IP Group — Deep dive into the life sciences portfolio

IP Group offers liquid public market exposure to impactful private technology and life sciences companies from across the English-speaking world. Its university and investment networks are international, with a deep thematic focus on building market-leading global companies, with the potential to scale above US$1bn in value. The group’s permanent balance sheet capital provides the flexibility to build companies from inception to scale that a traditional fixed fund life structure (based on a general partner/limited partners relationship) typically lacks, while allowing the group to retain influential shareholdings. IP Group has refocused its capital allocation policy to drive returns from its priority companies, with management targeting an average gross annual return of 20% over the next five years. IP Group invests thematically, seeking to invest in companies with products and services that meaningfully contribute to a sustainable, healthier and tech-enriched future.

IP Group’s wide discount to NAV likely reflects pressure on venture capital (VC) deal volumes and valuations from macroeconomic headwinds, but also investor anxiety over the ability of listed VC investment companies to provide continued funding to their early-stage portfolios amid muted VC exit volumes. However, we note that IP Group’s gross cash and deposits stood at £241.5m (or 19% of total portfolio value) at end-2022. This is further assisted by the £60m undrawn credit and its quoted portfolio, valued at £228.7m at end-2022. IP Group’s portfolio holdings raised a total £1.0bn in 2022 (of which 9% was from IP Group), less than the £2.4bn in 2021 but similar to 2020 and above earlier years. Therefore, IP Group’s management considers most of the portfolio as being well funded, although it did not provide detailed information on the cash runway across its portfolio, which we think could further reassure investors that IP Group’s portfolio companies have a large cash cushion. That said, management highlighted during the recent valuation deep-dive presentation that most of the top 20 holdings (across the entire portfolio, not just life sciences) that need to raise funding still have a cash runway towards the end of 2024.

IP Group acquired Touchstone Innovations in 2017 in a share-for-share merger and related £207m placing, valuing the acquisition at approximately £500m. The acquisition significantly broadened the life sciences portfolio, meaning that IP Group remains life sciences led. However, the acquisition took time to bed-down, with the impact continuing to be felt in FY18 and FY19, with portfolio fair value and NAV both falling in each of those years as IP Group integrated the two portfolios and wrote down the value of certain investments. However, the success of the acquisition can be gauged by the fact that, as at FY21 year-end, Touchstone investments represented 50% (by number) of the group’s top 20 investments, though notably only one of the group’s top five holdings (Featurespace).

IP Group’s life sciences portfolio (excluding ONT, considered a strategic holding) comprises 33 companies valued at £390.8m as at end-2022, including nine of the group’s top 20 holdings (see Exhibit 3). That said, IP Group highlighted recently that it has consolidated its life sciences portfolio into around 20 ‘core’ holdings.

Thematically, IP Group’s life sciences team invests in understanding disease, focusing on disease cure and prevention rather than investing in companies that simply treat symptoms, thereby helping to create healthier, rather than just longer, lives.

The four pillars of IP Group’s approach are:

Portfolio holdings that characterise IP Group’s four-pillar approach to life sciences include:

IP Group was Oxford Nanopore Technologies’ founding shareholder in 2005 and held a 14.4% stake in the company in the run up to the initial public offering (IPO). ONT successfully completed its IPO in September 2021, allowing IP Group to realise £84m on its investment by selling around one-fifth of its stake. This brought IP Group’s total partial realisation from ONT to £106m, already more than its total investment of £77m. IP Group held a c 10% stake in the company, valued at £205.5m, at end-2022, which (despite the 65% share price drop in 2022 to 246.5p vs the IPO price of 425p) implies a healthy gross multiple on invested capital of c 4.0x (of which 1.4x is realised).

ONT reported on 21 March 2023 that its Life Science Research Tools (LSRT) revenue in FY22 stood at £146.8m, which is within its FY22 guidance of £145–160m issued in March 2022 (even if at the lower end of the range). This implies 30% year-on-year underlying growth (excluding the foreign exchange impact and revenues from the Emirati Genome Program and COVID-19 sequencing). IP Group’s management highlighted that most of ONT’s peers reduced their sales growth guidance for FY22 to below 10% or withdrew it altogether throughout last year. ONT also reported an LSRT gross margin of 56.3% (vs 53.8% in FY21) and an adjusted EBITDA loss of £78.6m (vs £57.7m in FY21). Its cash, cash equivalents and other liquid investments amounted to £558.0m at end-2022 compared to £618.2m at end-2021. ONT’s management now guides to LSRT revenue growth of 16–30% on a constant currency basis in FY23, or more than 30% on an underlying basis both in FY23 and in the medium term. LSRT gross margin guidance now stands at more than 60% in FY23 and more than 65% in the medium term. The company continues to target adjusted EBITDA break-even by FY26.

ONT remains a core, strategic holding for the group with significant potential upside as the company fulfils its growth and profitability ambitions over the coming years, as illustrated by the average current broker target price of c 354p, based on Refinitiv data, versus ONT’s current share price of c 234.8p.

IP Group has a 56.4% stake in Istesso, valued at £95.6m. IP Group first invested in Modern Biosciences (later renamed Istesso) in 2005. It is now the group’s third most valuable holding after Oxford Nanopore and First Light Fusion. Istesso is developing new treatments for autoimmune disease by reprogramming the metabolism of immune cells, with the potential to benefit patients with diverse conditions such as rheumatoid arthritis, multiple sclerosis and ulcerative colitis. At the end of August 2022, Istesso announced that it had commenced a Phase IIb trial for rheumatoid arthritis – a randomised, multi-centre, double-blind parallel group, placebo-controlled trial investigating the efficacy and safety of multiple doses of the metabolic reprogramming agent MBS2320. The study is to consist of a 12-week treatment period and will enrol subjects in multiple countries in Europe and Latin America. Istesso expects results from the study in H124. A Phase III trial would then start in 2025 provided the Phase II results are positive. Moreover, Istesso received FDA’s Fast Track and orphan drug designations for MBS2320 for the treatment of patients with idiopathic pulmonary fibrosis.

