Morning Note: Market news and an update from healthcare company Syncona.

Market News

US equities pushed higher last night – S&P 500 (+0.4%); Nasdaq (+0.5%) – ahead of today’s US jobs data which will help illuminate the path ahead for interest rates. Amazon fell 4% after-hours as quarterly profit and sales forecasts missed, driven by weak cloud growth.

Nonfarm payrolls are expected to come in at 170k, with average hourly earnings at +0.3% month on month. Lorie Logan said rates may already be near a neutral level, potentially obviating the need for further cuts. Austan Goolsbee said that while fiscal policy uncertainty may lead to fewer rate cuts, he still expects some cuts over the next 18 months. 10-year Treasuries yield 4.45%, while gold recovered most of yesterday’s pullback and currently trades at $2,865 an ounce.

In Asia this morning, gains in mainland China lifted Asian stocks – Hang Seng (+1.2%); Shanghai Composite (+1.0%) – while a Hong Kong gauge of technology shares was poised to enter a technical bull market. In Japan, the Nikkei 225 fell by 0.7%.

The FTSE 100 is currently little changed at 8,718. Following its 0.25% rate cut yesterday, the Bank of England has halved its growth forecast for this year to 0.75% and estimates a shallow contraction at the end of last year, giving the economy a 2-in-5 chance of already being in a technical recession. Inflation will be much stronger than expected, peaking at 3.7% later this year, and that living standards will take a hit, with real post-tax take-home income practically flatlining in 2026 and 2027. 10-year Gilts yield 4.49%, while Sterling trades at $1.2450 and €1.1980.

Source: Bloomberg

Company News

Yesterday Syncona released a quarterly update covering the period from 01 October to 31 December 2024. The company provided an update on its portfolio of life science companies and committed to its ongoing share buyback programme. The shares currently trade on a 47% discount to the current estimated NAV.

Syncona is a healthcare company focused on founding, building, and funding global leaders in life science. The current portfolio is made up of 14 innovative companies and several life science investments, each addressing areas of significant unmet need for patients. The focus is mainly on the so-called ‘Third Wave’ technologies, such as gene and cell therapy, which are used in place of surgery or drugs, and which the company believes is currently in a ‘transformational’ period. Syncona also has a strong manufacturing platform capability which allows new products to be rolled out more quickly and efficiently, while creating barriers to entry.

The company’s 10-year strategy is to organically grow net assets to £5bn by 2032 versus a 2022 base of £1.3bn, equal to an IRR of 15%. The target is three new Syncona-founded companies a year, delivering an expanded portfolio of 20-25 companies, to deliver top quartile life science portfolio returns. Syncona employs one of three core financing paths: (1) strategic hold – funding companies on a sole basis to clinical proof-of-concept; (2) strategic syndicated – following the launch financing, companies will be syndicated with like-minded long-term investors and are likely to be held privately to clinical proof-of-concept; and (3) fully syndicated – companies syndicated early in their lifecycle by bringing in significant external capital, with comparatively lower Syncona investment, to fully exploit the opportunity.

In the latest quarter, the NAV fell by 1.8% to £1,124m, driven by a drop in the valuation of the life science business, partially offset by positive foreign exchange movements. On a per share basis the NAV rose by 0.3% to 179.4p per share, driven by accretive share buybacks (see below).

The value of the life science portfolio fell by 0.7% to £780m, or 69% of NAV, driven by a decrease in Autolus’ share price, partially offset by positive foreign exchange movements.

The remaining £345m of asset value is a strategic capital pool. The group holds 12-24 months of liquidity in cash and treasuries, with capital also allocated to several low volatility, multi-asset funds with daily liquidity, to manage inflation risk. In addition, there is more cash on the balance sheets of the group’s portfolio companies and access to third party financing.

This all provides the capital to invest in the life science business as the company builds and scales rapidly. Furthermore, at a time when the financing environment for public and private companies remains challenging, with sector specialist investors continuing to prioritise funding their existing portfolio over making new investments, and an absence of generalist investors in the sector, Syncona’s strong cash position leaves it well placed to take advantage of potential investment opportunities and fund its companies through the current market conditions.

In the latest quarter, there was no capital deployed into the life science portfolio. With £90m deployed so far during this financial year, the company now anticipates spend to be below or at the lower end of guidance range of £150m-£200m. This excludes the capital allocated to the share buyback programme (see below).

