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Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Schroders Capital Global Innovation. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
With eight of the 18 new investments bought for the Schroders Capital Global Innovation Trust (INOV) portfolio since 2019 being life sciences companies, it is clear that its portfolio managers see this as a key area of focus for the trust going forward. Here we take a closer look at the INOV life sciences portfolio to assess its progress and prospects.
The life sciences opportunity
The global healthcare industry benefits from several fundamental tailwinds that look capable of driving structural growth for many years, if not decades, into the future including a globally aging population and biomedical innovations. The confluence of advances being seen across scientific and technological disciplines is fuelling an unprecedented wave of innovation from within the life sciences industry, with biotechnology companies leading the way.
It is perhaps little wonder, therefore, that INOV’s portfolio managers, Tim Creed and Harry Raikes, have been finding abundant new opportunities for the life sciences part of the portfolio. Indeed, across all the exciting themes that Tim and Harry invest across, they cite life sciences as having the “greatest opportunity” for new investments over the last couple of years, and we are beginning to see the results.
Clinical milestones
It is the nature of development-stage life sciences investing that results can be “binary”, with individual company contributions inevitably driven by the results of clinical trials. The potential rewards are significant when the results of a trial read-out positively, but by contrast, the downside for investors can also be considerable should a trial fail to demonstrate the hoped-for efficacy in patients.
Overall, the INOV team is pleased with the development progress of the life sciences portfolio. By way of example, the valuation of Anthos was recently increased, driven by the positive result of its Phase 2 ANT-006 “Azalea” clinical trial in Abelacimab. Anthos is developing therapies for patients that are at high risk of cardiovascular and metabolic problems such as heart disease and stroke. This particular study was assessing Abelacimab’s ability to prevent thrombosis while mitigating the risk of bleeding in a cohort of atrial fibrillation patients that were deemed at moderate-to-high risk of stroke. Encouragingly, the study was stopped early due to evidence of best-in-class thrombosis prevention an “overwhelming reduction in bleeding”, when compared to the current standard of care.
Meanwhile, Neurona Therapeutics, a US-based clinical-stage cell therapy business, recently secured a notable investment of $1.6m (£1.3m) from INOV in Q1 2024, as part of a financing round which successfully raised $120m for the company’s ongoing development. Neurona is dedicated to developing innovative cell therapies for chronic diseases of the nervous system. In December 2023, Neurona reported positive results from a Phase I/II clinical trial, for its lead asset NRTX-1001 for the treatment of drug-resistant mesial temporal lobe epilepsy (MTLE). NRTX-1001 was well tolerated by all initial subjects and the first two subjects who received the treatment experienced a significant reduction of over 95% in their overall average monthly seizure counts one year after treatment. The investment from INOV further supports Neurona's mission and contributes to the advancement of its first-in-class cell therapy research and development efforts.
The quoted position in Autolus, which is developing Car-T cell therapies for cancer patients, also performed very well in 2023, with the share price increasing by more than 200% in US dollar terms. This share price movement reflected both encouraging results from clinical trials and other pipeline developments. In May and December 2023, Autolus presented positive results from a pivotal Phase 2 clinical trial for Obe-Cel, which is aimed at patients with relapsed / refractory adult B-cell acute lymphoblastic leukaemia. The company has filed a Biologics License Application with the FDA, seeking US regulatory market approval for the therapy.
As is usually the case, not all progress from within the INOV life sciences portfolio was positive, however. For example, AMO Pharma, an emerging biopharmaceutical business developing new treatments for serious and debilitating diseases, including rare genetic disorders, was one of the main detractors to performance during 2023. In September, the company reported that its Phase 3 Reach-Com clinical trial for AMO-02 for the treatment of congenital myotonic dystrophy did not meet its primary endpoint.
These examples are all clear demonstrations of the binary nature of this part of the INOV portfolio. They also provide a strong indication as to why Tim and Harry seek a diversified approach across different businesses, medical areas and development stages, as well as by combining the life sciences theme with several other exciting areas of innovation such as artificial intelligence, cybersecurity and fintech.
Encouraging development
Overall, however, the investment team is strongly encouraged by the progress made by the life sciences element of the INOV portfolio. Out of the 12 life science portfolio investments shown below, 10 have now reached clinical stage, which means they have products being tested in humans via highly-regulated clinical trials. Of these, five have already shown clinical proof of concept, which typically occurs during Phase 2 of the three-stage clinical trial process. Additionally, device business Cequr has received regulatory approval, which means it now has permission to sell its Simplicity insulin patch for diabetes patients.
