Patient Capital Trust interim results

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Mitchell Fraser-Jones 4 August 2017 Est. reading: 6 min read

Home > Words > Insights > WPCT interim results 2017

Today marks the release of the Woodford Patient Capital Trust’s interim results for 2017. You can find a copy of the report here, and we have published Neil’s portfolio manager’s review below.

Manager’s Review from Neil Woodford

In the Company’s annual report, I emphasised that the operational progress of many of the holdings in the portfolio were exceeding expectations and suggested that it was only a matter of time before this progress started to be reflected in valuations. It is pleasing that this has started to come through in terms of performance but the share price and NAV progress we have seen in recent months is insubstantial in the context of what, I believe, lies ahead.

Positive progress

The largest contribution to returns came from hybrid real estate agency business Purplebricks, which began its association with the portfolio as an unquoted business before pursuing a stock market listing in late 2015.

Growth throughout this period has been nothing short of exceptional, as the management team have successfully executed their ambitious plans to dominate the UK’s nascent online estate agency industry, while at the same time, significantly disrupt the traditional estate agency model. Its rapid progress in the UK has emboldened the management team to replicate their business model in other territories, launching in Australia last year and announcing plans to establish a US presence earlier this year.

In the period under review, shares in Purplebricks more than trebled in price, reflecting the success that the business is demonstrating in the UK and increasingly overseas. I am also confident there is more significant growth to come for the business in the years ahead.

Elsewhere among the quoted positions, we saw a solid contribution from US biotechnology businesses Theravance Biopharma and Prothena, and an impressive return from the UK gene-editing services business Horizon Discovery. Indeed, since the period end, Horizon has announced a deal to acquire GE’s gene technology business, Dharmacon, which further strengthens its position in this exciting and fast-evolving field.

There were also some good returns delivered by the unquoted portfolio, with British immuno-oncology business Immunocore among the highlights. Our website readers may remember that we focused on the opportunity that lies ahead for Immunocore in a company spotlight last year. At ASCO, the world’s biggest oncology conference, the company announced very compelling data from its lead programme, investigating IMCgp100 in metastatic uveal melanoma, a rare form of cancer with no current treatment options. The data shows a meaningful improvement in progression-free survival for patients with the condition. Effectively, the data showed that the drug doubles the length of time the condition stays stable without progressing further.

With the drug already having orphan drug designation in the US, the company now intends to rapidly progress the treatment through clinical development to make it available to patients as soon as possible.

This is clearly great news for Immunocore and the valuation at which the position is held in the portfolio has been uplifted to reflect the positive data. Looking forward, we remain very confident that Immunocore can deliver significant further growth as it progresses towards the commercialisation of its highly promising technology and advances additional development candidates towards the clinic.

Meanwhile, Ultrahaptics was revalued upwards following the successful completion of a further funding round that will provide additional capital needed to support the company’s global expansion and its entry into virtual and augmented reality markets. I remain delighted with the progress that Ultrahaptics is demonstrating and remain very excited about its long-term prospects – capturing just a small fraction of the potential that exists for the company’s innovative technology will result in substantial shareholder value being created.

Oxford Nanopore, Gigaclear and Autolus also saw uplifts to reflect the progress they are making on their way towards scaled commercial enterprises. Meanwhile, evergreen investor Arix Bioscience, and disruptive online mattress retailer Eve Sleep, successfully made the transition from unquoted to quoted via their successful market IPOs in February and May, respectively.

Overcoming hurdles

It wasn’t all plain sailing, of course – it never is. The share prices of several quoted businesses declined during the period. Some of these declines were to an extent justified, but some of them should be seen in the context of a stock market that often struggles to effectively value businesses that may be many years away from generating revenues.

Allied Minds was a key negative performer, following the announcement in April that it would discontinue funding seven subsidiaries. It is my view that the market has overreacted to this announcement. I remain attracted to the Allied Minds investment case – indeed I remain a strong supporter of the broader intellectual property commercialisation sector. The businesses I have backed have diverse portfolios of young, disruptive businesses with significant long-term potential.

