Once an afterthought, the life science/pharma industry now glimmers as a large blip on the hedge fund radar despite shortfall in flu vaccines and Merck headlines partly because aggressive marketing and pricing have made pharmaceutical companies America's most profitable industry.
This being presidential year as well, Richard shares with us about the life science/pharma industry in this capacity as he joins the dots between India, technology and the life science industry.
- As a co-founder of Life Science Group Partners, what are your reasons for starting a hedge fund with such a niche focus as health care and life sciences?
The market for biotechnology stocks is arguably the most inefficient in the world. We felt that opportunity combined with our experience could yield significant long-term rewards.
- How would you best describe Life Science Group Partner's management in terms of style and decision-making process?
We are value-based contrarians. Our shopping list is usually comprised of stocks that have excellent potential but are under-followed by today's momentum-based traders.
- From my understanding, Life Science Group Partners uses "valuation-based investing" method to seek significant long-term capital growth. Can you give us a breakdown of components that drive this method and why are they chosen in the first place?
First, we look at management. Most of our best long trades are companies that recently experienced a setback and are oversold by the market. A strong management team is necessary to ensure the setback will be remedied quickly. Secondly, we look for multiple opportunities to win via the drug pipeline or other events such as an acquisition. I can list many other components but they vary from opportunity to opportunity. We describe ourselves as long term due to the fact that the stockmarket habitually takes an emotional view to the biotech sector. Therefore, one must be patient to reap the rewards of stocks picked based on their fundamentals.
- What do you think is your edge over other managers or styles?
There are many talented managers in this field. We do think that our cumulative experience of the firm's partners offers our limited partners a solid platform to participate in the biotechnology market.
- In particular, net returns for the year 2002 sunk into the red for Life Science Group Partner but strong black figures were later posted for year 2003. How did you do that?
2002 was a year that broke all previous metrics for valuing a biotechnology company. For example, many companies that we felt had promise were selling for less than 50% of their cash holdings in 2002. That means investors gave the company itself no value and did not even see their cash balance as a store of value. As I described above, emotion can run rampant in biotechnology. The rebound was caused by the spectacular reversal in sentiment to the exact same companies investors deemed almost worthless the year before. That is a good example of why patience is necessary to succeed in biotechnology investing.
- While many factors interact to ensure success in the biotech/pharma industry, what two factors remain crucial to the Life Science Group Partners?
First governmental bodies must not succeed in limiting the profits a company can make if they develop a blockbuster drug. That will remove the incentive to provide risk capital to drug development. Second, let the talented and dedicated scientists throughout the world do their work unfettered and exciting medical treatments will continue to emerge at an accelerated pace.
- Tell us Richard, how do you identify technologies which merit further development into commercial entities and is this the single benchmark Life Science Group Partner use for stock selection?
We keep in close contact with numerous business and scientific leaders which the partners have befriended over the years. No, there is no single benchmark that we use for stock selection. Biotechnology companies are very diverse in their approach so one must evaluate each company individually.
- What is your maximum and average leverage used on Life Science Group Partners?
We rarely use leverage and have never been leveraged more that 1.2 to 1 which is very mild for a hedge fund.
- During this past year, what were the major trends that Life Science Group Partners invested in?
Our process doesn't lend itself to trend investing. We look at each opportunity on a stand alone basis.
- We have recently seen some late-stage drug failures cutting deep into profits. Are these drug failures a character of the industry or the result of poor development strategy?
Failure is a part of the current process. We do believe that early testing and modelling methods are getting better and over the long term, failure rates will be materially reduced.
- If the national health care system has a voice, what will it say?
I want efficacious drugs with no side effects and I want them for free!
- What do you think are the possible ramifications for the Presidential elections and (possible) rate hikes again in the same month of November for the life science/biotech markets and how are you positioning your fund in anticipation of this?
The biggest ramification for biotechnology will be in the stem-cell field which does not currently hold many solid public companies. For drug pricing, a democratic administration may attempt to regulate drug pricing which would be a disaster. We do not think that would happen unless democrats take the presidency and both houses, which are highly unlikely if you are to believe the current polls. Rate hikes are a negative for biotechnology and we are monitoring the trends. As your readers may know, pundits have predicted a break in the bond market to no avail so one must keep things in prospective.
- Technology, the great driver of healthcare costs is also the driver of India's recent bursting economic gains - how do you reconcile these two and are you seeing possible synergies between the two?
We do not share the view that technology raises healthcare costs but rather it reduces the cost per sick patient. In our opinion, the total rise in expenditures is due in the fact that more people are gaining access to quality healthcare. India is a good example of that trend. This is obliviously bullish for medical technology participants and patients.
- Going forward, what is your perspective on the life science/pharma industry for 2005? Give us some broad strokes.
The international pharmaceutical companies have made a monumental blunder by not acting much more aggressively in biotechnology acquisitions. There was a time in the late 1990s that the market cap of Pfizer was greater than the entire US biotechnology industry combined. That is not the case today.
Investors have been much too optimistic about the potential of EGFR cancer drugs like Imclone's and the eventual fallout will be painful for them. That may result in a short bear market for biotech which would create an excellent buying opportunity.
The spread between valuation metrics of large and small biotechnology has never been greater in our opinion. We believe that spread will close over the coming months and create opportunity for a long/short fund such as ours.
Richard J. Van Steen
+1 203 422 6500