The majority of the life science opportunities listed below are new investments, committed since Schroders took on the INOV mandate in 2019. Furthermore, these have typically been introduced to the portfolio at a later stage of their development than the inherited investments, as a result of intentional changes to the life sciences approach under Schroders stewardship.
Encouraging development of life science investments
Source: Schroders Capital, 2024
Companies shown are for illustrative purposes only and should not be viewed as a recommendation to buy or sell. Logos shown are the property of their own entities.
Realising value
When making investments in life sciences businesses, the portfolio managers normally expect to hold them throughout their development phase and into the early stages of their commercial journey. It doesn’t always work out that way, however, because these businesses are often attractive acquisition targets for larger pharmaceutical businesses.
The stars on the diagram above indicate two businesses that have already been acquired, allowing us to realise value from the holdings. The first of these, Carmot, was a business with high potential obesity and diabetes therapies in development, which was first bought for the portfolio in early 2023. This was through a highly access-restricted funding round, which Schroders was only able to participate in due to its deep expertise in biotech investing and close relationships with other high-quality biotech investors.
In December 2023, it was announced that Roche was to acquire Carmot for $2.7bn, at a price that is more than three times higher than our initial investment in the business. Tim and Harry had always anticipated this would be a successful investment but had been prepared to wait three-to-five years for the value to be realised. Ultimately, Carmot may be worth considerably more than Roche has paid for it, but in the context of a holding period of less than twelve months, this seems like an excellent price at which to exit. The deal allows the portfolio managers to quickly realise value and they can now redeploy capital in other exciting opportunities.
Meanwhile, the deal with Roche has been structured with potential future “milestone payments”. These allow exiting shareholders to maintain an exposure to the acquired company’s future success. If certain development milestones are met, INOV and other prior shareholders in Carmot, are entitled to further payments from Roche worth up to an additional $400m in total, on top of the $2.7bn initial acquisition price.
These milestone payments are relatively common in life science investing. Indeed, last year INOV benefited from additional contingent payments relating to the sale of Kymab to Sanofi in 2021. That deal was struck for an upfront payment of c. $1.1bn with the potential for future milestone payments of up to $350m. This translated into initial proceeds of $87m (£63m) to INOV for its holding in Kymab in 2021, with the potential for a further $27m once certain milestones were met. Kymab’s continued development success led to INOV receiving a further payment of $5.8m (£4.6m) in the first quarter of 2024. Tim and Harry are confident that positive development progress can continue.
Ideal for a global innovation mandate
The ability to invest globally is a positive as far as life sciences are concerned, because it allows the team to add another perspective to diversification. The UK is well known for its expertise in early-stage life sciences technology, in large part thanks to our excellent academic infrastructure. However, the US and Switzerland are also hotbeds of life sciences innovation, and the INOV portfolio has exposure to these countries as well.
With 180 investment professionals focused on private equity at Schroders Capital, INOV benefits from significant resources in finding exciting opportunities, not just in life sciences, but across all eight of the innovation themes that INOV is exposed to. Two of those themes are related to life sciences – oncology and biotech discovery platforms. In combination with the other six themes, and the tremendous potential to be found in the venture and growth parts of the portfolio, this builds a positive story of encouraging development for the INOV portfolio as a whole.
Schroders Capital Global Innovation invests in 8 themes
Source: Schroders Capital, 2024
Fund risk disclosures – Schroders Capital Global Innovation Trust plc
Investment risk: Long-term outcomes are more binary – extremely attractive rewards for success but some businesses will inevitably fail to fulfil their potential and this may expose investors to the risk of capital losses.
Overseas investment risk: The trust may invest in overseas securities and be exposed to currencies other than pound sterling – as a result, exchange rate movements may cause the value of the trust, individual investments, and any income paid to decrease or increase.
Private companies risk: The trust may invest in unquoted securities, which may be less liquid and more difficult to value, because they are generally not publicly traded – the lack of an open market may also make it more difficult to establish fair value.
Share price risk: The price of shares in the trust is determined by market supply and demand, and this may be different to the net asset value of the trust. This means the price may be volatile in response to changes in demand.
Small companies risk: As it can take years for young businesses to fulfil their potential, this investment requires patience.
Young companies risk: Young businesses have a different risk profile to mature blue-chip companies – risks are much more stock-specific, which implies a lower correlation with equity markets and the wider economy.
Gearing risk: The company may borrow money to make further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase by more than the cost of borrowing, or reduce returns if they fail to do so. In falling markets, the whole of the value in that investment could be lost, which would result in losses to the fund.
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