0001104659-22-125153.txt : 20221207 0001104659-22-125153.hdr.sgml : 20221207 20221207151334 ACCESSION NUMBER: 0001104659-22-125153 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20220930 FILED AS OF DATE: 20221207 DATE AS OF CHANGE: 20221207 EFFECTIVENESS DATE: 20221207 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEKLA HEALTHCARE INVESTORS CENTRAL INDEX KEY: 0000805267 IRS NUMBER: 046564285 STATE OF INCORPORATION: MA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-04889 FILM NUMBER: 221450072 BUSINESS ADDRESS: STREET 1: 100 FEDERAL STREET STREET 2: 19TH FLOOR CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6177728515 MAIL ADDRESS: STREET 1: 100 FEDERAL STREET STREET 2: 19TH FLOOR CITY: BOSTON STATE: MA ZIP: 02110 FORMER COMPANY: FORMER CONFORMED NAME: H&Q HEALTHCARE INVESTORS DATE OF NAME CHANGE: 19920703 N-CSR 1 tm2225212d1_ncsr.htm N-CSR

 

 

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  SECURITIES AND EXCHANGE COMMISSION  
  Washington, D.C. 20549  

 

FORM N-CSR

 

CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES

 

Investment Company Act file number 811-04889

 

Tekla Healthcare Investors
(Exact name of registrant as specified in charter)

 

100 Federal Street, 19th Floor, Boston, MA   02110
(Address of principal executive offices)   (Zip code)

 

Laura Woodward, Chief Compliance Officer and Vice President of Fund Administration
100 Federal Street, 19th Floor, Boston, MA 02110
(Name and address of agent for service)

 

Registrant’s telephone number, including area code: 617-772-8500

 

Date of fiscal year end: September 30

 

Date of reporting period: October 1, 2021 to September 30, 2022

 

 

 

 

 

ITEM 1. REPORTS TO STOCKHOLDERS.

 

 

 

 

TEKLA HEALTHCARE INVESTORS

Annual Report

  2  0  2  2


TEKLA HEALTHCARE INVESTORS

Distribution policy: The Fund has implemented a managed distribution policy (the Policy) that provides for quarterly distributions at a rate set by the Board of Trustees. Under the current Policy, the Fund intends to make quarterly distributions at a rate of 2% of the Fund's net assets to shareholders of record. The Policy would result in a return of capital to shareholders, if the amount of the distribution exceeds the Fund's net investment income and realized capital gains. A return of capital may occur, for example, when some or all of the money that you invested in the Fund is paid back to you. A return of capital distribution does not necessarily reflect the Fund's investment performance and should not be confused with "yield" or "income."

The amounts and sources of distributions reported in the Fund's notices pursuant to Section 19(a) of the Investment Company Act of 1940 are only estimates and are not being provided for tax reporting purposes. The actual amounts and sources of the amounts for tax reporting purposes will depend upon the Fund's investment experience during its fiscal year and may be subject to changes based on tax regulations. The Fund will send you a Form 1099-DIV for the calendar year that tells you how to report distributions for federal income tax purposes.

You should not draw any conclusions about the Fund's investment performance from the amount of distributions pursuant to the Policy or from the terms of the Policy. The Policy has been established by the Trustees and may be changed or terminated by them without shareholder approval. The Trustees regularly review the Policy and the frequency and rate of distributions considering the purpose and effect of the Policy, the financial market environment, and the Fund's income, capital gains and capital available to pay distributions. The suspension or termination of the Policy could have the effect of creating a trading discount or widening an existing trading discount. At this time there are no reasonably foreseeable circumstances that might cause the Trustees to terminate the Policy.

Consider these risks before investing: As with any investment company that invests in equity securities, the Fund is subject to market risk—the possibility that the prices of equity securities will decline over short or extended periods of time. As a result, the value of an investment in the Fund's shares will fluctuate with the market generally and market sectors in particular. You could lose money over short or long periods of time. Political and economic news can influence marketwide trends and can cause disruptions in the U.S. or world financial markets. Other factors may be ignored by the market as a whole but may cause movements in the price of one company's stock or the stock of companies in one or more industries. All of these factors may have a greater impact on initial public offerings and emerging company shares. Different types of equity securities tend to shift into and out of favor with investors, depending on market and economic conditions. The performance of funds that invest in equity securities of healthcare companies may at times be better or worse than the performance of funds that focus on other types of securities or that have a broader investment style.


TEKLA HEALTHCARE INVESTORS

Dear Shareholders,

We are in an unusual economic moment during which stock market performance is being driven in large part by macroeconomics. On the one hand we have low unemployment while, on the other hand, we are seeing multi-decade high inflation and appear to be moving toward a low growth economy. This situation has put the U.S. Federal Reserve, which has a dual mandate to pursue maximum employment and price stability, in a position where it believes that it must aggressively increase rates and otherwise engage in quantitative tightening to hopefully quell inflation. Typically, times of increasing interest rates are associated with reduced spending, investment and, frequently, stock market retracement while times of low unemployment are traditionally associated with increased spending, investment and, frequently, stock market advancement. We believe this dichotomous situation has led to volatility and recently to a downward trajectory in the stock market.

Given these dynamics, we would argue that it would be beneficial to invest in a sector that can perform well in both defensive (e.g. rising interest rate) environments and in growth centric (i.e., decreasing interest rate and high employment) environments. Healthcare can be such a sector. It is large, containing almost 1,500 individual public companies in the U.S. alone and, we estimate, a similar number of private U.S. companies. On a global basis, Bloomberg reports there are more than 4,000 global public healthcare companies. As such there are always individual names that, based on fundamentals, are poised to perform well (or poorly). The sector is also diverse and is comprised of multiple subsectors, some of which can perform well in defensive markets and others that can perform well in permissive markets.

As noted, healthcare is large, and it is also growing. According to the U.S. Centers for Medicare and Medicaid Services (CMS), national health expenditure reached $4.1 trillion in 2020. This accounts for spending of $12,350 per person and accounted for 19.7% of U.S. Gross Domestic Product (GDP). According to CMS, such spending is expected to grow by 5.4% per year, 1.1% faster than overall GDP, and reach $6.2 trillion by 2028.

Sector diversity is also impressive. We break down the sector into individual subsectors such as pharmaceuticals, biotechnology, medical devices, life science tools, managed care, healthcare facilities, healthcare services, healthcare supplies, healthcare distributors, healthcare REITs and healthcare technology. In our experience, almost all economic environments provide an opportunity for the right companies in one or


1


more sectors to thrive. The following are several examples of the kinds of relationships we often see, though many other fundamental and market factors can have an impact on our analysis, investment decisions and portfolio construction.

Pharmaceuticals These companies tend to be large, well-managed, well-capitalized, multi-product companies that pay attractive dividends. In our experience, such entities tend to be defensive and perform best, on a relative basis, in flat, down or risk-off markets typified by rising rates or slowing growth.

Biotechnology Large biotech companies tend to perform similarly to pharmaceuticals though they can be a bit more volatile and may pay lower dividends. In our experience, during bull markets, large biotech companies can outperform pharmaceuticals. By contrast, Small- and Mid-sized (SMID) "biotechs" can perform well during bull markets. Conversely, SMID biotechs can underperform in risk-off bear markets, including during periods when rates are rising.

Medical Devices In our experience, "Medtech" company performance varies, particularly in the COVID-19 era. Traditionally, these companies, which typically sell therapeutic medical implant or function-assisting products, perform well in periods of increased utilization. This can occur when the economy is growing and/or when rates are low or decreasing.

Life Science Tools In our experience, this group often does well when global growth is thought to be accelerating. In recent years, performance of the group has been impacted by perceptions of Chinese growth rates.

Managed Care and Healthcare Facilities Performance of these groups is often inversely linked, in our experience. In general, healthcare facilities (e.g., hospitals) which perform medical procedures perform well when medical procedure growth is positive. Procedure growth tends to be positive when rates are declining and employment is high and/or growing. Managed care (e.g., HMOs), which pay for such procedures, do less well during such times.

Healthcare Distributors In our experience, this group typically exhibits strong free cash flow growth and is often thought of as being a defensive investment option. In recent years, the distributor group has benefitted from the advent and growth of biosimilar drugs, which it typically distributes.

Healthcare REITs This group borrows liberally to fund capital acquisition and, as such, is highly interest rate dependent. Healthcare REITs tend to perform well in decreasing or low-rate environments.


2


Healthcare Technology Healthcare Technology companies have traditionally focused on system sales to hospitals and other providers. In recent years, the group has diversified into providing more broad value-based core services. In our experience, the group can perform well in periods of high growth.

References: www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NHE-Fact-Sheet

Be well,

 

Daniel R. Omstead
President and Portfolio Manager


3


Fund Essentials

Objective of the Fund

The Fund's investment objective is to seek long-term capital appreciation by investing primarily in securities of healthcare companies. In addition, the Fund seeks to provide regular distribution of realized capital gains.

Description of the Fund

Tekla Healthcare Investors ("HQH") is a non-diversified closed-end healthcare fund traded on the New York Stock Exchange under the ticker HQH. HQH primarily invests in healthcare industries and will emphasize both large established companies and smaller, emerging companies with a maximum of 40% of the Fund's assets in restricted securities of both public and private companies.

Investment Philosophy

Tekla Capital Management LLC, the Investment Adviser to the Fund, believes that:

•  Aging demographics and adoption of new medical products and services can provide long-term tailwinds for healthcare companies

•  Late stage biotechnology product pipeline could lead to significant increases in biotechnology sales

•  Robust M&A activity in healthcare may create additional investment opportunities

Fund Overview and Characteristics as of 9/30/22

Market Price1

  $17.28  

NAV2

  $19.36  

Premium/(Discount)

  -10.74%  

Average 30 Day Volume

  98,912  

Net Assets

  $916,564,588  

Ticker

 

HQH

 

NAV Ticker

 

XHQHX

 
Commencement of
Operations Date
 

4/22/87

 
Fiscal Year to Date
Distributions
Per Share
  $1.83  

1 The closing price at which the Fund's shares were traded on the exchange.

2 Per-share dollar value of the Fund, calculated by dividing the total value of all the securities in its portfolio, plus any other assets and less liabilities, by the number of Fund shares outstanding.

Holdings of the Fund (Data is based on net assets)

Asset Allocation as of 9/30/22

Sector Diversification as of 9/30/22

This data is subject to change on a daily basis.


4


Largest Holdings by Issuer

(Excludes Short-Term Investments)

As of September 30, 2022

Issuer – Sector   % of Net
Assets
 
Amgen, Inc. – Biotechnology    

7.0

%

 
Gilead Sciences, Inc. – Biotechnology    

5.8

%

 
Vertex Pharmaceuticals, Inc. – Biotechnology    

5.1

%

 
Regeneron Pharmaceuticals, Inc. – Biotechnology    

4.9

%

 
Illumina, Inc. – Life Sciences Tools & Services    

3.0

%

 
AstraZeneca plc – Pharmaceuticals    

3.0

%

 
Horizon Therapeutics plc – Pharmaceuticals    

2.8

%

 
UnitedHealth Group, Inc. – Health Care Providers & Services    

2.4

%

 
Bristol-Myers Squibb Co. – Pharmaceuticals    

2.3

%

 
Alnylam Pharmaceuticals, Inc. – Biotechnology    

2.0

%

 
AbbVie, Inc. – Biotechnology    

1.9

%

 
Biogen, Inc. – Biotechnology    

1.9

%

 
Moderna, Inc. – Biotechnology    

1.8

%

 
Johnson & Johnson – Pharmaceuticals    

1.7

%

 
Jazz Pharmaceuticals plc – Pharmaceuticals    

1.5

%

 
United Therapeutics Corp. – Biotechnology    

1.5

%

 
Neurocrine Biosciences, Inc. – Biotechnology    

1.4

%

 
Apellis Pharmaceuticals, Inc. – Biotechnology    

1.4

%

 
argenx SE – Biotechnology    

1.4

%

 
Eli Lilly & Co. – Pharmaceuticals    

1.3

%

 

Fund Performance

HQH is a closed-end fund which invests predominantly in healthcare companies. Subject to regular consideration, the Trustees of HQH have instituted a policy of making quarterly distributions to shareholders. The Fund seeks to make such distributions in the form of long-term capital gains.

The Fund considers investments in companies of all sizes and in all healthcare subsectors, including but not limited to, biotechnology, pharmaceuticals, healthcare equipment, healthcare supplies, life science tools and services, healthcare distributors, managed healthcare, healthcare technology, and healthcare facilities. The Fund emphasizes innovation, investing both in public and pre-public venture companies. The Fund considers its venture investments to be a differentiating characteristic. Among the various healthcare subsectors, HQH has considered the biotechnology subsector, including both pre-public and public companies, to be a key contributor to the healthcare sector. The Fund holds biotech assets, including both public and pre-public, often representing 50-65% of net assets.


5


There is no commonly published index which matches the investment strategy of HQH. The S&P Composite 1500® Health Care Index* (S15HLTH) consists of approximately 180 companies representing most or all of the healthcare subsectors in which HQH typically invests; biotechnology often represents 15-20% of this index. By contrast, the NASDAQ Biotechnology Index®* (NBI), which contains over 350 constituents, is much more narrowly constructed. The vast majority of this index is comprised of biotechnology, pharmaceutical and life science tools companies. In recent years, biotechnology has often represented 72-82% of the NBI. Neither the S15HLTH nor NBI indices contain any material amount of pre-public company assets.

Given the circumstances, we present both NAV and stock returns for the Fund in comparison to several commonly published indices. One index, the S&P 500® Index* (SPX), is a commonly considered broad based index; this index is comprised of companies in many areas of the economy, including, but not limited to healthcare. As described above, the NBI is a healthcare index mostly focused in three healthcare sectors with a uniquely high level of biotechnology by comparison. The S15HLTH contains a wider representation of healthcare subsectors, but typically contains a much lower biotechnology composition.

HQH generally invests in a combination of large-cap growth-oriented and earlier stage innovative healthcare companies with a focus on the biotechnology sector. Generally, HQH targets biotechnology exposure below that of the NBI and a higher biotechnology exposure than that of the S15HLTH. We note that, in recent periods, biotechnology has been a significant contributor to returns (both positive and negative) associated with those indices. We believe this sector continues to have significant potential for growth in the future.

Fund Performance for the Period Ending September 30, 2022

Period

 

HQH NAV

 

HQH MKT

 

NBI

 

S15HLTH

 

SPX

 
6 month    

-7.58

     

-12.86

     

-9.14

     

-11.23

     

-20.21

   
1 year    

-16.78

     

-26.01

     

-25.24

     

-4.91

     

-15.50

   
5 year    

3.08

     

1.39

     

2.17

     

10.06

     

9.22

   
10 year    

9.25

     

8.50

     

10.29

     

13.75

     

11.69

   


6


Change in the value of a $10,000 investment

Cumulative total return from 9/30/2012 to 9/30/2022

All performance over one-year has been annualized. Performance data quoted represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown. The NAV total return takes into account the Fund's total annual expenses and does not reflect transaction charges. If transaction charges were reflected, NAV total return would be reduced. All distributions are assumed to be reinvested either in accordance with the dividend reinvestment plan (DRIP) for market price returns or NAV for NAV returns. Until the DRIP price is available from the Plan Agent, the market price returns reflect the reinvestment at the closing market price on the last business day of the month. Once the DRIP is available around mid-month, the market price returns are updated to reflect reinvestment at the DRIP price. The graph and table do not reflect the deduction of taxes a shareholder would pay on fund distributions or the sale of fund shares.

Risk Adjusted NASDAQ Biotechnology Index® computed by Tekla using Bloomberg data for the NBI and applying the fund's computed 0.90 beta to NBI performance to reflect the fund's lower historical risk.

Portfolio Management Commentary

Fund and Benchmark Performance and Other Influencing Factors

For the 12-month period ending September 30, 2022, the Fund net asset value was down 16.8% and market value down 26.0%, including reinvestment of dividends and distributions. Over the same period, the NBI was down 25.2% and the S15HLTH was down 4.9%, including reinvestment of dividends.

The largest positive contribution to Fund relative performance was company stock selection and an underweight allocation to small and midcap biotechnology stocks. Small and midcap biotechnology stocks suffered greater losses in the period than large companies and the Fund benefitted by underweighting these more volatile names. Fund stock selection was positive for smid-cap biotechnology stocks with contributions from positions in Karuna Therapeutics, Inc. (KRTX), up 84%, and Apellis Pharmaceuticals, Inc. (APLS), up 107%. An overweight allocation to healthcare distributors benefitted Fund performance, led by a position in McKesson Corp. (MCK), up 72%. A large contribution to


7


Fund performance came from a correct bet against Moderna, Inc. (MRNA) stock. Believing that the company's valuation would fall once covid vaccination sales estimates declined, the Fund hedged its Moderna stock position buying put options expiring January 2022 giving the Fund the right to sell MRNA stock at $380 and $400. At expiration Moderna stock closed at $160.07, well below the put option strike price and the Fund gained performance from this effectively underweight position.

The largest negative contribution to Fund relative performance was company stock selection and an underweight allocation to pharmaceuticals. The Fund overweight position leading to the greatest underperformance was a Fund position in Horizon Therapeutics plc (HZNP) which fell 44% in the period. In a large negative performance period for smaller biotechnology and growth stocks, large pharmaceutical companies outperformed by declining less. The Fund was underweight pharmaceuticals and this detracted from relative performance. In terms of stock selection, some the largest negative contributors to Fund performance were due to underweight positions in selected large cap companies that outperformed. Fund underweight positions in the period that contributed negatively to relative performance included AstraZeneca plc (AZN), down 7%, and Regeneron Pharmaceuticals, Inc. (REGN), up 14%.

Portfolio Highlights as of September 30, 2022

Among other investments, Tekla Healthcare Investors' performance benefitted in the past year by the following:

Moderna, Inc. (MRNA) is a vaccine company based on a new therapeutic modality, messenger RNA. The Company has multiple development programs in the clinic but is most well-known for its commercially successful vaccine candidate targeting the COVID-19 virus. At its peak in summer 2021, Moderna had a market capitalization of nearly $200 billion with roughly $20 billion in COVID-19 vaccines sales expected for 2021 and 2022. While the future path of the COVID-19 pandemic is uncertain, we decided the valuation for Moderna reflected too much optimism on the recurring nature of the booster vaccine business in the next decade. The Fund was underweight MRNA, yielding benchmark relative performance in the period as its stock price declined sharply in accordance with diminished expectations for vaccine sales.

McKesson Corp. (MCK) distributes pharmaceutical and medical-surgical supplies and also provides specialty pharmacy and biopharma services. The Company is benefiting from the renewal of its U.S. government contract to distribute COVID-19 vaccines and supplies, which helped


8


accelerate earnings growth over the past few years. Investor sentiment has also improved thanks to better visibility around the Company's opioid liability exposure. The Fund was overweight MCK, which delivered strong stock gains during the reporting period.

Rallybio Corp. (RLYB) is a clinical stage biotechnology company developing therapies for patients with severe and rare disorders. Its lead candidate, RLYB212, is a monoclonal antibody for the prevention of fetal and neonatal alloimmune thrombocytopenia, a rare condition with no currently approved therapies. RLYB completed a successful IPO in August 2021. Over the reporting period, RLYB provided positive clinical updates for lead candidate, RLYB212, as well as expanded its preclinical pipeline. The Fund benefited from being overweight RLYB during this period of outperformance.

Among other examples, Tekla Healthcare Investors' performance was negatively impacted by the following investments:

Horizon Therapeutics plc (HZNP) is a specialty pharmaceuticals company transitioning to a focused orphan disease business model centered around two key products, one for gout and the other for thyroid disease. Despite a strong early launch for the Company's thyroid disease product Tepezza, sales growth slowed during the reporting period. As a result, the Company's stock underperformed while the Fund was overweight.

