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Trends Watch: Biotech Investing

Jun 8, 2023

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Joshua Riegelhaupt, VP, Portfolio Manager, Baron Capital. 

What is your outlook for biotech investing?

In many ways biotech is in the strongest position it has ever been if one counts the number of new technologies available to target biology for drug discovery.  This tool bag includes a host of optionality within the world of small molecules, large molecules, RNA, DNA, cell therapy, gene therapy, and gene editing modalities.  It was only 20 years ago that this world was mostly small molecule design with large molecules just starting to scale.  Marry this tool bag to the proliferation in data and improvements in the speed of running experimental systems, and it seems inevitable that great strides in medicine will advance.  Overall, I am very optimistic about the field.

Where do you see the greatest opportunities and why?

Investment is never a dogmatic or singular area approach, but rather it is agnostic to drug development modality.  The investment mandate is to predict the generation of free cash flow that is higher than the present value of the cash in your pocket today.  This means there is not one area of greatest opportunity, as reflected in our investments, which are generally uncorrelated to one another.  Every disease presents itself differently, and this diversity requires nuance in the approach taken to solve the problem.  This is why the diversity of the tool bag is so critical for the field.  Generally, we are attracted to biotech companies that take meaningful risks, meaning they are tackling real diseases, and, if successful, their drugs will offer step function changes in the outcomes of patients. 

But to directly answer your question, I think genetic medicines, particularly gene therapy, have become interesting given their share underperformance over the past years, coupled with the current zeitgeist with FDA's Peter Marks being vocal about approving more gene therapies.

What are the greatest challenges you face and why? 

Generally, I think the industry’s greatest challenge is its unappealing nature to the generalist investor.  How do you get the public to view investing in biotech as worthwhile of their dollars?  And I am not talking about societal dollars but rather personal dollars.  Most people seem to agree that the National Institute of Health is a worthwhile institution. 

It is a tricky exercise to ask investors to run the Excel model for the net present value of an antibiotic (take something like amoxicillin which, in hindsight, is wildly economically net positive) and get them to invest ex-ante given the large cash requirements and duration risk.  Yet all those same people can't imagine a world without said therapy.  Biotech is viewed, often rightfully so, as cash-consuming, risky, and overly complex.  The most common knee-jerk reaction is, "isn't it binary?" which is never really the case if you follow the full duration of the story arc but is almost always the case on the day of the spectacular news that catches eyeballs a la clickbait. 

This reality manifests directly in our investment portfolio regarding cash and duration risk.  Will a great idea have enough capital to make it to cash breakeven/profitability?  What happens if the timeline goes from six years to eight years?  This question is more pressing today given macroeconomic conditions and the current belt tightening.  In some sense, the easy money of the past years allowed for too much company formation (U.S. small-cap biotech is 700 to 800 public companies), and it is imperative that we are vigilant and not waste our due diligence efforts on the wrong companies. A research approach that is both broad (to know the entirety of the investable field) and deep (to make sure we properly understand the risks of our investments) is a great challenge. 

What keeps you up at night? 

Really nothing.  I sleep very well. 

Early in my career, I used to sweat catalysts where I knew a company's shares could swing a large amount intraday.  Nowadays, these barely register, probably because I have experienced this so many times it is a very familiar feeling.  I also have come to appreciate volatility for what it means.  Volatility to me represents price uncertainty.  Essentially, the market doesn't know how to value the asset, which is then represented by price fluctuations (although some of this is due to liquidity factors since many of these stocks trade in thin markets).  This volatility then means that there is the opportunity to generate excess return or alpha, which is the scorecard all of us investors grade ourselves with. 

The bigger picture relates to my concerns regarding the social contract that biotech has with the public.  The public generally takes a skeptical view of the pharma industry.  In some surveys, pharma ranks alongside tobacco, which I find incredible given one industry's mission is to save your life and the other's is to kill you.  This is understandable in some ways given pharma's large lobby efforts in Washington, the unintelligible TV commercials no one likes, and the at-scale, post-risk, high gross margins in the industry.  While there are, of course, some bad actors in the industry like in all industries, I find the majority of the operators that I deal with to be good citizens.  It is incumbent on people working in biotech to remember the original industry motto crafted by George Merck in 1950, "We try to remember that medicine is for the patient. We try never to forget that medicine is for the people. It is not for the profits. The profits follow, and, if we have remembered that, they have never failed to appear."

Risks: All investments are subject to risk and may lose value.

 The discussion of market trends is not intended as advice to any person regarding the advisability of investing in any particular security. The views expressed in this document reflect those of Mr. Riegelhaupt. Some of our comments are based on management expectations and are considered “forward-looking statements.” Actual future results, however, may prove to be different from our expectations. Our views are a reflection of our best judgment at the time and are subject to change at any time based on market and other conditions and Baron has no obligation to update them.

 BAMCO, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission (SEC). Baron Capital, Inc. is a broker-dealer registered with the SEC and member of the Financial Industry Regulatory Authority, Inc. (FINRA).

For Institutional Use Only

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.

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Elana Margulies-Snyderman

Elana Margulies-Snyderman is an investment industry reporter and writer who develops articles, opinion pieces and original research designed to help illuminate the most challenging issues confronting fund managers and executives.

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