Syncona

Syncona is a unique vehicle offering exposure to high growth, although not without risks...

Disclosure – Non-substantive Research

This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. With this commentary, Kepler Partners LLP does not intend to influence your investment firm's behaviour. 

Syncona

Syncona (SYNC) founds, builds, and funds life science companies, seeking to build a relatively concentrated/high conviction portfolio of up to 15-20 companies. It aims to invest at a very early stage, partnering with academics and takes a long-term approach, seeking to maintain a majority equity stake over a company’s development. SYNC has the flexibility to run winners, such that the portfolio can be very concentrated.

The majority of SYNC’s companies will be located in the UK or Europe, which the managers see as rich ground for life science innovation and enabling for their operationally intensive, partnership approach to building portfolio companies. A key part of the strategy is that SYNC aims to start investments small (which reduces the financial risk) and add to investments as businesses progress and ‘de-risk’.

Since 2016, SYNC has had some strong successes. The portfolio is currently dominated by two listed holdings (Freeline and Autolus), with one other holding (Achilles) having announced it intends to float. In the interim results presentation, the managers highlighted three companies that were approaching the start of clinical trials: Quell, SwanBio and Anaveon, which represents the springboard for value accretion (assuming the trials are successful).

Given a majority of the portfolio companies are expected to absorb capital for the foreseeable future, one of SYNC’s core strengths is its balance sheet. Of total assets of c. £1.3bn, around 43% represented by cash.

Kepler View

Whilst SYNC sits in the AIC’s Healthcare and Biotechnology sector, it is very different to peers. SYNC aims to set up 2-3 companies per year, to deliver a handful of companies (3-5 over a 10-year period) to the point of product approval, whilst still owning a significant proportion of the equity of the company. This points to the key value-add provided by the manager, but also the high hurdles that each company must overcome to be successful. Whilst the number of winners from the portfolio will be relatively low, the financial rewards to SYNC will be very high if they are achieved.

We would expect the NAV progress of unquoted investments will reflect each company’s progress and will not reflect or echo that of the wider market. That said, it will be dominated over the short term by the two largest holdings which are both listed.

SYNC currently trades on a significant premium to NAV. Numis provide an estimated NAV of 185.5p, to which the shares trade at a premium of 36%. One might look at this premium differently, assuming cash and quoted shares are valued at par, and then calculate the implied premium of the unquoted investments (31% of NAV as at 31/12/20). Using this methodology, the shares trade at an 84% premium to SYNC’s unquoteds.

It is hard to make a judgement on the premium. Should any of the unquoted companies be successful, then a valuation based on cost is likely to be very conservative. On the other hand, these are risky investments, and SYNC has shown over its short life so far that there will be losing investments as well as winners in the portfolio.

BULL
BEAR
Unique approach, with deep well of expertise not likely found elsewhere
Highly concentrated portfolio, with significant exposure to two listed companies
Some strong successes so far delivered by the team
Illiquid investments, in many cases not generating revenues and a long path to profitability or exit
Clear positive impact on society, both from investments made and charitable donations
Premium is very high, and subject to changes in sentiment
William Heathcoat Amory
William Heathcoat Amory is a co-founding partner of Kepler Partners LLP and leads the Kepler investment trust research team. William has 18 years of experience as an investment company analyst. Prior to co-founding Kepler Partners in 2008, he was part of the Extel number 1 rated research team at JPMorgan Cazenove.

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