AstraZeneca plc (AZN) is a large multinational pharmaceutical company with geographic sales exposure across developed and emerging markets and a strong growth profile relative to most of its large-cap peers. The Company reported strong data from several key trials over the past year, most notably with Enhertu in breast cancer, causing the stock to perform well while the Fund was underweight.

Regeneron Pharmaceuticals, Inc. (REGN) is a leading, large biotechnology company developing novel antibody-based therapies across various indications. Regeneron's leading product is Eylea, an anti-VEGF antibody, for the treatment of macular degeneration, macular edema, and diabetic retinopathy. Of note, Eylea's patents will likely expire in the next 1-2 years and face significant biosimilar competition. Because the Eylea franchise is a key driver behind Regeneron's stock performance, we believed the stock would face significant downward pressure. However, a re-formulation of Eylea in higher concentration, named "High Dose Eylea" showed unexpectedly positive results in treating patients at longer durations while the Fund was underweight. This next generation product may protect some or even the majority of the Eylea franchise from competition.


9


Distributions

The Fund intends to make quarterly distributions at a rate of 2% of the Fund's net assets. The Fund intends to use net realized capital gains when making quarterly distributions, if available, but would make return of capital distributions if the amount of the distribution exceeds the Fund's net investment income and realized capital gains. During the last fiscal year, the Fund made quarterly distributions totaling $1.8300 per share, which were characterized as $0.1143 per share of net investment income and $1.7157 per share of net realized long-term capital gains. Final determination of the tax character of the distributions paid by the Fund in 2022 will be reported to shareholders in January 2023.

Distributions of return of capital decrease the Fund's total assets and total assets per share and, therefore, could have the effect of increasing the Fund's expense ratio. In general, the policy of making quarterly distributions at a fixed rate does not affect the Fund's investment strategy. However, in order to make these distributions, the Fund might need to sell portfolio securities at a less than opportune time.

*The trademarks NASDAQ Biotechnology Index®, S&P Composite 1500® Health Care Index and S&P 500® Index referenced in this report are the property of their respective owners. These trademarks are not owned by or associated with the Fund or its service providers, including Tekla Capital Management LLC.


10


TEKLA HEALTHCARE INVESTORS

SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2022

SHARES

  CONVERTIBLE PREFERREDS
(Restricted) (a) (b) - 7.6% of Net Assets
 

VALUE

 
   

Biotechnology - 4.7%

 
 

326,667

   

Amphivena Therapeutics, Inc. Series B (c)

 

$

33

   
 

525,972

   

Amphivena Therapeutics, Inc. Series C, 6.00% (c)

   

53

   
 

82,076

   

Arbor Biotechnologies, Series B, 8.00%

   

1,359,999

   
 

2,353,932

   

Arkuda Therapeutics, Inc. Series A, 6.00% (c)

   

4,162,222

   
 

487,526

   

Arkuda Therapeutics, Inc. Series B, 6.00% (c)

   

862,043

   
 

602,572

   

Dynacure Series C (d)

   

1,715,550

   
 

2,875,000

   

Hotspot Therapeutics, Inc. Series B, 6.00%

   

9,317,587

   
 

632,394

   

Hotspot Therapeutics, Inc. Series C, 6.00%

   

2,049,526

   
 

1,020,000

   

ImmuneID, Inc. Series A, 8.00%

   

2,040,000

   
 

7,187,500

   

Invetx, Inc. Series A, 8.00% (c)

   

4,816,344

   
 

3,089,091

   

Invetx, Inc. Series B, 8.00% (c)

   

2,070,000

   
 

277,444

   

Oculis SA, Series B2, 6.00% (d)

   

2,952,004

   
 

75,367

   

Oculis SA, Series C, 6.00% (d)

   

801,905

   
 

528,339

   

Parthenon Therapeutics, Inc. Series A

   

2,092,307

   
 

346,666

   

Priothera Ltd. Series A, 6.00% (c)

   

3,397,500

   
 

1,553,631

   

Quell Therapeutics, Series B (d)

   

2,936,363

   
 

294,589

   

ReCode Therapeutics, Series B, 5.00%

   

2,719,999

   
     

43,293,435

   
   

Health Care Equipment & Supplies - 0.2%

 
 

421,634

   

IO Light Holdings, Inc. Series A2

   

1,423,015

   
     

1,423,015

   
   

Pharmaceuticals - 2.7%

 
 

616,645

   

Aristea Therapeutics, Inc. Series B, 8.00%

   

3,399,996

   
 

1,295,238

   

Biotheryx, Inc. Series E, 8.00%

   

6,800,000

   
 

17,547,740

   

Curasen Therapeutics, Inc. Series A (c)

   

8,414,141

   
 

657,322

   

Endeavor Biomedicines, Inc. Series B, 8.00%

   

3,099,996

   
 

2,773,472

   

HiberCell, Inc. Series B

   

3,399,999

   
     

25,114,132

   
        TOTAL CONVERTIBLE PREFERREDS
(Cost $78,275,680)
   

69,830,582

   
PRINCIPAL
AMOUNT
  CONVERTIBLE NOTES
(Restricted) (a) (b) (c) - 0.0% of Net Assets
 
 
   

Biotechnology - 0.0%

 

$

303,323

   

Amphivena Therapeutics, Inc., 8.00%, due 10/25/22

   

0

   
        TOTAL CONVERTIBLE NOTES
(Cost $303,323)
   

0

   

The accompanying notes are an integral part of these financial statements.
11


TEKLA HEALTHCARE INVESTORS

SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2022

(continued)

SHARES

 

COMMON STOCKS - 86.1% of Net Assets

 

VALUE

 
   

Biotechnology - 48.6%

 
 

132,179

   

AbbVie, Inc.

 

$

17,739,744

   
 

367,414

   

Affimed N.V. (b) (d)

   

756,873

   
 

173,907

   

Alkermes plc (b)

   

3,883,343

   
 

92,438

   

Alnylam Pharmaceuticals, Inc. (b)

   

18,502,390

   
 

284,326

   

Amgen, Inc.

   

64,087,080

   
 

185,538

   

Apellis Pharmaceuticals, Inc. (b)

   

12,672,245

   
 

86,869

   

Arcutis Biotherapeutics, Inc. (b)

   

1,660,067

   
 

35,465

   

argenx SE ADR (b)

   

12,520,918

   
 

87,937

   

Arrowhead Pharmaceuticals, Inc. (b)

   

2,906,318

   
 

43,409

   

Ascendis Pharma A/S ADR (b)

   

4,482,413

   
 

137,035

   

BioCryst Pharmaceuticals, Inc. (b)

   

1,726,641

   
 

66,310

   

Biogen, Inc. (b)

   

17,704,770

   
 

28,433

   

Biohaven Pharmaceutical Holding Co., Ltd. (b)

   

4,298,217

   
 

71,154

   

BioMarin Pharmaceutical, Inc. (b)

   

6,031,725

   
 

57,580

   

BioNTech SE ADR

   

7,766,390

   
 

90,404

   

Black Diamond Therapeutics, Inc. (b) (e)

   

152,783

   
 

385,660

   

Caribou Biosciences, Inc. (b)

   

4,068,713

   
 

102,322

   

Cerevel Therapeutics Holdings, Inc. (b)

   

2,891,620

   
 

51,708

   

ChemoCentryx, Inc. (b)

   

2,671,235

   
 

143,592

   

Denali Therapeutics, Inc. (b)

   

4,406,838

   
 

158,501

   

Design Therapeutics, Inc. (b)

   

2,650,137

   
 

15,186

   

Fusion Pharmaceuticals, Inc. (b) (d)

   

45,710

   
 

7,593

   

Fusion Pharmaceuticals, Inc. (Restricted) (a) (b) (d)

   

20,569

   
 

200,492

   

G1 Therapeutics, Inc. (b) (e)

   

2,504,145

   
 

296,462

   

Galera Therapeutics, Inc. (b)

   

515,844

   
 

854,746

   

Gilead Sciences, Inc.

   

52,729,281

   
 

53,885

   

I-Mab ADR (b)

   

216,079

   
 

103,664

   

Intellia Therapeutics, Inc. (b)

   

5,801,037

   
 

33,437

   

Intercept Pharmaceuticals, Inc. (b)

   

466,446

   
 

56,499

   

Ionis Pharmaceuticals, Inc. (b)

   

2,498,951

   
 

15,557

   

Karuna Therapeutics, Inc. (b)

   

3,499,236

   
 

1,063,799

   

Mereo Biopharma Group plc ADR (b) (e)

   

916,037

   
 

138,636

   

Moderna, Inc. (b)

   

16,393,707

   
 

205,800

   

MoonLake Immunotherapeutics AG Class A (b)

   

1,638,168

   
 

125,116

   

Neurocrine Biosciences, Inc. (b)

   

13,288,570

   
 

2,970

   

NexGel, Inc. (b)

   

4,485

   
 

37,188

   

Novavax, Inc. (b)

   

676,822

   
 

51,406

   

Praxis Precision Medicines, Inc. (b)

   

116,692

   
 

154,807

   

Precision BioSciences, Inc. (b)

   

201,249

   
 

481,646

   

Pyxis Oncology, Inc. (b)

   

948,843

   
 

761,137

   

Rallybio Corp. (b) (e)

   

11,013,652

   
 

65,792

   

Regeneron Pharmaceuticals, Inc. (b)

   

45,322,135

   

The accompanying notes are an integral part of these financial statements.
12


TEKLA HEALTHCARE INVESTORS

SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2022

(continued)

SHARES

 

Biotechnology - continued

 

VALUE

 
 

88,712

   

Sarepta Therapeutics, Inc. (b)

 

$

9,806,225

   
 

68,117

   

Scholar Rock Holding Corp. (b) (e)

   

472,051

   
 

17,298

   

Seagen, Inc. (b)

   

2,366,885

   
 

115,649

   

Sutro Biopharma, Inc. (b)

   

641,852

   
 

142,714

   

Travere Therapeutics, Inc. (b)

   

3,516,473

   
 

138,057

   

TScan Therapeutics, Inc. (b)

   

421,074

   
 

44,502

   

Ultragenyx Pharmaceutical, Inc. (b)

   

1,842,828

   
 

357,080

   

uniQure N.V. (b) (d)

   

6,698,821

   
 

65,672

   

United Therapeutics Corp. (b)

   

13,750,403

   
 

567,550

   

Vectivbio Holding AG (b)

   

3,405,300

   
 

160,545

   

Vertex Pharmaceuticals, Inc. (b)

   

46,484,199

   
 

101,994

   

Xencor, Inc. (b)

   

2,649,804

   
 

27,684

   

Zai Lab Ltd. ADR (b)

   

946,793

   
     

445,400,826

   
   

Health Care Equipment & Supplies - 6.8%

 
 

114,588

   

Abbott Laboratories

   

11,087,535

   
 

174,859

   

Cardiovascular Systems, Inc. (b)

   

2,423,546

   
 

160,000

   

Cercacor Laboratories, Inc. (Restricted) (a)

   

618,886

   
 

39,619

   

DexCom, Inc. (b)

   

3,190,914

   
 

43,827

   

Edwards Lifesciences Corp. (b)

   

3,621,425

   
 

173,673

   

Guardant Health, Inc. (b)

   

9,348,817

   
 

15,551

   

IDEXX Laboratories, Inc. (b)

   

5,066,516

   
 

105,283

   

Lantheus Holdings, Inc. (b)

   

7,404,553

   
 

29,380

   

Medtronic plc

   

2,372,435

   
 

42,065

   

Stryker Corp.

   

8,519,845

   
 

80,863

   

Zimmer Biomet Holdings, Inc.

   

8,454,227

   
     

62,108,699

   
   

Health Care Providers & Services - 8.0%

 
 

17,832

   

Addus HomeCare Corp. (b)

   

1,698,320

   
 

22,890

   

Charles River Laboratories International, Inc. (b)

   

4,504,752

   
 

41,860

   

Cigna Corp.

   

11,614,894

   
 

51,696

   

Contra Zogenix, Inc. CVR (a) (b)

   

78,578

   
 

2,644

   

Evelance Health, Inc.

   

1,201,011

   
 

24,237

   

HCA Healthcare, Inc.

   

4,454,518

   
 

47,561

   

HealthEquity, Inc. (b)

   

3,194,672

   
 

20,290

   

Humana, Inc.

   

9,844,505

   
 

222,222

   

InnovaCare, Inc. Escrow Shares (Restricted) (a)

   

56,533

   
 

6,524

   

Medpace Holdings, Inc. (b)

   

1,025,377

   
 

34,160

   

Molina Healthcare, Inc. (b)

   

11,267,335

   
 

107,595

   

Owens & Minor, Inc.

   

2,593,040

   
 

42,732

   

UnitedHealth Group, Inc.

   

21,581,369

   
     

73,114,904

   

The accompanying notes are an integral part of these financial statements.
13


TEKLA HEALTHCARE INVESTORS

SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2022

(continued)

SHARES

 

Healthcare Services - 0.3%

 

VALUE

 
 

15,929

   

Laboratory Corporation of America Holdings

 

$

3,262,418

   
   

Life Sciences Tools & Services - 4.0%

 
 

216,209

   

Adaptive Biotechnologies Corp. (b)

   

1,539,408

   
 

143,346

   

Illumina, Inc. (b)

   

27,348,983

   
 

14,873

   

Thermo Fisher Scientific, Inc.

   

7,543,437

   
     

36,431,828

   
   

Medical Devices and Diagnostics - 1.7%

 
 

4,063

   

Align Technology, Inc. (b)

   

841,488

   
 

144,489

   

Boston Scientific Corp. (b)

   

5,596,059

   
 

15,181

   

Danaher Corp.

   

3,921,101

   
 

26,837

   

Intuitive Surgical, Inc. (b)

   

5,030,327

   
     

15,388,975

   
   

Pharmaceuticals - 16.7%

 
 

51,378

   

Arvinas, Inc. (b)

   

2,285,807

   
 

494,952

   

AstraZeneca plc ADR

   

27,143,168

   
 

297,171

   

Bristol-Myers Squibb Co.

   

21,125,886

   
 

37,470

   

Eli Lilly & Co.

   

12,115,924

   
 

465,507

   

Endo International plc (b)

   

45,014

   
 

411,374

   

Horizon Therapeutics plc (b)

   

25,459,937

   
 

120,019

   

Intra-Cellular Therapies, Inc. (b)

   

5,584,484

   
 

17,633

   

IQVIA Holdings, Inc. (b)

   

3,194,042

   
 

105,172

   

Jazz Pharmaceuticals plc (b) (d)

   

14,018,376

   
 

93,399

   

Johnson & Johnson

   

15,257,661

   
 

19,916

   

McKesson Corp.

   

6,768,851

   
 

71,668

   

Merck & Co., Inc.

   

6,172,048

   
 

82,038

   

Mirati Therapeutics, Inc. (b)

   

5,729,534

   
 

7,050

   

Perrigo Co. plc

   

251,403

   
 

60,450

   

Pfizer, Inc.

   

2,645,292

   
 

79,790

   

Spectrum Pharmaceuticals, Inc. (b)

   

34,310

   
 

28,747

   

Tetraphase Pharmaceuticals, Inc. CVR (a) (b)

   

1,725

   
 

291,666

   

Teva Pharmaceutical Industries Ltd. ADR (b)

   

2,353,745

   
 

69,000

   

Theseus Pharmaceuticals, Inc. (b) (e)

   

400,200

   
 

94,775

   

VYNE Therapeutics, Inc. (b) (e)

   

21,144

   
 

17,924

   

Zoetis, Inc.

   

2,657,950

   
     

153,266,501

   
        TOTAL COMMON STOCKS
(Cost $732,034,820)
   

788,974,151

   

The accompanying notes are an integral part of these financial statements.
14


TEKLA HEALTHCARE INVESTORS

SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2022

(continued)

SHARES

  EXCHANGE TRADED FUNDS (e) - 0.8%
of Net Assets
 

VALUE

 
 

24,569

   

iShares Nasdaq Biotechnology ETF

 

$

2,873,590

   
 

57,000

   

SPDR S&P Biotech ETF

   

4,521,240

   
    TOTAL EXCHANGE TRADED FUNDS
(Cost $7,597,985)
   

7,394,830

   
PRINCIPAL 
AMOUNT
 
SHORT-TERM INVESTMENTS - 5.2% of Net Assets
     

$

39,792,000

    Repurchase Agreement, Fixed Income Clearing
Corp., repurchase value $39,792,000, 0.83%,
dated 09/30/22, due 10/03/22 (collateralized by
U.S. Treasury Note 0.125%, due 07/15/2024,
market value $21,299,857 and U.S. Treasury
Bond 2.50% due 02/15/46, market value
$19,288,075)
   

39,792,000

   

SHARES

         
 

8,495,653

    State Street Institutional U.S. Government Money
Market Fund, Institutional Class, 2.91% (f)
   

8,495,653

   
    TOTAL SHORT-TERM INVESTMENTS
(Cost $48,287,653)
   

48,287,653

   
    TOTAL INVESTMENTS BEFORE MILESTONE
INTERESTS - 99.7%
(Cost $866,499,461)
   

914,487,216

   

INTERESTS

  MILESTONE INTERESTS (Restricted) (a) (b) - 1.0%
of Net Assets
 
 
   

Biotechnology - 0.2%

 
 

1

   

Rainier Therapeutics Milestone Interest

   

285,190

   
 

1

   

Therachon Milestone Interest

   

1,243,901

   
     

1,529,091

   
   

Health Care Equipment & Supplies - 0.0%

 
 

1

   

Therox Milestone Interest

   

1,090

   
     

1,090

   

The accompanying notes are an integral part of these financial statements.
15


TEKLA HEALTHCARE INVESTORS

SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2022

(continued)

INTERESTS

 

Pharmaceuticals - 0.8%

 

VALUE

 
 

1

   

Afferent Milestone Interest

 

$

272,563

   
 

1

   

Ethismos Research Milestone Interest

   

0

   
 

1

   

Impact Biomedicines Milestone Interest

   

1,720,697

   
 

1

   

Neurovance Milestone Interest

   

5,347,058

   
     

7,340,318

   
        TOTAL MILESTONE INTERESTS
(Cost $7,960,390)
   

8,870,499

   
        TOTAL INVESTMENTS - 100.7%
(Cost $874,459,851)
   

923,357,715

   
        OTHER LIABILITIES IN EXCESS OF
ASSETS - (0.7)%
   

(6,793,127

)

 
       

NET ASSETS - 100%

 

$

916,564,588

   

(a)  Security fair valued using significant unobservable inputs. See Investment Valuation and Fair Value Measurements.

(b)  Non-income producing security.

(c)  Affiliated issuers in which the Fund holds 5% or more of the voting securities (total market value of $23,722,336).

(d)  Foreign security.

(e)  All or a portion of this security is on loan as of September 30, 2022. See Note 1.

(f)  This security represents the investment of cash collateral received for securities lending and is a registered investment company advised by State Street Global Advisors. The rate shown is the annualized seven-day yield as of September 30, 2022.

