMELO and Sotagliflozin. The $200,000,000 loan will be available in two tranches, each maturing in December 2022 and bearing interest at 9.0 per cent per annum. The first $150,000,000 is available immediately and an additional tranche of $50,000,000 is available for draw by March 2019 at Lexicon's option if net XERMELO sales are greater than $25,000,000 in the preceding quarter. Under the terms of the transaction, the Company will invest up to $166,000,000 ($124,500,000 in the first tranche and up to an additional $41,500,000 by 30 March 2019) and BioPharma IV will invest up to $34,000,000 in parallel with the Company acting as collateral agent. The Company funded the first tranche on 18 December 2017 and recorded accrued interest of $405,000 for the period ended 31 December 2017. The outstanding balance as at 31 December 2017 was $124,500,000.
On 21 November 2017, the Company and BioPharma IV entered into a definitive loan agreement for up to $500,000,000 with Tesaro, Inc. (NASDAQ: TSRO), an oncology focused biopharmaceutical company ("Tesaro"). Under the terms of the transaction, the Company will invest up to $370,000,000 ($222,000,000 in the first tranche and up to an additional $148,000,000 by 20 December 2018) and BioPharma IV will invest up to $130,000,000 in parallel with the Company acting as collateral agent. The loan has a term of seven periods and is secured by Tesaro's US rights to ZEJULA and VARUBI. The first $300,000,000 tranche bears interest at LIBOR plus 8 per cent, with the second optional tranche bearing interest at LIBOR plus 7.5 per cent. The LIBOR rate is subject to a floor of 1 per cent and certain caps. Each tranche of the loan is interest-only for the first two periods, amortises over the remaining term, and can be prepaid at Tesaro's discretion, at any time, subject to prepayment fees. The Company funded the first tranche on 6 December 2017 and the Company recorded accrued interest of $1,468,000 for the period ended 31 December 2017. The outstanding balance as at 31 December 2017 was $222,000,000.
During the period, the Company entered into the RPS Note with RPS BioPharma Investments, L.P. on 30 March 2017 for $185,130,000. The Note bears a fixed interest rate of 12 per cent, matures on 30 June 2026 and is secured by rights to royalty payments from 21 pharmaceutical products. In the period, the Company recorded $11,758,000 of interest and amortisation payments of $85,479,000. The outstanding balance as at 31 December 2017 was $123,479,000.
On 27 March 2017, the Company acquired a limited partnership interest in BioPharma Secured Investments III Holdings Cayman L.P. ("BioPharma III") for $153,482,000. During the period, the Company recorded $11,758,000 of investment income and repayments of $29,995,000. The Company also recorded net loss on investments at fair value of $(8,000). The outstanding balance as at 31 December 2017 was $123,479,000.
BioPharma III, BioPharma IV, RPS BioPharma Investments, L.P., and RPI Acquisitions are related entities of the Company due to a principal of the Investment Manager having significant influence over each of these entities.
18. CONTINGENCIES, GUARANTEES AND FINANCIAL COMMITMENTS
At 31 December 2017, there were outstanding commitments of $329.5 million - 349.5 million in respect of investments (see Note 17 for further details).
19. SUBSEQUENT EVENTS
On 8 February 2018, the Company entered into a definitive term senior secured loan agreement for $150 million with NovoCure Limited (NASDAQ: NVCR), a commercial stage oncology company with a current market capitalisation of approximately $1.9 billion ("Novocure"). The $150 million loan will mature in February 2023 and bears interest at 9.0 per cent per annum. Novocure will use $100 million of the net proceeds to entirely prepay the $100 million 10.0 per cent coupon loan made by BioPharma III in 2015 that was scheduled to mature in 2020. As a limited partner in BioPharma III, the Company will receive a distribution of approximately $46 million from BioPharma III as a result of the prepayment from Novocure.
CORPORATE INFORMATION
Directors
Jeremy Sillem (Chairman)
Colin Bond
Duncan Budge
Harry Hyman
Investment Manager and AIFM
Pharmakon Advisors L.P.
110 East 59th Street #3300
New York, NY 10022
USA
Administrator
Link Alternative Fund Administrators Limited
Beaufort House
51 New North Road
Exeter
EX4 4EP
Company Secretary and registered office
Link Company Matters Limited
Beaufort House
51 New North Road
Exeter
EX4 4EP
Financial and strategic communications
Buchanan Communications Limited
107 Cheapside
London
EC2V 6DN
Independent Auditor
PricewaterhouseCoopers L.L.P.
7 More London Riverside
London
SE1 2RT
Joint brokers
J.P. Morgan Cazenove
25 Bank Street
London
E14 5JP
Goldman Sachs International
Peterborough Court
133 Fleet Street
London
EC4A 2BB
Legal adviser
Herbert Smith Freehills LLP
Exchange House
Primrose Street
London
EC2A 2EG
Registrar
Link Market Services Limited
The Registry
34 Beckenham Road
Beckenham
Kent
BR3 4TU
TISE sponsor
Carey Commercial Limited
1st and 2nd Floors
Elizabeth House
Les Ruettes Brayes
St Peter Port
Guernsey
GY1 1EW
National Storage Mechanism
A copy of the full Annual Report and Financial Statements will shortly be submitted to the National Storage Mechanism ("NSM") and will be available for inspection at the NSM, which is situated at:
www.morningstar.co.uk/uk/NSM
END
Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on this announcement (or any other website) is incorporated into, or forms part of, this announcement.
LEI: 213800AV55PYXAS7SY24
This information is provided by RNS
The company news service from the London Stock Exchange
END
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