Morning Note: Market news and an update from life sciences company Syncona.
Market News
This morning in Asia, equity markets were mixed: Nikkei 225 (+0.2%); Hang Seng (-0.6%); Shanghai Composite (-0.4%). The renminbi fell to a 7-month low against the dollar after the PBOC set its weakest reference rate since November. The US S&P Futures currently predict a 0.3% rise at the open this afternoon. The FTSE 100 is currently trading 0.2% higher at 8,227. Companies trading ex-dividend today include 3i (1.11%), British Land (2.51%), Experian (0.86%), Fidelity China Special Situations (2.92%), and United Utilities (3.29%).
The Bank of England’s MPC is expected to hold interest rates at 5.25% at its meeting today. The Tories are heading for an electoral wipeout in the General Election, three major polls showed. One even projected Rishi Sunak will lose his seat, which would be unprecedented for a serving prime minister. Sterling trades at $1.2703 and €1.1849.
France is preparing to sell €10.5bn of government bonds today, the first auction since Emmanuel Macron shocked markets by calling a snap election. It’ll be a test of whether the 30-bp widening in the French versus German spread over the past 10 days will be enough to entice buyers.
The 10-year Treasury currently yields 4.25%, while gold is $2,333 an ounce. The oil price slipped to $84.50 a barrel.
Source: Bloomberg
Company News
Syncona has today released results for its financial year to March 2024 and provided an update on its portfolio of life science companies. The shares currently trade on a 36% 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 £1.3bn base, 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 year to 31 March 2024, the NAV fell by 1.3% to £1,239m, or up by 1.2% to 188.7p per share. The value of the life sciences portfolio rose by 2.2% to £786m, or 63% of NAV, as an uplift from portfolio company Autolus was offset by a £56.4m write-off of the “Gyroscope milestone payments” following Novartis’ decision to discontinue the development of Gyroscope’s lead programme.
The remaining £453m 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. The overall return within the capital pool was 3.4% in the period. In addition, there is more cash on the balance sheets of the group’s portfolio companies and access to third party financing. At 31 March 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.
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 in excess of 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 allocated £40m to the programme in the year, the company has today allocated a further £20m, in total amounting to 8% of the current market cap. So far, c. £20.2m of shares have been repurchased at an aggregate discount of 35%, leading to accretion of 1%.
Over the last 18 months, Syncona has undertaken a thorough review of its portfolio and is prioritising capital allocation towards its most promising companies and assets.
· Last November, Syncona took Freeline Therapeutics back into private ownership through an offer at $6.50 a share. Since peaking at around $280 a share in 2021, the shares had fallen sharply as a result of general industry factors and mixed data on its Haemophilia B program and halting of its Fabry disease programme.
· Earlier this week, Freeline acquired SwanBio to create a new company, Spur Therapeutics, combining two of Syncona’s clinical-stage portfolio companies. The combination will bring synergies around clinical capabilities and manufacturing know-how, as well as drive cost and operating efficiencies. Spur is now progressing two potentially first-in-class gene therapy assets through clinical trials and advancing a pipeline that moves beyond rare diseases into more prevalent conditions, starting with Parkinson’s disease. The acquisition has taken place at the portfolio companies’ holding valuations, resulting in a combined valuation of approximately £104.7m, with 99% owned by Syncona. In addition, Syncona has committed a further £40m to Spur to support the development of its expanded pipeline.
· In April, Syncona sold its 22% stake in portfolio company Clade Therapeutics to Century Therapeutics for up to $45m (£35.9m). The deal generated up-front consideration of $9.3m (£7.4m), an estimated £16.1m write down from the 31 December 2023 valuation of £23.5m. Although Clade has made significant scientific progress, it requires significant capital to progress to the clinic and despite the positive scientific progress to-date as well as the potential of its technology, access to significant third-party capital has been challenging, in line with the broader market conditions for pre-clinical biotechnology companies.
· In February, portfolio company Autolus announced a strategic collaboration with Germany’s BioNTech with the latter making a $200m investment in the former via a private placement in addition to making a $50m cash payment. In parallel, Autolus announced a $350m equity placement (at $6/share) to further strengthen its balance sheet to support the future potential launch of its key obe-cel product.
· Quell entered into a cell therapy collaboration with AstraZeneca focused on autoimmune diseases, for which it received $85m upfront, in a deal potentially worth over $2bn.
With today’s results, 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.
There were 15 clinical data read-outs in the year. Looking forward, the company currently has a ‘maturing’ portfolio of 13 companies, expected to deliver 11 capital access milestones and eight key value inflection points with the potential to drive significant NAV growth by the end of 2026, including two in the next six months, albeit they are not without risk. Syncona is funded to deliver on all of the portfolio’s potential key value inflection points.
Syncona deployed £172.2m of capital in the year, within its £150m-£250m guidance range. Capital was allocated to both new and existing portfolio companies, of which 86% was invested into clinical opportunities and assets that are approaching clinical entry.
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. It has been one of the worst bear markets for biotech on record, with the S&P Biotech Index (XBI) ending Syncona's financial year 45.7% lower than its peak in February 2021.
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 that 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 36% discount to our estimated live NAV of 178p, with the life sciences portfolio trading on a 60% discount, assuming the capital pool is valued at par.
Source: Bloomberg