Following the trial failure announcement from Prothena, today marks the release of the Woodford Patient Capital Trust annual report for 2017. Neil’s review reflects yesterday’s news but as you will read, it should not detract from the progress being demonstrated across much of the rest of the portfolio.
Portfolio manager’s review 2017
Head of Investment
23 April 2018
From day one, our ambition for WPCT has been to help early-stage businesses fulfil their potential through the provision of appropriately long-term capital and working with them to deliver commercial success. We wanted to invest in great ideas and help to turn those ideas into great businesses – in terms of quality and in terms of scale.
We are building some great businesses, and although this progress has not yet flowed through in terms of share price and net asset value performance, I continue to strongly believe that it will. Indeed, there have been some notable milestones met post period, which I will touch on later, and you can read more in a selection of case studies that follow, which focus primarily on the Company’s larger holdings.
Clearly not all investments we’ve made have developed in the direction initially envisaged. That is the nature of investing in earlier-stage, higher-risk businesses. We have just heard from Prothena, the company’s largest holding for much of the year, that its Pronto trial, investigating NEOD001 in AL amyloidosis, was unsuccessful. This is an extremely disappointing outcome and one which has surprised the company, with a much bigger and more significant placebo effect being observed than anything seen in prior trials would have suggested. As a result, Prothena has announced that it will halt all spending on NEOD001 immediately, including the termination of the ongoing Vital study, which had been due to read-out next year.
Since the launch of WPCT, we have been clear why we have backed Prothena and, given the positive progress throughout the development of the drug, we have been increasingly confident it would be successful. Such trial results are often symptomatic of early-stage investing and with regard to biotech trials the outcome is often binary – it comes down to whether a final trial is successful or not. Nevertheless, the result of the trial is undoubtedly a blow but we will be working with Prothena and its management on its strategy beyond Pronto – it has options.
The company still has an early and mid-stage clinical pipeline. It has a technology platform and a world-leading specialism in misfolding proteins, which are implicated in a number of different neurological disorders. This research platform has been validated by two major pharmaceutical companies – Roche (which is partnering Prothena in PRX002 in Parkinson’s disease, currently in phase II trials) and Celgene (which has recently collaborated with Prothena on three earlier stage clinical assets). The company also has its own, unpartnered assets about to enter the clinic and, with more than $500m on its balance sheet, it is very well-funded.
While Prothena’s announcement is disappointing, it should not overshadow the progress many of the portfolio companies have made – particularly in recent months. Many are inevitably now reaching the point at which a market listing is appropriate, and several of our portfolio holdings are either already progressing down that route or actively considering it. This is, of course, a legitimate route towards value realisation for early-stage businesses and one that we encourage companies to pursue, if it feels like the right time and an appropriate price.
Since year end, we have had positive developments from several companies. Proton Partners is now the UK’s first high energy proton beam therapy provider having started to treat its first patient in its Newport Centre this month. Unlike conventional cancer treatments, proton beam therapy uses protons to target and kill cancer cells with little or no damage to the surrounding tissue.
Benevolent AI, the London-based start-up using artificial intelligence to discover new drugs announced last week that it received $115m in additional funding from new and existing investors, to hire more people and expand its focus to new diseases. This new investment now values the business at just over $2bn.
Oxford Nanopore, now valued at $1.5bn, has completed a further £100m fundraising, which provides the capital it needs to move on to the next leg of its commercial journey. Purplebricks, whose shares trebled in 2017, has received a strategic investment from one of Europe’s leading digital publishers, Axel Springer, representing a major, positive endorsement of its business model and future growth potential. While Autolus, the company at the forefront of a revolutionary immuno-oncology cancer treatment dubbed the ‘living medicine’, has announced its intention to list on Nasdaq in 2018. Meanwhile, we received a bid for our stake in Gigaclear at an attractive premium to its carrying value at year-end. All of this points to a positive year ahead.
There are many examples of companies in the portfolio that have made meaningful progress on the road to commercialisation. Several have overcome significant challenges to get where they are today. There are many businesses in this portfolio that I believe should become multi-billion-dollar organisations within the next five years. Patience has been required to get to this stage and it remains a prerequisite for investing in this part of the asset class. The investment case for WPCT, despite Prothena’s news, remains compelling.
Thank you for your continued support.
