“The UK has a world-leading research base in life sciences,” says Martin Murphy, chief executive of healthcare investment fund Syncona, “but the value from it has been captured in the US. The UK has punched far below its weight, selling out too early while the US has built multi-billion-dollar companies from a standing start.” As we explain in more detail in this week’s cover story, a small number of UK-based fund managers have set out to change that, aiming to take advantage of the UK’s technology expertise while alleviating its shortage of capital. Neil Woodford, who raised £800m for his Patient Capital Trust nearly two years ago, was one of these, but the trust’s results so far have been disappointing and the shares now trade below the issue price.
An alternative comes in the form of Tom Henderson, who switched focus after a lucrative career at a US hedge fund, aiming instead to combine successful investing with good causes. In 2012 he raised £206m for a new venture, the Battle Against Cancer Investment Trust (BACIT), which would give 1% of its assets to charity each year and invest 1%, in conjunction with the Institute of Cancer Research, into developing promising cancer therapies. BACIT was a fund of funds, allocating its assets to carefully chosen fund managers. The clever bit – from an investor’s point of view – was the absence of a management fee from either itself or the funds it invested in.
In late 2016 BACIT changed course in order to accelerate its investment in life sciences. Now a £650m fund, thanks to performance and further share issuance, it has merged with Syncona, an arm of the Wellcome Trust charity, which seeks to commercialise cutting-edge medical research. The new fund will invest £100m per year in new research, while the existing portfolio from BACIT will continue to be managed by Henderson and his co-manager, Arabella Cecil, until it is required to fund life-science investments. Henderson and Cecil’s record is impressive, returning over 40% (an annualised 8.3%) since the fund’s inception, while limiting exposure to market corrections.
Still, it is the life-sciences investments that will determine the ultimate success of the combined fund, now renamed Syncona (LSE: SYNC). The £200m valuation of these investments was based on March 2016 data, since when there has been good progress. Blue Earth Diagnostics, with an investment value of £83m, already has a chemical entity, Axumin, on sale in the US for the diagnosis of recurrent prostate cancer (where current detection levels are only 10%). Nightstar, with an investment value of £34m, is a gene therapy company with a novel treatment for inherited eye disease. Finally, Autolus, with a value of £31m, is developing cancer treatments by means of the activation of the immune system.
With Syncona’s shares trading on an 11% premium to asset value, the implied value of the life-sciences arm is now nearly £300m. If Syncona achieves its target of a 15% internal rate of return (a measure of project profitability) by taking new products all the way from the laboratory to market, there is more to come. How does this compare with Patient Capital? “Neil Woodford has been a buyer of deals, not an original investor, so paid four times as much for his stake in Autolus as Syncona,” says one shrewd observer. “He has four people working on life sciences while Syncona has 20. [The latter also has] a more targeted, less hurried approach to investment… and excellent research connections.” Patient Capital may yet prove to be a good investment, but Syncona looks better.