Is Neil Woodford-backed Allied Minds plc a falling knife to catch after dropping 15% today?

Is a costly restructuring plan a reason to buy shares of Allied Minds plc (LON: ALM)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares of life sciences and technology incubator Allied Minds (LSE: ALM) are down over 15% in early trading after it announced it was cutting funding to seven of the 21 start-ups it has provided funding to. This will be a costly process for the company, which is 28% owned by Neil Woodford, and will result in a $146m writedown to the firm’s adjusted value.

But does this represent a stellar opportunity for investors to begin a position?

The bullish case

Cutting ties to a full third of the businesses it supports wasn’t an easy or, judging by the market reaction, popular decision to make. Yet, there is reason to be optimistic as it shows incoming CEO Jill Smith is taking to heart her remit to concentrate on commercialising the business lines with the most potential.

It was clearly time that the company shifted its focus to commercialisation as to date it has invested over $239m into portfolio businesses yet realised only $1.3m in revenue in H1 2016.

The bearish case

Allied Minds has sold itself to investors as a smart way to go through potential start-ups to find businesses that are worth investing in. But today’s admission that sevrn of these businesses aren’t panning out does not engender much confidence that the business plan is working.

With a huge write-off on the way, actual sales close to nil and a constant need to tap shareholders for further cash, would-be investors have plenty of reason to be wary. Investing in start-ups is exciting but Allied Minds’ plunging share price shows just how volatile a business model it is. Neil Woodford’s backing lends a great deal of credence to the company’s claims but it is simply too opaque and risky an investment for me.

A profitable path forward?

But not all funds looking to commercialise intellectual property fail to pan out completely. Another of Woodford’s big bets is on Touchstone Innovations (LSE: IVO), the company formerly known as Imperial Innovations, in which his funds hold a 23% stake.

While the firm’s shares are down around 33% from their 2015 peak it has at least shown it can successfully back and profit from its investments over a long period of time.

Two of its portfolio companies have recently signed licensing agreements with major pharma players Takeda and Bristol-Myers Squibb that could total $790m and $936m over time. These eye-wateringly high payments are far from assured as they’re based on reaching ambitious development, clinical, regulatory and sales milestones over many, many years. But the agreements are still a step in the right direction.

But the risks of this business model don’t end once a product is commercialised. For evidence of this we have to look no further than Touchstone’s spin-off, Circassia Pharmaceuticals, which it still owns a 9.3% stake in. Shares of the popular biotech firm plunged by two-thirds in June after its flagship cat allergy treatments turned out to be no more effective than a placebo in clinical trials.

What does this mean for potential investors? Small-scale tech and pharma firms are risky and even experts in these fields have a tough time picking long-term winners. That shares of Touchstone are sitting below their 2006 IPO price despite successful spin-offs tells me all I need to know about why small shareholders should avoid this volatile and opaque sector.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »