View the article online at http://citywire.co.uk/money/article/a884469
Woodford to sell Patient blue chips, hails $1bn 'unicorn'
Manager of Woodford Patient Capital Trust wants to maximise holdings in early stage companies as he pursues controversial fund raising.
Fund manager Neil Woodford has said he will sell the three remaining FTSE 100 stocks in Woodford Patient Capital (WPCT ) as he seeks to maximise the £730 million investment trust’s holdings in early stage growth companies.
Disposing of AstraZeneca (AZN), Provident Financial (PFG) and Legal & General (LGEN) will provide the star manager with around another £33 million to plough into the smaller medical research and technology stocks whose prospects continue to excite him, despite recent stock market volatility.
The portfolio reshuffle comes as Citywire AAA-rated Woodford seeks to convince shareholders to approve a further share issue and increase the trust’s capacity to invest in quoted and unquoted companies.
‘We’d like to because the opportunity set is bigger than we anticipated,’ he said.
Woodford raised a record £800 million for the investment trust last April and the proposal to raise more money has caused some disquiet among investors and analysts following the recent downturn.
After a three-month rally after listing last April, the shares succumbed to a sell-off in healthcare stocks exacerbated by a general stock market retreat caused by the slowdown in China and emerging markets. The shares trade 12% below their launch price and have tumbled 20% over the past six months.
When asked if issuing shares was a good idea when the stock was below its flotation point, Woodford replied: ‘I’m a great believer in buying low and selling high. The assets we invested in are attractive and are more attractive now.’
He said the trust would consider buying back some of its shares if the price fell to a significant discount below net asset value (NAV), although he added that it was a decision for the board. At peak last year the shares stood at a 15% premium above their underlying value. They now trade at around NAV.
Glaxo goes first
The announcement of the sales of the three FTSE stocks is a significant shift by Woodford. Although Patient Capital was launched to exploit growth opportunities in small cap healthcare and technology companies, originally the manager intended to hold a quarter of the fund in big dividend paying stocks.
The income received from these was meant to pay the fund’s costs and underpin its unique performance fee only charging structure. Woodford Investment Management only gets paid if the trust's portfolio grows by more than 10% a year, at which point the firm takes a 15% share of any outperformance above that hurdle.
Speaking to journalists last night, Woodford said: ‘The cost structure has been lower than expected,’ adding: ‘It’s rather anomalous to have holdings of AstraZeneca and Provident Financial in the portfolio. We will sell them and reinvest in the early stage companies.’
Although Glaxo remains a big holding in his other fund, Woodford Equity Income , where it is the third biggest position accounting for 7% of assets, it has become a ‘special situation’ investment as the manager - and other investors - await for a change in leadership and strategy at the company.
Woodford, who wants a break-up of Glaxo, repeated his view that the group’s boss Andrew Witty was wrong to maintain its diversified business model.
The manager said he had met Glaxo’s new chair, Sir Philip Hampton, and pressed upon him the need for change to revive the group’s prospects and share price, which has fallen 11% in the past year.
Woodford said he would accept a dividend cut from the company, whose shares yield 6.4%, if it was accompanied by reform and investment in a pipeline of new drugs.
Star stock Stratified
Although Woodford’s website shows Patient Capital had 23% in mid and large cap stocks at the end of January, the emphasis has moved away from the big, non-core income stocks. Within this category are BTG (BTG), the £2.3 billion UK biotech company, and Alkermes, a US biopharmaceutical developing treatments for diseases of the nervous system.
Just over 41% of the trust is held in unquoted, privately-owned companies whose shares do not trade on a public stock exchange.
As we highlighted last month, the star performer among the unquoted holdings has been Stratified Medical, which Woodford revealed was now worth $1 billion (£710 million). This makes it a 'unicorn' in the parlance of private equity investors when referring to unquoted tech firms that reach this heady valuation.
Founded by Ken Mulvany, a biotech entrepreneur who built and sold an earlier company, Proximagen, that Woodford also invested in, Stratified has impressed the manager with its use of artificial intelligence tools to search through data from medical trials for ideas for new treatments.
‘Ken is an incredibly bright entrepreneur. He believes in the power of big data,’ said Woodford. ‘You can deduce really interesting insights from that data and see uses that weren’t originally intended in the research.’
Stratified’s biggest success has been in two applications for Alzheimer’s disease, which were licensed to a big US pharmaceutical company in June 2014. In October of that year Woodford joined a £40 million fund raising, which valued the company at £100 million and saw a small position added to the Equity Income fund. It was added to Patient Capital where it accounts for 0.8% of total assets.
Last year, Stratified was the biggest contributor to the Equity Income fund’s performance, generating 2.86% of its annual return, a remarkable achievement for a previously small, unquoted company. It represented 2.6% of the fund at the end of last month.
Woodford said Stratified had been revalued after the unidentified US drugs company said it wanted to invest in the business. Woodford added to his stake and reflected the new valuation in his funds’ holdings.
Since then there have been reports of US investors shying away from the high valuations given to 'unicorns' and other high tech firms.
Big interest in Immunocore
The manager also hailed the success of Immunocore, another unquoted company, which is Patient Capital’s largest holding at 5.6% of the fund. Woodford said the Oxford-based cancer drug developer could be the UK’s Genentech, a reference to the pioneering US biotech company that was bought by Roche of Switzerland for nearly $47 billion seven years ago.
Last July Woodford and Eli Lilly of the US were among a large group of investors who raised $320 million for the company, giving it a valuation at the time of nearly $1 billion, according to the Financial Times.
The significance of the fund raising organised by investment bank Credit Suisse was the amount of interest it generated, with 53 investors vying for a piece of the action.
‘Institutional investors are beginning to rumble that there are some fantastic science-based companies in the UK at reasonable valuations,’ said Woodford.
No chance Clinton
It’s not all been plain sailing, however. Aside from the wild swings in biotech stocks, investors in Patient Capital have been unsettled by events at Northwest Biopharmaceuticals in the US. As we revealed, Woodford was prompted to request the company appoint two new non-executive directors to lead an independent inquiry into allegations of financial impropriety that Northwest denies.
Woodford is awaiting the publication of its findings in the next two months. Northwest shares have lost nearly two-thirds of their value in the past year and represented 1.25% of Patient Capital at the end of last month.
The sell-off in biotech stocks started late last summer after Hilary Clinton, the Democrat battling to win the party’s nomination for president, vowed to tackle high drug prices if elected.
Echoing the sentiments of other biotech investors, Woodford predicted she would fail even if she gained power. ‘I’ve got more chance of flying to the moon with a piano strapped to my back than she has of doing that.’
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by Gavin Lumsden on Oct 23, 2016 at 00:01