ADR American Depository Receipt

CVR Contingent Value Right

The accompanying notes are an integral part of these financial statements.
16


TEKLA HEALTHCARE INVESTORS

STATEMENT OF ASSETS AND LIABILITIES

SEPTEMBER 30, 2022

ASSETS:

 
Investments in unaffiliated issuers (cost $834,950,179),
at value including $8,253,577 of securities loaned
 

$

890,764,880

   
Investments in affiliated issuers, at value
(cost $31,549,282)
   

23,722,336

   

Milestone interests, at value (cost $7,960,390)

   

8,870,499

   

Total investments

   

923,357,715

   

Cash

   

743

   

Foreign currency, at value (cost $58)

   

49

   

Dividends and interest receivable

   

194,459

   

Securities lending income receivable

   

4,711

   

Receivable for investments sold

   

2,668,312

   

Prepaid expenses

   

49,104

   

Other assets (see Note 1)

   

272

   

Total assets

   

926,275,365

   

LIABILITIES:

 

Payable upon return of securities loaned

   

8,495,653

   

Accrued advisory fee

   

775,047

   

Accrued investor support service fees

   

40,875

   

Accrued shareholder reporting fees

   

43,421

   

Accrued other

   

355,781

   

Total liabilities

   

9,710,777

   

Commitments and Contingencies (see Notes 1 and 5)

 

NET ASSETS

 

$

916,564,588

   

SOURCES OF NET ASSETS:

 
Shares of beneficial interest, par value $.01 per share,
unlimited number of shares authorized, amount
paid in on 47,343,726 shares issued and outstanding
 

$

473,437

   

Additional paid-in-capital

 

$

891,270,791

   

Total distributable earnings (loss)

 

$

24,820,360

   
Total net assets (equivalent to $19.36 per share
based on 47,343,726 shares outstanding)
 

$

916,564,588

   

The accompanying notes are an integral part of these financial statements.
17


TEKLA HEALTHCARE INVESTORS

STATEMENT OF OPERATIONS

YEAR ENDED SEPTEMBER 30, 2022

INVESTMENT INCOME:

 

Dividend income (net of foreign tax of $18,181)

 

$

7,986,287

   

Interest and other income

   

112,314

   

Securities lending, net

   

172,166

   

Total investment income

   

8,270,767

   

EXPENSES:

 

Advisory fees

   

9,976,451

   

Investor support service fees

   

504,283

   

Legal fees

   

236,295

   

Administration fees

   

207,935

   

Custodian fees

   

198,656

   

Shareholder reporting

   

174,558

   

Trustees' fees and expenses

   

174,292

   

Professional services fees

   

128,556

   

Transfer agent fees

   

59,862

   

Other (see Note 2)

   

280,061

   

Total expenses

   

11,940,949

   

Net investment loss

   

(3,670,182

)

 

REALIZED AND UNREALIZED GAIN (LOSS):

 

Net realized gain (loss) on:

 

Investments in unaffiliated issuers

   

58,756,545

   

Closed or expired option contracts written

   

7,619,045

   

Foreign currency transactions

   

5,493

   

Net realized gain

   

66,381,083

   

Net change in unrealized appreciation (depreciation) on:

 

Investments in unaffiliated issuers

   

(252,596,821

)

 

Investments in affiliated issuers

   

2,083,711

   

Milestone interests

   

(2,077,996

)

 

Option contracts written

   

(4,349,159

)

 

Foreign currency

   

(9

)

 

Net change in unrealized appreciation (depreciation)

   

(256,940,274

)

 

Net realized and unrealized gain (loss)

   

(190,559,191

)

 
Net decrease in net assets resulting from
operations
 

$

(194,229,373

)

 

The accompanying notes are an integral part of these financial statements.
18


TEKLA HEALTHCARE INVESTORS

STATEMENTS OF CHANGES IN NET ASSETS

    Year ended
September 30,
2022
  Year ended
September 30,
2021
 
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS:
 

Net investment loss

 

($

3,670,182

)

 

($

6,230,384

)

 

Net realized gain

   

66,381,083

     

82,529,358

   
Change in net unrealized appreciation
(depreciation)
   

(256,940,274

)

   

78,876,879

   
Net increase (decrease) in net
assets resulting from operations
   

(194,229,373

)

   

155,175,853

   
DISTRIBUTIONS TO SHAREHOLDERS
(See Note 1):
   

(84,311,515

)

   

(91,590,428

)

 

CAPITAL SHARE TRANSACTIONS:

 
Reinvestment of distributions
(1,918,258 and 1,553,813 shares,
respectively)
   

38,203,392

     

38,621,063

   

Total capital share transactions

   

38,203,392

     

38,621,063

   
Net increase (decrease) in
net assets
   

(240,337,496

)

   

102,206,488

   

NET ASSETS:

 

Beginning of year

   

1,156,902,084

     

1,054,695,596

   

End of year

 

$

916,564,588

   

$

1,156,902,084

   

The accompanying notes are an integral part of these financial statements.
19


TEKLA HEALTHCARE INVESTORS

FINANCIAL HIGHLIGHTS

   

For the years ended September 30,

 
   

2022

 

2021

 

2020

 

2019

 

2018

 
OPERATING PERFORMANCE FOR A
SHARE OUTSTANDING THROUGHOUT
EACH YEAR
 

Net asset value per share, beginning of year

 

$

25.47

   

$

24.04

   

$

20.33

   

$

25.62

   

$

26.02

   

Net investment loss (1)

   

(0.08

)

   

(0.14

)

   

(0.05

)

   

(0.07

)

   

(0.10

)

 

Net realized and unrealized gain (loss)

   

(4.20

)

   

3.63

     

5.50

     

(3.46

)

   

1.63

   
Total increase (decrease) from investment
operations
   

(4.28

)

   

3.49

     

5.45

     

(3.53

)

   

1.53

   

Distributions to shareholders from:

 

Net investment income

   

(0.11

)

   

(0.61

)

   

(0.01

)

   

(0.17

)

   

(0.15

)(2)

 

Net realized capital gains

   

(1.72

)

   

(1.45

)

   

(1.77

)

   

(1.65

)

   

(1.79

)(2)

 

Total distributions

   

(1.83

)

   

(2.06

)

   

(1.78

)

   

(1.82

)

   

(1.94

)

 

Increase resulting from shares repurchased (1)

   

     

     

0.04

     

0.06

     

0.01

   

Net asset value per share, end of year

 

$

19.36

   

$

25.47

   

$

24.04

   

$

20.33

   

$

25.62

   

Per share market value, end of year

 

$

17.28

   

$

25.57

   

$

20.62

   

$

18.34

   

$

23.15

   

Total investment return at market value

   

(26.01

%)

   

34.64

%

   

23.38

%

   

(12.88

%)

   

0.05

%

 

Total investment return at net asset value

   

(16.78

%)

   

15.03

%

   

29.77

%

   

(12.74

%)

   

7.37

%

 

RATIOS

 

Net investment loss to average net assets

   

(0.36

%)

   

(0.54

%)

   

(0.20

%)

   

(0.31

%)

   

(0.41

%)

 

Expenses to average net assets

   

1.19

%

   

1.11

%

   

1.10

%

   

1.12

%

   

1.08

%

 

SUPPLEMENTAL DATA

 

Net assets at end of year (in millions)

 

$

917

   

$

1,157

   

$

1,055

   

$

871

   

$

1,082

   

Portfolio turnover rate

   

41.21

%

   

69.19

%

   

52.44

%

   

47.65

%

   

45.75

%

 

(1)  Computed using average shares outstanding.

(2)  Amount previously presented incorrectly as solely distributions from net realized capital gains has been revised to reflect the proper classification.

The accompanying notes are an integral part of these financial statements.
20


TEKLA HEALTHCARE INVESTORS

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(1)  Organization and Significant Accounting Policies

Tekla Healthcare Investors (the Fund) is a Massachusetts business trust formed on October 31, 1986 and registered under the Investment Company Act of 1940 as a non-diversified closed-end management investment company. The Fund commenced operations on April 22, 1987. The Fund's investment objective is long-term capital appreciation through investment in U.S. and foreign companies in the healthcare industry. The Fund invests primarily in securities of public and private companies that are believed by the Fund's Investment Adviser, Tekla Capital Management LLC (the Adviser), to have significant potential for above-average growth. The Fund may invest up to 20% of its net assets in securities of foreign issuers, expected to be located primarily in Western Europe, Canada and Japan, and securities of U.S. issuers that are traded primarily in foreign markets.

The preparation of these financial statements requires the use of certain estimates by management in determining the Fund's assets, liabilities, revenues and expenses. Actual results could differ from these estimates and such differences could be material. The following is a summary of significant accounting policies followed by the Fund, which are in conformity with accounting principles generally accepted in the United States of America (GAAP). The Fund is an investment company and follows accounting and reporting guidance in the Financial Accounting Standards Board Accounting Standards Codification 946. Events or transactions occurring after September 30, 2022, through the date that the financial statements were issued, have been evaluated in the preparation of these financial statements.

The market value of the Fund's investments will move up and down, sometimes rapidly and unpredictably, based upon political, regulatory, market, economic, and social conditions, as well as developments that impact specific economic sectors, industries, or segments of the market, including conditions that directly relate to the issuers of the Fund's investments, such as management performance, financial condition, and demand for the issuers' goods and services. The Fund is subject to the risk that geopolitical events will adversely affect global economies and markets. War, terrorism, and related geopolitical events have led, and in the future may lead, to increased short-term market volatility and may have adverse long-term effects on global economies and markets. Likewise, natural and environmental disasters and epidemics or pandemics may be highly disruptive to economies and markets. This means that the Fund may lose money on its investment due to unpredictable drops in a security's value or


21


TEKLA HEALTHCARE INVESTORS

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(continued)

periods of below-average performance in a given security or in the securities market as a whole.

Investment Valuation

Shares of publicly traded companies listed on national securities exchanges or trading in the over-the-counter market are typically valued at the last sale price, as of the close of trading, generally 4 p.m., Eastern Time. The Board of Trustees of the Fund (the Trustees) has established and approved fair valuation policies and procedures with respect to securities for which quoted prices may not be available or which do not reflect fair value. Convertible, corporate and government bonds are valued using a third-party pricing service. Convertible bonds are valued using this pricing service only on days when there is no sale reported. Restricted securities of companies that are publicly traded are typically valued based on the closing market quote on the valuation date adjusted for the impact of the restriction as determined in good faith by the Adviser also using fair valuation policies and procedures approved by the Trustees described below. Non-exchange traded warrants of publicly traded companies are generally valued using the Black-Scholes model, which incorporates both observable and unobservable inputs. Short-term investments with a maturity of 60 days or less are generally valued at amortized cost, which approximates fair value.

Convertible preferred shares, warrants or convertible note interests in private companies, milestone interests and other restricted securities, as well as shares of publicly traded companies for which market quotations are not readily available, such as stocks for which trading has been halted or for which there are no current day sales, or which do not reflect fair value, are typically valued in good faith, based upon the recommendations made by the Adviser pursuant to fair valuation policies and procedures approved by the Trustees.

The Adviser has a Valuation Sub-Committee comprised of senior management which reports to the Valuation Committee of the Board at least quarterly. Each fair value determination is based on a consideration of relevant factors, including both observable and unobservable inputs. Observable and unobservable inputs may include (i) the existence of any contractual restrictions on the disposition of securities; (ii) information obtained from the company, which may include an analysis of the company's financial statements, products, intended markets or technologies; (iii) the price of the same or similar security negotiated at arm's length in an issuer's completed subsequent round of financing; (iv) the price and extent of public trading in similar securities of


22


TEKLA HEALTHCARE INVESTORS

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(continued)

the issuer or of comparable companies; or (v) a probability and time value adjusted analysis of contractual terms. Where available and appropriate, multiple valuation methodologies are applied to confirm fair value. Significant unobservable inputs identified by the Adviser are often used in the fair value determination. A significant change in any of these inputs may result in a significant change in the fair value measurement. Due to the uncertainty inherent in the valuation process, such estimates of fair value may differ significantly from the values that would have been used had a ready market for the investments existed, and differences could be material. Additionally, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different from the valuations used at the date of these financial statements.

Milestone Interests

The Fund holds financial instruments which reflect the current value of future milestone payments the Fund may receive as a result of contractual obligations from other parties. The value of such payments are adjusted to reflect the estimated risk based on the relative uncertainty of both the timing and the achievement of individual milestones. A risk to the Fund is that the milestones will not be achieved and no payment will be received by the Fund. The milestone interests were received as part of the proceeds from the sale of seven private companies. Any payments received are treated as a reduction of the cost basis of the milestone interest with payments received in excess of the cost basis treated as a realized gain. The contractual obligations with respect to the milestone interests provide for payments at various stages of the development of Afferent, Ethismos Research, Neurovance, Impact Biomedicines, Therachon, Rainier Therapeutics, Inc., and Therox's principal product candidate as of the date of the sale.

The following is a summary of the impact of the milestone interests on the financial statements as of and for the year ended September 30, 2022:

Statement of Assets and Liabilities, Milestone interests, at value

 

$

8,870,499

   

Statement of Assets and Liabilities, Total distributable earnings

 

$

910,109

   
Statement of Operations, Change in unrealized appreciation (depreciation)
on Milestone interests
 

($

2,077,996

)

 

Options on Securities

An option contract is a contract in which the writer (seller) of the option grants the buyer of the option, upon payment of a premium, the right to purchase


23


TEKLA HEALTHCARE INVESTORS

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(continued)

from (call option) or sell to (put option) the writer a designated instrument at a specified price within a specified period of time. Certain options, including options on indices, will require cash settlement by the Fund if the option is exercised.

The Fund's obligation under an exchange traded written option or investment in an exchange traded purchased option is valued at the last sale price or in the absence of a sale, the mean between the closing bid and asked prices. Gain or loss is recognized when the option contract expires, is exercised or is closed.

If the Fund writes a covered call option, the Fund foregoes, in exchange for the premium, the opportunity to profit during the option period from an increase in the market value of the underlying security above the exercise price. If the Fund writes a put option it accepts the risk of a decline in the market value of the underlying security below the exercise price. Over-the-counter options have the risk of the potential inability of counterparties to meet the terms of their contracts. The Fund's maximum exposure to purchased options is limited to the premium initially paid. In addition, certain risks may arise upon entering into option contracts including the risk that an illiquid secondary market will limit the Fund's ability to close out an option contract prior to the expiration date and that a change in the value of the option contract may not correlate exactly with changes in the value of the securities or currencies hedged.

All options on securities and securities indices written by the Fund are required to be covered. When the Fund writes a call option, this means that during the life of the option the Fund may own or have the contractual right to acquire the securities subject to the option or may maintain with the Fund's custodian in a segregated account appropriate liquid securities in an amount at least equal to the market value of the securities underlying the option. When the Fund writes a put option, this means that the Fund will maintain with the Fund's custodian in a segregated account appropriate liquid securities in an amount at least equal to the exercise price of the option.

The average number of outstanding put options purchased and call options written for the year ended September 30, 2022 were 363 and 363, respectively.


24


TEKLA HEALTHCARE INVESTORS

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(continued)

Derivatives not accounted
for as hedging instruments
under ASC 815
  Statement of Assets and
Liabilities Location
 

Statement of Operations Location

 
Equity Contracts
 
      Assets, Investments,
at value
 

$

    Net realized gain
on investments
 

($

95,213

)

 
 
 
 
           
 
 
   
 
 
  Change in unrealized
appreciation (depreciation)
on investments
 

$

1,465,848

   
 
 
 
      Liabilities, options
written, at value
 
 

$


 
  Net realized gain (loss)
on closed or expired
option contracts written
 

$

7,619,045

   
 
 
 
           
 
 
   
 
 
  Change in unrealized
appreciation (depreciation)
on option contracts written
 

($

4,349,159

)

 

Other Assets

Other assets in the Statement of Assets and Liabilities consists of amounts due to the Fund at various times in the future in connection with the sale of investments in one private company.

Investment Transactions and Income

Investment transactions are recorded on a trade date basis. Gains and losses from sales of investments are recorded using the "identified cost" method. Interest income is recorded on the accrual basis, adjusted for amortization of premiums and accretion of discounts. Dividend income is recorded on the ex-dividend date, less any foreign taxes withheld. Upon notification from issuers, some of the dividend income received may be redesignated as a reduction of cost of the related investment if it represents a return of capital.

The aggregate cost of purchases and proceeds from sales of investment securities (other than short-term investments) for the year ended September 30, 2022 totaled $404,629,825 and $484,868,414, respectively.

Securities Lending

The Fund may lend its securities to approved borrowers to earn additional income. The Fund receives cash collateral from the borrower and the initial collateral received by the fund is required to have a value of at least 102% of the current value of the loaned securities traded on U.S. exchanges, and a value of at least 105% for all other securities. The Fund will invest its cash collateral in State Street Institutional U.S. Government Money Market Fund (SAHXX), which is registered with the Securities and Exchange Commission (SEC) as an investment company. SAHXX invests substantially all of its assets in the State Street U.S. Government Money Market Portfolio. The Fund will receive the benefit of


25


TEKLA HEALTHCARE INVESTORS

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(continued)

any gains and bear any losses generated by SAHXX with respect to the cash collateral.

The Fund has the right to recall loaned securities on demand. If a borrower fails to return loaned securities when due, then the lending agent is responsible and indemnifies the Fund for the lent securities. The lending agent uses the collateral received from the borrower to purchase replacement securities of the same issue, type, class and series of the loaned securities. If the value of the collateral is less than the purchase cost of replacement securities, the lending agent is responsible for satisfying the shortfall but only to the extent that the shortfall is not due to any decrease in the value of SAHXX.

Although the risk of loss on securities lent is mitigated by receiving collateral from the borrower and through lending agent indemnification, the Fund could experience a delay in recovering securities or could experience a lower than expected return if the borrower fails to return the securities on a timely basis. The Fund receives compensation for lending its securities by retaining a portion of the return on the investment of the collateral and compensation from fees earned from borrowers of the securities. Securities lending income received by the Fund is net of fees retained by the securities lending agent. Net income received from SAHXX is a component of securities lending income as recorded on the Statement of Operations.

Obligations to repay collateral received by the Fund are shown on the Statement of Assets and Liabilities as Payable upon return of securities loaned and are secured by the loaned securities. As of September 30, 2022, the Fund loaned securities valued at $8,253,577 and received $8,495,653 of cash collateral.

Repurchase Agreements

In managing short-term investments the Fund may from time to time enter into transactions in repurchase agreements. In a repurchase agreement, the Fund's custodian takes possession of the underlying collateral securities from the counterparty, the market value of which is at least equal to the principal, including accrued interest, of the repurchase transaction at all times. In the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral by the Fund may be delayed. The Fund may enter into repurchase transactions with any broker, dealer, registered clearing agency or bank. Repurchase agreement transactions are not counted for purposes of the limitations imposed on the Fund's investment in debt securities.


26


TEKLA HEALTHCARE INVESTORS

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(continued)

Distribution Policy

Pursuant to a Securities and Exchange Commission exemptive order, the Fund may make periodic distributions that include capital gains as frequently as 12 times in any one taxable year in respect of its common shares, and the Fund has implemented a managed distribution policy (the Policy) providing for quarterly distributions at a rate set by the Trustees. Under the current Policy, the Fund intends to make quarterly distributions at a rate of 2% of the Fund's net assets to shareholders of record. The Fund intends to use net realized capital gains when making quarterly distributions, if available, but the Policy would result in a return of capital to shareholders if the amount of the distribution exceeds the Fund's net investment income and realized capital gains. If taxable income and net long-term realized gains exceed the amount required to be distributed under the Policy, the Fund will at a minimum make distributions necessary to comply with the requirements of the Internal Revenue Code. The Policy has been established by the Trustees and may be changed by them without shareholder approval. The Trustees regularly review the Policy and the frequency and rate of distribution considering the purpose and effect of the Policy, the financial market environment, and the Fund's income, capital gains and capital available to pay distributions.

The Fund's policy is to declare quarterly distributions in stock. The distributions are automatically paid in newly-issued full shares of the Fund unless otherwise instructed by the shareholder. Fractional shares will generally be settled in cash, except for registered shareholders with book entry accounts of the Fund's transfer agent who will have whole and fractional shares added to their accounts. The Fund's transfer agent delivers an election card and instructions to each registered shareholder in connection with each distribution. The number of shares issued will be determined by dividing the dollar amount of the distribution by the lower of net asset value or market price on the pricing date. If a shareholder elects to receive a distribution in cash, rather than in shares, the shareholder's relative ownership in the Fund will be reduced. The shares reinvested will be valued at the lower of the net asset value or market price on the pricing date. Distributions in stock will not relieve shareholders of any federal, state or local income taxes that may be payable on such distributions. Additional distributions, if any, made to satisfy requirements of the Internal Revenue Code may be paid in stock, as described above, or in cash.


