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By Cynical Bear | Monday 10 September 2018
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
To emphasise the point about the contrasting investment strategies of Neil Woodford and Terry Smith that I covered earlier today, I thought it appropriate to cover the health-tech AI spoof, BenevolentAI, that has just filed its results for the year to 31 December 2017 at Companies House (HERE). I am still struggling to find any evidence of anything other than a reasonably good concept here.....and it’s meant to be worth $2 billion!
BenevolentAI is the largest holding in Woodford Patient Capital Trust at the moment at over 10% of NAV and, astonishingly, is currently up to 5th in the flagship Equity Income Fund at 3.18% of the portfolio. It is valued at $2 billion pursuant to a $120 million funding round earlier this year that looked a bit odd to me.
The accounts tell us very little. Apparently, the group “continues to develop and apply deep-learning, machine learning and more sophisticated intelligence technology combined with pharmaceutical expertise to accelerate the process by which new medicines are discovered and developed.”
Sounds great; however, although it states that it has produced a number of “exciting validation points” it is very light on any detail. This business has now been going for many years but I struggle to find any real evidence of successes from the technology either in the accounts or on its website.
The P&L makes odd reading too as there is a £2 million licence fee from a related party for reasons unknown and an additional collaboration payment of £585,000, both of which are identical to last year which looks strange. What is this related party, Adarga Limited, actually licensing and what is it doing with it?
Nevertheless, the team is growing, and the cash burn is growing in parallel. The business was down to a cash balance of under £20 million at year end but the recent $120 million funding round will keep them well-funded for a good while yet, even if some of that was used for the acquisition of a laboratory and a significant number of scientists in Cambridge earlier this year.
If this company had been valued at $200 million, I would be raising an eyebrow but wouldn’t think it was crazy as AI might be able to help drug development in some way and I understand how valuations can get ahead of themselves in certain high-tech areas; however, in what way can any sane person value this business at $2 billion as it doesn’t appear to be doing very much!
This valuation has been driven up by Woodford, pretty much alone, having led the last two funding rounds, a valuation that has been a significant help to the performance of his funds. I calculate that Woodford Investment Management would have made about £2 million from the initial significant uplift in the valuation in the Equity Income Fund.
I may be wrong here and just perhaps there could be some incredible bit of technology at the heart of this business….but I don’t believe so. I just think that Woodford has got himself in a right old mess and as this is now such a significant part of both WPCT and EIF, he has to keep the spoof alive and just cross everything and hope.
Who knows, perhaps there’s a bigger fool out there that will snap up this “global leader in the development and application of artificial intelligence for scientific innovation” and help Mr Woodford out of this particular predicament.
Doubt it though.
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