- The biotech company could fetch a valuation of more than £4bn
- A successful IPO would spell good news for IP Group, which holds a 15 per cent stake
Following its calamitous debut, Deliveroo (ROO) has managed to claw back some of its losses now that its shares have hit the open market. But they are still down more than a quarter from their IPO price, and retail investors who bought into the offer have been left with a severe bout of indigestion.
Deliveroo’s flop is not just an embarrassment for the Amazon (US:AMZN)-backed food delivery company. Having become the poster child for the reforms proposed by the Lord Hill review, it also raises questions over London’s approach to becoming a hub for high growth technology businesses.
Arguably, Deliveroo’s failure to deliver was a problem of its own making. While institutional investors raised concerns over the dual class share structure, they also expressed more fundamental doubts about its business model amid a reliance on gig economy workers.
In that light, it is perhaps unfair to equate the lack of appetite for Deliveroo’s shares with the City’s ambitions to attract more tech listings being doomed. True, the migration of start-ups to New York has continued – both electric van maker Arrival (US:ARVL) and online car retailer Cazoo have been lost to the Spacs craze. But a big upcoming IPO could prove the real test case for London’s tech prospects – that of Oxford Nanopore.
A bona fide tech start-up
Biotechnology company Oxford Nanopore recently announced it had selected London as its IPO venue, and, depending on market conditions, its long-awaited float could arrive in the second half of this year.
The company was spun out of Oxford university in 2005 using seed money from IP Group (IPO), a specialist in commercialising intellectual property. It focuses on genome sequencing technology, developing proprietary tools that can decode the DNA and RNA of any living organism.
Oxford Nanopore’s devices work by passing a sample of DNA or RNA through miniscule holes – called ‘nanopores’ – in a membrane, measuring how the genetic material reacts to an electrical current, and determining the order of the nucleotides. Such sequencing technology has a wide range of applications – from detecting infectious diseases and developing therapies to treat cancer, to analysing biodiversity and improving crop efficiency.
Chief executive Dr Gordon Sanghera says that 2020 was a “pivotal year". Indeed, the company’s technology has been used around the world to track variants of the virus that causes Covid-19, identifying around a fifth of the ‘SARS-CoV-2’ genomes that have been catalogued by scientists from more than 85 countries.
In August, Oxford Nanopore secured a £113m contract to supply the UK government with its ‘LamPORE’ testing kit, which provides rapid, high-volume and low-cost detection of SARS-CoV-2. That’s more than double the £52m of revenue Oxford Nanopore generated in 2019.
And there could be more government work to come beyond the pandemic. An NHS study published in January concluded that LamPORE could be used as part of a wider winter respiratory illness screening programme, testing for other viruses such as influenza.
A windfall for IP Group
Oxford Nanopore’s float is good news for its existing investors, which includes the likes of Singaporean sovereign wealth fund GIC and Baillie Gifford’s Edinburgh Worldwide Investment Trust (EWI). The company is IP Group’s top holding and the third unicorn to emerge from its portfolio alongside pain management specialist Hinge Health and fuel cell developer Ceres Power (CWR).
IP values its 15 per cent stake in Oxford Nanopore at £340m, implying that the business as a whole is worth £2.3bn. But Berenberg believes it could “comfortably” fetch a valuation of more than £4bn, and says that each £1bn added to the valuation would translate to a £150m fair value gain for IP Group.
Not everyone will get a share of the spoils, however. Investors in the failed Woodford Equity Income Fund look set to miss out on another windfall as Oxford Nanopore – once a core part of the unquoted portion of the fund – approaches listing.
Link Fund Solutions, which handled the liquidation of the fund, sold the DNA-sequencing technology start-up to US investor Acacia Research (ACTG) last year, at a value of £20.8m according to Citywire. The deal was part of a cut-price package of 19 healthcare holdings sold to Acacia for £224m.
Acacia’s results, published last month, value its Oxford Nanopore shares at $111m (£80m). If the firm lists at the £4bn plus valuation suggested by Berenberg, the 6 per cent stake Acacia bought in 2020 would be worth over £200m.
Ryan Hughes, head of active portfolios at AJ Bell says “while I’m sure some investors will feel let down by this process, others may have been relieved to get some of their money back last year rather than having to wait even longer.”
Still, it’s not bad news for all Woodford investors. Oxford Nanopore was the second largest holding in Schroder UK Public Private Trust (SUPP) – formerly Woodford’s Patient Capital Trust – at the end of September, making up 13.7 per cent of the fund.
Nanotechnology but giant potential
Par for the course with growth-focused unicorns, Oxford Nanopore is loss-making at present and burning through cash. Despite increasing its revenue by over 60 per cent in 2019, investment in research and development and a new manufacturing facility saw its operating loss widen by almost 30 per cent to £80.9m.
Sanghera says his company is “still only in the foothills of what is possible” and that going public “is the start of the next phase of our journey. Gaining access to deeper, international pools of capital would support our ambitious growth plans, enhancing our ability to innovate and scale our manufacturing and commercial functions.”
The company faces competition from US-based Pacific Biosciences (US:PACB) and Illumina (US:ILMN), the latter of which dwarves Oxford Nanopore with a $60.5bn market cap.
But Andrea Traversone, managing partner at venture capital firm Amadeus Capital Partners, says that Oxford Nanopore could ascend to the top of the pack. He believes that “nanopore sequencing, with its ability to sequence long DNA fragments, in real time, at scale, represents the next generation of sequencing technologies and Oxford Nanopore has the potential to become its market leader.”
Analysts at Numis are similarly bullish, arguing that it is “the most advanced nanopore sequencing company globally…Fundamentally, it is the cheapest and most scalable sequencing approach yet developed.”
Oxford Nanopore therefore certainly has the makings for a blockbuster UK biotech listing. But investors will want to see a path to profitability, the details of which we hope to see in its IPO prospectus.