27


TEKLA HEALTHCARE INVESTORS

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(continued)

Share Repurchase Program

In March 2022, the Trustees approved the renewal of the repurchase program to allow the Fund to repurchase up to 12% of its outstanding shares in the open market for a one-year period ending July 14, 2023. Prior to this renewal, in March 2021, the Trustees approved the renewal of the share repurchase program to allow the Fund to repurchase up to 12% of its outstanding shares for a one-year period ending July 14, 2022. The share repurchase program is intended to enhance shareholder value and potentially reduce the discount between the market price of the Fund's shares and the Fund's net asset value.

During the years ended September 30, 2022 and September 30, 2021, the Fund did not repurchase any shares through the repurchase program.

Federal Taxes

It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute to its shareholders substantially all of its taxable income and its net realized capital gains, if any. Therefore, no Federal income or excise tax provision is required.

As of September 30, 2022, the Fund had no uncertain tax positions that would require financial statement recognition or disclosure. The Fund's federal tax returns are subject to examination by the Internal Revenue Service for a period of three years.

Distributions

The Fund records all distributions to shareholders on the ex-dividend date. Such distributions are determined in conformity with income tax regulations, which may differ from GAAP. These differences include temporary and permanent differences from losses on wash sale transactions, passive foreign investment companies transactions, installment sale adjustments, foreign currency gains and losses, book to tax difference due to merger, partnership basis adjustment and net operating losses. Reclassifications are made to the Fund's capital accounts to reflect income and gains available for distribution under income tax regulations. At September 30, 2022, the Fund reclassified ($1,366,783) from accumulated net realized loss on investment and $1,625,298 to undistributed net investment income, with a net impact of ($258,515) to paid in capital, for current period book/tax differences.


28


TEKLA HEALTHCARE INVESTORS

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(continued)

The tax basis components of distributable earnings and the tax cost as of September 30, 2022 were as follows:

Cost of Investments for tax purposes

 

$

884,560,040

   

Gross tax unrealized appreciation

 

$

173,732,458

   

Gross tax unrealized depreciation

 

($

134,934,783

)

 

Net tax unrealized appreciation on investments

 

$

38,797,675

   

Late-year ordinary and post-October capital loss deferrals

 

($

13,977,306

)

 

The Fund has designated the distributions for its taxable years ended September 30, 2022 and 2021 as follows:

Distributions paid from:

 

2022

 

2021

 

Ordinary income (includes short-term capital gain)

 

$

5,266,396

   

$

27,187,763

   

Long-term capital gain

 

$

79,045,119

   

$

64,402,665

   

Commitments and Contingencies

Under the Fund's organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into agreements with service providers that may contain indemnification clauses. The Fund's maximum exposure under these agreements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risk of loss to be remote.

Investor Support Services

The Fund has retained Destra Capital Advisors LLC (Destra) to provide investor support services in connection with the ongoing operation of the Fund. The Fund pays Destra a fee in an annual amount equal to 0.05% of the average aggregate daily value of the Fund's Managed Assets pursuant to the investor support services agreement.

(2)  Investment Advisory and Other Affiliated Fees

The Fund has entered into an Investment Advisory Agreement (the Advisory Agreement) with the Adviser. Pursuant to the terms of the Advisory Agreement, the Fund pays the Adviser a monthly fee at the rate when annualized of (i) 2.50% of the average net assets for the month of its venture capital and other restricted securities up to 25% of net assets and (ii) for all other net assets, 0.98% of the average net assets up to $250 million, 0.88% of the average


29


TEKLA HEALTHCARE INVESTORS

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(continued)

net assets for the next $250 million, 0.80% of the average net assets for the next $500 million and 0.70% of the average net assets thereafter. The aggregate fee would not exceed a rate when annualized of 1.36%.

The Fund has entered into a Services Agreement (the Agreement) with the Adviser. Pursuant to the terms of the Agreement, the Fund reimburses the Adviser for certain services related to a portion of the payment of salary and provision of benefits to the Fund's Chief Compliance Officer. During the year ended September 30, 2022, these payments amounted to $139,755 and are included in the Other category of expenses in the Statement of Operations, together with insurance and other expenses incurred to unaffiliated entities. Expenses incurred pursuant to the Agreement as well as certain expenses paid for by the Adviser are allocated to the Fund in an equitable fashion as approved by the Trustees or officers of the Fund who are also officers of the Adviser.

The Fund pays compensation to Independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The Fund does not pay compensation directly to Trustees or officers of the Fund who are also officers of the Adviser.

(3)  Other Transactions with Affiliates

An affiliate company is a company in which the Fund holds 5% or more of the voting securities. Transactions involving such companies during the year ended September 30, 2022 were as follows:

Affiliated Companies

  Beginning
Value as of
September 30,
2021
  Purchases at
Cost
  Proceeds
from Sales
  Net Realized
Gain/(Loss)
on sale of
Affiliated
Companies
  Change in
Unrealized
Appreciation/
Depreciation
  Ending Value
as of
September 30,
2022**
 
Amphivena
Therapeutics, Inc.
 

$

86

   

$

364

   

$

   

$

   

($

364

)

 

$

86

   
Arkuda
Therapeutics, Inc..
   

2,800,002

     

871,943

     

     

     

1,352,320

     

5,024,265

   
Curasen
Therapeutics, Inc.
   

7,000,000

     

1,414,141

     

     

     

     

8,414,141

   

Invetx, Inc.

   

3,450,000

     

2,074,195

     

     

     

1,362,149

     

6,886,344

   

Priothera Ltd.

   

1,081,123

*

   

2,946,771

     

     

     

(630,394

)

   

3,397,500

   
   

$

14,331,211

   

$

7,307,414

   

$

   

$

   

$

2,083,711

   

$

23,722,336

   


30


TEKLA HEALTHCARE INVESTORS

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(continued)

Affiliated Companies

  Shares as of
September 30,
2022**
  Principal
Amount as of
September 30,
2022
  Dividend/
Interest
Income
from
Affiliated
Companies
  Capital Gain
Distributions
from Affiliated
Companies
 

Amphivena Therapeutics

   

852,639

   

$

303,323

   

$

   

$

   

Arkuda Therapeutics, Inc.

   

2,841,458

     

     

     

   

Curasen Therapeutics, Inc.

   

17,547,740

     

     

     

   

Invetx, Inc.

   

10,276,591

     

     

     

   

Priothera Ltd.

   

346,666

     

     

     

   

   

31,865,094

   

$

303,323

   

$

   

$

   

* Not an affiliate as of September 30, 2021.

** Hotspot Therapeutics, Inc. was an affiliate as of September 30, 2021 but not an affiliate as of September 30, 2022.

(4)  Fair Value Measurements

The Fund uses a three-tier hierarchy to prioritize the assumptions, referred to as inputs, used in valuation techniques to measure fair value. The three-tier hierarchy of inputs is summarized in the three broad levels. Level 1 includes quoted prices in active markets for identical investments. Level 2 includes prices determined using other significant observable inputs (including quoted prices for similar investments, interest rates, credit risk, etc.). The independent pricing vendor may value bank loans and debt securities at an evaluated bid price by employing methodologies that utilize actual market transactions, broker-supplied valuations, and/or other methodologies designed to identify the market value for such securities and such securities are considered Level 2 in the fair value hierarchy. Level 3 includes prices determined using significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments). These inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

For the year ended September 30, 2022, the total amount of transfers between Level 3 and Level 1 was $4,080,321. The two investments were transferred due to an initial public offering and the values are being supported by the market price.


31


TEKLA HEALTHCARE INVESTORS

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(continued)

The following is a summary of the levels used as of September 30, 2022 to value the Fund's investments

Assets at Value

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Convertible Preferreds

 

Biotechnology

 

$

   

$

   

$

43,293,435

   

$

43,293,435

   

Health Care Equipment & Supplies

   

     

     

1,423,015

     

1,423,015

   

Pharmaceuticals

   

     

     

25,114,132

     

25,114,132

   

Convertible Note

 

Biotechnology

   

     

     

0

*

   

0

*

 

Common Stocks

 

Biotechnology

   

445,380,257

     

20,569

     

     

445,400,826

   

Health Care Equipment & Supplies

   

61,489,813

     

     

618,886

     

62,108,699

   

Health Care Providers & Services

   

72,979,793

     

78,578

     

56,533

     

73,114,904

   

Healthcare Services

   

3,262,418

     

     

     

3,262,418

   

Life Sciences Tools & Services

   

36,431,828

     

     

     

36,431,828

   

Medical Devices And Diagnostics

   

15,388,975

     

     

     

15,388,975

   

Pharmaceuticals

   

153,264,776

     

1,725

     

     

153,266,501

   

Exchange Traded Funds

   

7,394,830

     

     

     

7,394,830

   

Short-term Investments

   

8,495,653

     

39,792,000

     

     

48,287,653

   

Milestone Interests

 

Biotechnology

   

     

     

1,529,091

     

1,529,091

   

Health Care Equipment & Supplies

   

     

     

1,090

     

1,090

   

Pharmaceuticals

   

     

     

7,340,318

     

7,340,318

   

Other Assets

   

     

     

272

     

272

   

Total

 

$

804,088,343

   

$

39,892,872

   

$

79,376,772

   

$

923,357,987

   

* Represents security valued at zero.

The following is a reconciliation of Level 3 assets for which significant unobservable inputs were used to determine fair value.

Investments in
Securities
  Balance as of
September 30,
2021
  Net realized
gain (loss) and
change in
unrealized
appreciation
(depreciation)
  Cost of
purchases
and
conversions
  Proceeds
from
sales and
conversions
  Net
transfers
in
(out of)
Level 3
  Balance
as of
September 30,
2022
 

Convertible Preferreds

 

Biotechnology

 

$

31,989,201

   

$

372,101

   

$

15,017,858

   

$

   

($

4,085,725

)

 

$

43,293,435

   
Health Care
Equipment &
Supplies
   

1,423,015

     

     

     

     

     

1,423,015

   

Pharmaceuticals

   

20,599,995

     

(8,459

)

   

4,522,596

     

     

     

25,114,132

   

Convertible Notes

 

Biotechnology

   

0

*

   

     

     

     

     

0

*

 


32


TEKLA HEALTHCARE INVESTORS

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(continued)

Investments in
Securities
  Balance as of
September 30,
2021
  Net realized
gain (loss) and
change in
unrealized
appreciation
(depreciation)
  Cost of
purchases
and
conversions
  Proceeds
from
sales and
conversions
  Net
transfers
in
(out of)
Level 3
  Balance
as of
September 30,
2022
 

Common Stocks

 

Biotechnology

 

$

322

   

$

10,063

   

$

   

$

     

($10,385)

   

$

   
Health Care
Equipment &
Supplies
   

1,768,200

     

(1,149,314

)

   

     

     

     

618,886

   
Health Care
Providers &
Services
   

139,911

     

(61,007

)

   

     

(22,371

)

   

     

56,533

   

Milestone Interests

 

Biotechnology

   

1,758,375

     

(128,412

)

   

     

(100,872

)

   

     

1,529,091

   
Health Care
Equipment &
Supplies
   

1,982

     

(705

)

   

     

(187

)

   

     

1,090

   

Pharmaceuticals

   

9,289,198

     

(1,948,880

)

   

     

     

     

7,340,318

   

Other Assets

   

15,966

     

     

2,520

     

(18,214

)

   

     

272

   
   

$

66,986,165

   

($

2,914,613

)

 

$

19,542,974

   

($

141,644

)

 

($

4,096,110

)

 

$

79,376,772

   
Net change in unrealized appreciation (depreciation) from
investments still held as of September 30, 2022
 

($

2,929,685

)

 

* Represents security valued at zero.

The following is a quantitative disclosure about significant unobservable inputs used in the determination of the fair value of Level 3 assets.

   

Fair Value at
September 30,
2022

 

Valuation Technique

 

Unobservable Input

 

Range
(Weighted Average)

 

Common Stocks
 
 

 

$

618,886
 
 

 

Market approach
 
 

 

Discount for lack of
marketability
Revenue allocation

 

50.00% (50.00%)
10.00% (10.00%)
 

 

 
 

 

56,533
 

 

Probability adjusted
value

 

Probability of events
Timing of events

 

50.00% (50.00%)
0.50-1.50 (0.99) years

 

Convertible Preferreds

 

69,830,582

 

Transaction price

 

(a)

 

N/A

 

Milestones Interests
 

 

8,870,499
 

 

Probability adjusted
value

 

Probability of events
Timing of events

 

25.00%-100.00% (72.79%)
0.75-14.75 (3.69) years

 

Other Assets
 

 

272
 

 

Probability adjusted
value

 

Probability of events
Timing of events

 

95.00% (95.00%)
5.75 (5.75) years

 
   

$

79,376,772

               

(a) The valuation technique used as a basis to approximate fair value of these investments is based upon a transaction price or subsequent financing rounds.


33


TEKLA HEALTHCARE INVESTORS

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(continued)

(5)  Private Companies and Other Restricted Securities

The Fund may invest in private companies and other restricted securities if these securities would currently comprise 40% or less of net assets. The value of these securities represented 9% of the Fund's net assets at September 30, 2022.

At September 30, 2022, the Fund had a commitment of $3,278,519 relating to additional investments in four private companies.

The following table details the acquisition date, cost, carrying value per unit, and value of the Fund's private companies and other restricted securities at September 30, 2022. The Fund on its own does not have the right to demand that such securities be registered.

Security (#)

  Acquisition
Date
 

Cost

  Carrying Value
per Unit
 

Value

 

Afferent Milestone Interest

 

07/27/16

 

$

377,701

   

$

272,563.00

   

$

272,563

   

Amphivena Therapeutics, Inc.

 

Series B Cvt. Pfd

 

07/17/17

   

4,903,056

     

0.00

††

   

33

   

Series C Cvt. Pfd

 

12/10/18

   

1,887,644

     

0.00

††

   

53

   

Cvt. Note

 

08/25/21

   

303,323

     

0.00

     

0

   

Arbor Biotechnologies Series B Cvt. Pfd

 

10/29/21

   

1,367,052

     

16.57

     

1,359,999

   

Aristea Therapeutics, Inc. Series B Cvt. Pfd

 

07/27/21

   

3,399,996

     

5.51

     

3,399,996

   

Arkuda Therapeutics, Inc.

 

Series A Cvt. Pfd

 

05/16/19, 04/02/20, 07/15/21

   

5,608,507

     

1.77

     

4,162,222

   

Series B Cvt. Pfd

 

01/24/22

   

863,441

     

1.77

     

862,043

   

Biotheryx, Inc. Series E Cvt. Pfd

 

05/19/21

   

6,814,067

     

5.25

     

6,800,000

   

Cercacor Laboratories, Inc. Common

 

03/31/98†

   

0

     

3.87

     

618,886

   
Curasen Therapeutics, Inc.
Series A Cvt. Pfd
 

09/18/18, 01/07/20, 10/21/21

   

8,414,141

     

0.48

     

8,414,141

   

Dynacure Series C Cvt. Pfd

 

04/21/20, 10/28/20

   

5,611,822

     

2.85

     

1,715,550

   

Endeavor Biomedicines, Inc. Series B Cvt. Pfd

 

01/21/22

   

3,103,846

     

4.72

     

3,099,996

   

Ethismos Research Milestone Interest

 

10/31/17

   

0

     

0.00

     

0

   

Fusion Pharmaceuticals, Inc. Common

 

09/20/22

   

0

     

2.71

     

20,569

   

HiberCell, Inc. Series B Cvt. Pfd

 

05/05/21

   

3,406,945

     

1.23

     

3,399,999

   

Hotspot Therapeutics, Inc.

 

Series B Cvt. Pfd

 

04/22/20, 06/17/21

   

6,916,047

     

3.24

     

9,317,587

   

Series C Cvt. Pfd

 

11/15/21

   

2,053,056

     

3.24

     

2,049,526

   

ImmuneID, Inc. Series A Cvt. Pfd

 

04/28/21

   

2,044,520

     

2.00

     

2,040,000

   

Impact Biomedicines Milestone Interest

 

07/20/10

   

0

     

1,720,697.00

     

1,720,697

   

InnovaCare, Inc. Escrow Shares Common

 

12/21/12†

   

73,738

     

0.25

     

56,533

   


34


TEKLA HEALTHCARE INVESTORS

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(continued)

Security (#)

  Acquisition
Date
 

Cost

  Carrying Value
per Unit
 

Value

 

Invetx, Inc.

 

Series A Cvt. Pfd

 

08/06/20

 

$

3,452,934

   

$

0.67

   

$

4,816,344

   

Series B Cvt. Pfd

 

03/28/22

   

2,071,261

     

0.67

     

2,070,000

   
IO Light Holdings, Inc.
Series A2 Cvt. Pfd
 

04/30/20, 05/17/2021, 09/15/2021†

   

1,394,759

     

3.38

     

1,423,015

   

Neurovance Milestone Interest

 

03/20/17

   

4,917,881

     

5,347,058.00

     

5,347,058

   

Oculis SA,

 

Series B2 Cvt. Pfd

 

01/16/19, 12/23/2019

   

2,335,688

     

10.64

     

2,952,004

   

Series C Cvt. Pfd

 

04/07/21

   

801,905

     

10.64

     

801,905

   

Parthenon Therapeutics, Inc. Series A Cvt. Pfd

 

08/12/21

   

2,092,307

     

3.96

     

2,092,307

   

Priothera Ltd. Series A Cvt. Pfd

 

10/07/20, 10/19/21

   

4,044,974

     

9.80

     

3,397,500

   

Quell Therapeutics Series B Cvt. Pfd

 

11/29/21, 03/23/22

   

2,955,956

     

1.89

     

2,936,363

   

Rainier Therapeutics Milestone Interest

 

09/28/21

   

294,620

     

285,190.00

     

285,190

   

ReCode Therapeutics Series B Cvt. Pfd

 

10/12/21, 02/16/22

   

2,731,756

     

9.23

     

2,719,999

   

Therachon Milestone Interest

 

07/01/19

   

2,362,765

     

1,243,901.00

     

1,243,901

   

Therox Milestone Interest

 

06/18/19

   

7,423

     

1,090.00

     

1,090

   
       

$

86,613,131

       

$

79,397,069

   

  (#)  See Schedule of Investments and corresponding footnotes for more information on each issuer.

  †  Carrying Interest received as part of a corporate action for a previously owned security.

  ††  Carrying value per unit is greater than $0.00 but less than $0.01.


35


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Trustees of Tekla Healthcare Investors:

Opinion on the Financial Statements and Financial Highlights

We have audited the accompanying statement of assets and liabilities of Tekla Healthcare Investors (the "Fund"), including the schedule of investments, as of September 30, 2022, the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, the financial highlights for each of the five years in the period then ended, and the related notes. In our opinion, the financial statements and financial highlights present fairly, in all material respects, the financial position of the Fund as of September 30, 2022, and the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on the Fund's financial statements and financial highlights based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements and financial highlights. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and financial highlights. Our procedures included confirmation of securities owned as of September 30, 2022 by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.

DELOITTE & TOUCHE LLP
Boston, Massachusetts
November 21, 2022

We have served as the auditor of one or more Tekla investment companies since 2004.


36


TEKLA HEALTHCARE INVESTORS

TRUSTEES

Name, Address1, Date of Birth,
Length of Time Served, Principal Occupation(s)
During Past 5 Years and Other Directorship Held
  Position(s) Held with Fund,
Term of Office2
  Number of Portfolios
in Fund Complex
Overseen by Trustee
 
Jeffrey A. Bailey, Born: 4/1962  

Trustee since 2020

 

4

 

CEO, IlluminOss Inc. (2018-2020); Board Chairman, Aileron Therapeutics Inc. (since 2018); Director, Madison Vaccines, Inc. (since 2018); Director, BioDelivery Systems, Inc. (since 2020).

