Morning Note: Market News and an update from life science company Syncona.
Market News
US CPI fell to 2.9% in July, a touch below the 3.0% forecast. The core figure was 3.2%, supporting the case for a cut in interest rates at the Fed meeting next month. Raphael Bostic told the FT he’s open to a September cut, while Austan Goolsbee said he’s more concerned about the labour market than inflation. Gold fell back to $2,455 an ounce, while the 10-year Treasury yields 3.84%.
US equities inched higher last night: S&P 500 (+0.4%); Nasdaq (+0.1%). Nike rallied by 4% after hours on news that Bill Ackman’s Pershing Square has taken new stake.
In Asia this morning, markets were mixed: Nikkei 225 (+0.8%); Hang Seng (-0.1%); Shanghai Composite (+0.9%). Japan’s GDP grew more than expected last quarter, driven by consumer spending. China retail sales beat, but Bloomberg Economics warned a slowdown in investment pointed to weakness heading into the third quarter.
The FTSE 100 is currently trading 0.1% higher at 8,292. Companies trading ex-dividend today include Anglo American (1.47%), Barclays (1.32%), GSK (0.94%), HSBC (1.21%), LSE (0.41%), Rio Tinto (2.80%), and Shell (0.96%).
The UK economy grew by 0.9% year on year in Q2, in line with market expectations. Both Industrial Production (-1.4% YoY) and Manufacturing Production (-1.5%) declined less than forecasted. Sterling trades at $1.2852 and €1.1670.
Brent Crude slipped below $80 a barrel. Iron ore hit its lowest level since 2022 as Chinese steelmakers cut production by 9% last month due to weak demand and low prices.
Source: Bloomberg
Company News
Earlier in the week, Syncona released results for the three months to 30 June 2024 and provided an update on its portfolio of life science companies. The shares currently trade on a 35% discount to 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 13 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.
During the latest quarter, the NAV fell by 6.3% to £1,160m, or by 4.9% to 179.4p per share. The decline was driven by a drop in the valuation of the life science business, alongside a positive return from the capital pool and accretive share buybacks.
The value of the life science portfolio fell by 8.3% to £739m, or 64% of NAV, driven by a decrease in the Autolus share price, partially offset by valuation uplifts in Beacon and Forcefield (see below).
The remaining £421m 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 the last financial year, the overall return within the capital pool was 3.4%. In addition, there is more cash on the balance sheets of the group’s portfolio companies and access to third party financing. As at 30 June 2024, both of the group’s listed companies (Autolus and Achilles) were funded to deliver clinical data which represent key milestones for their businesses.
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, the company deployed £23.3m into the life science portfolio and continues to anticipate spend of £150m-£200m in the financial year to 31 March 2025. 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 would look to return capital to shareholders. As part of that process and considering the material discount to NAV at which the shares trade and the near-term NAV per share accretion available, the company is currently buying back its shares.
Having repurchased £40m last year, the company has allocated a further £20m, in total amounting to 8% of the current market cap. In the latest quarter, £11m of shares were repurchased at an aggregate discount to NAV of 38%, resulting in accretion of 0.94p to NAV per share.
Over the last 18 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. The group took Freeline Therapeutics back into private ownership; portfolio company Freeline acquired SwanBio to create a new company, Spur Therapeutics; the stake in Clade Therapeutics was sold; Autolus announced a strategic collaboration with Germany’s BioNTech; and Quell entered a cell therapy collaboration with AstraZeneca.
Two of the group’s portfolio companies recently attracted investment from external partners, leading to valuation uplifts:
· Beacon raised $170m in a Series B financing, with Syncona committing $42.5m in a round led by Forbion, alongside a leading global syndicate. Syncona's holding was written up by £14.3m, a 17.9% uplift to the 31 March 2024 valuation.
· Roche Venture Fund committed £10m to Forcefield’s Series A financing, alongside Syncona’s commitment of £20m. The group’s holding was written up by £2.4m, a 37.6% uplift to the 31 March 2024 valuation.
The company has delivered strong clinical execution:
· Beacon treated the first patient in its Phase II/III registrational trial in XLRP, from which data would form the basis of a potential regulatory filing.
· Anaveon entered the clinic, initiating its Phase I/II trial of ANV600, a potential capital access milestone.
Looking forward, the company currently has a ‘maturing’ portfolio of 13 companies, expected to deliver 10 capital access milestones by the end of 2026, with eight expected by the end of 2025.
There are eight key value inflection points with the potential to drive significant NAV growth by the end of 2026, including two by the end of 2024. This includes the US commercial launch by Autolus of obe-cel, dependent on anticipated FDA regulatory approval in November. Syncona is funded to deliver on all the portfolio’s potential key value inflection points, albeit they are not without risk.
During the quarter, the company has added two new oncology companies to its portfolio:
· iOnctura – Syncona is leading an €80m Series B financing in iOnctura, a clinical-stage oncology company developing innovative therapies for neglected and hard-to-treat cancers. Syncona has invested €30m and will have a 23% stake in the business.
· Yellowstone – Syncona has launched Yellowstone, an oncology company pioneering soluble bispecific T-cell receptor (TCR)-based therapies, with a £16.5m Series A financing commitment, and will have a 60.9% stake in the business.
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, which are listed on the FTSE250 index, have fallen heavily over the last couple of years, due in part to the impact of rising bond yields on the valuation of, and appetite for, unprofitable ‘blue-sky’ companies.
The recent retreat in bond yields and the pick-up in sector M&A could provide positive triggers, although the valuation discount at which Clade Therapeutics was sold highlights the potential downside risk for the group’s other unlisted holdings. Although market conditions have been challenging, the company believes value is returning to late-stage clinical assets and financing conditions are beginning to improve in the private markets.
The shares currently trade on a 35% discount to our estimated live NAV of 179p, with the life sciences portfolio trading on a 55% discount, assuming the capital pool is valued at par.
Source: Bloomberg