Investment Philosophies and Fundamental Trends

Biotech and Money had the opportunity to speak to Andy Smith CIO of Mann Bioinvest about their investment philosophies and the fundamental trends. Andy has a unique combination of experience across operations and research and development at major pharmaceutical companies coupled with an astute commercial and financial perspective from his experience as lead portfolio manager at the aforementioned life science sector funds. This breadth of knowledge provides Andy and Mann Bioinvest with the ability to evaluate opportunities in the sector

B&M: Andy, tell me briefly about Mann Bioinvest and your role there.

AS: Mann Bio is a single family office with a specialism in biopharma and life sciences founded by Jim Mellon. We try and act as if we are an institutional investor. I have a long track record at institutions like 3i, Schroeder and AXA and the processes we use when we make investments are just the same.

Within life sciences, we have a broad remit. We can look at pharmaceuticals, biotechnology, medical devices, diagnostics. Even pharmacy benefit managers, and healthcare insurers. We can choose from a universe of more than 2000 listed companies worldwide to invest in our portfolio, and we whittle it down to just 40.

B&M: Apart from the fact you are a specialist biopharma investor, is there anything you can point to that makes your approach or philosophy unique as fund managers?

AS: Not necessarily unique. But we do have genuine sector expertise. I trained as a scientist a long time ago and then moved to the R&D side of a pharma company. I eventually completed an MBA and went back to Smith Kline Beecham, where I soon moved over to the commercial side.

And that commercial experience, both managing a real pharmaceutical product, having responsibility for the global sales of one particular product, and also sitting on product teams as the commercial person of new products being developed, has characterised the way we look at things at Mann Bioinvest.

B&M: So in a sense I guess the competitive advantage of your fund is the deep commercial and sector experience you bring?

AS: Exactly. Go to your nearest fund manager and ask how long he/she has spent in a pharmaceutical company. How much tactical and strategic experience do they have in managing real products and development? They don’t have any.

B&M: What performance have you seen? And what do you expect to see?

AS: Last year we underperformed our index significantly. We were very negative on the valuations of the lowest two or three strata of life science companies, because we thought that they were widely overvalued. They had data on two or three patients and had 5 or 6 billion dollar valuations, which was the preserve, when I first started in the industry, of a private company. And these were public companies.

So we underperformed because we didn’t have the flakiest, the highest beta if you like, stocks in the portfolio last year. And they went up a lot before they crashed a lot.

Our edge is to take that practical pharmaceutical experience with a valuation overlay has an influence on what we invest in, and what we keep away from. And that, until the recent pullback, gave our fund 40% up since inception 2 years ago. What do we attribute that to? I come back to this training I’ve had in a pharmaceutical company to value and assess products, work out their chances of technical success in realistic terms not optimistic terms. And to value what they’re going to see at the end of the day. It’s going through the process of valuing their product, looking at the relevant valuation of that compared to others you can invest in, and deciding if you want to invest, what valuation you want to invest at. That process is, at the very least, iterative. But there are tens of thousands of individual steps which could stop a product moving through clinical development. And if you’ve never worked at a pharma company, how the hell are you going to know if any of them are due to come up any time soon?

Things like drug solubility or QTc issues with off target issues. People who’ve done a classics degree at Oxford and come to manage a life science portfolio have no idea of those sorts of things. They might learn them as they go along, as certainly I’ve learned a lot. But if you don’t have that background you’re at a disadvantage.

B&M: Let’s talk a little about the composition of your portfolio. Your fund has a relatively low exposure to the UK. We want to understand why that is - is that because you’re down on UK biotech and biopharma? What’s the thinking?

AS: In the UK we have a particular issue of former academics, professors of medicine or of biochemistry, who decide to run a biotech company, who have no experience of developing a drug or marketing a drug, so it’s rife for failure.

We only have to look back at Germany in the late 90’s early 2000’s, where the government funded every Herr Doctor Professor to start a biotech company. They did. They even created their own stock market, the Neuer Markt for them to IPO on. And almost all of them have failed. Unfortunately, there is a recipe for disaster that tends to concentrate amongst the small cap life science sector. Completely inexperienced management, who have no experience of developing, manufacturing drugs, or doing clinical trials, marketing drugs, until they actually do it for the first time.

