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A disappointing year for Schroder UK Public Private Trust

Schroder UK Public Private Trust (SUPP – formerly Woodford Patient Capital Trust) has announced its annual results for the year ended 31 December 2019. It was a year of major change for the trust and one that its chairman, Susan Searle, describes as disappointing – its net asset value fell 49.3%, from 97.61p to 49.46p, while its share price fell 53.3%, from 82.10p to 38.35p. Since the company’s year end, World economies have been severely disrupted by the COVID-19 pandemic. SUPP’s chairman says that this may create opportunities for some of the many healthcare companies in its portfolio, but will also put pressure on other aspects of their activity, such as fundraising.

Potential delays to paying down the gearing

In her outlook, Susan says that the continuing delays in the sale of the assets from the LF Equity Income Fund will continue to cause disruption to a number of SUP’s investee companies. This, together with the current general market conditions created by the outbreak of the COVID-19 pandemic, may impact the private equity market and may further affect the trust’s ability to pay down the gearing within the timeframe that the board would like.

It’s Woodford, not Schroders…

The trust’s directors says that, as Woodford Investment Management resigned on 13 December 2019, and Schroders were appointed the same day, the 2019 performance was in effect the responsibility of Woodford rather than Schroders. Woodford is not able to provide an investment manager’s report, so the board have put together a review instead.

Board’s review of performance

This was clearly very disappointing with the NAV falling by 49.3% from 97.61p to 49.46p. The top 5 contributors to this negative return were as follows:

  • Benevolent AI: -7.67% – the company has made good progress via collaborations with AstraZeneca and Novartis, a new funding round took place at a lower level, albeit the funding was provided by Temasek who should prove a strong future cornerstone investor.
  • Industrial Heat: -7.44% – mainly as a result of technology development delays.
  • Autolus Therapeutics: -4.45% – as a result of a more sceptical background for listed biotech companies and then delays in constructing a technical facility.
  • Kuur Therapeutics (previously called Cell Medica): -3.29% – as a result of a lower valuation for new funds.
  • Rutherford Health (previously called Proton Partners): -3.07% – as a result of delays in the ramp-up of new centres.

Board’s review of portfolio activity

The major sales were as follows:

  • Oxford Sciences Innovation plc – £41.4m – sold, at a small premium (1.5%) to the then valuation.
  • Autolus Therapeutics – £32.1m – sold given its liquidity.
  • Ultrahaptics – £19.0m – sold profitably to a London private equity fund.
  • Sensyne Health – £17.9m – sold given its liquidity.
  • Prothena – £17.5m – sold given its liquidity.

All of the above were completed in order to raise cash to finance funding requirements and to seek to manage gearing.

The major purchases were as follows:

  • Atom Bank – £44.4m – as part of the transaction with WEIF referred to above and then a further funding commitment, alongside other shareholders, Toscafund and BBVL.
  • Rutherford (previous called Proton Partners) – £35m – acquired as a primary issue, linked to the Woodford commitment entered into at the time of IPO.
  • Benevolent AI – £15m – as part of a previously committed funding.
  • RateSetter – £14.3m – as part of the transaction with WEIF
  • Spin Memory (previously called Spin Transfer Tech) – £13.2m – as part of the transaction with WEIF.

Schroder’s summary of the top 10 holdings

Atom Bank (14.4% of the portfolio)

Atom Bank is the UK’s first bank built exclusively for mobile. It is redefining what a bank should be, making things easier, more transparent and better value in a world of finance. Currently the bank offers savings accounts, mortgages and business loans. During 2019 Atom has been investing into its infrastructure and technology platform. The Company was awarded a £10m Banking Competition and Remedies grant to drive competition in lending to SMEs, and also successfully completed its second mortgage securitisation of over £500m. This followed the successful £50m fundraising round completed earlier in the year with participation from BBVA, Toscafund, Perscitus LLP, alongside SUPP.

In early March, Atom invoked full contingency and moved swiftly to complete implementation of homeworking for all roles by the end of the month. Throughout, it has maintained strong customer service levels while responding to Government initiatives in support both of mortgage customers and SMEs. Strongly capitalised and highly solvent Atom plans to launch new savings products in Q2 and to continue lending to the real economy throughout 2020 and beyond.

