Woodford Patient Capital rally comes to painful end

Woodford Patient Capital investment trust (WPCT) has suffered a serious drop of price, losing more than 11 per cent during the past couple of hours after its second largest holding suffered a major setback. 

Prothena, an Irish biotech firm listed on the American NASDAQ index, announced that Pronto, the most advanced drug in its pipeline, had been discontinued after it failed two medical trials.  

The stock, which comprises 9 per cent of the portfolio, had fallen 70 per cent by the time the bell struck to open US markets at 2.30pm. 

This will come as a bitter blow for long-suffering shareholders in WPCT, who had seen performance take a turn for the better over the past month. The trust had leapt to the top of the AIC UK All Companies sector – and indeed the entire investment trust universe – with gains of 16.8 per cent over the month to the morning of 23 April. 

But the news from Prothena means WPCT has lost about two thirds of the month’s gains today, with the share price down 10.3 per cent as at 3pm.  

The trust had seen its discount narrow dramatically to -2.5 per cent, down from a 12-month high of more than -14 per cent on 19 March; it too will inevitably be affected by the news. 

Woodford’s £700 million long-termist investment trust launched three years ago. Those who bought on day one and have remained loyal will be sitting on a sizeable loss, given the shares have fallen from an IPO price of 100p to 76p. 

Woodford, though, is sticking to his guns and will be retaining his holding in Prothena. He says: ‘We have always been clear why we have backed Prothena and, given the positive progress throughout the development of this drug, we have been increasingly confident it would be successful. 

‘Such trial results are symptomatic of early-stage investing, however, and with specific regard to biotech trials outcomes are binary. Nevertheless, the result of this trial is undoubtedly a blow and we will be working with the company and its management team on its strategy beyond Pronto – it has options.’

He points out that Prothena still has an early and mid-stage clinical pipeline. ‘It has a technology platform and a world-leading specialism in misfolding proteins, which are implicated in a number of different neurological disorders.’ He adds: ‘The company also has its own, unpartnered assets about to enter the clinic and, with more than $500m on its balance sheet, it is very well-funded.’

However, given that the whole Pronto development programme is being scrapped, this morning’s events are another painful setback for Woodford. 

Commentators have been increasingly vocal in their criticism of his small-cap experiment in the shape of WPCT, which launched three years ago. The share price has trended largely downwards since August 2015, yet there has been a shift towards a higher-risk approach. 

For example, unquoted assets can now comprise up to 80 per cent of the portfolio, up from 60 per cent at launch, and 80 per cent of the gross portfolio assets are now invested in unquoted securities, according to Woodford Asset Management.

Meanwhile, Woodford’s wider reputation has taken a buffeting as his eponymous Equity Income fund has suffered. Last autumn he took the unusual step of apologising for the fund’s disappointing returns

James Yardley of Chelsea Financial Services believes this impacted WPCT. ‘I think a combination of poor performance and negativity surrounding Woodford caused the trust to get sold off quite heavily,’ he says. 

It’s important to note that unquoted companies are not valued on a daily basis as main market stocks are, so it’s misleading to draw conclusions based on short-term data. Unquoted company valuations ‘will only be revised when milestone events trigger a revision, such as a new fund raising round or announcement of an IPO. Therefore, movement of the net asset value will always lag the underlying progress and value of many of the unquoted portfolio companies,’ explains a spokesperson from Woodford Asset Management. 

-Neil Woodford: Out to prove the doubters wrong

What had been underlying the trust’s short-term change of fortune, prior to this morning? As Yardley points out, there had been significant milestones from several holdings in the WPCT portfolio that have helped to boost the share price. Prothena’s promising-looking trials were one bright spot, but there were others giving investors cause for optimism. 

In particular, the portfolio’s largest holding, Oxford Nanopore, recently completed a £10 million funding round which valued the company at £1.5 billion. ‘Their product seems to be proven and now it is a case of ramping up production to meet demand,’ Yardley adds. 

Finally, last week, the fourth-largest holding, Benevolent AI, announced it had received $115 million in funding at a valuation of $2 billion.  

However, whether these potential benefits can offset the negative impact of the Prothena debacle and resuscitate WPCT’s fortunes once again remains to be seen. 

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