Patient capital

I was impressed to see last week that the UK equity manager Neil Woodford has raised a record £800m to launch his new investment trust focusing on early-stage companies, having originally set out to raise £200m. The launch of the Woodford Patient Capital Trust is the largest of any UK-based listed fund and is testament to the pulling power of Mr Woodford, who became the UK’s best-known equity manager during his 30 years at Invesco Perpetual before setting up on his own.

Patient Capital intends to focus on companies whose offering is based on intellectual property; Woodford has a record of investing in unquoted biotechnology companies. The goal is to fully deploying its capital within one to two years of launch. Once this is achieved, the fund will hold 50 to 100 stocks, of which 75% will be invested in early-stage companies; the rest will consist of mature companies.

The new fund is potentially a big boost for the UK life sciences industry, which has shown signs of a revival over the last year or so, as evidenced by successful flotations of companies such as Horizon Discovery and Circassia. However, this is dwarfed by developments in the US where the New York Stock Exchange Arca biotech index has risen by over 200% since the start of 2011, easily outpacing the S&P 500, which has grown 64%. At this rate, it will not be long before the cumulative market capitalisation of US biotech companies tops $1tn.  

For some, the exuberance is eerily familiar to the bull market that preceded the biotech crash of 2000. Yet it may be different this time. Then, investors were betting on the promise of genomic science, which failed to immediately live up to the hype. Now, however, they are investing in more advanced treatments as the scientific breakthroughs of the past decade reach commercialisation.

The US life sciences industry has matured. In 2001, the cumulative market capitalisation of the top five biotech groups was $82bn. Now Gilead, Amgen, Biogen, Celgene and Regeneron are worth over $500bn combined. Gilead is bigger than many of the best-known names in pharma, including GlaxoSmithKline, Sanofi and Bristol-Myers Squibb, while Biogen is larger than AstraZeneca and Eli Lilly.

There are concerns that the US market is now in a bubble with stocks significantly overvalued and poised for a big fall when the bubble bursts. Woodford has been quoted as saying that he thinks this might be the case in some parts of the quoted US biotech sector but interestingly he noted in a recent interview with The Daily Telegraph that the valuations of unquoted British biotech companies are at bargain-basement levels.

If Woodford is right, investing in such companies will expose his new fund to the biotech boom while insulating it from the much-feared and discussed possibility of a bust. The flip side of such optimism is that if a crash slows the conveyor belt ferrying biotechs to big-ticket partnerships, buyouts and IPOs, early-stage British biotechs may find it harder to find capital when they need to graduate to large clinical trials.

I certainly hope that Woodford’s analysis is correct, both for the sake of the UK life science industry and also from a personal perspective as I have subscribed for shares in the Woodford Patient Capital Trust.