View of an active private life science investor
In March, Jon Moulton increased his shareholding in Redx Pharma as the biotech company successfully completed it’s IPO on London’s AIM. Jon has long experience of turnarounds, having invested in them for 30 years and with considerable success. Jon is a Trustee of the UK Stem Cell Foundation. He is a very active angel investor. He is Non-Executive Chairman of FinnCap, the stockbroker and a Member of the Advisory Board for the £3.1bn UK Regional Growth Fund. Here we talk to him about life as an active private investor.
B&M: Jon, perhaps we can start with a little background to yourself.
JM: I’m very active private investor across a range of things. In Life sciences, I’ve been doing biotech deals since about 1982. So I’ve always been at the edges of the life sciences, having probably about a dozen or 15 investments into biotech companies of an assortment of types personally.
I have a lot of interest in medical matters. I run a charity that funds clinical trials. I’m a trustee of the UK Stem Cell Foundation. I’ve been involved in one or two government initiatives in the area over the years.
So although it’s never been the centre of my activity it’s always been part of my activity. It’s been a very successful area for me over the years. Only one company has given me a realised loss over all that time, and even then I didn’t lose a great deal. So it’s been quite a reasonable area to actually invest in.
B&M: What are the criteria you’re looking for when assessing your investment opportunities?
JM: Clearly as it’s with a view to making money over time it will be something novel. I also look for good management. I also look for affordability. I’m a private investor who can deploy at most a few million pounds. So if someone wants to set up a company that needs 120 million quid to hit commercial activity, it’s probably not for me. I’m a very poor small passive investor in things and do take reasonable stakes.
B&M: If we took those elements of criteria you look at. I’m assuming they were in place when you invested in Redx but was there anything else?
JM: I particularly like that they had a very good sales pitch about the novelty of the redox chemistry and they were able to show me some very interesting bits of chemistry. I’m a chemist at base myself, so always find it interesting. It looked very novel.
They were pretty commercial souls, they were sensibly established with a view to being able to fund themselves appropriately. The management team was pretty strong at the start. It’s stronger now than it was then but it was strong enough to get it going.
B&M: Is that important for you, a story that resonates with the lay man?
JM: These are relatively close to clinic, at least in your head, as opposed to completely going out prospecting at a very early stage. So yeah I mean it’s quite easy to see how the stuff working they’re doing with Liverpool and the Broadgreen Trust on MRSA for example could very rapidly lead to a valuable drug.
The basal cancer compounds certainly could do the same. Some of the others are much less clear as to quite how well they will go. But the chemistry is certainly interesting and the effect at the chemical level for these things is really quite good.
It is a portfolio of projects, any couple of which working would probably result in it being a very attractive investment.
B&M: Do you have an opinion on where you think the more compelling opportunities in the sector lie?
JM: They’re in a couple of hotspots. Anything reconstructive I think is going to be a good business to be in over the next decade.
I do think the growth of tailored medicine and genetic medicine will provide new opportunities. I think you’re going to see opportunities coming out of enhanced sequencing technologies, enabling technology there.
You’re going to see a much more opportunity in assorted tools of the biotech world, whether they be an ability to knock out an antibody quickly and easily, or a quick method for measuring levels of things.
All kinds of things represent opportunities in the area. You just have to poke away at them with a reasonable degree of scepticism. Most of them will fail.
B&M: We hear a lot about rates of failure in the UK and I think a lot of people speak to there needs to be a mature approach to failure, in that if you’re going to fail, fail quickly and fail cheaply.
JM: Those are really desirable characteristics. The worse ones are the ones that stagger on for about 10 years, always raising too little money, end up with a hugely complicated capital structure and still no product.
The UK’s failure tolerance is less than the US. I haven’t found it very much of an issue in my biotech investment though. Maybe people who fail never come forward again. But I can’t recollect in the last few years where the prior failure of a management was a big issue. I’m not sure it’s that important. I haven’t met many people who claimed to have been switched off by a failure.
But bear in mind some of the folks absolutely thoroughly deserve to fail, and thoroughly deserve not to be funded again. They will have pursued relatively idiotic processes or been guilty of gross over promotion, which still occurs in the biotech area.
