RTW Venture Fund — Major biotech drawdown providing opportunities

RTWVF is managed by RTW, a New York-headquartered investment firm founded in 2009 by managing partner Dr Roderick Wong. He has an MD from the University of Pennsylvania medical school and an MBA from Harvard Business School. Prior to forming RTW he was a managing director and sole portfolio manager for the Davidson Kempner healthcare funds and has held various healthcare investment and research roles at Sigma Capital Partners and Cowen and Company (a sell-side firm).

RTW has three funds: two private and the listed RTWVF. It employs c 80 people, of whom around 30 have advanced scientific or medical degrees, and has c $5.8bn in assets under management. Since launch, the company has had the same mission: to identify transformational therapeutics that can change existing treatment standards. The focus is on individual assets and companies, and only those that are ranked by the RTW team as being in the highest quartile of probable success. The manager works collaboratively with its peers as a scientist, business builder and investor; however, there are very few other companies that are full-lifecycle investors.

RTWVF is a Guernsey-domiciled company that was admitted to the Specialist Fund Segment of the London Stock Exchange on 30 October 2019 and migrated to the Premium Segment of the Main Market on 6 August 2021, following shareholder approval. The fund also has an additional sterling-denominated quote (ticker: RTWG), although its reporting currency remains US dollars. At the time of listing, RTWVF’s core portfolio had six companies, four of which were developing clinical-stage therapeutics and two were innovative medtech businesses. By the end of June 2022, the number of core companies had grown to 41. RTWVF can be viewed as a ‘one-stop shop’ providing scientific expertise, capital support, drug development expertise and bespoke financing solutions across the biotech lifecycle.

16 September 2022 – announcement of Third Harmonic Bio initial public offering (IPO)

On 14 September 2022, portfolio company Third Harmonic Bio listed on the Nasdaq Global Market (ticker: THRD) in an upsized $185.3m IPO (c 10.7m shares at $17.0m per share). It is a clinical-stage biotechnology firm developing a first-in-class, selective, oral KIT inhibitor for the treatment of severe allergy and inflammation. Third Harmonic Bio’s lead asset, THB001, is in a Phase I clinical trial for the initial indication of chronic urticaria, a dermatologic disease driven by mast cell activation that results in red, itchy, painful welts or hives that develop in response to a specific stimulus (inducible urticaria) or with no known cause (spontaneous or idiopathic urticaria). The company also plans to pursue development of THB001 in additional diseases of the skin, airway, and gastrointestinal tract in which mast cells play a known role in the pathophysiology of the condition. Prior to the IPO, RTW participated in Third Harmonic Bio's $105m Series B financing round in December 2021.

15 September 2022 – H122 results to 30 June

During H122, RTWVF’s NAV and share price total returns of -26.8% and -45.7%, respectively, compared with the NASDAQ Biotechnology Index’s -20.7% total return and a 39.1% decline in its small-cap benchmark. At end-H122, RTWVF had 41 core portfolio holdings, 26 private and 15 public; all core portfolio positions were originally investments in private companies. Of the 41 core investments, 28 of these companies’ pipeline products are in clinical-stage programmes. During H122, there were two new private company investments (Lenz Therapeutics and Mineralys Therapeutics), three complete sales of public investments (Athira Pharma, Biomea Fusion, iTeos Therapeutics), one IPO (CinCor Pharma) and one sale of a royalty holding (Mavacamten).

19 July 2022 – additional investment in portfolio company Immunocore Holdings

RTW participated in a private investment in public equity (PIPE) in portfolio company Immunocore Holdings (ticker: IMCR). It sold an aggregate c 3.7m ordinary shares (2.0m American Depository Shares, each representing one ordinary share, and c 1.7m non-voting ordinary shares) at a price of $37.50 per share. Gross proceeds from the PIPE were c $140m before deducting offering expenses. RTW participated in the financing round together with Rock Springs Capital and General Atlantic. Immunocore is a UK-based, commercial-stage biotechnology company pioneering the development of a novel class of T-cell receptor bispecific immunotherapies designed to treat a broad range of diseases including cancer, infectious and autoimmune disease. It has been in RTWVF’s portfolio since its launch on 30 October 2019.