Rutherford Health (14.4% of the portfolio)

Rutherford operates three innovative cancer treatment centres in Newport (South Wales), Northumberland and Thames Valley, with a fourth centre in Liverpool recently handed over for commissioning of equipment. The service offering is extensive and covers: imaging, chemotherapy, immunotherapy, radiotherapy and high energy proton therapy. Over 300 patients have been treated across all services including 100 patients treated with high energy proton beam therapy. In 2019, the company listed on the NEX Growth Exchange raising £20m on listing and a further £70m through the year.

Rutherford Health has partnered with the NHS to provide cancer care to patients in times in which many NHS healthcare facilities are burdened with a high number of COVID-19 patients. Cancer patients receiving chemo-, radio- or proton beam therapy are particularly vulnerable to COVID-19 infections due to their weakened immune system and Rutherford outpatient facilities focused on cancer care only ensure a safe and prioritised treatment.

Oxford Nanopore (13.3% of the portfolio)

Oxford Nanopore has developed a new generation of DNA sequencers, which uniquely scale from small portable formats to ultra-high throughput. They are unique in combining this scalability with real-time data streaming and the ability to sequence very long fragments of DNA / RNA, which provides very rich biological data. The Company now has customers in about 100 countries, using its technology for a range of scientific research including pathogen analysis, cancer research, agriculture, human genetics and environmental research. During the year Oxford Nanopore raised £109.5m in investment from new and existing investors from the US, Europe and Asia/Pacific. This brings total primary investment into the company to £481m.

Oxford Nanopore is providing support on the frontline of the coronavirus outbreak through their MinION sequencers, which allow rapid and decentralized genome sequencing, enabling an improved surveillance of the coronavirus outbreak and better understanding of the disease and its development, including potential mutations. Oxford Nanopore has partnered with global public health scientists and public health authorities in more than 30 countries, with another 40+ countries preparing to use MinION sequencers.

BenevolentAI (6.0% of the portfolio)

BenevolentAI creates and applies artificial intelligence (AI) and machine learning to transform the way medicines are discovered and developed. Benevolent integrates its technology into every step of the drug discovery process from hypothesis generation to late-stage clinical development. The Benevolent Platform® is used by scientists and technologists to find new ways to treat disease, improve the efficacy and lower the development time and costs of new treatments. During 2019, as well as advancing its internal R&D pipeline, the company announced collaborations with AstraZeneca and Novartis, and a $90m investment from Temasek, a Singapore-headquartered investment company.

Benevolent AI has been providing important insight in the global effort to combat the COVID-19 outbreak. In February 2020, Benevolent published two papers in The Lancet outlining how its proprietary knowledge graph, queried by a suite of AI algorithms, enabled the rapid identification of a potential therapeutic candidate for COVID-19. Its scientists re-examined the affinity and selectivity of all the drugs in its knowledge graph to identify already approved drugs with both anti-viral and anti-inflammatory properties. Its research suggests that Baricitinib, an already approved drug for rheumatoid arthritis, could be used to inhibit both viral entry into cells and the human inflammatory response strongly associated with the terminal phase of COVID-19 infection. It could also be used in combination with the directly acting antivirals currently being used in the COVID-19 outbreak. A leading example of how AI is being applied to accelerate the drug discovery process.

Immunocore (4.3% of the portfolio)

Immunocore is a pioneering T cell receptor biotechnology company, working to develop and commercialise a new generation of transformative medicines to address unmet needs. The Company’s most advanced programmes are in oncology and it has a rich pipeline of programmes in infectious and autoimmune diseases. Its lead programme, Tebentafusp (IMCgp100), has entered pivotal clinical studies as a treatment for patients with metastatic uveal melanoma. During the year, two additional programmes entered the clinic and one was approved by the US FDA.

Autolus (3.3% of the portfolio)

Autolus Therapeutics is at the forefront of a revolutionary immuno-oncology treatment that is offering new hope to patients suffering from cancers. In 2019, Autolus continued to demonstrate good proof of concept data for its “chimeric antigen receptor T cell therapy” (CAR-T) platform in several of its key clinical programmes. At the American Society of Haematology (ASH) conference in December, the company provided additional compelling patient data for its clinical programme.

