Arix Bioscience plc (LON:ARIX) is the topic of conversation when Hardman and Co’s Analyst Dr Dorothea Hill caught up with DirectorsTalk for an exclusive interview.
Q1: You recently initiated on Arix Bioscience. What are the three key takeaways for the retail investor?
A1: In our opinion, the three key points are:
- that the company, being publicly listed on the LSE, is an accessible way to invest in exciting, early-stage biotech without the risk of being locked in
- They are a relatively young venture capital company and therefore it is primarily for investors with a high-risk appetite who are have a long-time horizon
- it is currently trading at a discount to NAV – so it is important to understand the reasons for this before taking the opportunity to buy shares
Q2: How should a generalist investor assess the technology?
A2: One of the key opportunities when looking at the company is that their investment team, who have considerable scientific and venture investing expertise, assesses in the order of 400 opportunities each year but selects only a handful, based on their experience. So, their shareholders are really backing the team in their ability to evaluate the technology on their behalf and to ensure a balanced and diversified portfolio.
So, in broad terms, their shareholders should be watching for operational and financial progression within each of the 16 portfolio companies, which is what represents value creation and growth. Examples would be positive clinical trial results, successful IPOs, positive revaluations by a third-party investor, or of course an exit – for example a sale to big pharma.
Q3: How should the investors assess their Net Asset Value?
A3: The company reports its NAV half yearly – which is composed of 16 portfolio companies and cash. In terms of visibility on the value of each component, they only report a breakdown of its core portfolio – so the larger, more established portfolio companies – each half, and the discovery portfolio only at the year end.
But because the listed portfolio companies contribute the majority of their NAV, there is good visibility on how the company is being valued by the market – but of course does also mean that the NAV fluctuates according to the share price of these listed companies, and general sentiment in the market. At Hardman, we do reflect the latest share prices of listed portfolio companies in our forecasts, so that our expected 2019 NAV reflects share prices on the last trading day of 2019, and our 2020 NAV forecast reflects the most up to date share price before publishing the note. The details are in the initiation note.
It is clearly more difficult for most retail investors to independently carry out their own evaluation of the private companies in the portfolio, in no large part due to the availability of information, but the company is conservative on this internally, and follows the IPEV guidelines, which maximises consistency.
Q4: What are you expecting for the 2019 results?
A4: We are forecasting that NAV for the full year will be around £208 million pounds, or £1.53 per share. This compares to a NAV of £232m at the interim stage – so a reduction by £24m – from the first half, and most of the reason for this is a reduction in the share price of Autolus. This was almost entirely due to an overhang in the market – Autolus has made good progress in its clinical pipeline, and on our estimates still represents a positive return for the company.
Q5: Going forward, what will you be looking for?
A5: The stock is currently trading at around a 40% discount to NAV – we will be looking at how this changes over the next 12 months, particularly with respect to the overhang in the market.
We are expecting Arix Biosciences to raise funds to support its balance sheet – whether through a placing or exits from the portfolio, for example.
And this should be a really strong year for the portfolio. There has already a lot of news in the first two months of this year – with the launch of QuenchBio, two placings and an IPO announcement – and we are expecting at least three pivotal trial readouts by the end of the year.