6 July 2022 – portfolio company Orchestra BioMed transaction update

Portfolio company Orchestra BioMed announced a strategic collaboration, the closure of a $110m private equity financing and plans to list on Nasdaq through a merger with RTW-sponsored Health Sciences Acquisitions Corporation 2 (ticker: HSAQ). Orchestra BioMed announced a strategic collaboration with Medtronic to develop BackBeat cardiac neuromodulation therapy as potential integrated hypertension treatment for cardiac pacemaker patients. Investors in the $110m Series D financing include Medtronic and Terumo Corporation as well as lead investor RTW; the financing is not contingent on the consummation of the merger. The merged company is expected to be listed on Nasdaq as Orchestra BioMed Holdings (ticker: OBIO) and supported by $20m in total forward purchase agreements and an up to $50m backstop agreement. The total $180m in gross financing is expected to fund the combined company into 2026 based on current plans and estimates.

14 April 2022 – new investment in Lenz Therapeutics and Ji Xing China partnership

Lenz Therapeutics entered into an exclusive licence agreement with Ji Xing Pharmaceuticals to develop and commercialise LNZ100 (aceclidine) and LNZ101 (aceclidine + brimonidine) for the treatment of the loss of near vision associated with presbyopia in patients in Greater China. This condition is estimated to affect almost two billion people globally and more than 120 million in the United States. RTW invested $10m in Lenz. Under the licensing agreement, Lenz will receive $15m in upfront payments and may receive up to $95m in additional payments, based on various prescribed development, regulatory and commercial milestones, as well as royalty payments based on future net sales.

Woody Stileman, RTW’s managing director, strategic partnerships, explains that the February 2021 to May 2022 70% drawdown in the small-cap biotech sector was second longest and deepest in its history, with the worst being the 85% March 2000 to March 2003 decline during the bursting of the internet/genomic bubble. He suggests that the valuations of biotech companies got back to the levels seen during the 2009 global financial crisis; at the end of June 2022, the NASDAQ Biotechnology Index was trading at a 4.5x price-to-sales multiple, compared with 23.2x during the peak of the genomic bubble. Stileman notes that at 30 June 2022, 65% of biotech companies with market caps below $10bn were trading at less than 2.0x the cash on their balance sheets and a record 34% of these were trading below their cash levels. He highlights that the share prices of smaller or newly listed biotech companies have been particularly weak.

There were a record 108 biotech IPOs in 2021 and the number of listed biotech companies has increased by 82% since 2015, but with many companies trading below their IPO prices or below the level of cash on their balance sheets, share issuance has dried up. The manager says there were 13 biotech IPOs in H122 compared to lows of three and four in 2008 and 2009 during the global financial crisis. He comments that private financing is heavily skewed towards Series A funding, while there may be a funding gap in the later stages for biotech companies that are early in their clinical development or which have unproven technologies. Stileman says that in the 2015/16 correction, biotech companies’ average cash balances were $123m but are now at $235m although burn rates have doubled so cash runways remain around 2.9 years. He suggests that while it is too early to confirm a bottom in biotech stocks, there are reasons for optimism including continued high levels of industry innovation and an uptick in industry M&A activity; Q222 saw the largest number of deals announced since Q218. The manager also highlights that there have been industry rumours about a c $40bn bid for Seagen by Merck, along with other potential deals which, if they proceed, could start a virtuous cycle.

Stileman opines that the current environment in the biotech sector favours active stock pickers focusing on post-proof of concept, mid-cap biotech companies that have the available capital and expertise to invest. The issue of US drug pricing has been an overhang for the healthcare sector; however, the manager says that the August 2022 announced Inflation Reduction Act’s drug pricing reform is narrower than bills introduced by the Democrats in recent years, with the impact largely limited to a small number of large pharma/biotech companies which already have successful products sold into the Medicare population. He believes that M&A is likely to increase to offset these drug price reform revenue pressures.

At 30 June 2022, RTWVF’s NAV was split c 62% core companies (broadly 50:50 between private and public firms), c 34% in other public holdings similar to investments in other RTW funds to mitigate cash drag (the effect of holding cash rather than investments with better return potential) and c 5% in cash and working capital.

