Syncona: a biotech trust that's going for a song

Syncona is an investment trust that invests in promising, privately-held biotechnology companies. It looks too cheap.

Syncona (LSE: SYNC), an investment trust containing stakes in privately-held biotechnology firms, has struggled over the past few months. It was formed in late 2016 when the £650m investment trust BACIT merged with the arm of the Wellcome Foundation that had been commercialising cutting-edge medical research. 

Within two years, the share price had doubled to £3 as investors were enthused by the strategy and some promising holdings, but it had fallen to 220p by the end of 2019 and 200p in March. 

This was despite the sales of two investments, Nightstar and Blue Earth, for an aggregate 6.2 times cost and the flotation of a third, Autolus, at $17 a share, which provided further uplift. Since March, Syncona has climbed to 231p, but it is remains a strong buy. 

The contents of Syncona's portfolio

Syncona now has nine portfolio investments, a number it expects to increase to between 15 and 20 with two or three additions a year. Syncona’s strategy is to invest right at the start by identifying “exceptional science”, bringing in academic partners, adding its own expertise and creating globally competitive companies. It will continue to fund them as their scientific concept is turned into a clinical product that is taken through patient trials and, once in receipt of regulatory approval, brought to the market.

This process used to take 15 years but innovation has brought that down to between eight and ten. “Our management has been doing this for 20 years,” says CEO Martin Murphy. 

“Our key differentiator with other venture capital funds is that we don’t set up businesses [simply in order to sell them on relatively quickly]. Our strategy requires a deep, long-term capital base with the ability to invest £100m in each company.” This optimises the terms of any external capital-raising and eventual disposal. 

The biotechnology revolution

Chief investment officer Chris Hollowood explains that there has been a revolution in biotechnology; it no longer costs $1bn to develop a drug.“Precision medicine, reliant on human genetics, enables faster development, smaller, more capital-efficient clinical trials and a targeted commercial roll-out.” 

Gene and cell therapy enables precise treatment of malfunctioning cells and tumours, reducing side effects. Closely-defined patient groups triple the success rate compared to conventional drugs and enable unsuccessful products to be cut earlier at lower cost. Autolus has made encouraging progress with its treatments of lymphoma and leukaemia. 

A firm called Freeline accounts for 11% of net assets and is working on a one-off treatment for haemophilia B and other degenerative genetic diseases. Current treatment requires enzyme replacement in patients three times a week at an annual cost to health systems of $500,000. 

Gyroscope (4% of assets) addresses the leading cause of blindness, offering a major improvement on today’s surgical techniques. Achilles (4%) seeks to treat different types of cancer by infiltrating cells of the immune system directly onto the tumour. As Hollowood points out:  “Chemotherapy damages... healthy tissue, potentially killing the patient.” Three other investments are at earlier, pre-clinical stages of development and two are recent formations.

Some products will probably fail, but the upside from success is a high multiple of invested capital when the companies are eventually sold. For now, however, Achilles (44%-owned) is valued at 1.5 times cost while other investments are held at cost, despite the progress being made throughout the portfolio. So there is plenty of scope for strong returns in future. Syncona’s price significantly undervalues its potential.

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