Patient Capital Trust update,

June 2016

Mitchell Fraser-Jones, 15 July 2016, 15:20

Woodford Patient Capital Trust plc

In a month dominated by the EU

referendum, global financial markets
experienced considerable volatility with
London as epicentre. The Woodford
Patient Capital Trust portfolio did not
escape unscathed in these conditions with
its net asset value suffering a decline
during June. As is usually the case with
short-term market movements, some of
this decline was justified by fundamentals
but much of it was not.

Circassia was the most significant negative contributor to performance

during the month, following the release of disappointing trial data regarding
its high-profile vaccine for cat allergy sufferers. Although many aspects of
the trial data were highly encouraging, further demonstrating the drugs
strong therapeutic benefits, the latest results also showed that a placebo
had broadly the same impact on the symptoms. This is unprecedented and,
thus far, inexplicable, but it does represent a material blow to the
companys allergy platform. We share the management teams clear
disappointment at this development but remain supportive shareholders.
There is much more to Circassia these days than its allergy franchise, and
the combination of its net cash and the value of its recent acquisitions
suggests that the shares have fallen too far. It is, equally, far too early to
conclude that there is no value in the allergy technology platform.

The views expressed in this article are those of the

author at the date of publication and not necessarily
those of Woodford Investment Management LLP. The
contents of this article are not intended as
investment advice and will not be updated after
publication unless otherwise stated.

Elsewhere, shares in companies such as Oxford Pharmascience, ReNeuron

and Vernalis also declined but there was nothing newsworthy to justify the
moves. Sometimes, the share prices of quoted early-stage businesses will
be volatile and they may sell off in small volume for no fundamental reason.
This is particularly the case in market conditions such as the ones that
prevailed in the aftermath of the referendum, with many market
participants wishing to make changes to their portfolio seemingly at any
price, with no regard for valuation or prospects. In each case, we see no
cause for concern.
One of our unquoted holdings, Kind Consumer, was however revalued
downwards during the month. The company has developed the UKs first
medically approved e-cigarette, Voke. Its market continues to develop
positively, with e-cigarettes becoming more widely accepted as smoking
reduction and cessation tools but manufacturing issues have delayed the
products launch, hence the downgrade. The company continues to work
with British American Tobacco to find the best way forward for the product.
More positively, another of our unquoted holdings, Mereo Biopharma,
successfully made its market debut during the month. We have been
invested in Mereo, which specialises in acquiring and developing neglected
mid-to-late-stage assets from major pharmaceutical companies, since July
2015. The portfolio benefited from a substantial uplift on the original
investment and, albeit early days, the shares have traded positively since
listing in early June.

Company Spotlight: Mereo BioPharma (by Lucinda

Crabtree)
Mereo is a clinical-stage, UK-based, biopharmaceutical company, founded
in March 2015, in order to fund and develop novel, mid-to-late stage
treatments that would have otherwise been side-lined by big
pharmaceutical companies in favour of other strategic opportunities. With a
focus on rare and specialty disease areas, the company intends to optimise
the commercial value of its acquired programs by entering into partnering
deals or, for selected opportunities, by commercialising the products itself.

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Mereo has an experienced and shareholder-orientated management team