Alexandra Taracanova, RTW’s director, academic and investor partnerships, highlights its analysis of the cash on the balance sheets of 22 of RTWVF’s 26 core private companies; the average cash runway is 32 months. Around 48% of the combined value have an approximated cash runway of more than 24 months; c 14% between 18 and 23 months; c 10% between 12 and 17 months and c 29% less than 12 months. Of these six businesses, two are RTW new companies and just two of the remaining four companies are in more challenging financial positions. Taracanova explains that RTWVF’s private companies are valued each month. During H122, 75% were marked down, mostly for non-company specific reasons; only three of the markdowns were due to idiosyncratic factors like delayed financing rounds. She says that RTW has some degree of downside protection as it is often higher up in the capital structure than other investors and ‘is in good shape and well-funded’.

Commenting on a couple of RTWVF’s largest holdings, Stephanie Sirota, RTW’s partner, chief business officer, says that Rocket Pharmaceuticals listed in 2015 and is now one of the top five listed gene therapy companies globally. The company has two clinical programme results due in Q422; Sirota is hopeful of positive outcomes. Despite strong operating performance Ji Xing Pharmaceutical’s listing has been delayed due to market conditions and the valuation of RTWVF’s investment in this company has been written down slightly to reflect this. A Series D financing is expected later in 2022.

Taracanova highlights RTW’s full lifecycle approach and broad offering of financial solutions, which enables it to participate in a diverse opportunity set. She says that this was clearly demonstrated in April 2022, with the sale of the royalty stake in Mavacamten, the underlying asset of RTW Royalty Holding 1 to Bristol Myers Squibb immediately after the drug had achieved the primary endpoint of its Phase III trials, achieving a greater than 3x return on the November 2020 investment. The royalty asset was originally acquired as part of a multi-solution transaction with Cytokinetics, a promising mid-stage cardiovascular company, which also included an equity investment, a regional partnering deal with Ji Xing Pharmaceuticals, and future clinical trial funding. Taracanova says this was a ground-breaking transaction because, as a single counterparty, RTW was able to move quickly, simplifying and de-risking the process that would otherwise have taken much longer with the involvement of multiple partners.

Exhibits 2 to 5 show the breakdown of RTWVF’s portfolio at 30 June 2022. There were modest changes in the fund’s geographic breakdown during H122, with the United States still representing more than three-quarters of the fund. However, over time this share is likely to moderate as RTW has expanded its regional presence with offices in London and Shanghai seeking to identify new opportunities in Europe and Asia. Compared with the end of 2021, there are some notable changes in RTWVF’s clinical-stage exposure, with a 13pp higher weighting in commercial companies and an 8pp lower weighting in Phase I assets.

In terms of modality, compared with the end of 2021, the fund has a 4pp higher exposure to small molecule and a 5pp lower exposure to antibody technologies. Within RTWVF’s therapeutic focus, there is a 5pp higher weighting in both cardiovascular and neurology and lower weightings in rare diseases (-7pp) and oncology (-6pp).

RTWVF’s H122 (ending 30 June) 26.8% NAV total return decline was primarily due to its core public holdings (-17.6pp) with other public holdings (-11.7pp), which was modestly offset by its core public holdings (+1.3pp) and performance fee allocation and expenses (+1.3pp) as the NAV decline led to a credit in the performance fee accrual. The largest positive contributors were RTW Royalty Holding 1 (+4.9pp – sale of Mavacamten to Bristol Myers Squibb), RTW Royalty Holding 2 (+0.5pp), Immunocore (+0.3pp) and CinCor Pharma (+0.1pp). The top detractors were Rocket Pharmaceuticals (-5.3pp), Ji Xing Pharmaceuticals (-2.4pp), C4 Therapeutics (-2.0pp) and Avidity Biosciences (-2.0%).During H122, RTWVF’s NAV total return (-26.8%) outperformed its small-cap benchmark (-39.1%) but lagged the NASDAQ Biotechnology Index’s -20.7% total return. Its share price lagged its NAV, leading to a widening in the company’s discount.

As shown in Exhibit 8 below, RTWVF’s NAV has outperformed the SPDR S&P Biotech ETF (a multi-cap index) and the NASDAQ Biotechnology Index (larger-cap biotech stocks) over all periods shown.