 
Kathy L. Goetz, Born: 4/1966  

Trustee since 2021

 

4

 

Independent Consultant (since 2020); Novartis Pharmaceuticals: Vice President and Head of Sales (2017-2019), Executive Director of Strategic Account Management (2015-2016).

 
Rakesh K. Jain, Ph.D., Born: 12/1950  

Trustee since 2007

 

4

 

Director, Steele Lab of Tumor Biology at Massachusetts General Hospital (since 1991); A.W. Cook Professor of Tumor Biology (Radiation Oncology) at Harvard Medical School (since 1991); Ad hoc Consultant/Scientific Advisory Board Member for pharmaceutical/biotech companies (various times since 2002); Ad hoc Consultant, Gershon Lehman Group (since 2004); Director, Co-Founder, XTuit Pharmaceuticals, Inc. (2012-2018).

 
Thomas M. Kent, CPA, Born: 6/1953  

Trustee since 2017

 

4

 

Director, Principal Global Investors Trust Co. (since 2014); Trustee, Thayer Academy ( 2009-2018); Director, New England Canada Business Council (since 2017).

 
W. Mark Watson, CPA, Born: 7/1950  

Trustee since 2022

 

4

 

Director, BioDelivery Sciences International, Inc. (2017-2022); Director, Inhibitor Therapeutics, Inc. (since 2014); Director, Global Health MCS, (since 2014); Director, Sykes Enterprises, Inc. (2018-2021); Director, The Moffitt Cancer Center (since 2009).

 

INTERESTED TRUSTEE

Daniel R. Omstead, Ph.D.3, Born: 7/1953   President since 2001,
Trustee since 2003
 

4

 

President of the Fund (since 2001), Tekla Life Sciences Investors (HQL) (since 2001), Tekla Healthcare Opportunities Fund (THQ) (since 2014), Tekla World Healthcare Fund (THW) (since 2015); President, Chief Executive Officer and Managing Member of Tekla Capital Management LLC (since 2002); Director: Hotspot Therapeutics, Inc. (Since 2021); IlluminOss Medical, Inc. (2011-2020); Dynex Corporation (2011-2017); Neurovance, Inc. (2015-2017); EBI Life Sciences, Inc. (2015-2017); Euthymics Biosciences, Inc. (2015-2017); Veniti, Inc. (2015-2018); Joslin Diabetes Center (2016-2019); Decipher BioSciences, Inc. (2016-2018).

 

1  The Address for each Trustee is: c/o Tekla Healthcare Investors, 100 Federal Street, 19th Floor, Boston, Massachusetts, 02110, 617-772-8500.

2  Each Trustee currently is serving a three year term.

3  Trustee considered to be an "interested person" within the meaning of the Investment Company Act of 1940, as amended (the "1940 Act"), through position or affiliation with the Adviser.


37


TEKLA HEALTHCARE INVESTORS

OFFICERS

Name, Address1, Date of Birth,
Principal Occupation(s)
During Past 5 Years
  Position(s) Held with
Fund, Term of Office2
and Length of Time Served
 
Daniel R. Omstead, Ph.D., Born: 7/1953  

President since 2001

 

President of the Fund, HQL (since 2001), THQ (since 2014), THW (since 2015); President, Chief Executive Officer and Managing Member of Tekla Capital Management LLC (since 2002).

 
Laura Woodward, CPA, Born: 11/1968
 
 
  Chief Compliance Officer,
Secretary and Treasurer
since 2009
 

Chief Compliance Officer, Secretary and Treasurer of the Fund, HQL (since 2009), THQ (since 2014), THW (since 2015); Chief Compliance Officer and Vice President of Fund Administration, Tekla Capital Management LLC (since 2009).

 

1  The Address for each officer is: c/o Tekla Healthcare Investors; 100 Federal Street, 19th Floor, Boston, Massachusetts, 02110, 617-772-8500.

2  Each officer serves in such capacity for an indefinite period of time at the pleasure of the Trustees.

The Fund's Statement of Additional Information includes additional information about the Fund's Trustees and is available without charge, upon request by calling (617) 772-8500 or writing to Tekla Capital Management LLC at 100 Federal Street, 19th Floor, Boston, MA 02110.


38


TEKLA HEALTHCARE INVESTORS

ANNUAL MEETING REPORT: An Annual Meeting of Shareholders was held on June 9, 2022. Shareholders voted to elect Trustees of the Fund to hold office for a term of three years or until their respective successors shall have been duly elected and qualified. The following votes were cast with respect to each of the nominees:

   

For

 

Withheld

 

Kathleen L. Goetz

   

36,410,241

     

809,536

   
Oleg M. Pohotsky, M.B.A, J.D.*    

36,340,586

     

879,191

   

W. Mark Watson, CPA

   

36,364,654

     

855,123

   

Kathleen L. Goetz, Oleg M. Pohotsky, M.B.A., J.D.* and W. Mark Watson, CPA were elected to serve until the 2025 Annual Meeting.

Trustees serving until the 2023 Annual Meeting are Jeffrey A. Bailey and Rakesh K. Jain, Ph.D.

Trustees serving until the 2024 Annual Meeting are Thomas M. Kent, CPA and Daniel R. Omstead, Ph.D.

Shareholders ratified the appointment of Deloitte & Touche LLP as the independent registered public accountants of the Fund for the fiscal year ending September 30, 2022 by the following votes:

For   Against/
Withheld
 

Abstain

 
  36,494,982      

385,607

     

339,188

   

* Mr. Pohotsky served as an independent trustee until he passed away on July 13, 2022.

FOR MORE INFORMATION: A description of the Fund's proxy voting policies and procedures and information on how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available (i) without charge, upon request by calling 1-800-451-2597; (ii) by writing to Tekla Capital Management LLC at 100 Federal Street, 19th Floor, Boston, MA 02110; (iii) on the Fund's website at www.teklacap.com; and (iv) on the SEC's website at www.sec.gov.

The Fund's complete Schedule of Investments for the first and third quarters of its fiscal year will be filed with the SEC on Form N-PORT. This Schedule of Investments will also be available on the Fund's website at www.teklacap.com or the SEC's website at www.sec.gov.


39


TEKLA HEALTHCARE INVESTORS

You can find information regarding the Fund at the Fund's website, www.teklacap.com. The Fund regularly posts information to its website, including information regarding daily share pricing, distributions, press releases and links to the Fund's SEC filings. The Fund currently publishes and distributes quarterly fact cards, which includes performance, portfolio holdings and sector information for each fiscal quarter. These fact cards will be available on the Fund's website and by request from the Fund's marketing and investor support services agent, Destra Capital Advisors LLC, at 1-877-855-3434.

FEDERAL TAX INFORMATION (unaudited): Certain information for the Fund is required to be provided to shareholders based on the Fund's income and distributions for the taxable year ended December 31, 2022. In February 2023, shareholders will receive Form 1099-DIV, which will include their share of qualified dividends and capital gains and return of capital distributed during the calendar year 2022. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual tax returns.

For corporate shareholders, 62.49% of ordinary income dividends paid by the Fund qualified for the dividends received deduction for the year ended September 30, 2022.

Under Section 854(b)(2) of the Code, the Fund designated $8,000,571 as qualified dividends for the year ended September 30, 2022.

DISTRIBUTION POLICY: The Fund has a managed distribution policy as described in the Notes to Financial Statements. For more information contact your financial adviser.

SHARE REPURCHASE PROGRAM: In March 2022, the Trustees reauthorized the share repurchase program to allow the Fund to repurchase up to 12% of its outstanding shares for a one year period ending July 14, 2023.

PORTFOLIO MANAGEMENT: Daniel R. Omstead, Ph.D., Jason C. Akus, M.D./M.B.A., Timothy Gasperoni, M.B.A., Ph.D., Ashton L.Wilson, Christopher Abbott, Robert Benson, Richard Goss, Loretta Tse, Ph.D., Jack Liu, M.B.A., Ph.D., Christopher Seitz, M.B.A., Graham Attipoe, M.B.A., M.D.; and Kelly Girskis, Ph.D. are members of a team that analyzes investments on behalf of the Fund. Dr. Omstead exercises ultimate decision making authority with respect to investments.


40


TEKLA HEALTHCARE INVESTORS

INVESTMENT OBJECTIVE, POLICIES AND
RISK FACTORS

The following information in this annual report is a summary of certain information about the Fund and changes since September 30, 2021. This information may not reflect all of the changes that have occurred since you purchased the Fund.

Investment Objective and Policies

There have been no changes in the Fund's investment objective and policies since September 30, 2021 that have not been approved by shareholders.

The Fund's investment objective is to seek long-term capital appreciation by investing primarily in equity and related securities (including securities subject to legal or contractual restrictions on resale) of U.S. and foreign companies principally engaged in the healthcare industries ("Healthcare Companies").

In an effort to achieve its investment objective, the Fund will invest primarily in securities of U.S. and foreign companies that are generally believed by the Investment Adviser to have significant potential for above-average long-term growth in revenues and earnings. The Investment Adviser expects that such companies generally will possess some or all of the following characteristics, in the Investment Adviser's judgment: current or anticipated strong market position for their services or products, experienced business management, recognized technological expertise, and the ability either to generate funds internally to finance growth or to secure outside sources of capital. For companies with earnings, the Investment Adviser generally will attempt to invest in securities that sell at price-earnings ratios or at multiples of underlying asset or potential values which, have upside potential.

The Fund may invest in securities of emerging growth Healthcare Companies, which may offer limited products or services or which are at the research and development stage with no marketable or approved products or technologies. The Fund also may invest in securities of large, well-known companies with existing products in the healthcare industries that are believed by the Investment Adviser to be undervalued in relation to their long-term growth potential or asset value.

The Fund also may invest up to 40% of its net assets in venture capital or other securities that are subject to legal or contractual restrictions on resale ("Restricted Securities").


41


TEKLA HEALTHCARE INVESTORS

INVESTMENT OBJECTIVE, POLICIES AND
RISK FACTORS

(continued)

The Fund also may invest up to 20% of its net assets in securities of foreign issuers, expected to be located primarily in Western Europe, Canada and Japan, and securities of U.S. issuers traded in foreign markets ("Foreign Securities"). The Fund may buy and sell currencies for the purpose of settlement of transactions in Foreign Securities.

Under normal market conditions, the Fund expects to invest at least 80% of its net assets in securities of Healthcare Companies. This policy may not be changed without 60 days' prior notice to the Fund's shareholders (the "shareholders"). The Fund is required, except for temporary defensive purposes, to invest at least 25% of its net assets in such companies. For purposes of satisfying the foregoing requirements, a company will be deemed to be a Healthcare Company if, at the time the Fund makes an investment therein, 50% or more of such company's sales, earnings or assets arise from or are dedicated to, or are expected to arise from or be dedicated to, healthcare products or services or medical technology activities. Determinations as to whether a company is a Healthcare Company will be made by the Investment Adviser in its discretion.

The equity and related securities in which the Fund may invest consist of common stock of Healthcare Companies and, to a lesser extent, of preferred stock, convertible debt, limited partnership interests and warrants or other rights to acquire common or preferred stocks of such companies. The Fund's investments in venture capital opportunities, which are considered Restricted Securities, will be made primarily in convertible preferred stock. The Fund may also purchase non-convertible debt securities in connection with its venture capital investments, and otherwise when the Investment Adviser believes that such investments would be consistent with the Fund's investment objective. While these debt investments typically will not be rated, the Investment Adviser believes that, in light of the risk characteristics associated with investments in emerging growth companies (see "Risk Factors"), if such investments were to be compared with investments rated by S&P or Moody's, they may be rated as low as "C" in the rating categories established by S&P and Moody's. Such securities are commonly referred to as "junk bonds" and are considered, on balance, as predominantly speculative.

Put or Call Options

The Fund may purchase and sell (or write) put or call options on any security in which it is permitted to invest or on any index of securities or other index the change in value of which has a high degree of correlation with the changes


42


TEKLA HEALTHCARE INVESTORS

INVESTMENT OBJECTIVE, POLICIES AND
RISK FACTORS

(continued)

in value of the Fund's portfolio securities, and may purchase and sell (or write) on a covered basis financial futures contracts and options on such futures.

Changes to Risk Factors During the Prior Fiscal Year

There have been no material changes to the Fund's Risk Factors since September 30, 2021.

Risk Factors

Investing in any investment company security involves risk, including the risk that you may receive little or no return on your investment or even that you may lose part or all of your investment. Investors should consider the following Risk Factors and special considerations associated with investing in the Fund's shares.

Portfolio Market Risk. As with any investment company that invests in equity securities, the Fund is subject to market risk—the possibility that the prices of equity securities will decline over short or extended periods of time. The price of an equity security of an issuer may be particularly sensitive to general movements in the stock market, or a drop in the stock market may depress the price of most or all of the equity securities held by the Fund. In addition, equity securities held by the Fund may decline in price if the issuer fails to make anticipated distributions or dividend payments because, among other reasons, the issuer experiences a decline in its financial condition. As a result, the value of an investment in the Fund's shares will fluctuate with the market. You could lose some or all of your investment over short or long periods of time. Political and economic news can influence market-wide trends and can cause disruptions in the U.S. or world financial markets. Other factors may be ignored by the market as a whole but may cause movements in the price of one company's stock or the stock of companies in one or more industries. All of these factors may have a greater impact on initial public offerings and emerging company shares.

Instability in the financial markets has led the U.S. government and certain foreign governments to take a number of unprecedented actions designed to support certain financial institutions and segments of the financial markets that have experienced extreme volatility, and in some cases a lack of liquidity, including through direct purchases of equity and debt securities. Federal, state, and foreign governments, their regulatory agencies or self-regulatory organizations


43


TEKLA HEALTHCARE INVESTORS

INVESTMENT OBJECTIVE, POLICIES AND
RISK FACTORS

(continued)

may take actions that affect the regulation of the issuers in which the Fund invests in ways that are unforeseeable. Legislation or regulation may also change the way in which the Fund is regulated. Such legislation or regulation could limit or preclude the Fund's ability to achieve its investment objective

The value of your investment in the Fund is based on the market prices of the securities the Fund holds. The increasing interconnectivity between global economies and financial markets increases the likelihood that events or conditions in one region or financial market may adversely impact issuers in a different country, region or financial market. Securities in the Fund's portfolio may underperform due to inflation (or expectations for inflation), interest rates, global demand for particular products or resources, natural/environmental disasters, pandemics, epidemics, cyber-attacks, terrorism, regulatory events and governmental or quasi-governmental actions. The occurrence of global events, such as terrorist attacks around the world, natural disasters, social and political discord or debt crises and downgrades, among others, may result in market volatility and may have long term effects on both the U.S. and global financial markets. A disruption of financial markets or other terrorist attacks could adversely affect Fund service providers and/or the Fund's operations as well as interest rates, secondary trading, credit risk, inflation and other factors relating to the shares. The Fund cannot predict the effects or likelihood of similar events in the future on the U.S. and world economies, the value of the shares or the NAV of the Fund.

Social, political, economic and other conditions and events, such as natural/environmental disasters, health emergencies (e.g., epidemics and pandemics), cyber-attacks, terrorism, conflicts and social unrest, may occur and could significantly impact issuers, industries, governments and other systems, reduce consumer demand or economic output, result in market closures, travel restrictions or quarantines, and generally have a significant impact on the economies and financial markets and the Investment Adviser's investment advisory activities and services of other service providers, which in turn could adversely affect the Fund's investments and other operations. These types of events quickly and significantly impact markets in the U.S. and across the globe leading to extreme market volatility and disruption. The extent and nature of the impact on supply chains or economies and markets from these events is unknown, particularly if a health emergency or other similar event, such as the recent COVID-19 outbreak, persists for an extended period of time. The value of the Fund's investment may decrease as a result of such events, particularly


44


TEKLA HEALTHCARE INVESTORS

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RISK FACTORS

(continued)

if these events adversely impact the operations and effectiveness of the Investment Adviser or key service providers or if these events disrupt systems and processes necessary or beneficial to the investment advisory or other activities on behalf the Fund.

Security Market Risk—Discount to NAV. Market price risk is a risk separate and distinct from the risk that the Fund's NAV will decrease. The Fund's shares have traded in the market below NAV per share (a discount), at NAV per share and above NAV per share (premium) since the commencement of the Fund's operations. There can be no assurance that the Fund's shares will trade at a premium in the future, or that any such premium will be sustainable. The Fund cannot predict whether the shares will trade in the future at, above or below their NAV.

Non-Diversification Risk. The Fund is non-diversified, meaning that the Fund is permitted to invest more of its assets in fewer issuers than "diversified" funds. Thus, the Fund may be more susceptible to adverse developments affecting any single issuer held in its portfolio, and may be more susceptible to greater losses because of these developments.

Selection Risk. Different types of equity securities tend to shift into and out of favor with investors, depending on market and economic conditions. The performance of funds that invest in equity securities of Healthcare Companies may at times be better or worse than the performance of funds that focus on other types of securities or that have a broader investment style.

Concentration in the Healthcare Industries. Under normal market conditions, the Fund expects to invest primarily in securities of Healthcare Companies representing a small number of industries and to invest at least 25% of its net assets in securities of Healthcare Companies. As a result, the Fund's portfolio may be more sensitive to, and possibly more adversely affected by, regulatory, economic or political factors or trends relating to the healthcare industries than a portfolio of companies representing a larger number of industries. This risk is in addition to the risks normally associated with any strategy seeking capital appreciation by investing in a portfolio of equity securities. As a result of its concentration policy, the Fund's investments may be subject to greater risk and market fluctuation than a fund that has securities representing a broader range of investments. The healthcare industries can be volatile. The Fund may occasionally make investments in a company with the objective of controlling or influencing the management and policies of that company, which could


45


TEKLA HEALTHCARE INVESTORS

INVESTMENT OBJECTIVE, POLICIES AND
RISK FACTORS

(continued)

potentially make the Fund more susceptible to declines in the value of the company's stock. The Investment Adviser may seek control in public companies only occasionally and most often in companies with a small capitalization.

Healthcare Companies have in the past been characterized by limited product focus, rapidly changing technology and extensive government regulation. In particular, technological advances can render an existing product, which may account for a disproportionate share of a company's revenue, obsolete. Obtaining governmental approval from U.S. governmental agencies such as the Food and Drug Administration (the "FDA"), and from non-U.S. governmental agencies for new products can be lengthy, expensive and uncertain as to outcome. Such delays in product development may result in the need to seek additional capital, potentially diluting the interests of existing investors such as the Fund. In addition, governmental agencies may, for a variety of reasons, restrict the release of certain innovative technologies of commercial significance, such as genetically altered material. These various factors may result in abrupt advances and declines in the securities prices of particular companies and, in some cases, may have a broad effect on the prices of securities of companies in particular healthcare industries.

A concentration of investments in any healthcare industry or in Healthcare Companies generally may increase the risk and volatility of an investment company's portfolio. Such volatility is not limited to the biotechnology industry, and companies in other industries may be subject to similar abrupt movements in the market prices of their securities. No assurance can be given that future declines in the market prices of securities of companies in the industries in which the Fund may invest will not occur, or that such declines will not adversely affect the NAV or the price of the shares.

Intense competition exists within and among certain healthcare industries, including competition to obtain and sustain proprietary technology protection. Healthcare Companies can be highly dependent on the strength of patents, trademarks and other intellectual property rights for maintenance of profit margins and market share. The complex nature of the technologies involved can lead to patent disputes, including litigation that could result in a company losing an exclusive right to a patent. Competitors of Healthcare Companies, particularly of the emerging growth Healthcare Companies in which the Fund may invest, may have substantially greater financial resources, more extensive development, manufacturing, marketing and service capabilities, and a larger


46


TEKLA HEALTHCARE INVESTORS

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RISK FACTORS

(continued)

number of qualified managerial and technical personnel. Such competitors may succeed in developing technologies and products that are more effective or less costly than any that may be developed by Healthcare Companies in which the Fund invests and may also prove to be more successful in production and marketing. Competition may increase further as a result of potential advances in health services and medical technology and greater availability of capital for investment in these fields.

