In one of my previous posts: Agronomics: Offering Unique Listed Exposure to Early Stage Companies in the Meat Free Space, I touched on the fact that some high growth areas are not very easy to find in listed equities. I highlighted how the Agronomics investment trust gives us as stock market investors a rare vehicle for gaining exposure to the tremendous potential of privately owned early stage lab-grown meat companies. In much the same vein, early-stage venture capital in technology companies is hard to reach for us as stock market investors. Today, I’d like to tell you about another UK listed investment trust, Frontier IP, that gives us early stage technology exposure, where the underlying holdings are in high growth niches and also at a very exciting point of their development.
Notably there are two very exciting private companies in Frontier’s portfolio that we get exposure to. The largest holding is in Exscientia, a drug discovery company using AI to uncover successful therapies. I will write more broadly at a later date on why I believe the convergence of AI and biotech technologies is one of the most powerful and exciting trends not just in investment terms but for humanity. Within this context, it’s important to note that Exscientia brought the first drug developed entirely by AI into clinical trials last year. The biotechnology industry certainly took notice. That’s why Exscientia has received a tremendous amount of interest in recent months. In fact, the company leveraged this success into two back-to-back venture capital (VC) rounds. Exscientia just raised $109.3 million in its Series C funding round back in March. And it followed that up with a $225 million Series D round in April – less than two months later. We don’t know the company’s exact valuation as it is a private company, but it is very likely that Exscientia is now a unicorn (as these two VC rounds must have pushed its valuation to over $1 billion). And here’s the thing – Exscientia didn’t need the money. The company has been profitable since 2017. So the cash raised from Bristol-Myers amongst others will be enough to carry Exscientia to an initial public offering (IPO) and I wouldn’t be surprised if this happens already within the next 12–18 months.
The other company within the portfolio that I personally believe has incredible prospects is the Vaccine Group, a company that is developing vaccines initially for use in animals. This is a holding that has real blue sky valuation potential given its novel approach (see detail below). As most diseases that afflict humans originally arise in other animals (as seems to have been the case with Covid), it is sensible to tackle them at source. Given the global damage inflicted by Covid, it is very likely that the Vaccine Group’s prospects have been materially boosted as nations seek to prevent another similar devastating outbreak. The recent appointment of Dr. Jeremy Salt as Chief Executive Officer is a positive step in the development of the business. Frontier IP holds a 17 per cent equity stake in TVG.
Key Holdings at an Inflection Point to Commercialisation
Frontier IP’s early access to companies with leading-edge IP and the structural growth in the target clusters offers potential for strong upside.
Frontier IP Group provides commercialisation services in return for equity in private technology companies. The Group’s equity holdings are in four high growth technology clusters comprising: artificial intelligence, robotics, big and sparse data, pathogens and cell imaging, food and agritech, and engineered particles and materials. The company’s mission is to create value through its Growth Technology Company investments by leveraging its access to leading edge university IP.
Frontier IP is a specialist in the field of Intellectual Property Commercialisation (IPC) and started life as far back as 2009. The Group today has offices in Cambridge, Edinburgh and London with 15 full time staff.
The Group set out to create value by uniting science, industry and finance to build proper businesses based on commercialising outstanding research. The Group’s approach is both innovative and capital efficient. It is based on proving the commercial worth of intellectual property, working closely in partnership with universities, academics and industrial partners; unusually, Frontier does not invest cash but earns its equity in portfolio companies in return for providing IP commercialisation and support services. These range from ensuring the business mechanics run smoothly, direct, hands-on support for technology development to developing industrial partnerships. This approach has seen the valuation rise from £3.5 m on IPO to £48 m today.
The strategy is based on proving the commercial value of IP before significant financial commitment and the Group does this through 5 distinct steps:
- Identifying and evaluating strong IP that can be commercialised. The IP is generated by academics, universities and other partners;
- Taking material equity stakes in return for commercialisation services and proactive, hands-on support – not for cash;
- Driving industry engagement to prove that the technology works, can be scaled up, and meets the demands or needs of real-world customers;
- Raising third-party funds for further development once milestones are achieved; and
- Generating value through potential deferred earnings that crystallise on realisation.
The technology sector has enormous breadth. Frontier IP focuses its resources on specific segments. This not only helps to maximise returns, but also helps Frontier IP establish a reputation for expertise and adding value in specific areas of technology. This attracts technology IP producers, be they academic institutions or technology companies, to the Group. The Group focuses on four technology clusters:
The four technology clusters encompass areas of technology that not only have thriving IP development but also scope for rapid commercial growth – perfect for Frontier IP to be able to add value over time.
The Group’s ability to select IP that could have commercial potential and to work in partnership with clients to achieve growth for equity, has seen the business perform impressively. In FY 2018 the value of Frontier IPs’ existing equity stakes increased by 34 percent to £9.0m, in FY 2019 by 47 percent to £13.3m and in FY 2020 by 47 percent to £19.4m - the Group’s board in fact has a proven track record over the past ten years.
Our portfolio is maturing, with several companies approaching inflection points which mark significant and material changes in their progress. This is reflected by an increased pace in fundraising, strengthening of management teams, and the deepening and extending of industrial relationships within the portfolio. Neil Crabb, CEO Frontier IP.
Market opportunity – the Economic Need for Intellectual Property (IP) Commercialisation
According to VSA Capital research, Frontier IP provides the bridge between IP creators and those who utilise IP for business. The IP creation market is very large, broad in technology scope and undercommercialised. There is a huge amount of technology IP available for potential commercialisation. UK Universities invested £8.2bn in R&D during 2017 (according to most recent UK Government data) across 164 academic Institutions. Most of their work is highly rated, they are responsible for 15% of the output in scientific papers published in the world’s top scientific journals. The universities produce high quality research, yet only 23 percent of that research can be replicated by industry. UK industry wants the best ideas, itself investing £23.7bn in research and development annually. Frontier IP bridges academia and industry, working with Universities to commercialise their IP and build businesses, and partnering with industry to help it find the right IP. To cut through the significant volume of IP available, the Group focuses on the four clusters outlined above.
Access to Leading Edge University IP
The Group has worked with Universities including Cambridge, Heriot-Watt Manchester, Plymouth, NOVA University Lisbon and the Portuguese Institute for Systems and Computer Engineering (INESC TEC). Frontier IP’s relationships help to secure early access to leading edge IP, such as AI in drug discovery that has led to a 2.4 percent equity holding in Oxford based Exscientia. Exscientia’s AI is now deployed to help discover drugs for pharmaceutical majors including Bayer, Bristol-Myers Squibb, GlaxoSmithKline, Roche and Sanofi.
Strong Relationships with Industry Partners
Frontier IP works closely with Universities, Research Institutes and Academics to identify IP that can be commercialised. The Group then plays a main role in not only providing expertise and access to external funding but also commercialisation by taking a hands-on approach to commercial and technical development and by bringing in industry partners. This is key to increasing equity value. Industry partners include Bosch, whom Frontier introduced to portfolio companies Fieldwork Robotics and PulsiV Solar.
A Proven and Different Business Model for Driving Value
FIPP’s strategy isn’t the traditional VC path of investing cash for equity and taking board seats. Instead, the principle would be to add value to IP and invention using its knowledge, skills and expertise to focus on technology with high commercial potential. In return, the Group would earn equity stakes. The model, though different to VC, is nonetheless now proven, reflected in a rise in market capitalisation from £3.5m at IPO in 2011 to £48m (May 2021).
The Business is Scaling
Given success in developing the portfolio, the Group is now scaling its activities. During FY 2019 (year-end June) Matthew White, former Head of Innovation at AB Sugar, joined as Chief Commercialisation Officer with a seat on the board, and Alex Pugh also joined as analyst. Since then, Frontier IP has made four further key recruits across its technology clusters, most recently the appointment of .
Key Portfolio Holdings At an Inflexion Point with Rising Potential for Near Term Exits
Funding is typically raised for portfolio companies from third parties once important commercial and technical milestones are achieved. This financing is to fund future development and progress to an exit. Shareholder value is therefore driven by the potential for realisations on exit, with the value of the portfolio representing potential deferred earnings. Frontier IP Group as yet has not yet made an exit. However, an exit at a premium to portfolio valuation, can be a real opportunity for investment upside. Within its portfolio of 19 equity holdings, the Group has a number of companies at inflection points and so moving ever closer to potential exits.
I believe there is still significant and underappreciated value within the portfolio and investors are underestimating the potential for valuation uplifts from Frontier IP. It is important to note that both Exscentia and Pulsiv’s recent fund raises - two of the largest portfolio holdings - were at a premium to the carrying value of Frontier’s holdings. In addition, the company made a recent unscheduled positive trading update indicating that momentum in the business has continued and the outcome will be materially ahead of management expectations. All this seems to suggest that positive newsflow on further commercial deals and milestones reached by FIPP’s largest portfolio companies are very likely, with obvious positive implications for the value of FIPP’s portfolio.
At this stage, the Board are not guiding on the portfolio valuation impact of the stunning Excentia fundraise. Frontier IP’s 2.27% stake in Exscientia was last valued at the interims at just £6.3m, equating to one quarter of Frontier IP’s portfolio value at the time. If we look at the fact that the fundraising happened at a significant premium to carrying value, it is very likely that the market will attach a significantly higher valuation to this stake over time. The possibility of an IPO - which would be an important first exit for FIPP - is now very real for this business.