To support its strategy, Syncona aims to maintain three years of financing runway to fund its portfolio. If, in the event of realisations, the capital pool increases significantly more than the three-year forward capital deployment guidance, and subject to an assessment of investment opportunities at the time, the Board will look to return capital to shareholders. As part of that process and considering the material discount to NAV at which the shares currently trade and the near-term NAV per share accretion available, the company is currently buying back its shares. In the latest quarter, £13.7m of shares were repurchased at an aggregate discount to NAV of 41%, resulting in accretion of 1.49p to NAV per share. Given the persistent discount to NAV, the company has announced an additional £15m programme, taking the total amount allocated to £75m, more than 13% of the current market cap.

Over the last 24 months, Syncona has undertaken a thorough review to rebalance, diversify, and de-risk its portfolio and is prioritising capital allocation towards its most promising companies and assets. 60% of its life sciences value is now in clinical and late-stage clinical companies. The group took Freeline Therapeutics back into private ownership and it acquired SwanBio to create a new company, Spur Therapeutics; the stake in Clade Therapeutics was sold; and Quell entered a cell therapy collaboration with AstraZeneca.

Syncona’s exposure to portfolio company Autolus has been rebalanced as it transitions from development stage to a commercial biotech, in line with the strategy of building companies to late-stage development. The company generated proceeds of £6.6m in the quarter taking total realised proceeds to £16.3m. Syncona has retained a 9.9% stake currently valued at £45m.

During the quarter, three key value inflection points with the potential to drive significant NAV growth over time have been delivered by the group’s later stage companies.

- Beacon released positive 24-month data from its Phase II SKYLINE trial and encouraging three-month safety and efficacy data from its Phase II DAWN study.

- Spur published data from its Phase I/II trial in Gaucher disease which reinforces the potential of its FLT201 therapy. Post-period end Spur announced it had held a successful end-of-Phase II meeting with the FDA, supporting the upcoming initiation of the Phase III trial in Gaucher disease. Syncona sees this as a key value inflection point and will continue to support Spur as it prepares to initiate a Phase III trial in 2025.

In December, portfolio company iOnctura announced new clinical data showing early positive results which support the initiation of a Phase II trial in uveal melanoma for its lead asset roginolisib. A data readout from this trial is expected in CY2026 and is a key value inflection point for iOnctura.

In November, portfolio company Autolus received marketing approval from the US regulator for AUCATZYL (obe-cel), its novel CAR T-cell therapy, for the treatment of adult patients with relapsed or refractory B-cell precursor acute lymphoblastic leukaemia.

Overall, there are seven key value inflection points with the potential to drive significant NAV growth by the end of 2027, including two by the end of 2025. There are also nine capital access milestones across the portfolio expected by the end of 2026, with seven expected by the end of 2025. Syncona is funded to deliver on all the portfolio’s potential key value inflection points, albeit they are not without risk.

Earlier in the week, portfolio company Achilles announced that its Board has recommended to undertake a members’ solvent voluntary liquidation of the company and return capital to shareholders. The amount to be returned is currently expected to be $1.50-$1.66 per share. As of 31 December 2024, Syncona's holding value in Achilles was £10.1m, or 0.9% of group NAV.

Overall, although high risk, we believe Syncona provides exposure to a unique investment vehicle, exposed to cutting edge healthcare technology, that provides good portfolio diversification. The group’s investment track record to date is good – the disposal of portfolio companies has often generated an attractive return on invested capital. As always, data generated from the clinical pipeline will be a critical driver of value, and while not without risk, the group has several portfolio companies approaching key milestones that could provide a catalyst for the share price.

However, the shares have fallen heavily over the last few years, due in part to the impact of rising bond yields on the valuation of, and appetite for, unprofitable ‘blue-sky’ companies.

The company believes there is substantial latent value in the portfolio and with an improving macro environment for biotech, management is confident and excited by the value and impact the company can deliver by the end of 2027. That said, the board remains frustrated by the share price performance and widening discount to NAV and will continue to review options to maximise value for shareholders over the medium term.

The shares currently trade on a 47% discount to our estimated live NAV of 176p, with the life sciences portfolio trading on a 68% discount, assuming the capital pool is valued at par.

Source: Bloomberg