The healthcare and life sciences companies that Syncona invests in should be hot tickets. These sectors are abuzz with ideas, while demand from both the public and the medical world is stronger than ever.
Syncona, an investment trust, has a declared purpose “to extend and enhance human life ... by creating and building companies to deliver transformational treatments to patients in areas of high unmet need.”
Chris Hollowood, chief executive, said yesterday: “Earlier this financial year, we set out an ambitious plan to organically scale the business to £5 billion of net assets within ten years. At the heart of this is improving shareholder returns. Growing the asset base will allow us to operate our model at scale, driving balance sheet efficiency and enabling enhanced risk-adjusted returns.”
And yet Syncona’s shares languish at around 151p, nearly a fifth below the 186.5p net asset value of the 13 firms it is invested in: a disappointing state of affairs, the board admits. Peel Hunt, the broker, says, bluntly, that the two should at least be in line, and its target price of 225p would be a 20 per cent premium.
Someone has got it badly wrong; the question is who? A clue lies in the fact that the NAV was 202.9p at the half-year stage on September 30.
There is no doubt that a business as speculative as this is vulnerable to the macroeconomic environment, which could not be much worse right now. Rising interest rates and a European war do not encourage backers.
The deeper question surrounds the business model. Commercialising university projects is a well-established business route with several successes, and was clearly what parent Wellcome Trust had in mind when it created Syncona in 2012 and floated it in 2016.
But this is an unusual investment trust, specialising in start-ups in which its management takes a hand. Hollowood is rare among trust bosses in chairing five investee companies, one of which, SwanBio, has suffered a £51 million write-down. It is a commitment that would test the most battle-hardened businessman, and it has to be said he is not yet that. After a PhD in 2001, his most senior previous post was as a partner in a healthcare venture capital firm. The entire top team are science and medical graduates with little experience outside the sector.
Confronted with the reality that the worst-case scenario in Syncona’s business plan was not gloomy enough, last year the board redrew its strategy on conservative lines to concentrate on late-stage fledgling firms rather than out-and-out start-ups. This has not so far halted a decline in the shares dating back to 2018, when they stood at 284p.
The write-down of SwanBio shows what can go wrong. Karen Kozarsky, its co-founder and chief scientific officer, complained nine months ago: “Manufacturing is a huge burden in gene therapy. It takes a lot of material. It takes time, cost and all of that.” After the write-down it is working on financing options, suggesting backers are not exactly falling over one another to pump in more money. Kozarsky has wisely decided to focus on one gene therapy project rather than several, hinting at an element of learning on the hoof.
Ken Galbraith, a chief executive and chairman of several biotech firms, has come aboard as executive partner to inject operational, financing and investment experience. It would do no harm to recruit another decorated success from outside the medical industry.
Wellcome is still the biggest shareholder with 28 per cent, which is good and bad. An important backer, it has been a seller for the past four years, and that overhang is going to weigh on the shares. Dividends and share buybacks lie some way in the future.
As Peel Hunt says, the shares “represent a way to gain exposure to the UK’s high-quality healthcare and life sciences segment”. But whether it is a good-value route at the current price is moot.
ADVICE Avoid
WHY Toomuch going on to control and monitor to the standard that investors should demand
GB Group
By any standards, the identity and fraud firm GB Group is suffering from a severe lack of investor confidence.
The immediate problem was an annual impairment review resulting in a £122.2 million charge against its identity business, comprising its IDology and Acuant acquisitions. That led to a loss before tax of £118.8 million, compared with a £21.7 million profit a year ago. But more fundamental concerns were raised by the comment made by the chief executive, Chris Clark, that “we were impacted by unexpectedly deep post-pandemic corrections in some end markets”.
This should not be happening. Widespread digitalisation in nearly every commercial activity, growing demand for anti-fraud protection, greater regulation and the impact of artificial intelligence should all be stiffening customer loyalty and stimulating strong growth. Instead, despite a £36.3 million increase in statutory revenue, operating margins and net assets shrank.
The business is a world leader in digital location, establishing identity, and managing fraud risk and compliance. As Clark said: “No one is going to go hungry fighting fraud.” It is a never-ending game of cat and mouse that is speeding further and further beyond the reach of all but the specialists. It seems tailor-made for AI, but that works both ways. The villains have become more sophisticated AI users to replicate customer service departments.
While location services, anti-fraud and identity outside the US grew at comfortable rates, a few American fintech customers spoiled the party by scaling back orders. That vulnerability helped to scupper a takeover last autumn by the US private equity firm GTCR. News that GB was willing to be bought would normally put it in play, but five other would-be buyers were scared off and so far no other has come forward. That, however, can only be a matter of time.
ADVICE Buy
WHY A tempting add-on for a big fintech group