B&M: You do have to have a story that you can back that story up with real results
JM: Yes and I do prefer the easy stories I must say. It probably means I’ll miss something really dramatic, wild and extravagant. But I haven’t missed many areas in the past. Most of the big pharma simply isn’t spending enough on R&D to keep their own pipelines intact. So they have to keep buying these small biotech industries or funding partnerships with them.
B&M: If we come personally to the role you have as the trustee in the UK Stem Cell Foundation, how did that come about? Where you add the greatest value is on the capital raising stakes is it?
JM: If I had to say what I’d done best, it’s helping them carve cost out of the trials. Which is quite an interesting area. Because I run the charitable trust which does a lot of clinical trials, I’m well used to actually reviewing the costs, getting the things properly structured, sized, which is something which is really quite rarely done in the clinical trial area in the UK.
At UK Stem Cell Foundation it’s clearly about making the money go as far as you can. Because if you can do 3 trials instead of 2 that’s got to be a good idea hasn’t it?
B&M: There’s more of a renaissance around cell therapies and stem cells at the moment.
JM: You’re beginning to find them in quite a lot of places. There’s clearly great process being made in the eye. There’s a lot of stem cell therapies of course happening in things like multiple myeloma, leukaemia, and increasingly an amount of reconstructive stuff, around building bladders or bits of muscle or cartridge, which is going ahead very quickly and relies on stem cell technology.
Like a lot of things I suspect in 10 years’ time stem cell will just be part of the tool kit.
B&M: I’m wary not to focus on the Better Capital side of things, but I think it’s important to put into context for the purposes of your experience.
JM: Well as a vehicle it’s quite an unusual one. Most public private equity deal businesses are perpetual capital pools. Most of the time that results in them trading at a discount to net asset value. It also gives rise to not inconsiderable conflicts because he who values the shares gets his fees fixed on whatever value he puts up. So that conflict is unavoidable in a public vehicle of most kinds.
Better Capital is a distributive one, when we’ve basically realised investments we’ll send the money back, and proceeds. So we’re actually something which will vanish in a few years. That’s the biggest difference on other private equity type vehicles. Then the narrow focus on turn around.
B&M: Where would you see your role of Founder adds the greatest value? Where do you spend the majority of the most of the time in your day?
JM: For the last year I’ve been spending the majority of my days working on the portfolio of Better Capital which was not in good shape. It is in much better shape now. So a lot of time there.
I do a lot of other things. I’m despicably plural. I was on the government’s regional growth fund board. I chair the Channel Islands stock exchange. I chair a small airline. I chair Finn Cap which of course do life science floats themselves. Director of the Battle Against Cancer Investment Trust which funds the ICR. Plus three other boards, two other charities. That’s where most of all the days are.
B&M: Coming to a close then Jon, what do you see as the single biggest opportunity for Better Capital at the moment?
JM: Better Capital I wouldn’t say the opportunity is particularly good. It relies on a flow of troubled companies from the banks and because of very low interest rates the bank tends to not actually recognise problems. Deal flow is quite weak for Better Capital.
So the opportunity at the moment is to work on what we’ve got rather than get new deals. It’s a segment which you’d have thought given all the years of grief in the financial world would be awash with activity. But realistically we’ve only one substantial competitor, and neither of us is finding it easy to deploy significant amounts of money.
I think it’s right to say the amount of money going into corporate turnaround from private equity is below 1985 levels.
One of the reasons we have low productivity growth in the UK is the failure of an evolutionary death path… so we’re slowly stacking up lower returns, mediocre businesses, because there’s no means of sucking them out of the ecosystem.
So that’s part of your productivity gap in the UK. Quite how much of a gap it is is everyone’s guess, but at least noticeable.
B&M:We always like to ask if you have any parting words or advice you’d like to give our readers. Do you have any closing remarks?
JM: I have one strong piece of advice, which is far from well followed by VC’s, which is avoid preferred shares. There’s plenty of complexity and risk in small biotech companies. But to believe an elaborate capital structure is worth a very exorbitant cost of putting it together and the great difficulties it gives in subsequent rounds, is clearly inappropriate and yet the VC’s and some of the government bodies now insist on preferred ordinaries as a normal structure. The only thing it guarantees is a very substantial amount of money going to the lawyers. I wish they could be stopped, I really do.
You can read this and 10 other exclusive executives interviews in May’s Drugs & Dealers Magazine.