Head of Investment
23 April 2018
Progress report: Journey to commercial success
Atom Bank (3.57%)
Atom’s digital-only approach enables its customers to manage their money quickly, easily and efficiently.
In less than three years since it received regulatory approval, the challenger bank’s balance sheet has grown to £1bn and this is expected to increase further throughout 2018.
The bank, which is now part owned by Spanish banking giant BBVA, offers a range of fixed-term savings accounts and, with the support of its broker network, provides loans and mortgages to SMEs and private consumers. The company held off plans to launch current accounts and is awaiting the outcome of this year’s strategic review of retail banking business models from the Financial Conduct Authority (FCA) before making a decision regarding launching a product.
As it continues to scale up, the bank expects to use technology to enable it to operate at a significantly lower cost base than traditional banks. This will give it the confidence to offer market-leading rates of interest to its customers, while maintaining a low-risk approach towards generating value for its investors.
Autolus is at the forefront of a revolutionary immuno-oncology cancer treatment, dubbed the ‘living medicine’, that is offering new hope to cancer patients suffering from blood-related cancers such as lymphoma and myeloma.
CAR-T cell therapy involves extracting white blood cells from a patient and genetically engineering them to recognise and kill specific cancer cells before infusing them back into the patient. This treatment approach has turned from hope to reality as the first two products have received regulatory approval in the US, made by competitors Novartis and Kite (acquired by Gilead) following successful clinical trials. The potential in treating cancers is being recognised not just by big pharmas looking to acquire the next big innovation, but by investors and patients alike.
Founded just four years ago, Autolus, whose advanced cell programming technology was pioneered at University College London, is an early entrant in the CAR-T cell therapy space. Using its patent-protected technology, it has one of the most experienced management teams advancing CAR-T products beyond what its peers have already proven.
For example, by using dual-targeting CAR-T’s – engineering an immune cell to recognise two cancer cell-specific features, not just one – the treatment is less likely to result in the cancer escaping and reoccurring, one of the most common reasons for the current CAR-T therapies to fail. With its lead products already in development, Autolus has the potential to bring improved products to market ahead of any other company. The company is developing multiple other features such as a ‘safety switch’ to help reduce the risks of unwanted side effects, and a feature with the ability to recognise and challenge a hostile tumour environment that is trying to resist CAR-T cells.
The company has announced its intention to list on Nasdaq in 2018.
Benevolent AI (6.00%)
In less than 50 years, artificial intelligence will be able to beat humans at all of their own tasks, according to an Oxford University study. Benevolent AI could claim that it is doing that in the pharmaceutical field and, according to a University of Oxford study, healthcare research already1.
Each year, more than one million research papers are published in the quest to discover new drugs, yet the vast majority are overlooked because researchers simply do not have the capacity to analyse them all.
Using artificial intelligence, Benevolent AI is able to mine and analyse vast reams of academic literature, studies and other data about particular diseases, enabling researchers to come up with more conclusive hypotheses in a fraction of the time.
Faster to market
Getting a successful drug to market faster has positive commercial implications too. A drug’s patent typically lasts 20 years, but it can take up to 12 years after a drug’s discovery to get it to market, leaving just eight years of patent protection remaining. If Benevolent Al is able to extend this patent protection to more than 10 years, the net benefit could be significant, not forgetting the hundreds of millions of pounds that will be saved by having a shorter development stage.
Set up in 2013, London-based Benevolent AI’s technology has so far led to potential breakthroughs for previously untreatable conditions such as motor neurone disease (ALS) and cystic fibrosis. Its ground-breaking technology has also not gone unnoticed by the industry, including several major pharmaceutical companies. In April 2018, it received $115m in additional funding from new and existing investors, to hire more people and expand its focus to new diseases. This new investment now values the business at just over $2bn.
Federated Wireless (1.31%)
Beating the spectrum crunch
There is only so much space available to send wireless signals – the so-called spectrum – and this is becoming a burning issue for the rapidly growing wireless industry.
The big carriers all have their own spectrum, but they need more space if they are to reap the benefits of the increasing demand for all things Wi-Fi, from smartphones and tablets to the broader ecosystem of the Internet-of-things.
Federated Wireless, founded by Allied Minds, might just have the solution. It has developed a cloud-based spectrum access system (SAS) that will enable carriers and others in the industry to extend the access of wireless networks by unlocking the value potential of a ‘shared spectrum’.