Overall, the Group currently trades on a reported NAV per share multiple of 1.3x, an undemanding rating that I believe has capacity to expand further given the increased confidence in the FIPP management following the impressive progress with key portfolio companies like Exscientia, Pulsiv and the Vaccine group. It is not unreasonable given the progress to date to expect that by the end of FY’21 (30 June), the fair value of the portfolio will increase by half (sum of the parts basis, putting the largest investments on peer multiples). This may prove conservative given the growth trajectory currently.
More Detail On Key Portfolio Companies
Exscientia is Frontier’s largest portfolio company, a clinical stage pharma technology company pioneering the use of artificial intelligence (AI) to design new drugs. Exscientia’s end-to-end AI-first drug discovery platform, CentaurAI™, is enabling the company to generate novel drugs and overcome conventional drug discovery limitations several years faster than industry benchmarks. Exscientia has demonstrated the platform’s capabilities by creating the fist fully AI-designed drug to enter clinical trials and advancing multiple drug candidates into preclinical testing. In addition to its growing proprietary pipeline, the company has conducted drug discovery partnerships with Bristol-Myers Squibb, Sanofi, Bayer and Dainippon Sumitomo as well as several biotech companies.
Importantly, the recent US$225m (£162m) fundraising round was led by Softbank’s Vision fund as well as being backed by a host of shrewd investors including GT Healthcare Capital and Bristol-Myers Squibb. In addition, Softbank is providing an additional US$300m equity commitment to Exscientia that can be drawn at its discretion. Exscientia has advanced the first two fully AI-designed drugs into clinical trials and now has over 20 active programs in its pipeline.
Although Exscientia has yet to reveal valuation details of April’s US$225m Series D funding round, Frontier’s corporate broker N+1 Singer expects the company to deliver £6m valuation gains in the second half to June 2021 and has a £61m (111p a share) sum-of-the-parts valuation on the portfolio. This now looks conservative. Frontier’s 2.1 percent stake in Exscientia was revalued up by £1.87m to £6.269m (11.4p a share) at 31 December 2020, implying a read-through valuation of £276m ($384m). However, Sky News subsequently reported Exscientia’s March 2021 $100m Series C investment round managed by BlackRock was priced at a $650m (£464m) valuation, implying a £9.8m (17.8p a share) valuation for Frontier’s 2.11 percent diluted stake. It is important to note that there was further fundraising in April so even a value of $650m could be conservative!
Exscientia has announced deals with (substantially) in excess of £500m of access and milestone payments through partnerships with the global pharmaceutical companies, therefore has the real potential to achieve a $1bn valuation if listed.
Pulsiv, a spin out from the University of Plymouth, is on a mission to “make the most efficient use of electricity wherever it is converted”. Its energy saving power conversion technology has numerous applications and markets of significant size across consumer electronics and solar production. Fundraising and debt conversion to date value Pulsiv north of £22m, with Frontier IP’s resulting 18.8 percent equity stake now worth at least £4.1m (8.1p a share). Furthermore, Pulsiv is now working with a major multinational to incorporate its technology into a new consumer product line. It has also been working with German engineering giant Bosch to optimise the design of an energy-efficient solar microinverter prototype to prepare it for mass manufacture. The business is now very close to commercialisation and revenue generation.
Pulsiv recently announced a new equity funding round (raising £620k) and a new CEO appointment. The company name has changed from Pulsiv Solar to Pulsiv to reflect the much wider range of potential applications for the technology. Pulsiv now has funding, proven technology, industry involvement and international market opportunity. To deliver on this opportunity, the Pulsiv team has been strengthened. A new CEO has been announced, Darrel Kingham, an ex-General Manager of Aixtron, a German-based provider of deposition equipment to semiconductor manufacturers. Dr Zaki Ahmed, who developed Pulsiv’s technology, has also left his post at the University of Plymouth, where he was Associate Professor of Information Technology, to work full time for the Company.
Fieldwork Robotics, a developer of robotic technology to harvest soft fruit and vegetables that addresses the need for heightened food safety and the shortage of UK seasonal workers, is progressing with a raspberry-harvesting robot in collaboration with Hall Hunter Partnership, one of the UK’s biggest soft fruit producers, and is working with Bosch to optimise the software and design of the robotic arms. An alpha prototype for manufacturability of its raspberry harvesting robot is expected for trials later this year. Fieldwork is also developing a cauliflower harvesting robot with Bonduelle, a leading vegetable producer in more than 100 countries. Frontier IP holds a 26.7 per cent stake worth £1.35m. There have already been many acquisitions over the past year in the space and interest is growing as demand for automation in harvesting grows: John Deere has bought Blue River Technology, a company developing robots to precisely spray herbicides and pesticides for $305m. More recently, ADM Capital’s Cibus fund bought an 11.7 percent stake in Norwegian agricultural robotics firm Saga Robotics, hailing a future “revolution” in agricultural robotics. Recent peer group deals therefore highlight the valuation upside for Fieldwork Robotics.