IP Group’s holding in Pulmocide is an example of an investment in the development of novel drugs with the potential to save lives in areas of unmet medical need: in this case, invasive respiratory infection. Pulmocide is looking to treat common acute and chronic respiratory tract infections associated with serious complications. With expertise in the identification of compounds with optimal characteristics for lung delivery, unlike currently available treatments for fungal infections in the lung, Pulmocide’s approach to drug development provides targeted delivery to the lung so that infections can be treated with minimal unwanted systemic effects.

Pulmocide raised a US$52m Series C extension round in December 2022 (bringing the total round size to US$147.5m) to advance the company’s lead asset PC945 through a global Phase III registration programme in patients with invasive pulmonary aspergillosis who have failed prior therapy. PC945 is a potent, novel triazole antifungal that has been specifically designed for use as an inhaled therapy. Phase III trials started in 2022, with registration with the FDA anticipated in 2025.

Genomics is a spin-out from the University of Oxford, focused on bringing the genomics revolution to healthcare. Building on the broad experience of the founders, the company has developed a unique rapid genetic screening platform that enables a prevention-first approach to healthcare by using its risk prediction tools to ensure more people are on the right screening, diagnosis and treatment pathways.

In October 2022, Genomics announced a partnership with Our Future Health to generate polygenic risk scores (PRS) as part of the research programme’s aim to find new ways to prevent, detect and treat common diseases such as dementia, diabetes, heart disease, stroke and cancer across the UK population.

Our Future Health will be the UK’s largest ever health research programme, collecting information from millions of volunteers to create a detailed picture of the health of the UK population. By helping researchers to develop new ways to detect disease at an earlier stage and identify people who are at higher risk of disease, Our Future Health is designed to improve prevention and treatment and ultimately deliver better health outcomes. In particular, the programme aims to support the use of genomics in disease prevention and population health by enabling the development and testing of new early diagnostic technologies and preventive interventions.

The calculation of PRS is an important part of the programme as these enable personalised approaches to prevention, and to healthcare in general. PRS-powered tests and tools can identify people at elevated risk of disease and match them to the right prevention, screening or treatment pathways, with the aim of preventing disease altogether or catching it early when outcomes are better. Genomics has recently demonstrated the accuracy of its approach across 53 different common diseases and traits, with scores for these to be calculated within the programme.

Genetics is an important risk factor for many common diseases, with mutations in critical genes often associated with rare diseases. However, for many common diseases, small variations in DNA in up to millions of positions add up to affect the risk of developing a disease. These variations are insignificant on their own, but their effects can be combined and measured in a PRS to give a more accurate prediction of risk.

In this way, PRS-powered tests and tools can identify people who may be at risk of disease, many of whom are currently invisible to the NHS, and put them on the treatment pathways that will be most effective for them.

During 2022, the life sciences portfolio (excluding Oxford Nanopore, which fell 64% in the period) lost 10% of fair value, or £41.8m. This was led by declines in publicly listed portfolio companies, most notably Diurnal (£13.7m), Centessa (£14.8m) and Athenex (£7.2m). This reflected the sell-off in the biotechnology/life sciences sector alongside the broader stock markets (growth stocks in particular), as well as company-specific issues. The latter include reimbursement and pricing setbacks relating to Diurnal’s endocrine drug franchise (IP Group decided to sell the business during the period), as well as Centessa’s decision to discontinue development of its Phase III drug lixivaptan.

Meanwhile, Hinge Health (one of IP Group’s three unicorns and a provider of digital solutions for chronic musculoskeletal pain) continues to significantly grow revenues and expand its customer base, according to IP Group’s management. Nevertheless, IP Group marked down its investment by 27% compared to Hinge Health’s US$6bn valuation in a funding round in October 2021 (translating into a £9.9m valuation loss for IP Group). This was part of a broader valuation adjustment exercise to reflect the softening valuations of late-stage VC businesses across the market. For a discussion of further developments within the main life sciences holdings, see below.

IP Group continues to make new investments, including a £3.5m Series A financing for GripAble, an Imperial College-originated company developing digitally-enabled rehabilitation programmes and devices for people with neurological and musculoskeletal conditions, and Kynos Therapeutics, an Edinburgh University spinout developing novel drugs against kynurenine 3-monooxygenase, a pivotal enzyme in the mediation of autoimmunity and cancer. In addition, the group invested £2.4m into Abliva, a Stockholm-listed biotech company developing novel agents for the treatment of rare mitochondrial diseases. Abliva’s lead drug, KL1333, has been approved by the US FDA to enter a potentially pivotal study in primary mitochondrial disease, supported by a £16m funding round that closed in May 2022.

While the stock market environment for growth stocks has been undoubtedly trickier in 2022 (and so far in 2023) than 2021, we believe that the positive fundamentals of the life sciences portfolio still hold true and that this bodes well for continued clinical performance in 2023 and 2024, meaning that we should expect continuing progress and major milestones to be achieved across the portfolio (see Exhibit 5 for an overview of IP Group’s current therapeutics portfolio).

We set out below nine life sciences companies, each with major milestones that are expected to be achieved over the next two years, meaning either a valuation inflection point (ie results from a clinical trial), a potential exit to a major pharmaceutical company or, in due course, a Nasdaq IPO.

In particular, investors should note that:

The nine life sciences companies (sorted by carrying value) are: