Patient Capital Trust update, November 2017

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Mitchell Fraser-Jones 21 December 2017 Est. reading: 5 min read

November proved a challenging month for the performance of the Woodford Patient Capital Trust, primarily as a result of share price weakness in the portfolio’s largest holding, Prothena. We have already provided a comprehensive update on Prothena which you can read here, or read the summary below. Our conclusion is that the recent share price weakness is unjustified and will prove to be temporary but, in the near term, it has been unhelpful.

Idex

Idex held a Capital Markets Day early in November, which was attended by Paul Lamacraft. Idex outlined the opportunity that lies ahead for it in the biometric payment card market, with a series of confident presentations from key members of the management team. The opportunity came across very clearly in the presentations and it is evident that 2018 will be a key year for the company, which expects to see increasing adoption of the use of off-chip fingerprint sensors in payment cards – an area in which Idex has a clear and substantial technology lead. This lead is reflected in the strategic relationship that Idex now has with the global payment company, Mastercard. Beyond next year, there is a significant opportunity for biometric solutions to be increasingly used in the ‘internet of everything’.

The Idex share price has been weak this year, but we retain strong conviction in the company’s technology and the long-term opportunity that lies ahead for the business.

NetScientific

We’ve seen a series of announcements from NetScientific over the last few weeks that give a strong indication that the new management team is making good commercial progress in developing the company’s assets. Among the announcements is news that Proaxsis, which is developing a range of products to detect certain disease biomarkers, has signed a series of agreements that should accelerate its commercial development and increases its near-term sales potential. Meanwhile, digital health company Wanda, announced that a major client, HRS, is expanding the deployment of its technology to all home health patients, following a successful evaluation in high risk, co-morbid congestive heart failure patients. The results demonstrated that readmission rates were reduced by 72% with a compliance rate of 74%.

The shares have responded well to these announcements, but the share price remains well below the level at which the trust first invested. We are encouraged by the progress that the new management team is making and remain confident that outlook for long-term returns from here is attractive.

Kymab (unquoted)

During the month, Kymab presented data at the Society for Immunotherapy of Cancer meeting on its lead immuno-oncology antibody KY1044, which is demonstrating strong potential for inhibiting tumour growth. KY1044 is a fully human antibody that allows the immune system to better recognise and kill tumours. This is still a pre-clinical programme, but this data represents proof of concept, and Kymab now plans to file an investigational new drug application in late 2018 and commence clinical trials in 2019. The asset will be evaluated in cancer patients both as a monotherapy and in combination with other immunotherapies.

This is a very encouraging development for an early-stage British business with very impressive technology. Not only is this good news for Kymab’s lead programme, but it also bodes well for the other assets that stem from its antibody platform.

Prothena

Prothena shares weakened after a Research & Development (R&D) day, in which investors were given an update on the company’s pipeline progress. Despite a lot of positive reassuring information across a range of the company’s late-stage and earlier-stage assets, the market appears to have focused on a delay in its Vital phase III trial for NEOD001, the company’s potential treatment for AL amyloidosis. We have reached a very different conclusion from the market.

The Vital study has been delayed because of the time taken for ‘events’, such as cardiac hospitalisation or death, to occur in the trial. There can be only two reasons for this – either the standard of care has improved or NEOD001 is working. There is nothing to suggest the former: although AL amyloidosis patients are generally living longer than they used to, that should have been captured by the dataset on which the original trial timelines were based. And on the latter, the R&D day provided new information about patient baseline characteristics in the trial, which showed that there was a higher proportion of more severely affected patients. Events in these patients would be expected to occur more rapidly, but the trial read-out has been delayed by a year because those events appear to be occurring more slowly than anticipated. Consequently, we see the delay as an encouraging indication that the drug is working, and view the market’s reaction therefore as inappropriately negative.

Importantly, Prothena is fully-funded to complete the late-stage trials in NEOD001, so, although short-term share price weakness can be frustrating and may feel unsettling for some investors, it cannot change the outcome for this business now. That outcome will be formed on the basis of the clinical trial data alone and we don’t have long to wait for the first data to read out – the results from the Phase IIb Pronto trial in NEOD001 are expected in Q2 2018. A very confident and reassuring meeting with Prothena’s management team last week has bolstered our conviction in the long-term investment case even further, to the extent that it is as strong as it ever has been.

Budget announcements

The conclusion of the Patient Capital Review, and the government initiatives announced in November’s Budget that stem from it, represent a significant step forward in addressing the fundamental lack of capital that is flowing to a part of the economy that badly needs it. The establishment of a £2.5bn investment fund targeted at providing capital for innovative, knowledge-intensive businesses is a great start, but the initiatives go much further. A raft of other measures designed to attract significantly more long-term capital to this part of the market and encourage a more entrepreneurial culture within the British economy, demonstrate that the government understands the nature of the problems and that it is committed to helping solve an issue which has blighted the UK economy for decades.

We don’t see immediate benefits to the portfolio, but over time, we believe this will be great news for many of the businesses we have backed in the Woodford Patient Capital Trust portfolio and others like them. The ability to access patient capital is profoundly important and the significant improvement in the amount available of this capital will help young, knowledge-intensive British businesses scale-up and fulfil their long-term potential.

These things take time, as implied by the name of the trust and indeed the name of the government’s review. We can fully understand that some investors are frustrated by the lack of share price and NAV progress delivered thus far, but we remain absolutely confident that, in time, the ultimate objective of this trust, namely double-digit annualised long-term returns will be delivered. We can also completely understand that some investors may be tired of hearing us repeatedly say this. But we genuinely believe in the investment opportunity the trust exists to exploit and are confident that the portfolio is now tantalisingly close to delivering the returns that investors expect.

Woodford Patient Capital Trust plc
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What are the risks?

  • Long-term outcomes are more binary – extremely attractive rewards for success but some businesses will inevitably fail to fulfil their potential and this may expose investors to the risk of capital losses
  • As it can take years for young businesses to fulfil their potential, this investment requires patience
  • The value of the trust as well as any income it pays will fluctuate which may partly be the result of exchange rate changes
  • The price of shares in the trust is determined by market supply and demand, and this may be different to the net asset value of the trust. This means the price may be volatile in response to changes in demand
  • The trust may invest in overseas securities and be exposed to currencies other than pound sterling – as a result, exchange rate movements may cause the sterling value of investments to decrease or increase
  • The trust may invest in unquoted securities, which may be less liquid and more difficult to value, because they are generally not publicly traded – the lack of an open market may also make it more difficult to establish fair value
  • Young businesses have a different risk profile to mature blue-chip companies – risks are much more stock-specific, which implies a lower correlation with equity markets and the wider economy

Important information

We do not give investment advice so you need to decide if an investment is suitable for you. If you are unsure whether to invest, you should contact a financial adviser. The trust currently intends to conduct its affairs so that its securities can be recommended by IFAs to ordinary retail investors in accordance with the FCA’s rules in relation to non-mainstream investment products and intends to continue to do so for the foreseeable future. The securities are excluded from the FCA’s restrictions which apply to non-mainstream investment products because they are shares in an investment trust.

Woodford Investment Management Ltd is authorised and regulated by the Financial Conduct Authority (firm reference number 745433). Incorporated in England and Wales, company number 10118169. Registered address 9400 Garsington Road, Oxford OX4 2HN.

Woodford Patient Capital Trust plc is incorporated in England and Wales, company number 09405653. Registered as an investment company under section 833 of the Companies Act 2006. Registered address Beaufort House, 51 New North Road, Exeter, EX4 4EP.

© 2019 Woodford Investment Management Ltd.
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