that we hold in very high regard as it has an excellent track record for
successfully executing projects within the pharmaceutical industry. The
company also benefits from a strong outsourcing business model that
brings together an extensive network of specialists for each individual asset
to assist management in gauging its clinical and commercial potential.
We first invested in the company in July 2015. Since then, the company has
made excellent progress it has so far acquired three, exceptionally wellcharacterised drug candidates from Novartis, each with different
therapeutic indications. Since acquiring this portfolio, the Company has
commenced two new Phase 2 clinical studies in 2016 and intends to
commence registration studies for lead product candidate BPS-804 during
H2 2016. Mereo will ideally add other opportunities to its portfolio as they
emerge.
The current pipeline consists of:
- BGS-649, an enzyme inhibitor being developed for obese men with
hypogonadotropic hypogonadism, which is a clinical syndrome caused by
inadequate levels of testosterone
- BCT-197, an orally active agent for acute exacerbations of chronic
obstructive pulmonary disease (AECOPD)
- BPS-804, a fully human monoclonal antibody which aims to improve bone
density in brittle bone syndrome, a rare orphan condition characterised
by fragile bones that break easily but also by fatigue and muscle
weakness, among other symptoms
Each treatment program is backed by supportive clinical data that suggests
excellent potential for first-in-class candidates with very attractive market
opportunities. We are particularly excited about BPS-804, given the lack of
alternative treatment options, the potential to be disease modifying and the
fact that the company could look to commercialise this particular
opportunity itself.
Brittle bone syndrome or, more scientifically, osteogenesis imperfecta (OI),
is an orphan genetic disorder that is characterised by fragile bones that
break easily. In addition to fractures, people with OI often have muscle
weakness, hearing loss, fatigue, joint laxity, curved bones, scoliosis, and
short stature. The majority of cases of OI (estimated at approximately 90%)
are caused by a dominant mutation in a gene coding for type I collagen, a
key component of healthy bone. Treatment of OI is supportive, focusing on
minimising fractures and maximising mobility, but to date, there are no
treatments that address the underlying bone weakness.
BPS-804 works by inhibiting sclerostin, which inhibits the activity of boneforming cells, known as osteoblasts. The company believes that by blocking
sclerostin, BPS-804 will induce or increase osteoblast function and
maturation of these cells, increasing bone formation and reducing bone
resorption1, thereby reducing fractures in OI patients.
The initial focus of Mereos product candidate will be on the adult patient
base with the paediatric market potentially following afterwards.
Additionally, the company looks to capitalise on this huge opportunity in
both the US and Europe where the company has robust intellectual
property protection, US Food and Drug Administration (FDA) and European
Commission (EC) orphan drug designation and there is a substantial unmet
demand for effective OI treatments.
BPS-804 already enjoys a significant lead time advantage over other antisclerostin approaches for this particular indication. Mereos approach is
well-validated by strong clinical data and the company continues to make
steady progress in developing the drug, which is approaching Phase IIb/III of
its clinical trials.

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In looking to raise capital to fund its fast-evolving portfolio, Mereo made its
market debut early last month via a private placing and concurrent AIM
admission. We took advantage of this opportunity to increase our position
in what we view to be an attractively valued, early-stage business. We have
seen a substantial uplift on our original investment at the point of listing
and, albeit still early days, the shares have traded positively since then.
However, we believe that the market price is still far from reflecting Mereos
long-term commercial potential.
As with the majority of early-stage companies there are risks that certain
trials will bump into problems or even, in some cases, fail. However, the
companys three assets are each in different therapeutic indications so
there is no platform risk. Our due diligence also supports the
managements approach in developing these treatments. As such, we have
formed a positive judgment not only on the scale of the commercial
opportunity but also on the managements ability to deliver.
Looking forward, we remain excited about Mereos prospects. Despite
being in its early days, the company has made great progress in a short
time period and its acquired assets are backed by very encouraging clinical
data. We believe Mereo can deliver very attractive returns to its investors in
the long-term.
Meanwhile, Theravance Biopharma was rewarded for making encouraging
progress by a steady share price rise. The company reported positive
results from a study of its Vibativ antibiotic, which is used to treat infections
that are resistant to conventional antibiotics. The study indicated that
Vibativ could have considerably wider applications than those it is currently
approved for, including MRSA.
Several of the portfolios other intellectual property commercialisation
companies also delivered an encouragingly positive performance during
the month, including Malin, Allied Minds and Imperial Innovations.
There was minimal portfolio activity during the month. We participated in
the initial public offering (IPO) of Draper Esprit, a leading venture capital
investment company involved in the creation, funding and development of
high-growth technology businesses with an evergreen, patient capital
investment approach much like our own. We also participated in share
placing in polymer technology business Revolymer and added marginally to
the holdings in Prothena and 4D Pharma at very attractive price levels.

1. The process by which bones are broken down, releasing calcium into the
blood stream

What are the risks?

- The value of the fund and any income from it may go down as well as up,
so you may get back less than you invested
- Past performance cannot be relied upon as a guide to future
performance
- The annual management charge is charged to capital, so the income of
the fund may be higher but capital growth may be restricted or capital
may be eroded
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to decide if an investment is suitable for you. Before investing in a fund,
please read the Key Investor Information Document and Prospectus, and
our Terms and Conditions. If you are unsure whether to invest, you should
contact a financial adviser.

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