The model works best, in my view, when small amounts of capital are deployed at a very early-stage to help establish businesses and evidence the potential of their technology. More capital is selectively deployed as and when those companies demonstrate successful progress against subsequent milestones. Indeed, that is the model that we deploy for the Company. As is natural in this space, not all of them will fulfil their potential, and so it can become necessary to withdraw support and funding from certain businesses. These are obviously difficult decisions but it is an important discipline and sends a positive message to shareholders about a management team’s intent.

We never believed that all of Allied Minds’ subsidiaries would succeed and we have built our positive investment case for the stock around the value that we see in its portfolio of more successful subsidiaries. These include businesses such as Federated Wireless, Scifluor and Precision Biopsy, into which we have also directly invested for the Company’s portfolio.

By crystallising value in businesses that are not demonstrating the progress that had been hoped for, Allied Minds can focus more aggressively on the companies that are rapidly progressing towards their commercial goals and reallocate capital towards new ideas. In that respect, we believe the strategy is sensible and will help to accelerate the creation of long-term value for shareholders. We expect to hear positive news from these more promising businesses through the remainder of this year and into next.

Elsewhere, shares in 4D Pharma declined, despite continued positive progress in the development of its live biotherapeutic therapies. Similarly, ReNeuron also declined, despite the fact that the company announced very positive data in its stroke trial. In each of these instances, we remain very attracted to a long-term commercial opportunity that is being substantially overlooked by the market.

By way of example, ReNeuron, a leading clinical-stage stem cell business, had a market capitalisation at period end of £54m. At its latest financial year end (31 March 2017), the company held £53m in cash on its balance sheet, meaning that the stock market is effectively ascribing a value of £1m to the future value of this company’s world-class technology. This appears ludicrous, in my view, but it also serves as an effective demonstration of how market inefficiencies can lead to compelling long-term investment opportunities.

New entrants

In terms of portfolio activity, we introduced Novabiotics, a clinical-stage biotechnology company focused on developing first-in-class therapies for difficult-to-treat diseases, and we also participated in follow-on funding rounds for several companies. These included Inivata (a liquid biopsy technology company), Ombu (an early-stage investment company focused on industrial sectors), Atom Bank (a digital challenger bank) and Ultrahaptics, which is mentioned above. We also took advantage of temporary share price weakness to add to the portfolio’s positions in Prothena, Theravance Biopharma and Thin Film Electronics. The portfolio’s position in Utilitywise was sold in May.

Looking ahead

Overall, the portfolio is in excellent shape and we remain very confident in the long-term return outlook from here. I said in the annual report that I could see the fundamental progress that our businesses were delivering and that it was only a matter of time before this progress started to be reflected in valuations. It is pleasing that this has started to come through in terms of performance but the best is yet to come, in my view. I remain very confident that this portfolio will deliver the attractive double-digit annualised returns that we set out to deliver at launch.

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Got a view?

  1. Bravo Neil and the Team – looking forward to positive returns.

    1. Allied Minds has been a disaster – it used to be top ten in the equity income fund – now it is nowhere. Don’t believe the biased positive spin – they would say that wouldn’t they.
      I know this blog relates to the PC trust but I suspect you also hold the fund too.
      How is Capita doing? Prov Financial? Remember Neil sold Rolls Royce and it’s now up 75%! Circassia, NW bio therapeutics. Babcock is down. I suspect many of us are losing faith not just in the objectivity of their due diligence but also the blog reports.
      I see today Purplebricks is in the news today for dishonest advertising, house builder are down due to Govt policy and their are problems ahead in my view for Lloyds when they raise the overdraft interest rate to 56% which will lose them clients
      Suggest you keep your eyes open wide

      1. Only hold WPCT.

      2. H in from start 04 Aug 2017 at 5:13 pm

        Simon, I agree wholeheartedly with your comments, The purplebricks showed some very concerning mis selling on the BBC this week, and after all the usp of this online estate agency is well and truly everywhere now. My other concern is the rise in ReNeuron shares today following the release of Neil,s blog .. up almost 8%!! reminded me of the “show me the money” tv show that was axed many years ago, and to quote from another show, “I,m OUT” and happy to be so.

      3. On the contrary to Allied Minds being a disaster. I beilieve ALM as a business is in better shape now than it has ever been before, plus its stock is as cheap as its ever been too so the investment case for ALM is now stronger than ever before imo. Im actually surprised Neil hasn’t added more tbh.

