Woodford Crisis - Autolus Theraputics

Woodford's Equity Income Fund remains suspended

Posted by Gary Smith on July 6, 2019

Neil Woodford's Equity Income Fund remains suspended. Investors continue to be unable to sell or buy units in the fund. The first 28 day suspension period has now ended. The next possible unlocking date is 29th July, however no date has been fixed for trading to restart. Woodford, speaking in a video on his website, said:

“we are using the time... to ensure we get the right outcomes for our investors.”

The stocks picked for his Equity Income fund contained a number of questionable calls, at least in the sense that they were no-dividend paying stocks held by an income fund. And no prospects for one in the foreseeable future, either.

These questionable stocks look like money pits.

These companies could well have excellent prospects years into the future, could even be leaders in their field today, but right now they are not selling a product but still require millions and millions of dollars worth of research and development spending.

One of those companies is:

Autolus Theraputics

In the Woodford Equity Income Fund 2018 Annual Report (latest – to 31st December) Woodford held 6,312,380 shares valued at £157mn, 3.37% of the entire portfolio in Autolus Theraputics.

His stake in Autolus, in all of his funds, amounts to 27% of the equity in Autolus Theraputics, according to the K-20 filed by that company for 2018.

Autolus Theraputics is engaged in research and development into T-cell treatments for cancer, a new procedure. The company claims that it is a world leader in T-cell technology.

The technique, according to medicalexpress.com:

“involve[s] extracting specialised immune cells, called T cells, from a patient's blood and altering them in the lab so they recognise and fight cancer cells. The modified T cells are multiplied a thousand-fold in the lab and then put back into the patient's bloodstream.”

Autolus Theraputics does not currently sell a product.

In the last reported financial year it lost $51 million. Autolus's only revenue was a $1.4mn grant. In 2017 it lost $19mn, in 2016 $15mn.

In it's filings the company acknowledges that it is a deep money pit with no prospect of a dividend in the foreseeable future.

This sentence, in the annual report, sticks out:

"We have incurred significant losses in every year since our inception [2014]. We expect to continue to incur losses over the next several years and may never achieve or maintain profitability".

It looks like the chances of this stock paying a dividend are zero in the foreseeable future. Any product would take a number of years to get approved before the revenue started coming in.

I have seen reports online that Neil Woodford made his name by not falling victim to the dotcom crash of the late 1990s. This may be true, but it is also marketing puff. There were millions to be made in that boom. It is true that you had to get in and out deftly, if you were left holding the stock when the bust came you were toast. But millions were made on the way up in companies with no revenue just brilliant ideas.

In this instance it looks like Woodford is making a similar mistake on a new technology that needs to be proved. But I would argue this is much worse than the dotcom boom in which people were throwing crazy money at new websites that turned out to not be profitable. Woodford in this investment is throwing money at a much more complex new technology that doesn't seem to work every time.

Undoubtedly investing in these early stage companies could be very profitable if he is proved right eventually, but very expensive in the interim and there is always the prospect that, as the company doesn't have an income, you have to keep giving them money or all of your earlier investment in the past is wasted.

This might even be fine if it was an insignificant proportion of the portfolio, however the fund has collapsed in size because of redemptions and poor calls making this investment now stand out as a calamitous error.

The size of the fund has fallen sharply. But even when the fund was £8.9bn the stake made up 1.87% (per the WEIF half year report 2017). The fund is now $3.9bn and now the stake is 3.37%.

It's problems like this that mean the suspension of the fund could continue for much longer.