Buy What Woodford Bought -- Only Cheaper!

Published in Company Comment on 8 June 2010

Woodford paid 140p per share -- you can pay just 87p.

Neil Woodford is best known for his big defensive blue chip investments, companies such as British American Tobacco (LSE: BATS) and GlaxoSmithKline (LSE: GSK).

However, unlike many conservative equity-income fund mangers, he also likes to have the odd dabble in the AIM market. His small-cap picks are often interesting, whether they be quirky little income providers or companies with big capital-growth prospects – or both.

Looking down into the depths of the portfolio of Woodford's Edinburgh Investment Trust (LSE: EDIN), whose annual results I reviewed last week, you'll find a handful of companies that are listed on AIM.

Placing bet

One company that particularly caught my eye was Proximagen (LSE: PRX), a £50m market cap biopharmaceuticals firm, with a website motto 'Discoveries for life'.

Proximagen focuses on diseases of the central nervous system. Its programmes aim to improve the quality of life for patients suffering from diseases such as Parkinson's and Alzheimer's.

In June last year, in one of the largest biotech fundraisings in the UK of the past decade, the company raised £50m in a placing, at an undiscounted 140p per share. The funds were raised to acquire and in-licence further drug development programmes, and see them through to commercialisation.

Edinburgh Investment Trust took 1.8m shares, giving it a stake of just over 3% in Proximagen, whilst Invesco Perpetual, for whom Woodford runs the giant Income and High Income funds, ended up owning 30% of the company.

Another interesting participant in the placing was Lansdowne Partners, the hedge fund manager that reportedly made £200m betting on the credit-crunch share price collapses of Barclays (LSE: BARC) and Northern Rock.

A transformational year

In November, Proximagen acquired Cambridge Biotechnology Ltd from Biovitrum AB for a percentage of future revenues generated from Cambridge's drug development pipeline.

It is also currently in the process of completing the acquisition of Minster Pharmaceuticals (now de-listed from AIM) for 6p per share cash, valuing Minster at about £4.3m.

In its annual results announced in March, Proximagen reported revenue just shy of £1m, but with hefty R&D expenditure and administrative costs, it made a bottom-line loss of £3.2m.

That was no surprise. The business isn't expected to be profit-making at this stage. Its main claim to fame at the moment is that, as a result of the placing, it is one of the best-capitalised companies in the European biotech sector.

A recent addition to the Board of Directors looks a good appointment. Dr Jackie Hunter, who took up a non-executive role in January, arrived from GlaxoSmithKline with nearly 30 years' drug discovery and development experience under her belt.

Proximagen's chief executive, Kenneth Mulvany, anticipates 'exciting times ahead … with the expectation of reporting significant events in due course, which will reinforce our ability to generate value from our balanced and focused pipeline.'

Prospects

Since the placing at 140p the share price has spent a year drifting down to its current 87p.

Biotechnology is a risky, specialist area and it's not a sector in which I invest. I freely confess that I haven't got a clue about the prospects for Poximagen's pipeline of products!

However, the company must have plenty going for it if the likes of Neil Woodford and Lansdowne Partners have been prepared to pump money into it.

If you're considering investing alongside them, though, at a 38% discount to the price they paid, just be aware that although Woodford's Edinburgh Investment Trust holding is worth £1.5m, that represents only 0.2% of the portfolio.

In other words, don't bet the farm on a biopharmaceutical.

More from G A Chester:

G A Chester holds shares in Barclays and GlaxoSmithKline.

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