The company has made significant commercial, operational and technical progress since it was launched in 2012. It is on course to receive full certification from the Federal Communications Commission (FCC), which will enable the company to launch its innovative technology commercially in the second half of 2018. Customer interaction is high with trials underway with major players including Verizon, Ericsson, Qualcomm, Nokia and Samsung. While Charter, the second largest cable company in the US, invested in the company in September 2017.
For many years, under-investment in broadband networks in rural areas had left much of the UK in a virtual blackout for new web-based services. Gigaclear was one of the first investments in the portfolio and it has seized the opportunity to identify those rural communities where there is pent-up demand for reliable, ultrafast broadband.
Founded in 2010, the company designs, builds and operates superfast, pure fibre broadband networks for rural areas in the UK and it was still at its early roll-out stage when the Company invested. We saw a niche commercial opportunity and a company with a clear, compelling business plan overseen by an experienced management team.
Despite being a capital-intensive business, management has successfully executed its business plan during the time we have been invested and it now has more than 60,000 rural properties with access to broadband compared to 15,000 in 2014. In March of this year, Gigaclear received a bid from Infracapital, an infrastructure investment vehicle managed by M&G Prudential. It has given the Company the opportunity to exit at an appropriate valuation, locking in gains from a successful investment and accessing liquidity in an unexpected part of the market.
Spun out of Oxford University in 2008, Immunocore is at the forefront of the fast-growing field of immuno-oncology (treatments that use the immune system to kill cancers). The company’s T cell receptor (TCR) technology alters white blood cells known as T cells to recognise and attack cancerous ones.
Its main TCR asset, IMCgp 100, is currently in a pivotal clinical study for the treatment of metastatic uveal melanoma, a rare eye disease with no current treatments. It also has a range of earlier-stage drug candidates, which are being developed as potential treatments for various types of solid cancer.
In addition to its own pipeline, the £1bn-valued company has secured partnerships with major pharmaceutical companies including Genentech, GlaxoSmithKline, Eli Lilly and MedImmune, the biologics division of AstraZeneca. In late 2017 it received $40m of backing from the Bill & Melinda Gates Foundation.
Mereo BioPharma (3.65%)
Drug discovery with a twist
Mereo BioPharma isn’t an ordinary biopharmaceutical company – it doesn’t do conventional drug discovery. Instead, it has seized on an opportunity to commercialise potential life-changing drugs that are being overlooked for business reasons by healthcare giants.
The cost of drug development is huge – it can cost around £2bn to develop a single treatment from discovery to launch – and subsequent margin pressure is forcing many big healthcare companies to focus on their core areas, resulting in many potential treatments falling by the wayside. This is where Mereo steps in.
The UK-based company seeks to acquire mainly rare disease drug candidates that have already had ‘gold-standard development’ and commercialise them. Its experienced team of scientists and researchers examine the trial data to identify only therapies that demonstrate significant medical and commercial potential. A key part of its analysis is exploring whether a drug tested for one type of disease could also be used as a treatment for another.
Founded in 2015, the AIM-listed company has already acquired three pipeline product candidates from Novartis that have passed phase II clinical trials and in October 2017 entered into an agreement with AstraZeneca for its fourth asset. In all of the deals, Mereo has purchased the assets with full intellectual property rights, with Novartis and AstraZeneca taking equity stakes in the company in exchange.
Oxford Nanopore (7.92%)
A DNA breakthrough
DNA is the source code of life and the ability to sequence this code has become increasingly important for scientific research, including biomedical research in infectious disease and cancer.
The ability to sequence DNA directly, quicker, cost-effectively and on-demand, whether that is in a lab or in the field, creates vast opportunities for diagnostics and precision medicine, agriculture, food and water testing, as well as traditional uses in scientific research. For Oxford Nanopore, this is already a reality.
DNA sequencing systems have traditionally been bulky and costly, but Oxford Nanopore is developing a new generation of DNA sequencers that can – uniquely in the market – scale from tiny and portable to benchtop and high throughput, and sequence in real time.
Its pocket-size DNA sequencer the MinION, introduced in 2014, has been successfully used to sequence human and crop genomes, to track outbreaks of pathogens like salmonella, MRSA, Zika, Lassa and Ebola, to research cancer genetics, and to understand the complex biological composition of seawater and ice.
