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.
The best way in
A good way to access the sector is through a fund, especially an investment trust. The BB Biotech Trust and the Biotech Growth Trust are my long-term favourites. Invesco also has an exchange-traded fund (ETF) that tracks the Nasdaq Biotech index.
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
All this sounds exciting on paper, but the real test is whether the managers behind the fund can prove that they can pick the right businesses. This is where most venture capitalists fall down. They have a great powerpoint presentation, but a paucity of valuable, cash-generative exits.
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
Existing businesses such as Freeline are also gathering momentum. This firm recently reported data on the first two patients in its haemophilia-B trial. Following treatment, both patients were free of spontaneous bleeding episodes. Syncona has invested around £200m in this business.
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.