The Vaccine Group
One of the most exciting investments is Frontier’s 17 per cent stake (book value of £3m) in The Vaccine Group (TVG). TVG develops and commercialises novel vaccine platform technology, which is being used to develop a wide range of different vaccines to combat zoonotic and economically-damaging diseases. These include vaccines to combat COVID-19, Ebola, Lassa fever, African Swine Fever, porcine respiratory and reproductive virus (PRRSV), and bovine tuberculosis. TVG is a University of Plymouth spin out and has so far been awarded more than £9 million in grants from the UK, US and Chinese governments. It has also signed its first commercial deal with ECO Animal Health Group plc and The Pirbright Institute to develop vaccine candidates to combat PRRSV, one of the most economically damaging diseases to the pig industry. As most diseases that afflict humans originally arise in other animals, it is sensible to tackle them at source. Moreover, there is considerable value in developing animal vaccines because of the economic damage diseases, such as bovine tuberculosis, can cause.
For instance, Sars-Cov-2 originally arose in bats and entered human populations via an unidentified intermediary species. Covid-19 has also been found in cats, dogs, ferrets and mink. Longer term, there is potential for TVG to develop a vaccine for use in humans. Indeed, Oxford University says there will be a need for second-generation vaccines because of the danger from virus mutations reducing the efficacy of those currently being deployed. TVG’s technology takes a different approach to attacking the virus than other vaccines under development. The science is worth explaining as it highlights the blue-sky potential for TVG, and the upside for Frontier IP.
Sars-Cov-2 infects people via its spike proteins which latch on to a protein, ACE 2, found on cells in alveoli and other parts of the body. The alveoli are where the lungs and blood exchange oxygen from the air and carbon dioxide in the process of breathing in and out. The spike protein forces an entry into a cell by cracking it open using the interaction with the ACE 2 protein. It is estimated there are more than 180 Sars-Cov-2 vaccines under development. Most are targeting the spike proteins: they aim to train the body’s natural defences to recognise the spike protein and destroy the virus in the body.
The concerns around the emergence of the Kent, Brazil and South African Sars-Cov-2 variants, all resulting from spike protein mutations, highlight two major issues:
- Firstly, the spike protein mutates more often than other proteins in the virus, perhaps because it is the contact point between the virus and host.
- Secondly, because it is the main contact point between the virus and host, mutations able to avoid or overcome the body’s defences mean a variant virus is likely to gain ground more rapidly.
Bearing this in mind, TVG’s vaccine candidates are targeting the nucleocapsid and membrane proteins, both essential to the virus’s structure. These proteins are building blocks necessary for constructing the virus’s core and surface and are created earlier than spike proteins as the virus reproduces itself — meaning a vaccine that targets them can eradicate the virus sooner.
TVG has undertaken initial animal trials with three of the six current vaccine candidates and is analysing the data from these trials, with the other three about to be tested. The company is also making good progress with animal vaccines for Ebola, Lassa fever and other diseases causing human or economic harm, including bovine tuberculosis.
In my view, FIPP has an exciting portfolio of early-stage technology businesses, where the high risk is somewhat mitigated by the diversified nature of the business.
I see key risks as:
- Failure of a key portfolio company
- Downturn in technology valuations
- Downturn in availability of funding for early-stage technology companies
- Downturn in IPO markets, hampering exits
- Increased competition in sourcing new opportunities
- Protection of intellectual property, especially from patent challenges.
Of the 19 portfolio companies, a number are at a point of acceleration in commercial development, paving the way for a step up in valuation or a potential exit. Frontier IP has a proven record in commercialising University IP and increasing its EPS and NAV as portfolio company valuations rise. That success is seeing the Group invest in its own expansion for growth. I believe that the Frontier IP represents an excellent opportunity for investors to gain diversified (therefore lower risk) exposure to early-stage technology companies, based on leading edge IP, which is sorely lacking in international stock markets. Although Frontier IP has yet to have an exit to crystallise cash value, and the timing and value of potential exits is hard to assess, given the number of companies in the Frontier IP portfolio now at inflection points, this is becoming a real possibility over the next twelve months. As a result, I believe the shares offer distinct valuation upside potential: I believe the shares still only trade on a modest premium to the last reported NAV even though forthcoming full year results should deliver material valuation uplifts from several investee companies.
This material is not investment research in accordance with the legal requirements designed to promote investment research independence and is also not subject to any prohibition on dealing ahead of the dissemination of investment research; and as such is considered to be a marketing communication.
All investments have the potential for profit and loss and your capital may be at risk. Past performance is not indicative of future results.