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Paul and Brett's Alpha

November 2023


The second half of November and early December are generally a busy time for your managers, as we attend a number of investor events, in and around which we engage with all manner of healthcare companies. Not only those that we are invested in or might consider investing in, but their competitors and the leaders in all sorts of different fields and those newer companies (often private) that might be the next wave of competition for our holdings or prospective investments for the Trust.  

As unreconstructed science geeks, these meetings are always informative, even if they do not lead us (directly or otherwise) to new investment opportunities. One must always take them with a pinch of salt though. Rare is the founder CEO or CSO who isn’t imbued with enthusiasm for their innovation, for we are cashflow wonks as well and need numbers rather than dreams to put into a spreadsheet. No model, no investment.  

For most of the last decade, the dream has really been all you needed; a good idea and a credible narrative. We know from our own inquisitions that few investors were interested in tedious real-world metrics such as valuation, or cash flow projections to break-even. Some management teams positively bristled at the intrusion of financial reality into their little science bubbles and got short shrift from us as a result (we have yet to invest in any IPOs).  

Against this backdrop, several things struck us about this year’s winter conference season. Firstly, some trivialities: there were a lot more people than last year; normality (and all the congestion and travails that inevitably brings) is upon us. That said, there still seem to be significantly fewer European investors venturing to the US than the other way around. Make of that what you will.  

We would reiterate that getting out and about only serves to remind one how inferior the virtual world of Zoom and Teams is when it comes to kicking the tyres, and we expect to be travelling more in 2024 than in 2023. Difficult markets and challenging performance may mean less fee income for asset managers, but the correct response to that is not to cut the travel and research budgets. 

“Change always comes later than we think it should” 

Onto more important observations. Of more interest were many of the companies themselves. Three things were notable and their collective weight may represent the beginnings of a sea change that could improve sentiment in the cash burning/pre-commercial areas of healthcare. For this reason alone, we think it worth mentioning.  

Firstly, many companies are in the midst of management change. The group we are thinking of is a rag-tag but significant grouping, and we shall keep this on a no-names basis for reasons that may become obvious in due course. Some are in challenging situations, some are in that difficult transition from R&D to commercial and some are just very, very cheap (i.e. unloved).  

Sometimes it isn’t clear why it is happening “now” and the timing is “interesting”. Building up a business is hard work and we fully understand why someone might want to retire, or look for a new challenge. Generally though, the voluntary version of this typically happens after some milestone is achieved; going out on a high and all that.  

It becomes far more interesting to the impartial observer when the decision to sidle off comes at a less fortuitous moment. Are we seeing boards being more accountable to investors, and investors being more activist? If so, this is long overdue and frankly very healthy. To the extent one can generalise, we feel that the cohort of incoming management is less science-oriented and more financial and business strategy minded. This cannot be a bad thing. 

Secondly, there is the messaging. For so many years, in so many meetings, the conversation has been dominated by the CEO and CSO, around themes of science or commercial strategy. The CFO might be there in the room (or on stage for the analyst-led ‘fireside chat’) and might get the odd question so as to not feel left out, but the emphasis lay elsewhere.  

More recently, CFOs have received far more airtime and sometimes been the sole C-suite representative. Questions around the longer-term outlook, the assumptions underpinning the long-range plan, cash needs and plans for additional funding have been addressed head-on and fulsomely. There is clear recognition that capital is both scarcer and more expensive than it used to be, and needs careful stewardship rather than rapid consumption in the push for growth at all costs.  

Thirdly, there is the interaction with the interlocutors. Pockets of cloying sycophancy are ever-present, but there is both a notably greater willingness on the part of the sell-side to interrogate companies more robustly around financial metrics, and also a harder edge to some of the responses to questions.  

We can think of several examples where companies have been asked about the next leg to the story, or the appetite for acquisitions or in-licensing, only to rebut forcefully about a relentless focus on maximising the opportunity for existing assets and executing in a way that will create long-term shareholder value. Again, this is all to be commended.  

There have been a number of companies that we have previously diligenced as potential investments for the Trust but decided not to proceed owing to concerns over management quality within the C-suite (regardless of any valuation considerations). Two of these have replaced what we consider to be the weak links within management during 2023,  and both of them are now back under active consideration as a potential future investments. 

“Make it so” 

These past two years have been unremittingly tough. As we touched upon last month, sentiment toward healthcare in general is low and the wariness of smaller, less diversified companies, and those not yet financially self-sustaining, is greater still.  

We are quite rightly and repeatedly asked to offer an opinion on what might change this picture and shake the sector free of this morass. One can talk about fundamentals and valuation all day, but once in a funk, the market tends to need a catalyst to re-assess and re-engage. So what might prompt such a reassessment?  

As we noted last month, our feeling is that the healthcare sector is out of fashion and confidence has been drained by an over-interpretation of the risks to funding for many of the smaller companies. Continued lamentable R&D productivity does not help matters at any level of market capitalisation, but this has been the industry backdrop for nearly two decades, so that in and of itself cannot be held responsible for the current de-rating.  

Demonstrable pragmatism around the notion that funding will be harder to come by is surely going to be welcome. This should have always been a bigger part of the conversation in the biotech world, since any investment is ultimately a judgment about capital stewardship on the part of management.  

It also remains true that the least worst option is often the best option. In a world where economic growth looks likely to slow, investors may well pivot towards sectors with defensive end-market characteristics. The lofty valuations in the technology space might also prompt them toward value, of which there is plentiful in healthcare at the lower end of the market cap scale. 

The allure of cheap companies positing realistic and readily understandable business plans to investors might even be enough to get some of the generalists off the side-lines...  

We always appreciate the opportunity to interact with our investors directly and you can submit questions regarding the Trust at any time via:  

As ever, we will endeavour to respond in a timely fashion and we wish you and your loved ones a merry Christmas and a prosperous new year.  

Paul Major and Brett Darke