With respect to healthcare industries, cost containment measures already implemented by national governments, state or provincial governments and the private sector have adversely affected certain sectors of these industries. The implementation of the Affordable Care Act ("ACA") has created increased demand for healthcare products and services, but potential changes to the ACA and future healthcare laws and regulations may impact demand for healthcare products and services and has had or may have an adverse effect on some companies in the healthcare industries. Increased emphasis on managed care in the United States and a shift toward value based payment models may put pressure on the price and usage of products sold by Healthcare Companies in which the Fund may invest and may adversely affect the sales and revenues of Healthcare Companies.

Product development efforts by Healthcare Companies may not result in commercial products for many reasons, including, but not limited to, failure to achieve acceptable clinical trial results, limited effectiveness in treating the specified condition or illness, harmful side effects, failure to obtain regulatory approval, and high manufacturing costs. Even after a product is commercially released, governmental agencies may require additional clinical trials or change the labeling requirements for products if additional product side effects are identified, which could have a material adverse effect on the market price of the securities of those Healthcare Companies.

Certain Healthcare Companies in which the Fund may invest may be exposed to potential product liability risks that are inherent in the testing, manufacturing, marketing and sale of pharmaceuticals, medical devices or other products. A product liability claim may have a material adverse effect on the business, financial condition or securities prices of a company in which the Fund has invested.

All of these factors as well as others may cause the value of the Fund's shares to fluctuate significantly over relatively short periods of time.


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TEKLA HEALTHCARE INVESTORS

INVESTMENT OBJECTIVE, POLICIES AND
RISK FACTORS

(continued)

Risks Associated with Regulatory and Policy Changes. At any time after the date hereof, U.S. and non-U.S. governmental agencies and other regulators may implement additional regulations and legislators may pass new laws that affect the investments held by the Fund, the strategies used by the Fund or the level of regulation or taxation applying to the Fund. These regulations and laws impact the investment strategies, performance, costs and operations of the Fund, as well as the way investments in, and shareholders of, the Fund are taxed. In particular, changes to U.S. healthcare policy could affect the Fund and its investments. The affordability of healthcare in the U.S. will remain a topic of debate, and proposals, laws and regulations to reduce the costs of healthcare products and services could adversely impact healthcare companies that the Fund invests in.

Investment in Emerging Growth Companies. The Fund may invest in equity securities of emerging growth Healthcare Companies. While these securities offer the opportunity for significant capital gains, such investments also involve a degree of risk that can result in substantial losses. There can be no assurance that securities of start-up or emerging growth companies will, in the future, yield returns commensurate with their associated risks.

Liquidity of Portfolio Investments. The Fund may invest in securities that are traded in the over-the-counter markets or on regional stock exchanges where the low trading volume of a particular security may result in abrupt and erratic price movements or that are not traded in any market. An investment in such securities may have limited liquidity, and the Fund may find it necessary to sell at a discount from recent prices or to sell over extended periods of time when disposing of such securities. In addition, the Fund may invest up to 40% of its net assets in Restricted Securities, which by their terms are illiquid. In many cases, Restricted Securities in which the Fund may invest cannot be sold except in a public offering registered under the Securities Act of 1933, as amended, pursuant to an exemption from the Securities Act or in compliance with applicable Securities and Exchange Commission regulations.

Venture Capital Investments Risk. The Fund may occasionally invest in venture capital opportunities. While these securities offer the opportunity for significant capital gains, such investments also involve a degree of risk that can result in substantial losses. Some of the venture capital opportunities in which the Fund may invest are expected to be companies that are in a "start-up" stage of development, have little or no operating history, operate at a loss or


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RISK FACTORS

(continued)

with substantial variations in operating results from period to period, have limited products, markets, financial resources or management depth, or have the need for substantial additional "follow-on" capital to support expansion or to achieve or maintain a competitive position. Such additional investments may dilute the interests of prior investors, such as the Fund. Some of these companies may be emerging companies at the research and development stage with no marketable or approved products or technology. There can be no assurance that securities of start-up or emerging growth companies will, in the future, yield returns commensurate with their associated risks.

These investments, which are considered Restricted Securities, will be made primarily in convertible preferred stock. The Fund may also purchase non-convertible debt securities in connection with its venture capital investments, and otherwise when the Investment Adviser believes that such investments would be consistent with the Fund's investment objective. While these debt investments typically will not be rated, the Investment Adviser believes that, in light of the risk characteristics associated with investments in emerging growth companies, if such investments were to be compared with investments rated by S&P or Moody's, they may be rated as low as "C" in the rating categories established by S&P and Moody's. Such securities are commonly referred to as "junk bonds" and are considered, on balance, as predominantly speculative.

Restricted Securities and Valuation Risk. Some of the Fund's investments are subject to restrictions on resale and generally have no established trading market or are otherwise illiquid with little or no trading activity. The valuation process requires an analysis of various factors. The Fund's fair value methodology includes the examination of, among other things, (i) the existence of any contractual restrictions on the disposition of the securities; (ii) information obtained from the issuer which may include an analysis of the company's financial statements, the company's products or intended markets, or the company's technologies; and (iii) the price of a security sold at arm's length in an issuer's subsequent completed round of financing. As there is typically no readily available market value for some of the Restricted Securities in the Fund's portfolio, such Restricted Securities in the Fund's portfolio are valued at fair value as determined in good faith by or under the direction of the Board pursuant to the Fund's valuation policy and a consistently applied valuation process. Because of the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Fund's investments determined in good faith by the Board may differ


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TEKLA HEALTHCARE INVESTORS

INVESTMENT OBJECTIVE, POLICIES AND
RISK FACTORS

(continued)

significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material. There is no single standard for determining fair value in good faith.

As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment, while employing a consistently applied valuation process for the types of investments the Fund makes.

Foreign Securities Risk. The Fund may invest up to 20% of its net assets in Foreign Securities. Foreign Securities involve special risks that are not typically associated with U.S. dollar denominated or quoted securities of U.S. issuers. Foreign Securities may be affected by changes in currency rates, changes in foreign or U.S. laws or restrictions applicable to such investments and changes in exchange control regulations (e.g., currency blockage). A decline in the exchange rate of the currency (i.e., weakening of the currency against the U.S. dollar) in which a portfolio security is quoted or denominated relative to the U.S. dollar would reduce the value of the portfolio security. In addition, if the currency in which the Fund receives dividends, interest or other payments declines in value against the U.S. dollar before such income is distributed as dividends to Shareholders or converted to U.S. dollars, the Fund may have to sell portfolio securities to obtain sufficient cash to pay such dividends.

Brokerage commissions, custodial services and other costs relating to investment in international securities markets generally are more expensive than in the United States. In addition, clearance and settlement procedures may be different in foreign countries and, in certain markets, such procedures have been unable to keep pace with the volume of securities transactions, thus making it difficult to conduct such transactions.

Foreign issuers are not generally subject to uniform accounting, auditing and financial reporting standards comparable to those applicable to U.S. issuers. There may be less publicly available information about a foreign issuer than about a U.S. issuer. In addition, there is generally less government regulation of foreign markets, companies and securities dealers than in the United States, and the legal remedies for investors may be more limited than the remedies available in the United States. Foreign securities markets may have substantially less volume than U.S. securities markets and securities of many foreign issuers are less liquid and more volatile than securities of comparable domestic issuers. Furthermore, with respect to certain foreign countries, there is a possibility of


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TEKLA HEALTHCARE INVESTORS

INVESTMENT OBJECTIVE, POLICIES AND
RISK FACTORS

(continued)

nationalization, expropriation or confiscatory taxation, imposition of withholding or other taxes on dividend or interest payments (or, in some cases, capital gains distributions), limitations on the removal of funds or other assets from such countries, and risks of political or social instability or diplomatic developments which could adversely affect investments in those countries. Adverse diplomatic developments may include the imposition of economic or trade sanctions or other measures by the U.S. or other governments and supranational organizations or changes in trade policies. These developments may, among other things, limit the ability of the Fund to invest in certain securities or require the disposition of an investment.

Key Personnel Risk. There may be only a limited number of securities professionals who have comparable experience to that of the Fund's existing portfolio management team in the area of Healthcare Companies. If one or more of the team members dies, resigns, retires or is otherwise unable to act on behalf of the Investment Adviser, there can be no assurance that a suitable replacement could be found immediately.

Concentration of Investments. The Fund may from time to time concentrate its investments in a few issuers and take large positions in those issuers. As a result, the Fund may be subject to a greater risk of loss than an investment company that diversifies its investments more broadly. Taking larger positions is also likely to increase the volatility of the Fund's NAV reflecting fluctuation in the value of its large holdings. The Fund may make investments in any company with the objective of controlling or influencing the management and policies of that company. Investing for the purpose of controlling or influencing the management and policies of a company could potentially make the Fund less diversified and more susceptible to declines in the value of the company's stock. The Investment Adviser may seek a control position in private venture capital investments where the Investment Adviser believes its knowledge and experience will be of significant benefit to the invested company and, therefore, to the Fund's investment. The Investment Adviser expects to seek control in public companies only occasionally and most often in companies with a small capitalization.

Anti-Takeover Provisions Risk. The Fund's Amended and Restated Declaration of Trust ("Declaration of Trust"), dated April 21, 1987, as amended, has provisions that could have the effect of limiting the ability of other entities or persons to (1) acquire control of the Fund, (2) cause it to engage in certain


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(continued)

transactions, or (3) modify its structure. The By-Laws also contain provisions regarding qualifications for nominees for Trustee positions, advance notice of shareholder proposals, and requirements for the call of special shareholder meetings. These provisions may be considered "anti-takeover" provisions.

Related Party Transactions Risk. The majority of the Board is unaffiliated with the Investment Adviser; nevertheless, the Fund may be subject to certain potential conflicts of interest. Although the Fund has no obligation to do so, it may place brokerage orders with brokers who provide supplemental investment research and market and statistical information about Healthcare Companies and the healthcare industries. In addition, other investment companies advised by the Investment Adviser may concurrently invest with the Fund in Restricted Securities under certain conditions. The Fund also may invest, subject to applicable law, in companies in which the principals of the Investment Adviser or Trustees of the Fund have invested, or for which they serve as directors or executive officers.

The Investment Company Act prohibits the Fund from engaging in certain transactions involving its "affiliates," including, among others, the Fund's Trustees, officers and employees, the Investment Adviser and any "affiliates" of such affiliates except pursuant to an exemptive order or the provisions of certain rules under the Investment Company Act. In the view of the staff of the Commission, other investment companies advised by the Investment Adviser may, in some instances, be viewed to be affiliates of the Fund. Such legal restrictions and delays and costs involved in obtaining necessary regulatory approvals may preclude or discourage the Fund from making certain investments and no assurance can be given that any exemptive order sought by the Fund will be granted.

The Investment Adviser's investment team is responsible for managing the Fund as well as three other closed-end investment companies. In the future, the investment team may manage other funds and accounts, including proprietary accounts, separate accounts and other pooled investment vehicles, such as unregistered hedge funds. In the future, a portfolio manager may manage a separate account or other pooled investment vehicle which may have materially higher fee arrangements than the Fund and may also have a performance-based fee. The side-by-side management of these funds or accounts may raise potential conflicts of interest relating to cross trading, the allocation of investment opportunities and the aggregation and allocation of trades.


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RISK FACTORS

(continued)

Special Purpose Acquisition Company Risk. The Fund may invest in SPACs. SPACs are collective investment structures that pool funds in order to seek potential acquisition opportunities. Unless and until an acquisition is completed, a SPAC generally invests its assets (less an amount to cover expenses) in U.S. Government securities, money market fund securities and cash. SPACs and similar entities may be blank check companies with no operating history or ongoing business other than to seek a potential acquisition. Certain SPACs may seek acquisitions only in limited industries or regions. If an acquisition that meets the requirements for the SPAC is not completed within a predetermined period of time, the invested funds are returned to the entity's shareholders. Investments in SPACs may be illiquid and/or be subject to restrictions on resale.


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TEKLA HEALTHCARE INVESTORS

New York Stock Exchange Symbol: HQH
NAV Symbol: XHQHX

100 Federal Street, 19th Floor
Boston, Massachusetts 02110
(617) 772-8500
www.teklacap.com

Officers

Daniel R. Omstead, Ph.D., President
Laura Woodward, CPA, Chief Compliance Officer,
Secretary and Treasurer

Trustees

Jeffrey A. Bailey
Kathleen L. Goetz
Rakesh K. Jain, Ph.D.
Thomas M. Kent, CPA
Daniel R. Omstead, Ph.D.
W. Mark Watson, CPA

Investment Adviser

Tekla Capital Management LLC

Administrator & Custodian

State Street Bank and Trust Company

Transfer Agent

Computershare, Inc.

Legal Counsel

Dechert LLP

Shareholders with questions regarding share transfers may call

1-800-426-5523

Daily net asset value may be obtained from
our website (www.teklacap.com) or by calling

617-772-8500


 

ITEM 2. CODE OF ETHICS.

 

(a)As of the end of the period covered by this report, the Registrant has adopted a code of ethics that applies to the Registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the Registrant or a third party.

 

(b)No disclosures are required by this Item.

 

(c)During the period covered by this report, the Registrant did not make any substantive amendment to the code of ethics.

 

(d)During the period covered by this report, the Registrant did not grant any waiver, including any implicit waiver, from any provision of the code of ethics.

 

(e)Not applicable.

 

(f)A copy of the Registrant’s code is filed as Exhibit 1 to this Form N-CSR. Copies of the Code will also be made available, free of charge, upon request, by writing or calling Tekla Capital Management LLC at 100 Federal Street, 19th Floor, Boston, MA 02110, 617-772-8500.

 

ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.

 

The Registrant’s Board of Trustees has determined that the Registrant has at least one audit committee financial expert serving on its audit committee. The audit committee financial expert is Thomas M. Kent. He is “independent” for the purposes of Item 3.

 

ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

 

(a)Audit Fees. The aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of the Registrant’s annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years were $114,230 for the fiscal year ended September 30, 2022 and $106,650 for the fiscal year ended September 30, 2021.

 

(b)Audit Related Fees. The Registrant was not billed any fees in each of the last two fiscal years ended September 30 for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the Registrant’s financial statements and not otherwise included above.

 

(c)Tax Fees. The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning were $6,670 for the fiscal year ended September 30, 2022 and $6,180 for the fiscal year ended September 30, 2021. The nature of the services comprising the fees disclosed under this category was tax compliance.

 

(d)All Other Fees. The Registrant was not billed any fees in each of the last two fiscal years ended September 30 for products and services provided by the principal accountant, other than the services reported in paragraphs (a) through (c) of this Item.

 

(e)(1)  Pre-approval Policies and Procedures.

 

Pursuant to the Registrant’s Audit Committee Charter (“Charter”), the Audit Committee is responsible for approving in advance the firm to be employed as the Registrant’s independent auditor. In addition, the Charter provides that the Audit Committee is responsible for approving any and all proposals by the Registrant, its investment adviser or their affiliated persons or any entity controlling, controlled by, or under common control with the adviser that provides services to the Registrant to employ the independent auditor to render permissible non-audit services related directly to the operations and financial reporting of the Registrant. In determining whether to pre-approve non-audit services, the Audit Committee considers whether such services are consistent with the independent auditor’s independence. The Charter further permits the Audit Committee to delegate to one or more of its members authority to pre-approve permissible non-audit services to the registrant, provided that any pre-approval determination of a delegate is for services with an estimated budget of less than $15,000.

 

 

 

 

(2) None of the services described in each of paragraphs (b) through (d) of this Item were approved by the Audit Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.All services described in paragraphs (b) through (d) of the NCSR were approved in advance by the Audit Committee of each Fund.

 

(f)Not applicable.

 

(g)None.

 

(h)Not applicable.

 

ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.

 

The Registrant has a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act (15 U.S.C. 78c(a)(58)(A)). The members of the Audit Committee are Kathleen L. Goetz, Thomas M. Kent and W. Mark Watson.

 

ITEM 6. INVESTMENTS.

 

The Registrant’s Schedule of Investments is included as part of the Report to Shareholders filed under Item 1 of this form.

 

ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

 

The Registrant has adopted the following proxy voting policies and procedures.

 

PROXY VOTING POLICIES AND PROCEDURES

 

Policy

 

The following are the policies and procedures adopted and implemented by Tekla Capital Management LLC (“TCM”) for voting proxies with respect to portfolio securities held by Tekla Healthcare Investors, Tekla Life Sciences Investors, Tekla Healthcare Opportunities Fund and Tekla World Healthcare Fund (each a “Fund” and collectively the “Funds”). The policies and procedures are reasonably designed to ensure that proxies are voted in the best interest of the Funds and the Funds’ shareholders, in accordance with TCM’s fiduciary duties and Rule 206(4)-6 under the Investment Advisers Act of 1940 (the “Investment Advisers Act”). TCM considers the “best interests” of the Funds and their shareholders to mean their best long-term economic interests.

 

TCM shall vote proxies for the exclusive benefit, and in the best economic interest, of the Funds and their shareholders. Such exercise of voting rights shall be subject to the same standard of care as is generally applicable to TCM’s performance of its duties, as set forth in the advisory agreements with the Funds. The policies and procedures contained herein are designed to be guidelines, however each vote is ultimately cast on a case-by-case basis, taking into consideration the relevant facts and circumstances at the time of the vote. Any material conflicts that may arise will be resolved in the best interests of the Funds and their shareholders.

 

A proxy committee has been designated and is responsible for administering and overseeing the proxy voting process. The committee consists of the President of TCM, TCM’s Chief Compliance Officer (“CCO”), and the analyst responsible for oversight of the company that is the subject of the proxy. The committee considers proxy questions and determines the vote on behalf of the Funds.

 

 

 

 

Procedures

 

Logistics

 

TCM’s CCO shall be responsible for maintaining the proxy log, monitoring corporate actions and confirming the timely voting of proxies. The proxy log shall contain the following information, in accordance with Form N-PX:

 

the name of the issuer;

 

the exchange ticker symbol, if available;

 

the CUSIP number, if available;

 

the shareholder meeting date;

 

a brief identification of the matter voted on;

 

whether the matter was proposed by the issuer or a security holder;

 

whether TCM cast its vote on the matter;

 

how TCM cast its vote on the matter (for, against, abstain; for or withhold regarding the election of directors); and

 

whether TCM cast its vote for or against management;

 

TCM’s CCO shall also record whether any conflicts of interest have been identified and, if so, what action was taken to resolve the conflict with respect to each vote cast and each abstention.

 

Substantive Voting Decisions

 

TCM’s substantive voting decisions turn on the particular facts and circumstances of each proxy vote. The following is a list of common proxy vote issues and TCM’s standard considerations when determining how to vote such proxies.

 

Routine Matters/Corporate Administrative Items. After an initial review, TCM generally votes with management on routine matters related to the operation of the issuer that are not expected to have a significant economic impact on the issuer and/or its shareholders.

 

Potential for Major Economic Impact. TCM may review and analyze on a case-by-case basis, non-routine proposals that are more likely to affect the structure and operation of the issuer and to have a greater impact on the value of the investment.

 

Corporate Governance. TCM may review and consider corporate governance issues related to proxy matters and generally supports proposals that foster good corporate governance practices.

 

Special Interest Issues. TCM may consider: (i) the long-term benefit to shareholders of promoting corporate accountability and responsibility on social issues; (ii) management’s responsibility with respect to special interest issues; (iii) any economic costs and restrictions on management; and (iv) the responsibility of TCM to vote proxies for the greatest long-term shareholder value.

 

Limitations on Director Tenure and Retirement. TCM may consider: (i) a reasonable retirement age for directors, e.g. 70 or 72; (ii) the introduction of new perspectives on the board; and (iii) the arbitrary nature of such limitations and the possibility of detracting from the board’s stability and continuity.

 

Directors’ Minimum Stock Ownership. TCM may consider: (i) the benefits of additional vested interest; (ii) the ability of a director to serve a company well regardless of the extent of his or her share ownership; and (iii) the impact of limiting the number of persons qualified to be directors.

 

D&O Indemnification and Liability Protection. TCM may consider: (i) indemnifying directors for acts conducted in the normal course of business; (ii) limiting liability for monetary damages for violating the duty of care; (iii) expanding coverage beyond legal expenses to acts that represent more serious violations of fiduciary obligation than carelessness (e.g. negligence); and (iv) providing expanded coverage in cases when a director’s legal defense was unsuccessful if the director was found to have acted in good faith and in a manner that he or she reasonably believed was in the best interests of the issuer.

 

Director Nominations in Contested Elections. TCM may consider: (i) long-term financial performance of the issuer relative to its industry; (ii) management’s track record; (iii) background to proxy contest; (iv) qualifications of both slates of nominees; (v) evaluations of what each side is offering shareholders as well as the likelihood that the proposed objectives and goals can be met; and (vi) stock ownership positions.

 

 

 

 

Cumulative Voting. TCM may consider: (i) the ability of significant stockholders to elect a director of their choosing; (ii) the ability of minority shareholders to concentrate their support in favor of a director or directors of their choosing; and (iii) the potential to limit the ability of directors to work for all shareholders.

 

Classified Boards. TCM may consider: (i) providing continuity; (ii) promoting long-term planning; and (iii) guarding against unwanted takeovers.

 

Poison Pills. TCM may consider: (i) TCM’s position on supporting proposals to require a shareholder vote on other shareholder rights plans; (ii) ratifying or redeeming a poison pill in the interest of protecting the value of the issuer; and (iii) other alternatives to prevent a takeover at a price demonstrably below the true value of the issuer.

 

Fair Price Provisions. TCM may consider: (i) the vote required to approve the proposed acquisition; (ii) the vote required to repeal the fair price provision; (iii) the mechanism for determining fair price; and (iv) whether these provisions are bundled with other anti-takeover measures (e.g., supermajority voting requirements) that may entrench management and discourage attractive tender offers.

 

Equal Access. TCM may consider: (i) the opportunity for significant shareholders of the issuer to evaluate and propose voting recommendations on proxy proposals and director nominees, and to nominate candidates to the board; and (ii) the added complexity and burden.

 

Charitable Contributions. TCM may consider: (i) the potential benefits to shareholders; (ii) the potential to detract the issuer’s resources from more direct uses of increasing shareholder value; and (iii) the responsibility of shareholders to make individual contributions.

 

Stock Authorizations: TCM may consider: (i) the need for the increase; (ii) the percentage increase with respect to the existing authorization; (iii) voting rights of the stock; and (iv) overall capitalization structures.

 

Preferred Stock. TCM may consider: (i) whether the new class of preferred stock has unspecified voting, conversion, dividend distribution, and other rights; (ii) whether the issuer expressly states that the stock will not be used as a takeover defense or carry superior voting rights; (iii) whether the issuer specifies the voting, dividend, conversion, and other rights of such stock and the terms of the preferred stock appear reasonable; and (iv) whether the stated purpose is to raise capital or make acquisitions in the normal course of business.

 

Director Compensation. TCM may consider: (i) whether director shares are at the same market risk as those of the shareholders; and (ii) how option programs for outside directors compare with the standards of internal programs.

 

Golden and Tin Parachutes. TCM may consider: (i) whether they will be submitted for shareholder approval; and (ii) the employees covered by the plan and the quality of management.

 

Compensation. TCM may consider: (i) Whether the company has an independent compensation committee; (ii) whether the compensation committee engaged independent consultants; (iii) whether the compensation committee has lapsed or waived equity vesting restrictions; and (iv) whether the company has adopted or extended a Golden Parachute without shareholder approval. TCM will generally support annual advisory votes on executive compensation.

 

Limitations

 

TCM may abstain from voting a proxy if it concludes that the effect on shareholders’ economic interests or the value of the portfolio holding is indeterminable or insignificant. TCM may abstain from voting a proxy if it concludes that the cost of voting is disproportionate to the economic impact the vote would have on the portfolio holdings. With respect to certain privately held companies, TCM may not have the opportunity to vote or may have a limitation on its ability to vote. For example, in certain cases a company may be permitted by its charter or other governing documents to take action without a shareholder meeting and with written consent of fewer than all shareholders.

 

Conflicts of Interest

 

The Proxy Committee identifies any potential conflicts of interest. Each potential conflict must be addressed in a manner which will be in the best interest of the Funds and their shareholders. If any potential conflict is identified the Proxy Committee consults with the Funds’ counsel. Where conflicts of interest arise between clients and TCM, TCM may convene an ad-hoc committee to debate the conflict and to give a ruling on a preferred course of action. If the ad-hoc committee determines that TCM has a conflict of interest in any instance, TCM’s CCO shall disclose the conflict to the Board and seek voting instructions.

 

TCM may cause the proxies to be voted in accordance with the recommendations of an independent third party service provider that TCM may use to assist in voting proxies.

 

 

 

 

Disclosure

 

The following disclosure shall be provided in connection with these policies and procedures:

 

TCM shall provide a description or a copy of these policies and procedures to the Boards of Trustees of the Funds annually and upon request.

 

TCM shall make available to the Funds its proxy voting records, for inclusion on the Funds’ Form N-PX.

 

TCM shall include its proxy voting policies and procedures in its annual filing on Form N-CSR.

 

TCM shall cause the Funds’ shareholder reports to include a statement that a copy of these policies and procedures is available upon request (i) by calling a toll-free number; (ii) on the Funds’ website, (if the Funds choose); and (iii) on the SEC’s website.

 

TCM shall cause the Funds’ annual and semi-annual reports to include a statement that information is available regarding how the Funds voted proxies during the most recent twelve-month period (i) without charge, upon request, either by calling a toll-free number or on or through the Funds’ website, or both; and (ii) on the SEC’s website.

 

Recordkeeping

 

TCM shall maintain records of proxies voted in accordance with Section 204-2 of the Advisers Act, including proxy statements, a record of each vote cast, and a copy of any document created by the Adviser that was material to making a decision of how to vote the proxy, or that memorializes the basis for the Adviser’s decision on how to vote the proxy. TCM shall also maintain a copy of its policies and procedures and each written request from a client for proxy voting records and the Adviser’s written response to any client request, either written or oral, for such records. Proxy statements that are filed on EDGAR shall be considered maintained by TCM. All such records shall be maintained for a period of five years in an easily accessible place, the first two years in the offices of TCM.

 

ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

 

(a) (1)    As of December 7, 2022, Daniel R. Omstead, Ph.D., Jason Akus, M.D./M.B.A., Timothy Gasperoni, M.B.A., Ph.D., Ashton Wilson, Christopher Abbott, Robert Benson, Richard Goss, Loretta Tse, Ph.D., Jack Liu, M.B.A, Ph.D., Christopher Seitz, M.B.A., Graham Attipoe, M.B.A., M.D. and Kelly Girskis, Ph.D. are members of a team that analyzes investments on behalf of the Registrant. Dr. Omstead exercises ultimate decision making authority with respect to investments. Dr. Omstead also performs other duties including management of the investment adviser and makes investments on behalf of Tekla Life Sciences Investors (“HQL”), Tekla Healthcare Opportunities Fund (“THQ”) and Tekla World Healthcare Fund (“THW”). The date each team member joined the portfolio management team and each team member’s business experience for at least the last five years is included below.

 

Daniel R. Omstead, Ph.D. is President and Chief Executive Officer of the investment adviser and has been employed by the investment adviser of the Registrant since 2000. He is also President of the Registrant, HQL, THQ and THW.

 

Jason Akus, M.D./M.B.A. is Senior Vice President, Research of the investment adviser and is responsible for investment research and due diligence in the biotechnology, medical device, and diagnostic areas. Dr. Akus joined the investment adviser of the Registrant in 2001.

 

Timothy Gasperoni, M.B.A., Ph.D. is Senior Vice President, Research of the investment adviser. He was previously a Senior Analyst and Founding Member of Sabby Capital.  He joined TCM in 2015.

 

Ashton Wilson is Senior Vice President of the investment adviser. He was previously a Vice President in equity derivative trading at Goldman Sachs and Co. and was an equity derivative trader at Bank of America Merrill Lynch. He joined TCM in 2018.

 

Christopher Abbott is Vice President, Research of the investment adviser. Previously, Mr. Abbott was at Leerink Partners where he was a Vice President on the Equity Research Team. He joined TCM in 2016.

 

 

 

 

Robert Benson is Vice President of the investment adviser. Previously, Mr. Benson was at State Street Global Advisors (SSgA) where he performed quantitative research for asset allocation, equities, and alternatives teams. He joined TCM in 2016.

 

Loretta Tse, Ph.D. is Vice President of the investment adviser. She previously ran a biotech consulting business and worked at various venture funds and start-up companies and was Managing Director at Fred Hutchinson Cancer Research Center. She joined TCM in 2015.

 

Richard Goss is Senior Analyst of the investment advisor. Previously, Mr. Goss was at Leerink Partners where he was a Vice President on the Large Pharma and Biotech Equity Research Teams and a Healthcare Analyst at Datamonitor. He joined TCM in 2018.

 

Jack Liu, M.B.A., Ph.D. is Senior Analyst of the investment adviser. He was previously a Research Analyst at Weatherbie Capital. He joined TCM in 2019.

 

Christopher Seitz, M.B.A. is Senior Analyst of the investment adviser. Previously, Mr. Seitz was a Healthcare Analyst Intern at Nantahala Capital Management and an Associate at Excel Venture Management. He joined TCM in 2021.

 

Graham Attipoe, M.B.A., M.D. is Analyst of the investment adviser. Previously, Dr. Attipoe was a Research Analyst for Eagle Health Investments LP and a M.B.A. Summer Consultant for the Boston Consulting Group. He joined TCM in 2022.

 

Kelly Girskis, Ph.D. is Analyst of the investment adviser. Previously, Dr. Girskis was an Equity Research Associate at SVB Leerink. She joined TCM in 2021.

 

(a) (2)    The following table lists the number and types of other accounts and assets under management in those accounts advised by the Registrant’s portfolio management team as of the end of the Registrant’s fiscal year.

 

 

 

 

   REGISTERED                     
   INVESTMENT                     
PORTFOLIO  COMPANY   ASSETS   POOLED   ASSETS   OTHER   ASSETS 
MANAGER  ACCOUNTS   MANAGED   ACCOUNTS   MANAGED   ACCOUNTS   MANAGED 
Daniel R. Omstead   3   $ 2,033 million    0    0    0    0 
Jason Akus   3   $ 2,033 million    0    0    0    0 
Timothy Gasperoni   3   $ 2,033 million    0    0    0    0 
Ashton Wilson   3   $ 2,033 million    0    0    0    0 
Christopher Abbott   3   $ 2,033 million    0    0    0    0 
Robert Benson   3   $ 2,033 million    0    0    0    0 
Loretta Tse   3   $ 2,033 million    0    0    0    0 
Richard Goss   3   $ 2,033 million    0    0    0    0 
Jack Liu   3   $ 2,033 million    0    0    0    0 
Christopher Seitz   3   $ 2,033 million    0    0    0    0 
Graham Attipoe   3   $ 2,033 million    0    0    0    0 
Kelly Girskis   3   $ 2,033 million    0    0    0    0 

 

None of the funds or other accounts is subject to a performance-based advisory fee.

 

Each member of the portfolio management team may perform investment management services for other accounts similar to those provided to the Registrant and the investment action for each account may differ. The portfolio management team may discover an investment opportunity that may be suitable for more than one account. However, the investment opportunity may be limited so that all accounts may not be able to fully participate or an investment opportunity or investment allocation may be allocated to just one account or may be allocated between accounts at different levels based on an investment decision made by the investment team.  The investment team may subsequently make investment decisions that result in investment levels that make the accounts more differentiated or, conversely, more closely or completely aligned.  Such investment decisions may occur within a day or two.  In addition, the investment adviser may receive different compensation from each account. In that case, the portfolio management team may have an incentive to direct investments to an account that could result in higher fees for the investment adviser. The registrant has adopted procedures designed to allocate investments fairly across multiple accounts.

 

Additionally, a portfolio manager may be perceived to have a conflict of interest if he has other executive management responsibilities. In addition to managing the Registrant, HQL, THQ and THW, Dr. Omstead is the President of the investment adviser of the Registrant. Dr. Omstead periodically discusses the amount of time he allocates to each of his responsibilities with the Registrant’s Board of Trustees.

 

The portfolio management team’s management of personal accounts may also present certain conflicts of interest. The Registrant has adopted a code of ethics designed to address these potential conflicts.

 

(a) (3)    As of September 30, 2022, portfolio manager compensation is comprised of a base salary and discretionary compensation as described below.

 

Base Salary Compensation. The team members receive a base salary compensation linked to individual experience and responsibilities. The amount of base salary is reviewed annually.

 

Discretionary Compensation. Discretionary Compensation is in the form of a cash bonus, paid annually, which may be 50% or more of the team member’s base salary. Several factors affect discretionary compensation, which can vary by team member and circumstances. The discretionary compensation component is determined based on factors including investment performance of accounts managed by the team predominantly relative to the S&P 500 Index and a blended consideration of appropriate healthcare indicies and related performance metrics during the Fund’s fiscal year, performance of specific investments proposed by the individual, financial performance of the investment adviser and a qualitative assessment of the individual overall contribution to the investment team and to the investment adviser. Discretionary compensation is evaluated annually after the completion of the Registrant’s fiscal year.

 

 

 

 

 

 

 

(a) (4)    As of September 30, 2022, the dollar range of Registrant’s shares beneficially owned by the portfolio managers are as follows as of the end of the Registrant’s fiscal year:

 

PORTFOLIO MANAGER  DOLLAR RANGE OF SHARES BENEFICIALLY OWNED
Daniel R. Omstead  over $1,000,000
Jason Akus  none
Timothy Gasperoni  $10,001 – $50,000
Ashton Wilson  none
Christopher Abbott  none
Robert Benson  none
Loretta Tse  none
Richard Goss  none
Jack Liu  none
Christopher Seitz  none
Graham Attipoe  none
Kelly Girskis  none

 

(b) N/A.

 

ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS.

 

Period  (a) Total No.
of Shares
Purchased (1)
   (b) Average
Price Paid per
Share
   (c) Total No.
of Shares
Purchased as
Part of
Publicly
Announced Plans
or Programs
   (d) Maximum No.
of Shares that
May Yet Be
Purchased Under
the Plans or
Programs
 
Month #1 (Oct. 1, 2021-Oct. 31, 2021)             5,404,055 
Month #2 (Nov. 1, 2021 – Nov. 30, 2021)              5,404,055 
Month #3 (Dec. 1, 2021– Dec. 31, 2021)              5,404,055 
Month #4 (Jan. 1, 2022 – Jan. 31, 2022)                  5,404,055 
Month #5 (Feb. 1, 2022 – Feb. 28, 2022)             5,404,055 
Month #6 (Mar. 1, 2022 – Mar. 31, 2022)             5,404,055 
Month #7 (Apr. 1, 2022 – Apr. 30, 2022)                  5,404,055 
Month #8 (May 1, 2022 – May 31, 2022)              5,404,055 
Month #9 (June 1, 2022 – June 30, 2022)                         5,404,055 
Month #10 (Jul. 1, 2022 – Jul. 31, 2022)                  5,623,378 
Month #11 (Aug. 1, 2022 – Aug. 31, 2022)                  5,623,378 
Month #12 (Sep. 1, 2022 – Sep. 30, 2022)                  5,623,378 
Total                

 

 

 

(1)On June 30, 2011, the share repurchase program was announced, which has been subsequently reviewed and approved by the Board of Trustees. On March 18, 2021, the Trustees approved the renewal of the share repurchase program, allowing the Registrant to repurchase up to 12% of its outstanding shares in the open market for a one year period ending July 14, 2022. On March 17, 2022, the Trustees approved the renewal of the share repurchase program, allowing the Registrant to repurchase up to 12% of its outstanding shares in the open market for a one year period ending July 14, 2023.

 

 

 

 

ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

 

There have been no material changes, to the procedures by which the shareholders may recommend nominees to the Registrant’s Board of Trustees, where those changes were implemented after the Registrant last provided disclosure in response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR229.407)(as required by Item 22(b)(15) of Schedule 14A (17 CFR240.14a-101)), or this Item.

 

ITEM 11. CONTROLS AND PROCEDURES.

 

(a)In the opinion of the principal executive officer and principal financial officer, based on their evaluation which took place within 90 days of this filing, the Registrant’s disclosure controls and procedures are adequately designed and are operating effectively to ensure (i) that material information relating to the Registrant, including its consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which this report is being prepared; and (ii) that information required to be disclosed by the registrant on Form N-CSR is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms.

 

(b)There were no changes in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal half-year that have materially affected or that are reasonably likely to materially affect the Registrant’s internal control over financial reporting.

 

Item 12. Disclosure of Securities Lending Activities for Closed-End Management Investment Companies.

  

(a) The following table shows the dollar amounts of income, and dollar amounts of fees and/or compensation paid, relating to the Fund’s securities lending activities during the fiscal year ended September 30, 2022.

 

  (1)     Gross income from securities lending activities   $ 237,227  
  (2)     Fees and/or compensation for securities lending activities and related services      
    (a)   Fee paid for services as securities lending agent   $ 30,372  
    (b)   Collateral management expenses not included in (a)   $ 0  
    (c)   Administrative fees not included in (a)   $ 0  
    (d)   Indemnification fees not included in (a)   $ 0  
    (e)   Rebate (paid to borrowers)   $ 34,731  
    (f)   Other fees not included in (a)   $ 0  
  (3)     Aggregate fees/compensation for securities lending activities   $ 65,103  
  (4)     Net income from securities lending activities   $ 172,124  

 

(b) Goldman Sachs Bank USA, doing business as Goldman Sachs Agency Lending (“GSAL”) serves as securities lending agent for the Fund and in that role administers the Fund’s securities lending program pursuant to the terms of a securities lending agency agreement entered into between the Fund and GSAL.

 

ITEM 13. EXHIBITS.

 

(a) (1) The Code of Ethics that is the subject of the disclosure required by Item 2 is attached hereto (Exhibit 1).

 

(a) (2) Separate certifications of the Principal Executive and Financial Officers as required by Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto (Exhibit 2 and 3).

 

(a) (3)  Notice to Fund’s shareholders in accordance with Investment Company Act Section 19(a) and Rule 19a-1(Exhibit 4).

 

(b)       Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto (Exhibit 5).

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

(Registrant) TEKLA HEALTHCARE INVESTORS

 

By (Signature and Title)* /s/ Daniel R. Omstead
  Daniel R. Omstead, President

 

Date: 12/7/22  

 

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

By (Signature and Title)* /s/ Laura Woodward
  Laura Woodward, Treasurer

 

Date: 12/7/22  

 

 

 

* Print the name and title of each signing officer under his or her signature.

 

 

 

EX-99.CODE ETH 2 tm2225212d1_ex99-codeeth.htm EXHIBIT 99.CODE ETH

 

Exhibit 99.CODEETH

 

Exhibit 1

 

Sarbanes-Oxley Code of Ethics

 

Introduction

 

The Board of Trustees of Tekla Life Sciences Investors, Tekla Healthcare Investors, Tekla Healthcare Opportunities Fund and Tekla World Healthcare Fund (each a “Fund”) has established this Code of Ethics (“Code”) in accordance with the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. This Code does not supersede or otherwise affect the separate code of ethics that the Fund and its investment adviser have adopted pursuant to Rule 17j-1 under the Investment Company Act of 1940, as amended (“1940 Act”).

