We’ve blogged already about looking inside funds and having looked at some mainstream funds like Fundsmith and Tech funds, I thought I’d look at some biotech funds. I must confess a personal interest in this, I‘m an investor in Arix Bioscience (ARIX) and am wondering what to do next: I first invested in Arix shortly after it listed in 2017. My interest was piqued by seeing Neil Woodford’s ill-fated funds as seed investors. I was intrigued about his strategy; he was celebrated then and ironically it was illiquid higher risk investments like Arix that caused so much trouble at the end of Woodford’s story after poor core performance led to massive outflows. I had also never invested in a “venture” style biotech fund like this. Mainstream large cap biotech funds, yes, but venture, no!
I bought a small stake in Arix, it had fallen from the new issue price and I thought I’d been clever. I didn’t buy any more. Although performance of its portfolio wasn’t bad, the discount to the net asset value kept widening.
Long investment horizon
This was the first lesson I learnt about Biotech – what drives these stocks is news flow. The company’s portfolio was small, and early stage, so news-flow was limited. The company kept investing, raising money to invest, the portfolio was going gently in the right direction, but the stock just drifted down as investors got disillusioned. The stock is also small and relatively illiquid.
Neil Woodford’s problems are catching
Woodford’s troubles and the liquidation of his funds were also affecting Arix: In June 2019, following big withdrawals by investors, Woodford’s LF Woodford Equity income fund was “gated”: i.e. investors were trapped in the fund while new administrators sold off the assets in an orderly fashion. The prospect of Woodford’s large stake in Arix being sold overhung the market. 2018’s bad trend continued in to 2019. It also overhung the shares of one Arix’ biggest holdings – Autolus, which was also a big holding of the Woodford Equity income Fund. So Woodford depressed Arix share price and the share price of one of its biggest assets.
The end was in sight though: the Woodford administrators sold the Arix stake in June of 2020. A large block of Autolus shares was sold in the first week of Feb 21 and the broker Stifel inferred that the stake was sold by the Woodford fund. The decks have been cleared. The share price bounced higher.
It is unique in my investing career to have been in such a technical situation as this, but an issue like a forced seller in the wings is bound to be bad for a share price.
What to do?
Since my first purchase I had kept an eye on Arix and bought again in late 2019. At this point I’d lost half my original investment, but I just thought the story was good. The stock was dramatically cheap, and the Woodford problems could not go on forever. Then, cheapness and quality would win out (I hoped). when I had a good look again a year later in late 2020, after the Woodford sale, the shares had bottomed out and I thought the situation even more compelling. I bought a lot more.
Arix then realised one of its investments, VelosBio, for 12x cost! Merck acquired it for $2.75Bn. The share price rocketed. From a NAV/share of 150p post listing, the NAV now stands at around 250p (including the sale cash). The share price performance is less stellar, Here’s the last three years!
This sounds like a happy ending, but a small speculative investment is now quite big. I need a good reason to keep it: initially, owning my first biotech/venture fund had educational value, I was getting a feel for biotech investing. I was learning by losing money. Now it was serious money.
Want to find out what happened next? Tune in next week to see how it all panned out…
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