Woodford Patient Capital Trust annual report

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Neil Woodford 21 April 2017 Est. reading: 8 min read

Home > Words > Blog > Woodford Patient Capital Trust annual report

Today marks the publication of the Woodford Patient Capital Trust annual report. You can download the full report here, but below is Neil’s review of the trust’s progress in 2016.

We began 2016 with the money raised at the launch of WPCT fully deployed – and so the period under review started with a portfolio primed for its long-term patient capital journey. It is rich in quality, broad in terms of development stage and technology and, most importantly, high in potential.

The operational progress made during the year, across the majority of the portfolio, was extremely encouraging. Much of this fundamental progress has yet to be reflected in the net asset value of the Company itself, which declined 4.2 per cent in 2016. I understand that some investors may be disappointed at the net asset value progress thus far and, although I would have preferred to have been writing this review having delivered a positive return, it must be remembered that the investment strategy was never designed to deliver significant short-term wins.

It remains early days for this strategy, which is seeking to exploit very long-term investment opportunities. Indeed, it is the disconnect between the short-term focus of the modern stock market and the long-term needs of early-stage businesses that in part explains the Company’s performance last year and which has created such a compelling investment opportunity in the first place.

Long-term capital providers such as WPCT must work closely with the early-stage businesses they have backed in pursuit of commercial success, but this ultimate goal can take years, sometimes decades, to fulfil. While on the journey towards commercialisation, these companies need capital partners that are prepared to stay with them for the long term. For years, the UK has been failing to make the most of its knowledge economy assets, with increasingly adverse implications for the long-term health of the overall economy. Primarily, this is because the early-stage businesses that look to develop and commercialise the outstanding intellectual property that emanates from British universities have been deprived of the capital they need to succeed.

Encouragingly, the government does now seem to be paying attention to this fundamental problem. We are currently engaged in its Patient Capital Review, which was announced by the Chancellor in last year’s Autumn Statement – and we await its outcomes with interest and optimism.

In the meantime, however, the opportunity that exists for those capital providers that are prepared to take a long-term, supportive view towards investing in early-stage businesses remains compelling.

Positive progress

Barely a week goes by when I don’t hear of something coming to fruition within the portfolio. In my view, it is only a matter of time before this starts to be reflected in the net asset value and share price of the Company.

Indeed, some of this progress is already beginning to be reflected in the individual company valuations of our unquoted holdings. The unquoted portion of the portfolio, which accounted for approximately 40 per cent of the Company’s assets, delivered a positive contribution to returns of more than two per cent in 2016. In contrast, the quoted part of the portfolio, which accounted for approximately 60 per cent of assets, delivered a negative contribution of more than five per cent during the year.

To an extent, this is of course down to stock specifics as I explore below. However, broadly speaking, I do not believe that the operational performance of the portfolio’s quoted businesses was, in aggregate, so much worse than the operational performance of its unquoted holdings. There is a world of difference between the underwhelming progress of share prices last year and the underlying progress of the portfolio – which has surpassed my expectations. That such a wide disconnect exists serves, I believe, to highlight the problem that the Patient Capital Review is aiming to solve.

Ultimately, the probability of success or failure is no different for an unquoted company than it is for a quoted company. An issue for early-stage businesses is whether to remain unquoted or list on the stock market and, depending on the business, staying private for longer can make the journey easier. Indeed, for some there is little benefit to a stock market listing for an early-stage business that could still be several years away from generating revenues, let alone profits. But, for the patient investor, this source of market inefficiency can at least be exploited because it can lead to substantial valuation anomalies.

There’s more detail on the progress being made by each of the Company’s top 10 holdings at the end of this review but one stock I wish to highlight to demonstrate my conviction and investment strategy is Prothena – a company I have known for many years.

Having performed well in 2015, Prothena’s share price fell significantly in the first few weeks of 2016, primarily as a result of an increase in the short interest in the stock. Our investment focus is resolutely on the long-term fundamentals of the business, which, despite the short-term share price performance, have been improving all year. News from the company has significantly reinforced our positive view on the stock and we took advantage of temporary share price weakness to add to the Company’s position.

In particular, my increasing conviction is due to the progress that Prothena has made with its leading drug development candidate, which is for AL amyloidosis, a rare and often fatal organ disease affecting fewer than 10,000 patients a year. Results from its phase I and II trials have been outstanding, while patient advocacy groups have been calling for its urgent approval. There are currently no approved drugs for AL amyloidosis and in 2018 we will learn the results of two late-stage trials, which, if positive, would result in a significant revaluation of the company.

From a fundamental perspective, the AL amyloidosis opportunity on its own would warrant a valuation far above that of today’s, in my view. Meanwhile, Prothena has also made significant progress on two other development candidates, one in Parkinson’s disease and the other in psoriatic arthritis. The speed with which it has identified and developed these three assets suggests that there could be more to follow in time.

The company’s rapid progress and its positive share price performance in the second half of the year are the principal reasons why its position in the portfolio has grown significantly from 6.3 per cent of assets to 14.4 per cent at year end.

In the world of equity investment, nothing is certain. As with any therapy in clinical trials, there is a risk that one or more of them fails to deliver the positive outcome that we hope for and expect. However, I am convinced that this business is poised to deliver incredibly attractive long-term returns to its shareholders and to improve the lives of patients suffering from these awful, debilitating diseases.

Overcoming hurdles

Some businesses in the portfolio have encountered problems and, undoubtedly, others will too. This is part of the territory when investing in early-stage businesses. What’s important, in my opinion, is how one reacts to these hurdles when they arise and the lessons one learns.

For patient capital investing to be a success, one has to work through the difficult periods. My approach has always been to favour voice over exit, which means overcoming hurdles to continue to support and nurture businesses that I retain my long-term faith in.

This was the case with Circassia, which announced results from a late-stage trial into its cat allergy vaccine in June. Although many aspects of the trial data were highly encouraging, further evidencing the drug’s strong therapeutic benefits, the results also showed that a placebo had broadly the same impact on symptoms. This development led to Circassia’s share price declining by more than two-thirds during the period, making it a significant negative contributor to performance. More recently (and outside the period under review), it announced similar results for its house dust mite vaccine and has now decided to stop investing in the development of its allergy portfolio.

We share the management team’s obvious disappointment at these trial results but remain supportive shareholders. There is much more to Circassia than its allergy platform and it remains in a strong position. It continues to successfully develop the asthma and respiratory assets that it acquired in 2015, with three new pipeline candidates added in the second half of the period under review. In March 2017, it announced a commercial collaboration with AstraZeneca, which significantly strengthens the company’s strategy as a speciality biopharma business.

New entrants

Several new holdings were introduced to the portfolio during 2016, primarily funded by reducing the Company’s exposure to larger, more liquid companies early in the period.

These new holdings included Thin Film Electronics, a Norwegian company that specialises in printed electronics, an innovative new technology with a huge range of commercial applications, especially in relation to the ‘internet of things’. I have known the company for a long time and I am confident that it is poised for substantial growth as its technology becomes more widely adopted.

We also participated in the IPO of Draper Esprit, a leading venture capital investment company involved in the creation, funding and development of high-growth technology businesses with a like-minded investment approach to our own.

Among new unquoted positions were Metalysis, a titanium materials company serving the 3D printing industry, Nexeon, a battery technology company with enormous potential to improve battery performance across a wide range of industries, and Accelerated Digital Ventures, a newly-formed business that aims to provide patient capital to young British digital businesses with significant growth potential.

Looking ahead

The WPCT has evolved in 2016, but the original investment hypothesis remains in place. In fact, I believe it is stronger than ever. That statement may surprise those investors that have been eager to see an early return on their investment or those that are frustrated by the lack of net asset value progress seen thus far. To an extent, I share those emotions, but they are insignificant compared to the confidence and excitement that I have in the opportunity from here.

I know how much fundamental progress our businesses are delivering and I hope I have managed to convey some of that progress in this update. In my view, it is only a matter of time before this progress is reflected in valuations. As for how long this takes, it is difficult to be precise. I said towards the start of this review that it is still early days for this long-term investment strategy but I acknowledge that I can’t say that for ever.

At launch, I set out to deliver double-digit annualised long-term returns. It is, of course, critical that I do so and I remain absolutely confident that I will.

In the meantime, I’d like to thank investors for their continued support.

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  1. Do you think NWBO is now a right off Niel

    1. Hi Mike,

      You may find this link helpful – it’s a reply from Neil to a comment received late last year on this issue.

