Patient Capital Trust update, October 2016

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Mitchell Fraser-Jones 17 November 2016 Est. reading: 6 min read

We have often talked about the difference between sentiment and fundamentals on these pages. There is a meteorological parallel between the weather and the climate. One is much more transient than the other – one short-term, the other long-term.

In our view, the investment climate for investing patient capital in early-stage businesses is extremely attractive and improving. Recently, however, the weather has been a bit grim. In fact, we have just passed through an intense storm, as the US presidential campaign precipitated a period of extreme negative sentiment towards health care stocks in particular, with concerns about what a Clinton victory might mean for drug pricing in the US weighing on share prices across this large part of the portfolio.

Unsurprisingly, this was a challenging backdrop for the trust’s performance and it’s net asset value declined during the month. Theravance Biopharma was in the eye of this storm, with news of an equity offering adding further pressure to its share price. In our view, this fundraising is a long-term positive for the business as it gives it more capital to further progress its rapidly developing pipeline. We recently met its management team for an update on the company’s progress and the news coming out of the business is even better than we had previously thought. We continue to view Theravance Biopharma’s long-term prospects as extremely attractive.

Meanwhile, shares in Prothena also declined, despite the absence of fundamental news. You can read more about Prothena and our confidence in the long-term investment case, in this month’s company spotlight below.

Company spotlight: Prothena (by Neil Woodford)

Prothena is a US-based biotechnology company focused on discovering, developing and commercialising therapies directed specifically to disease-causing proteins. I’ve known the company and its management team very well since it spun out of Elan in 2012. In fact, as a shareholder in Elan for several years prior to Prothena’s spin-off, my knowledge of its technology pre-dates its existence as a standalone company.

My high conviction in Prothena’s long-term prospects is based upon a solid grasp of the fundamentals of the business and confidence in a leadership team that has repeatedly demonstrated the ability to discover and develop novel drugs. The company is developing 3 main therapies, each in multi-billion dollar indications.

Prothena’s lead asset, NEOD001, is a potential therapy for AL Amyloidosis, an orphan disease caused by the accumulation of certain misfolded and inherently toxic proteins, which can negatively affect the functioning of human organs. In July, Prothena released very compelling clinical data from its phase I/II extension study in previously treated patients, which confirmed further evidence of both safety and efficacy of the treatment. Most encouragingly, however, the drug has demonstrated excellent response rates in the cardiac, renal and external nervous systems – the three organ systems most impacted by the disease. Indeed, the lead investigator from the Mayo Clinic, a globally acclaimed medical centre, described the consistent cardiac and renal response rates as unprecedented. The company’s NEOD001 programme is expected to complete its phase IIb study in early 2018, followed by results from the confirmatory phase III study in newly diagnosed patients. Based on the compelling early signs of efficacy and the design of the ongoing phase IIb study, I am very confident that Prothena’s potential treatment for AL Amyloidosis can be a huge success, both commercially and in changing patients’ lives for the better.

The company’s second pipeline asset is PRX002, a potential therapy for treating Parkinson’s disease which is being developed in partnership with Roche. Earlier this month, the company announced highly encouraging data from its phase Ib study, which demonstrated that the antibody is safe and, importantly, that it can reach the brain. Current treatments for Parkinson’s are limited in that they only tackle the symptoms of the disease because it has thus far been impossible to get drugs into the brain to treat the causes of the disease. This is still an early-stage asset but, demonstrating that PRX002 can reach the brain therefore makes it a potentially disease-modifying therapy for a terrible condition that affects millions of patients around the world.

Prothena’s pipeline also includes PRX003, a potential treatment for psoriatic arthritis, a debilitating condition which manifests through painful joint inflammation. The company has recently announced its plans to progress PRX003 into phase II following positive results from earlier clinical trials.

Overall, the progress Prothena has made in recent years is incredibly exciting. I have been impressed by the company’s ability to identify proteins of interest and neatly execute the early-stage development of its potential therapies in a relatively short time-frame. The speed with which it has identified and progressed the three assets currently under development suggests that there could be more to follow in time.

Prothena has been a position in the Woodford Patient Capital Trust since it launched and, thus far, it has been the greatest positive contributor to performance. Looking even further back, since the first patient dosed in its first in-man study for NEOD001 in late April 2013, the share price has risen by over 700% in dollar terms (significantly more in sterling terms) 1.

The company’s extraordinary progress and its positive share price performance are the principle reasons why its position has grown so significantly, making it the biggest position I’ve ever held in percentage terms, in any portfolio. I believe strong performers should be allowed to run in a portfolio and continue to view Prothena’s weighting as appropriate, in the context of the trust’s mandate and the considerable conviction that I have in the investment case.

Looking forward, Prothena’s commercial prospects look more compelling than ever before. From a fundamental perspective, the AL Amyloidosis opportunity on its own, would warrant a valuation far above that of today’s, in my view. Indeed, given the pace at which the company has developed its Parkinson’s and psoriatic arthritis programmes recently, the size of those commercial opportunities could also justify an investment in Prothena in their own right too.

In the world of equity investment, nothing is certain, but 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.

On a brighter note, Alkermes bucked the general weakness in the biotechnology sector following some very positive clinical data from its FORWARD 5 trial for ALKS 5461, the company’s potential blockbuster treatment for major depressive disorder. This success follows earlier trial disappointments that saw Alkermes’ market cap more than halve in January this year. Nevertheless, the company retained confidence in ALKS-5461 and this latest data represents an important step towards the commercialisation of an asset that the market had all but written off.

Meanwhile, Thin Film Electronics also performed well, on news that it is expanding its manufacturing capabilities in the US. This will bolster the company’s production capacity and marks another important step on its own journey towards commercialisation.

There were no major changes to the portfolio during October and we remain very confident in the long-term return outlook for the trust. The surprise result of the US presidential election has removed some of the clouds that were hanging over the health care sector from a market sentiment perspective. Fundamentally, we did not believe that a Clinton presidency would undermine the long-term investment case for health care but the Trump victory has certainly improved sentiment towards the sector. Longer-term, we remain convinced that there are structural growth drivers for the global health care industry. We have found some very attractive and genuinely innovative companies in which to invest in this sector, and more broadly in other industries that are ripe for disruption.

Woodford Patient Capital Trust plc
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