RTWVF is the smallest of the seven funds in the AIC Biotechnology & Healthcare sector. To enable a broader comparison, we also include two Switzerland-listed funds, BB Biotech and HBM Healthcare Investments in the selected peer group in Exhibit 9. Of the four funds that primarily invest in biotech stocks (RTW, BB Biotech, Biotech Growth Trust and International Biotechnology Trust), RTWVF’s NAV total returns rank first over the last one and second over the last two years. Its closest peer is Syncona, another early-stage investor, but that company has around half of its portfolio in treasury bills and cash, while RTWVF uses its non-core listed holdings to fund new core investments. It has lagged the performance of Syncona over the last 12 months, but has a meaningfully higher NAV total return over the last two years. RTWVF currently has the second-widest discount in a group where only one fund is trading at a premium. It has the joint-highest ongoing charge in the selected group and, in line with most of its peers, a performance fee is payable. RTWVF is currently ungeared and is one of three funds that does not pay a dividend.

RTWVF invests in early-stage companies, which typically do not generate revenues and invest for future growth rather than returning cash to shareholders, hence it does not pay dividends. Any proceeds from portfolio company sales or distributions are reinvested.

RTWVF’s valuation has declined over the past few months during a period of heightened investor risk aversion. Its shares are trading at a 20.1% discount to cum-income NAV, which is considerably wider than the 5.0% average discount (based on monthly NAVs) over the last year (range of a 21.8% premium to a 27.9% discount) and the average 4.1% premium since the fund was launched in October 2019.

The board has the authority to issue new shares up to 20% of the outstanding share base in any rolling 12-month period without filing an updated prospectus, providing they are issued on a non-dilutive basis at a premium to NAV. It also has an annual authority to repurchase up to 15% of shares outstanding to manage a discount. In FY21, c 20.9m shares were issued (c 10.9% of the share base) raising net proceeds of c $44.1m, which added c 1% to NAV per share. There have been no allotments or share repurchases so far in FY22.

RTW describes itself as a company of ‘scientists and entrepreneurs’, aiming to change patients’ lives through medical and scientific innovation. It has a long-term, repeatable approach, seeking transformational innovations by undertaking deep scientific research. This is complemented by experience in capital markets and company building, along with transactional, operational and legal expertise. Having the ability to collect data on early-stage technologies provides RTW with a competitive advantage and opportunities for future investments. There is a four-step investment process:

There is a monthly committee meeting to review, and update where necessary, the valuation of all private holdings; these are also independently valued by an external assessor at least twice a year. For private investments, the targeted average timeline to IPO is less than three years for company formations and Series A fundings, and less than 18 months for mid- to late-stage funding rounds. At the time of investment, single holdings are limited to 15% of RTWVF’s NAV (was 30% for Rocket Pharmaceuticals), although in practice a single new investment is capped at 5%. The company aims to generate NAV total returns above 20% per year over the medium term.

Research is regularly refreshed to understand how products are developing and to determine their expected probability of success at their next trial readouts. Each asset is assessed in terms of its potential risk-adjusted returns. All private investments are allocated pro rata across RTW’s three funds; however, RTWVF has double the weighting compared with each of the two private funds. This is also the ratio employed when positions are reduced or sold. If considered appropriate, the manager is prepared to support RTWVF’s portfolio companies when they have setbacks.

RTW is planning to develop a formalised approach to environmental, social and governance issues and already has a responsible investor statement. The company’s approach to investment in life sciences companies is made up of goals and principles that are aligned specifically with its mission to assist in the development of breakthrough therapies that transform millions of lives, find cures for diseases and improve people’s quality of life. As a guiding principle, RTW prioritises an overall positive impact on patients in combination with long-term meaningful outcomes to society.

RTWVF may employ gearing up to 50% of NAV at the time of drawdown for investment and working capital purposes. At end-June 2022, net gearing was 0%.

RTW receives a monthly management fee, in advance, at the beginning of each month in an amount equal to 0.104% (1.25% pa) of RTWVF’s NAV. A performance fee is payable based on 20% of the change in NAV (adjusted for share issuance and the weighted number of shares in issue during the reporting period). This fee is subject to an 8% NAV total return compound annual growth rate hurdle from the start of the initial performance allocation period to the current performance allocation period. In FY21, RTWVF’s ongoing charges excluding performance fees were 1.78%, which was 32bp lower than 2.10% in FY20 (no performance fee was payable).

RTWVF currently has 212.4m ordinary shares in issue. Its average daily trading volume over the last 12 months is c 85k shares. As shown in the chart below, RTW’s manager, Roderick Wong, is its second-largest shareholder.

At the 21 June 2022 AGM, shareholders approved an increase in the total directors’ remuneration payable from $300k to $500k per year to ensure there are extra resources available to grow and diversify the board.