During 2019, Autolus did experience one setback – a five month construction-related delay to its new semi-automated UK manufacturing facility in Stevenage. This negatively impacted progress of its clinical trials. However, as of September, the facility became operational and is now delivering clinical products for patients in both Europe and the US. Autolus’ proprietary ability to produce products in a semi-automated closed system is a major milestone that should offer a distinct competitive advantage relative to competitors, in terms of both efficiency and quality control.

Autolus’ manufacturing facility has continued to operate uninterrupted despite the outbreak of COVID-19, which is a major achievement for the firm given how critical this supply is to key therapeutic programmes for the year ahead.

Inivata (3.2% of the portfolio)

Inivata is a leader in liquid biopsy, a transformative approach that identifies tiny amounts of cancer DNA in the blood of patients with cancer. The Company’s technology is based on pioneering research from the Cancer Research UK Cambridge Institute, at the University of Cambridge and is reinforced by multiple high calibre publications. Its lead product, InVisionFirst®-Lung, is commercially available and helps clinicians to make informed treatment decisions for patients with Lung cancer. Further products in development help to manage patients with early stage cancer. The Company has a CLIA certified, CAP accredited laboratory in Research Triangle Park, NC and laboratories in Cambridge, UK.

Inivata is actively engaging with thoracic oncology experts on how they are modifying their patient care practices and adapting to the current COVID-19 crisis. Inivata has also engaged mobile blood draw services to enable patients to have blood drawn and their cancer profiled via the InVisionFirst test without needing to visit a healthcare facility.

Carrick Therapeutics (3.1% of the portfolio)

Carrick Therapeutics is a biopharmaceutical company focusing on targeting key pathways in cancer progression and adaptive resistance. During 2019 Carrick hired a new CEO to transition the company and drive the next growth phase. For their lead asset, targeting a receptor on cancer cell, Carrick Therapeutics completed a phase 1a dose escalation and safety study with positive results and started enrolling the phase 1b trial.

Carrick is actively managing the COVID-19 situation to ensure the safety of clinical trial patients, their continued access to study therapy and high data quality. The company is providing a nurse-led dispensing service with direct-to-home delivery to trial patients.

Mission Therapeutics (2.8% of the portfolio)

Mission Therapeutics has built a leading platform for the discovery and development of first-in-class, small molecule drugs that selectively target deubiquitylating enzymes (DUBs) – an emerging drug class that is attracting significant commercial interest in the area of protein homeostasis. The company focuses on treatment of kidney disease, fibrosis, rare mitochondrial diseases, and neurodegenerative. Mission Therapeutics has a major collaboration with AbbVie in the Alzheimer’s Disease and Parkinson’s Disease area.

It has been shown in the literature that a Mission asset could potentially enhance autophagy and reduce replication of MERS-CoV up to 28,000-fold. Mission has approached selected pharma companies to develop compounds to reduce replication of the related virus SARS-CoV-2.

Evofem Biosciences (2.8% of the portfolio)

Evofem Biosciences is a clinical-stage biopharmaceutical company that is focused on non-hormonal contraceptive products and products for the prevention of sexually transmitted infections. The company’s primary candidate, Phexxi, is currently undergoing review by the U.S. Food and Drugs Agency (FDA), and if approved will be directly marketed to consumers by the company during the latter half of 2020 and early 2021. Evofem Biosciences is listed on the US Nasdaq exchange.

Evofem is not directly affected by COVID-19, with its main product awaiting FDA approval at the time of writing. However, generalised social lockdowns will make commercialisation and further product trials more difficult until the situation returns to normal.

[QD comment: there are no major surprises here. 2019 was clearly a terrible year for the trust, which is what ultimately forced Woodford Investment Management to resign abruptly just before year end. 2020 has not started particularly well either. With markets reeling from the effects of covid-19, SUPP’s share price is down some 37.5% YTD (from 31 December 2019 to 30 April 2020) and it is clear that the trust is more heavily leveraged coming into this than the board would like it to be. Schroders have got their work cut out.]

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