The MinION is just one of several products on the company’s shelves. The PromethION, recently made available in early access, is already showing promise to compete with the largest traditional devices. GridION X5 is a benchtop sequencer with 5X the power of MinION, the can be used to provide a sequencing service. At the smaller end, the Flongle will adapt MinION for smaller tests like diagnostics, and it is developing the SmidgION, which can be used with a smartphone.
The company is valued at around £1.5bn, with its order book increasing 300% year-on-year. With a rapidly growing customer base, its focus is now on commercial execution of its core products, including the MinION and PromethION, as well as keeping ahead on innovating to expand the market.
Treating the untreatable
Degenerative diseases such as Alzheimer’s, Parkinson’s and Huntington’s are caused by the body’s once-healthy proteins and cells breaking down, taking on different shapes and becoming toxic. This is Prothena’s focus – researching and developing drugs for diseases, many of which are currently untreatable, caused by these misfolded proteins and cell adhesion disorders.
Spun out of Elan in 2012, the company’s leading drug development candidate was for AL amyloidosis, a rare and often fatal organ disease affecting fewer than 10,000 patients a year. It announced in April 2018 that its Pronto trial, investigating NEOD001 in AL amyloidosis, was unsuccessful. As a result, Prothena has halted all spending on NEOD001 immediately, including the termination of the ongoing Vital study, which had been due to read-out next year.
The company still has an early and mid-stage clinical pipeline. It has a technology platform and a world-leading specialism in misfolding proteins, which are implicated in a number of different neurological disorders. This research platform has been validated by two major pharmaceutical companies – Roche (which is partnering Prothena in PRX002 in Parkinson’s disease, currently in phase II trials) and Celgene (which has recently collaborated with Prothena on three earlier stage clinical assets, in a deal potentially worth $2.2bn). The company also has its own, unpartnered assets about to enter the clinic and, with more than $500m on its balance sheet, it is very well-funded.
Proton Partners (3.78%)
A new way to beat cancer
Proton Partners is the UK’s first high-energy proton beam therapy provider. Unlike conventional cancer treatments, proton beam therapy uses protons to target and kill cancer cells with little or no damage to the surrounding tissue. This potentially ground-breaking treatment had not been available in the UK until Proton Partners opened the doors to the UK’s first proton beam therapy centre in Newport, South Wales in April 2018 – several months ahead of schedule.
Although the company only launched just over three years ago, it is on track to fulfil its goal of having a network of its unique cancer centres within 90 minutes of 75 per cent of the UK’s population by 2023. Construction is already underway at three further centres across the UK, which will be available to medically-insured and self-pay patients, as well as those referred by the NHS.
Cementing its position
Purplebricks’ efficient low-cost high-quality approach to buying, selling and renting property is disrupting the property industry – and not just in the UK. The company is successfully replicating its disruptive business model internationally, currently operating across three continents.
The company has been a significant positive contributor to the portfolio since we first invested in 2015 – several months before the hybrid property agent listed on the stock market. Last year, its share price rose by 195 per cent, contributing 6.57 per cent to the overall performance of the portfolio.
It continues to grow – the number of local property experts doubled to 650 last year – and its significant commercial progress in just a few years suggests that Purplebricks is ideally placed to drive and capitalise on the structural shift in the estate agency market that is being seen worldwide.
The concept of being able to feel and manipulate objects without touching is fast becoming a reality – and Ultrahaptics is already making waves.
The Bristol-based company’s technology uses high-frequency ultrasound that allows people to feel without touching. These high frequencies create just enough pressure to make an indentation on the skin enabling people to create and control virtual shapes in the air – these can take various forms, including buttons, sliders and dials.
Dubbed ‘haptic technology’, it has stirred interest from car manufacturers, including Bosch for its concept car, allowing drivers to control dashboards without taking their eyes off the road. The company is also developing products for household appliances, consumer electronics and the gaming industry – its technology is now being used in Las Vegas by gaming giant IGT for one of its most popular game machines.
It has an array of commercial partners including Nike, Dell, Intel, Harman International, Bosch and IBM, while it also has over 45 academic partners, including the University of Oxford, the University of Tokyo, Stanford University and MIT. In April 2018, the company received the Queen’s Award for Enterprise in the innovation category.