Syncona is an unusual investment trust that invests in promising privately held biotech companies. It should be a core holding in any portfolio, says David Stevenson.
Investors in the biotech sector have had a tough time over the last year. High valuations and concern over regulators and politicians attempting to lower drug prices have hit the Nasdaq Biotech index, which contains 220 companies. This benchmark has fallen by 11.39% over the last 12 months, compared with a gain of 18.7% for the S&P 500 index.
The long-term growth story, however, remains compelling. An ageing society is demanding better, more targeted medicines and technology is rising to the occasion, as the genomics-led revolution in care shows. Big Pharma gets the story, which is why it's been buying into the sector for the last few years in order to replenish its portfolios.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
The best way in
But listed businesses only represent a portion of the available biotech universe of businesses. Many of the most interesting firms are privately held, usually with venture-capital firms as investors. Few vehicles provide access to this sector.
In my view the core holding for biotech investors should be Syncona (LSE: SYNC). I've held shares in this fund for years and I recently topped up my holdings. I think it is by far the best way of accessing privately held biotech firms. Recent share-price weakness offers an excellent chance to get on board.
The Syncona story is unusual. It started out as an independent investment business trading within the Wellcome Trust. It then merged with a UK trust called BACIT (Battle against Cancer investment trust), which was running a multi-fund portfolio. The merged entity is in effect a world-leading life-sciences venture capitalist joined at the hip with a traditional multi-fund manager kicking off cash that can be reinvested in private businesses. Followers of the Warren Buffett approach to investing will spot a classic ploy use a cash float from a boring business to provide growth capital for equity investments.
A good eye for winners
Syncona passes this challenge easily. It's already produced two exits in its short listed life. Blue Earth Diagnostics, the prostate-cancer imaging company, was sold to Bracco Imaging in late June. The other was Nightstar Therapeutics, a Nasdaq-listed retinal gene-therapy company. Syncona made a tenfold and a 4.5-fold return on these two companies respectively. Since December 2016 Syncona's share price has risen by around 70%, while its net asset value (NAV) gained 38% in the year to April. After its recent deals, Syncona is flush with cash worth around £915m, or 70% of assets.
According to funds analysts at Numis, a stockbroker, this might act as a "drag on NAV growth in the near term, but leaves the business well-financed to support growth in its existing portfolio, as well as to support new initiatives".
We can certainly see that last point emerging at the portfolio level. Syncona has founded three new portfolio companies over the past year: OMass Therapeutics (drug discovery), Anaveon (immuno-oncology), and Quell Therapeutics (cell therapy).
A treatment for haemophilia
But not every business in its portfolio has had such good luck. One portfolio business called Autolus Therapeutics, which is a Nasdaq-listed company, has seen its share price fall 47% since April, driven lower in part by worries that co-investor Neil Woodford might sell stock to help with his own issues. It's not too difficult to see why investors might be wary. The portfolio has a young, risky feel to it. There's a mountain of cash that will need to be invested to make a return, probably at the rate of between £100m and £200m per annum. And investors have slightly soured on biotech firms more generally. As a result, Syncona's share price is down by 6.7% over the last six months. At approximately 245p a share, it is trading at roughly 20% above the NAV based on calculations from Numis. For a potential high-growth fund, that looks to me like a more than decent entry price.
David Stevenson has been writing the Financial Times Adventurous Investor column for nearly 15 years and is also a regular columnist for Citywire.
He writes his own widely read Adventurous Investor SubStack newsletter at davidstevenson.substack.com
David has also had a successful career as a media entrepreneur setting up the big European fintech news and event outfit www.altfi.com as well as www.etfstream.com in the asset management space.
Before that, he was a founding partner in the Rocket Science Group, a successful corporate comms business.
David has also written a number of books on investing, funds, ETFs, and stock picking and is currently a non-executive director on a number of stockmarket-listed funds including Gresham House Energy Storage and the Aurora Investment Trust.
In what remains of his spare time he is a presiding justice on the Southampton magistrates bench.
The 30 house price hotspots
While we have seen house prices sliding, these sought-after locations have seen prices jump by at least 5% over the previous 12 months
By John Fitzsimons Published
Working parents will be entitled to 15 hours free childcare for two-year-olds from next year
The government has extended free childcare hours to working parents of two-year olds but it won’t be automatic so make sure you don’t miss out
By Marc Shoffman Published