US hedge fund Kerrisdale put out a report in early November, saying it was ‘certain’ that the biotech stock’s flagship drug would fail, triggering a precipitous share price fall of up to 80%. The stock fell by 7.5% on the day and it is off 24% over 12 months.
However, Woodford (pictured) underlined his faith in the company, saying he has held it in every fund he has ever managed since it was spun out of Elan in 2012, over which time he has built a strong relationship with the management and a deep understanding of its product range. Prothena is a 15.63% position in the trust.
‘The position in Prothena – and indeed the conviction in the investment case that has contributed to the size of the holding – is the product of a long-standing relationship with the company and its management team, which pre-dates its existence as an independent company,’ he said.
‘It is worth remembering that the position size in the funds is also partly the product of the positive share price performance seen from the stock over the last three-to-four years, despite the continued, and increasingly vocal, presence of short positions.
‘I can understand that the publication of negative research can be disconcerting for investors but please bear in mind that the share price today, even after the recent setback, is higher than the average price at which we bought the shares (average book price for Woodford Equity Income fund = c. $35, Patient Capital = c. $40, current share price = c. $46).’
The long v the short sellers
Woodford said despite Prothena’s management giving a ‘series of confident, evidence-based presentations’ in a shareholder update at the firm’s R&D day last week, the market has focused on a delay in two tests of its flagship drug NEOD001 as ‘a key negative’.
He believes this is ‘the wrong thing to focus on and the wrong conclusion to draw though’. He pointed out that Pronto, one of the drugs in testing, remains on track to read out in Q2 next year. Although the read out of Vital study has been pushed back from the first half of 2018 to the second half, Woodford said he is still ‘very encouraged about the progress of the trial’.
‘The R&D day also contained new information about patient baseline characteristics in the Vital trial, which showed that it includes a greater proportion of more severely affected patients, in which the disease has progressed further,’ he said.
‘One should expect events in these patients to occur faster – but the trial read out, however, has been delayed by a year because events appear to be occurring slower than anticipated.
‘Overall, therefore, in my view, the delay of the Vital trial read-out is a very promising sign that NEOD001 is working.’
Woodford Patient Capital is down 10.8% over one year and now trading on a 9.7% discount to net asset value (NAV).