      4. Also Neil jettisoned HSBC (up over 50% since then). The Equity Income Fund has however trounced the FTSE100 since launch so can’t really complain.

  2. It’s comforting to hear the best is yet to come Neil as that’s what we are all waiting for as investors in this company!

    1. Phliip Johnson 09 Aug 2017 at 12:11 am

      I concur although for WPCT the charges are very low indeed and only really kick in as performance ticks up which makes for a very positive business model for both fund manager and investors. I think however for.the Income fund – given its size – that fees should be cut. I’m sticking with the income fund for another 6-12 months but will bail out unless I see performance and some of the constituent calls improving

  3. Hi Guys, great to see we are on track. I really don’t mind and I don’t want to make a big deal out of it, but please can you ask me for permission next time before using a picture of one of my biceps. Thanks

    1. I thought they were Neil’s!

  4. Well done to Neil & the team – I do hope the positivity of the update helps shareholders to understand the “long and winding” path that is investment success, rather than the assumption WPCT will simple turn out 10-15% growth from the starting blocks. I remain an avid and extremely long term supporter and I plan to retire still holding these shares!
    One question I do have is whether there’s potential that extreme share price anomalies like ReNeuron are exacerbated by the fact that more and more people are using passive ETF’s that rely on market cap / size to allocate capital. I think I read somewhere that ETF’s have topped 100bn in value as of 2017. I wonder if another advantage of WPCT and potentially other well managed active funds in the “small enterprise” space is that they will benefit from the fact that indexing doesn’t really work for smaller companies (and therefore means there’s a sort of capital vacuum in that space because more and more people pile money into indexes).
    Keep up the great work!

    1. Anton BalintModerator 08 Aug 2017 at 4:18 pm

      Hi David,

      Yes, probably – we believe ETFs can have an impact on markets which can lead to opportunities for active patient investors.

      Kind regards,

  5. JOSEPH VASSALLO 04 Aug 2017 at 9:18 pm

    I am concerned about some of the investments WPCT has invested in. I still think that NWBO’s science is good but the company’s governance is very poor and would have expected an experienced manager to have found this before investing a large proportion of he trust. I have invested some of my own money in NWBO, but I bought the shares at 20c rather than $4 per share WPCT paid. I think having over 14% of the trust invested in Prothena is extremely risky. The probability is that it would go the same way a Circasia. With early biothech companies there is much less than 50% of success.
    My worry is that Woodford has invested money in companies like Industrial heat. This is a pure scam. It is meant to produce energy from cold fusion i.e. from fusing 2 hydrogen atoms at room temperature. For Neil Woodford to be convinced that this is possible is very worrying to me. He should have asked experts before.
    However he has made a lot of money before, albeit with blue chip companies rather than start-ups. Let us give him some more time but we should start seeing results in a year or two.

    1. I get the logic of what you are saying – but I think a lot of the people posting negatively are missing an obvious paradox. When Apple, for example, was a struggling tech business before it had a big break it was a ludicrously undervalued investment and people would have said “steer clear”. Yet now when it’s a huge business with a lot less room to grow it’s basically an assumed investment.
      The point of the trust is that only a handful of these businesses really need to “make it” in the future for us as shareholders to turn a profit. I am hugely positive about the future direction of WPCT but I wonder if some of us are missing that this is a trust investing in early stage business that may very well fair, because some of them, we are not sure which, will do fantastically well.
      As a final point I think it was in “stocks for the long run” that he makes the point how one of the best early startups in the 20th century was the company that invented the mixer tap – you’d be up like 200 fold if you were an early investor. Imagine one of these businesses achieving that……!

      1. bernard curran 08 Aug 2017 at 9:22 am

        ditto agree in for the long term

  6. Regrettably I did not understand or put money into a pension until 13 years ago. With hard work and a little luck I am finally beginning to build a little nest egg for my retirement. I have just received a small legacy and will be investing some into the Woodford funds. Having watched a number of you tube clips and read articles on Woodford, I have bought into the ideas and like the philosophy of supporting UK businesses.

    So, I hope you guys do a good job with my investment. It will be the difference between being able to retire in ten years or so. Or having to work until I am 85….

    1. I’m also an investor in WPCT, but I hope you generally do at least 10x the amount of research you outline hear before investing in anything.

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