The Woodford Patient Capital Trust delivered a positive return in February, with the largest contribution to performance coming from Prothena, the portfolio’s largest holding. Shares in the company rose by more than 25% (in sterling terms) during the month, despite the absence of any major fundamental developments. Prothena did announce its full-year results in the month but, as is typically the case for biotechnology businesses with no on-market products and therefore no revenues, results statements are rarely as important as clinical trial updates which can arrive at any time during the year. The company did use its results as an opportunity to remind investors of the meaningful progress it made throughout 2016 across its three key development candidates but the strong share price performance was probably more to do with improved market sentiment rather than anything fundamental. Although this was beneficial to performance, we continue to believe that Prothena’s share price continues to massively under-appreciate the company’s long-term potential.
Purplebricks also performed very well. The company continues to attract an increasing number of customers in the UK and, with its launch in Australia progressing well, Purplebrick’s disruptive business model is beginning to demonstrate its international viability. Towards the end of the month, the company successfully raised further capital to enable it to expand its footprint into the US market, prompting a further significant positive reaction in its share price, which increased by more than 50% during the month.
Within the unquoted part of the portfolio, we saw a valuation uplift for Gigaclear during the month, which reflects the positive progress the business has been making. Gigaclear builds and operates superfast, pure fibre broadband networks for rural communities around the UK. The company continues to grow its client base, with more community networks being rolled out and better penetration in existing ones. Meanwhile with improved market intelligence capabilities, Gigaclear is now better-equipped to assess customer demand and allocate its sales and marketing efforts. Also, the company plans to further improve its outsourced model for deploying its broadband, which should result in cost reductions, more efficient broadband roll-outs and, ultimately, enhanced shareholder value.
On a less positive note, Vernalis was one of the main detractors from performance. Its share price has more than halved over the course of the last 12 months, partly as a result of the negative market sentiment towards early-stage healthcare stocks for much of this period, but also in part as a result of a slower-than-anticipated ramp up of sales of Tuzistra, which was approved as a prescription cough-cold medicine in the US in 2015. Although sales of newly approved drugs often build slower than analysts initially forecast, the most recent update from Vernalis has failed to assuage market concerns about the gap between the level of current sales and that which sales are ultimately forecast to reach. We had also hoped to have seen greater progress by now but we believe that its management team is taking the right steps to ensure the product does ultimately fulfil its potential.
Furthermore, it is important to put the Vernalis share price into an appropriate fundamental context. It has a market cap at the time of writing of £129m, but with around £75m of cash on its balance sheet, it has a current enterprise value of just over £50m. By the end of this year it should have three prescription products on the market and a pipeline of other products from which it is realising value through out-licensing deals. Indeed, in focusing on Tuzistra, the market chose to completely ignore an announcement last month, of a new agreement with Corvus Pharmaceuticals which represents the largest out-licensing deal in Vernalis’ history. This involves an upfront milestone payment of $3m for CPI-444, which is currently in Phase I/Ib clinical trials in patients with advanced cancers. In aggregate, this deal has the potential to earn Vernalis up to $220m in milestones – that is more than three times the company’s current enterprise value which, in our view, highlights just how profoundly undervalued this business is. We remain patient and supportive shareholders.
In terms of portfolio activity, Arix Bioscience, an evergreen investor in early-stage businesses with a focus on life sciences, successfully made the transition from unquoted to quoted during the period, courtesy of its initial public offering (IPO). This resulted in a modest uplift to its valuation and an opportunity to add to the position.