      Kind regards
      Mitch

  2. bernard curran 21 Apr 2017 at 5:49 pm

    THANKS FOR THE UPDATE NEIL MUCH APPRECIATED AND STILL COMMITED TO THIS FUND AND YOUR TWO OTHER FUNDS

  3. There is a conspicuous absence of comment regarding the impact of the NWBO Capital Loss. I would be intrigued to know how significant that loss was, in relation to the portfolio loss of £32M. Was it material? Was it significantly more than £32M? Where is the summary of the main contributors (and mitigators, including Forex) to this loss? NWBO is not a significant holding now, but that is after we have suffered a substantial loss on it. I am also rather eager to hear how WPCT have learned from the NWBO experience. We are presented with fascinating technical detail on the products being developed by the investee companies in the portfolio, but I don’t recall much commentary about due diligence and qualitative analysis of the people running these companies. The people running the NWBO outfit didn’t exactly have exemplary track records, and I certainly would not have trusted their CEO with anything. Do we now run checks on management integrity and credibility, before we get too excited about their claims? I still worry about WPCT being exploited by such people in the future. I remain committed to this Fund, but I think that your investors deserve more transparency on the learning experience here.

    1. Good point, well made Rob. Annual meeting will be held in May I think……worth bringing up then.

      1. I hope to raise a similar point at the AGM, which I have made on this board before, separate to the NWBO fiasco. To restate:

        WPCT has invested in Atom Bank and spoke recently about a couple of uplifts in Atom’s valuation. Yet from my real-world, rather than investor, experience what I see is a fintech market positively exploding with new entrants, eg Monzo, Revolut, Supercard, WeSwap, Loot, Transferwise, Zopa, Monese, etc etc .. I have tried many of them and fine some pretty good. I have also tried Atom Bank and so far find it absolutely dire: an Android app version that is rightly given a low rating by users (see Google Play reviews) because it is just awful; a product range that never seems to actually get off the ground, etc. There is no way that Atom Bank is a strong leader in fintech right now.

        WPCT has also invested in Eve, one of the new generation mattress makers. But having tried Eve on a 100-night trial, I have also tried five others and will probably try a couple more, all on the same 100-night trial. By comparison to the ones which contain springs as well as foam, Eve looks a bit basic. As I said in a previous comment, the seemingly naive enthusiasm for companies such as Eve and Atom Bank, and the stated uplift in their (unquoted) market caps, makes me wonder about WPCT’s overall judgement.

        As for the latest WPCT shock – Allied Minds crashing – I recall at last year’s AGM Neil saying how it was “criminally undervalued”. It has since halved but that is not just “sentiment” is it ? The underlying assets of ALM have significantly reduced in value now that a number of them have been written off completely. So was Neil factually correct to state, as he did, that ALM was “criminally undervalued” in May 2016 ?

        I am still quite heavily invested in WPCT despite my qualms because I hope that Neil’s judgement will prove good in the longer run. But I think that right now these are very legitimate concerns which deserve to be raised, rather than being dismissed as “investor impatience”.

        1. Once again couldn’t agree more – I detest being palmed off with the ‘patient’ line – it’s 2 years since launch already!

          AGM is 11.00am on 12 June 2017 at Modern Art Oxford – had to Tweet to find out as impossible to find on website.

          1. All the info re AGM are on page 90 of the annual report including important issues to be voted on.I found it easy to locate by clicking on download report if anyone is interested. once again many thanks for the insight.
            Mitch might there be any chance all your replies and words from Neil could be put on a few easy to find pages re NWBO as it seems that some readers may not be aware that a lot of questions have already been answered, It has been an unfortunate episode but I for one will be quite relieved when its not constantly rearing its ugly head.
            Can I also say that after 2 years of 3 to 5 years of patience needed I for one am still very happy to be invested. Nice to see a few of the uplifts explained in the full report too.
            Regards
            Neal

            1. Thanks Neal. We are looking to introduce some way of collating answers to questions like this that crop up periodically. In the meantime, I have included links to some of the other comments we’ve made recently on Northwest Biotherapeutics, in reply to Rob below.

              Kind regards
              Mitch

        2. So appears that we will now be (inadvertently) funding that well known investment guru Will I Am – marvellous:

          https://www.insidermedia.com/insider/northeast/will.i.am-appointed-to-atom-bank-role

    2. Hi Rob,
      As you may be aware, we publish a contribution analysis of the portfolio every quarter, which will explain why we didn’t feature Northwest in this report – it wasn’t one of the most meaningful contributors to performance in 2016. We have featured it in previous reports, however, and there is plenty of information on this website about what has happened – most recently, Neil comprehensively answered a comment in January, which you can find here.
      We hope this helps,
      Kind regards
      Mitch

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