 

This Code is designed to deter wrongdoing and promote: (i) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; (ii) full, fair, accurate, timely, and understandable disclosure in reports and documents that the Fund files with, or submits to, the Securities and Exchange Commission (“SEC”) and in other public communications made by the Fund; (iii) compliance with applicable governmental laws, rules, and regulations; (iv) the prompt internal reporting of violations of the Code to an appropriate person or persons; and (v) accountability for adherence to the Code. The Code applies to the Funds’ President, Treasurer, Secretary and Assistant Treasurer (collectively, “Covered Officers,” each of whom is set forth in Exhibit A).

 

A.       Principles of Honest and Ethical Conduct

 

1. General Objectives

 

The Fund expects all Covered Officers to adhere to the highest possible standards of honest and ethical conduct. All Covered Officers are expected to handle actual or apparent conflicts of interest between personal and professional relationships in a manner that is above reproach, and to place the interests of the Fund above their own personal interests.

 

2. Conflicts of Interest

 

All Covered Officers should be scrupulous in avoiding a conflict of interest with regard to the Fund’s interests. A conflict of interest occurs when an individual’s private interest interferes in any way with the interests of the Fund. This includes any specific situation or transaction that the Trustees of the Fund who are not interested persons as defined in the 1940 Act, would consider to create the appearance of a conflict of interest. A conflict situation can arise when a Covered Officer takes actions or has interests that may make it difficult to perform his or her work for the Fund objectively and effectively. Conflicts of interest also arise when a Covered Officer, or a member of his or her family, receives improper benefits as a result of his or her position with the Fund, whether such benefits are received from the Fund or a third party. Any conflict of interest that arises in a specific situation or transaction must be disclosed by the Covered Officer and resolved before taking any action.

 

Conflicts of interest may not always be evident, and Covered Officers should consult with the Funds’ Chief Compliance Officer or the Funds’ legal counsel if they are uncertain about any situation.

 

Examples of possible conflicts of interest include:

 

i)Outside Employment or Activities. Covered Officers may not engage in any outside employment or activity that interferes with their performance or responsibilities to the Fund or is otherwise in conflict with or prejudicial to the Fund. A Covered Officer must disclose to the Funds’ Chief Compliance Officer any outside employment or activity that may constitute a conflict of interest and obtain the Funds’ Chief Compliance Officer’s approval before engaging in any such employment or activity.

 

 

 

ii)Gifts.Covered Officers may not accept gifts or other items of more than small value, consistent with industry standards from any person or entity that does business with or on behalf of the Fund.

 

iii)Other Situations. Because other conflicts of interest may arise, it would be impractical to attempt to list all possible situations in this Code. If a proposed transaction or situation raises questions or doubts, a Covered Officer should consult with the Funds’ Chief Compliance Officer before engaging in the transaction or activity.

 

1.       Corporate Opportunities

 

Covered Officers may not exploit for their own personal gain, or for the personal gain or their family members or relatives, opportunities that are discovered through the use of Fund property, information, or position, unless the opportunity is first disclosed fully in writing to the Board of Trustees and the Board of Trustees declines to pursue such opportunity.

 

B.Full, Fair, Accurate, Timely, and Understandable Disclosure in Fund Disclosure and Reporting Documents

 

As registered investment companies, it is of critical importance that the Funds’ public communications, reports, and filings contain full, fair, accurate, timely, and understandable disclosure. Accordingly, Covered Officers are expected to consider it central to their roles as officers of the Funds to promote full, fair, accurate, timely, and understandable disclosure in the Funds’ public communications and reports, and in the documents that the Funds file with, or submits to, the Securities and Exchange Commission (the “SEC”).

 

Depending on his or her position with the Funds, a Covered Officer may be called upon to provide necessary information to make the Funds’ public reports, communications, and SEC filings and submissions complete, fair, and understandable. The Funds expect Covered Officers to take this responsibility very seriously and to provide prompt and accurate answers to inquiries related to the Funds’ public disclosure requirements. Covered Officers may be asked to certify the accuracy of all responses and information provided for inclusion in the Funds’ public reports, communications, and SEC filings and submissions.

 

C.       Compliance with Applicable Governmental Rules and Regulations

 

As registered investment companies, the Funds are subject to regulation by the SEC and must comply with Federal securities laws and regulations, as well as other applicable laws. The Funds insist on strict compliance with the spirit and the letter of these laws and regulations. Each Covered Officer shall cooperate with Fund counsel, the Funds’ independent accountants, and the Funds’ other service providers with the goal of maintaining the Funds’ material compliance with applicable governmental rules and regulations.

 

The Funds expect their Covered Officers to comply with all laws, rules, and regulations applicable to the Funds’ operations and business. Covered Officers should seek guidance whenever they are in doubt as to the applicability of any law, rule, or regulation, or regarding any contemplated course of action. Covered Officers should also make use of the various guidelines which the Funds and their service providers have prepared on specific laws and regulations. If in doubt on a course of action, a good guideline is “always ask first, act later” — if you are unsure of what to do in any situation, seek guidance before you act.

 

 

 

  

Covered Officers are encouraged to attend courses and seminars for the purpose of keeping themselves apprised of developments relating to those governmental statutes, rules, and regulations applicable to the Funds.

 

Upon obtaining knowledge of any material violation of any applicable law, rule, or regulation by the Funds or a person acting with or on behalf of the Fund, a Covered Officer shall report such violation to the Funds’ Chief Compliance Officer, Fund counsel, or both. (See Section VI of the Code for a discussion of reporting Code violations.) Each Covered Officer shall cooperate or take such steps as may be necessary or appropriate to remedy any such material violation.

 

D.       Confidentiality

 

Covered Officers must maintain the confidentiality of information entrusted to them by the Funds, except when disclosure is authorized by Fund counsel or required by laws or regulations. Whenever possible, Covered Officers should consult with Fund counsel if they believe they have a legal obligation to disclose confidential information. Confidential information includes all non-public information that might be of use to competitors, or harmful to the Funds or their shareholders, if disclosed. The obligation to preserve confidential information continues even after employment as a Covered Officer ends.

 

E.Prompt Internal Reporting of Violations of the Code; Evaluation of Possible Violations; Determination of Sanctions

 

1.Reporting to the Funds’ Chief Compliance Officer

 

A Covered Officer shall promptly report knowledge of, or information concerning, any material violation of this Code to the Funds’ Chief Compliance Officer. Any such report shall preferably be in writing, and shall describe in reasonable detail the conduct that such Covered Officer believes to have violated this Code. The Funds’ Chief Compliance Officer shall also have the authority to draft a report of a suspected material violation of the Code, if no written report is made by a Covered Officer.

 

2.Evaluation of Reports

 

The Funds’ Chief Compliance Officer shall then consult with Fund counsel to the extent necessary to determine whether the reported conduct actually violates the Code. If it is determined that there has been a violation of the Code, the Funds’ Chief Compliance Officer will determine (in consultation with Fund counsel) whether the violation has had or may have, in the reasonable judgment of the Funds’ Chief Compliance Officer, a material adverse impact upon the Fund.

 

iNo Material Adverse Impact on the Funds. If the Funds’ Chief Compliance Officer determines that the violation has not caused a material adverse impact upon the Fund, the Funds’ Chief Compliance Officer shall determine what sanctions, if any, may be appropriate for the violation. (See G of this Code for a discussion of possible sanctions.)

 

 

 

iiMaterial Adverse Impact on the Funds. If the Funds’ Chief Compliance Officer determines that the violation has caused a material adverse impact upon the Fund, the Funds’ Chief Compliance Officer shall promptly notify the Board of such violation. The Board shall be entitled to consult with independent legal counsel to determine whether the violation actually has had a material adverse impact upon the Fund; to formulate sanctions, if any, appropriate for the violation; or for any other purpose that the Board, in its business judgment, determines to be necessary or advisable. (See G of this Code for a discussion of possible sanctions.)

 

3.Periodic Reports by the Funds’ Chief Compliance Officer to Board of Trustees.

 

The Funds’ Chief Compliance Officer shall report to the Board at each regularly scheduled Board meeting all violations of this Code (whether or not they caused a material adverse impact upon the Fund) and all sanctions imposed.

 

F.       Waivers of Provisions of the Code

 

1.Waivers.

 

A Covered Officer may request a waiver of a provision of this Code if there is a reasonable likelihood that a contemplated action would be a material departure from a provision of the Code. Waivers will not be granted except under extraordinary or special circumstances.

 

The process of requesting a waiver shall consist of the following steps:

 

i.The Covered Officer shall set forth a request for waiver in writing and submit such request to the Funds’ Chief Compliance Officer. The request shall describe the conduct, activity, or transaction for which the Covered Officer seeks a waiver, and shall briefly explain the reason for engaging in the conduct, activity, or transaction.

 

ii.The determination with respect to the waiver shall be made in a timely fashion by the Funds’ Chief Compliance Officer, in consultation with Fund counsel, and submitted to the Board for ratification.

 

iii.The decision with respect to the waiver request shall be documented and kept in the Fund’s records for the appropriate period mandated by applicable law or regulation.

 

2.Disclosure of Waivers.

 

To the extent required by applicable law, waivers (including “implicit waivers”) shall be publicly disclosed on a timely basis. An “implicit waiver” is defined as the Fund’s failure to take action within a reasonable period of time regarding a material departure from a provision of the Code that has been made known to an “executive officer” of the Fund. For this purpose, an “executive officer” is a Fund’s President or Chief Executive Officer, Vice President (who is in charge of a principal policymaking function), or any other person who performs similar policymaking functions for the Fund. For the purpose of determining whether an “implicit waiver” has occurred, if a material departure from a provision of the Code is known only by the Covered Officer who has caused the material departure, the material departure will not be considered to have been made known to an executive officer of the Fund.

 

 

 

  

G.       Accountability for Adherence to the Code

 

The matters covered in this Code are of the utmost importance to the Fund and its shareholders, and are essential to the Fund’s ability to conduct its business in accordance with its stated values. Covered Officers are expected to adhere to these rules in carrying out their duties for the Fund.

 

The Fund will, if appropriate, take action against any Covered Officer whose actions are found to violate this Code. Sanctions for violations of the Code may include, among other things, a requirement that the violator undergo training related to the violation, a letter of sanction, the imposition of a monetary penalty, and/or suspension or termination of the employment of the violator. Where the Fund has suffered a loss because of violations of this Code or applicable laws, regulations, or rules, it may pursue its remedies against the individuals or entities responsible.

 

H.       Recordkeeping

 

1.General.

 

The Fund requires accurate recording and reporting of information in order to make responsible business decisions. All of the Fund’s books, records, accounts and financial statements must be maintained in reasonable detail, must appropriately reflect the Fund’s transactions and must conform both to applicable legal requirements and to the Fund’s system of internal controls.

 

2.Code of Ethics Records.

 

A copy of this Code, any amendments hereto, and any reports or other records created in relation to waivers of or amendments to provisions of this Code shall be kept as records of the Fund for six years from the end of the fiscal year in which such document was created. Such records shall be furnished to the SEC or its staff upon request.

 

I.       Amendments to the Code

 

The Covered Officers and the Funds’ Chief Compliance Officer are encouraged to recommend improvements to this Code to the Board, and the Board may amend the Code in its discretion. In connection with any amendment to the Code, the Funds’ Chief Compliance Officer shall prepare a brief description of the amendment, in order that this description may be disclosed in accordance with applicable law and regulations.

 

Exhibit A: Covered Officers

 

Daniel R. Omstead, President

 

Laura Woodward, Treasurer and Secretary

 

EX-99.CERT 3 tm2225212d1_ex99-cert.htm EXHIBIT 99.CERT

Exhibit 99.CERT

 

EXHIBIT 2: CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

 

I, Daniel R. Omstead, certify that:

 

1.I have reviewed this report on Form N-CSR of TEKLA HEALTHCARE INVESTORS;

 

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report;

 

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have:

 

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and

 

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.The registrant’s other certifying officer(s) and I have disclosed to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)All significant deficiencies and material weaknesses in the designor operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

 

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: 12/7/22   /s/ Daniel R. Omstead
      Name: Daniel R. Omstead
      Title: President

 

 

 

EXHIBIT 3: CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

 

I, Laura Woodward, certify that:

 

1.I have reviewed this report on Form N-CSR of TEKLA HEALTHCARE INVESTORS;

 

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report;

 

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have:

 

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and

 

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.The registrant’s other certifying officer(s) and I have disclosed to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)All significant deficiencies and material weaknesses in the designor operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

 

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: 12/7/22   /s/ Laura Woodward
      Name: Laura Woodward
      Title: Treasurer

 

 

EX-99.SECTION 19(A) 4 tm2225212d1_ex99-section19a.htm EXHIBIT 99.SECTION 19(A)

 

Exhibit 99.Section 19(a)

 

EXHIBIT 4: SECTION 19(a) NOTICE TO FUND’S SHAREHOLDERS

 

TEKLA HEALTHCARE INVESTORS

 

Notification of Sources of Distribution

 

Distribution Paid Date: June 30, 2022
 
Distribution Amount Per Common Share: $0.44

 

The following table sets forth the estimated amounts of the current distribution, paid June 30, 2022, and the cumulative distributions paid this fiscal year-to-date from the following sources: net investment income, net realized short-term capital gains, net realized long-term capital gains and return of capital or other capital source. The Fund estimates that it has distributed more than its income and net realized capital gains; therefore, a portion of your distribution may be a return of capital. A return of capital may occur, for example, when some or all the money that you invested in the Fund is paid back to you. A return of capital distribution does not necessarily reflect the Fund's investment performance and should not be confused with `yield' or `income'. All amounts are expressed per common share.

 

               Percentage 
       Percentage      Breakdown of the 
       Breakdown   Total Cumulative   Total Cumulative 
   Current   of Current   Distributions for the   Distributions for the 
   Distribution   Distribution   Fiscal Year to Date1   Fiscal Year to Date1 
Net Investment Income  $0.0000    0%  $0.0000    0%
Net Realized ST Cap Gains  $0.0000    0%  $0.1173    8%
Net Realized LT Cap Gains  $0.0000    0%  $0.2870    20%
Return of Capital or Other Capital Source  $0.4400    100%  $1.0257    72%
TOTAL (per common share):  $0.4400    100%  $1.4300    100%

 

The table below includes information relating to the Fund’s performance based on its NAV for certain periods.

 

Average annual total return at NAV for the period April 30, 2017 through April 30, 2022   7.23%
Annualized current distribution rate expressed as a percentage of NAV as of April 30, 2022   8.56%
Cumulative total return at NAV for the fiscal year, through April 30, 20222   -15.66%
Cumulative fiscal year-to-date distribution rate expressed as a percentage of NAV as of April 30, 20221   6.96%

 

You should not draw any conclusions about the Fund’s investment performance from the amount of this distribution or from the terms of the Fund’s managed distribution policy.

 

The composition of this and subsequent distribution may vary from month to month because it may be materially impacted by future realized gains and losses on securities. The aggregate of the net unrealized appreciation of portfolio securities and net realized gains on sale of securities is $93,179,628 of which $82,060,161 represents net unrealized appreciation of portfolio securities.

 

The amounts and sources of distributions reported in this 19(a) Notice are only estimates and are not being provided for tax reporting purposes. The actual amounts and sources of the amounts for tax reporting purposes will depend upon the Fund's investment experience during the remainder of its fiscal year and may be subject to changes based on tax regulations. The Fund will send you a Form 1099-DIV for the calendar year that will tell you how to report these distributions for federal income tax purposes.

 

1The Fund’s current fiscal year began on October 1, 2021.
2Cumulative total return at NAV is the percentage change in the Fund’s NAV and includes all distributions and assumes the reinvestment of those distributions for the period of September 30, 2021 through April 30, 2022.

 

Tekla Healthcare Investors

CUSIP: 87911J103

www.teklacap.com

 

Tekla Capital Management LLC

100 Federal Street, 19th Floor

Boston, Massachusetts 02110

 

617-772-8500
Fax: 617-772-8577

 

03NXYA          002CSND066

 

 

 

 

TEKLA HEALTHCARE INVESTORS

 

Notification of Sources of Distribution

 

Distribution Paid Date: September 30, 2022
 
Distribution Amount Per Common Share: $0.40

 

The following table sets forth the estimated amounts of the current distribution, paid September 30, 2022, and the cumulative distributions paid this fiscal year-to-date from the following sources: net investment income, net realized short-term capital gains, net realized long-term capital gains and return of capital or other capital source. The Fund estimates that it has distributed more than its income and net realized capital gains; therefore, a portion of your distribution may be a return of capital. A return of capital may occur, for example, when some or all the money that you invested in the Fund is paid back to you. A return of capital distribution does not necessarily reflect the Fund's investment performance and should not be confused with `yield' or `income'. All amounts are expressed per common share.

 

              Percentage 
       Percentage      Breakdown of the 
      Breakdown   Total Cumulative   Total Cumulative 
   Current   of Current   Distributions for the   Distributions for the 
   Distribution   Distribution   Fiscal Year to Date1   Fiscal Year to Date1 
Net Investment Income  $0.0000    0%  $0.0000    0%
Net Realized ST Cap Gains  $0.0000    0%  $0.1173    6%
Net Realized LT Cap Gains  $0.4000    100%  $0.6870    38%
Return of Capital or Other Capital Source  $0.0000    0%  $1.0257    56%
TOTAL (per common share):  $0.4000    100%  $1.8300    100%

 

The table below includes information relating to the Fund’s performance based on its NAV for certain periods.

 

Average annual total return at NAV for the period July 31, 2017 through July 31, 2022   4.07%
Annualized current distribution rate expressed as a percentage of NAV as of July 31, 2022   7.78%
Cumulative total return at NAV for the fiscal year, through July 31, 20222   -13.58%
Cumulative fiscal year-to-date distribution rate expressed as a percentage of NAV as of July 31, 20221   8.90%

 

You should not draw any conclusions about the Fund’s investment performance from the amount of this distribution or from the terms of the Fund’s managed distribution policy.

 

The composition of this and subsequent distribution may vary from month to month because it may be materially impacted by future realized gains and losses on securities. The aggregate of the net unrealized appreciation of portfolio securities and net realized gains on sale of securities is $113,790,573 of which $49,531,640 represents net unrealized appreciation of portfolio securities.

 

The amounts and sources of distributions reported in this 19(a) Notice are only estimates and are not being provided for tax reporting purposes. The actual amounts and sources of the amounts for tax reporting purposes will depend upon the Fund's investment experience during the remainder of its fiscal year and may be subject to changes based on tax regulations. The Fund will send you a Form 1099-DIV for the calendar year that will tell you how to report these distributions for federal income tax purposes.

 

1The Fund’s current fiscal year began on October 1, 2021.
2Cumulative total return at NAV is the percentage change in the Fund’s NAV and includes all distributions and assumes the reinvestment of those distributions for the period of September 30, 2021 through July 31, 2022.

 

Tekla Healthcare Investors 

CUSIP: 87911J103

www.teklacap.com

 

Tekla Capital Management LLC

100 Federal Street, 19th Floor

Boston, Massachusetts 02110

 

617-772-8500

Fax: 617-772-8577

 

03P5ZA        002CSND329

 

 

 

EX-99.906 CERT 5 tm2225212d1_ex99-906cert.htm EXHIBIT 99.906 CERT

 

Exhibit 99.906CERT

 

EXHIBIT 5: CERTIFICATION PUSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT

 

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of TEKLA HEALTHCARE INVESTORS, do hereby certify, to such officer’s knowledge, that the report on Form N-CSR of TEKLA HEALTHCARE INVESTORS for the period ended September 30, 2022 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as applicable, and information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of TEKLA HEALTHCARE INVESTORS for the stated period.

 

Dated: 12/7/22    
       
  /s/ Daniel R. Omstead   /s/ Laura Woodward
  Name: Daniel R. Omstead   Name: Laura Woodward
  Title: President   Title: Treasurer

 

A signed original of this written statement required by Section 906 has been provided to TEKLA HEALTHCARE INVESTORS and will be retained by TEKLA HEALTHCARE INVESTORS and furnished to the SEC or its staff upon request. This statement accompanies this report on Form N-CSR pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

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