My rule of thumb in drug development is that if something can go wrong, it absolutely will. I see too often UK life science companies making the same mistakes we made in SmithKline 20 years ago.

B&M: Nevertheless, wouldn’t you agree that now there’s a much greater sense of optimism for the potential for UK biotech and pharma companies?

AS: I think there is a groundswell of activity which many believe will lead to the emergence of potentially the next billion dollar companies coming out of the UK.

B&M: You’ve got the externalisation trends and ground breaking pharma academia collaborations. You’ve got new IPO commercialisation funds, with the likes of the Apollo Therapeutics fund for example. Do you share that sense of optimism? Or not?

AS: I share the sense of optimism that the infrastructure at an early stage is starting to be more defined. And that can only be good. We have a great infrastructure to get to that 1% level, where there’s some interesting technology. Unfortunately we don’t have the technological introspective to understand and say where that technology is going. We don’t yet have that joined up thinking, that the Americans seem to have in spades.

Most early stage life science companies don’t think that far ahead. Their management are thinking this is their last job. It seemed to me when I left 3i that the archetypical UK chief exec of a biotech company had decided to retire from a pharma company. They were a managing director of a country. So their last 2 or 3 years in a company was attending dinners and polishing rubber plants in o ces, it was not tactical pharmaceutical management.

Now if you contrast that in the US, there are a higher proportion of chief execs who are there to see that young company through to a level of success, sell it, go home and wait for their phone to ring for the next job. That’s a stark contrast to UK management. UK management in biotech companies seem to be there to prolong the agony.

For the average UK biotech, phase II is not meant to show if the drug works or not as it is in a pharmaceutical company. Phase II is to prolong the contract of the chief exec for another 2 or 3 years until it might or might not work in phase III. Which is why we have so many drugs failing in phase III, because we don’t show they work in phase II.

B&M: Isn’t that a rather an outdated perspective now though? Don’t you think that UK biotechs are changing and have learned the lessons of British Biotech and other high profile failures?

AS: I think the availability of money in the last few years, funding for companies, makes that situation perfectly able to continue. Don’t get me wrong, there are bright spots in the UK, AdaptImmune, Immunocore, there are some great technologies being properly commercialised by good people. But they are far diluted out by the many hundreds of others who are not up to it.

B&M: What do you think needs to change, for you to become more interested in increasing your exposure to UK biotech or pharma opportunities?

AS: I don’t think you can do it. Our biggest gain is our biggest pain if you like. Our largest positive attribute in the UK is the science base, and ability to develop ideas into laboratory experiments that show something wildly interesting that might have an implication in modern medicine.

Our downside is there are so many of those, it’s too easy to get people to fund them, be it aging investors, friends and family, or as you move up the sophistication of investors to a level where you get VCs funding some of these companies - sometimes in the full and certain knowledge the drug doesn’t work.

In the UK there has been too much money to enable this great universe of no hoper technologies to actually keep progressing. And I don’t see that changing. We are in the middle of a public market pull back, and all that means is those companies we’re talking about just go into hibernation for a couple of years, then they come back out and raise money. I don’t think there’s a cure for it. There will be cycles, but it won’t stop.

B&M: Rather a depressing perspective! Let’s shift to more positive ground. Are there any areas you’re excited about at the moment?

AS: Strangely enough our private deal flow, we see new medical devices as very exciting. Now whether it’s an artificial pancreas or curing of fungal infection that are completely untreatable or collagen that doesn’t come from humans, those sorts of aspects are reasonably good areas where we can see potential game changing products.

B&M: Can we close on what’s really exciting you at the moment, and the converse of that, what are you most worried about?

AS: We could do it together. The most worrying thing at the moment is the sell-off in the markets. People are realising they’re invested in stuff that they don’t understand. And people had the bullish typical top of market behaviour where they expected share prices to keep on rising in one direction, only ever. That’s not been the case.

Now we’re seeing the effect of that with people exiting the market, and the run off into ETF’s and sell-off of underlying holdings. That’s going to go on for a while. My biggest worry is the sell-off will go on for much, much longer. Two years is going to be too long. Six months is the minimum I probably expect.

Those of us who have been in the market have been through this before. Then we’ve been in a position where we go round to see small cap generalists in London to talk about biotech and life sciences, and we’re treated like a pariah.

What keeps me awake at night, is we’re throwing the baby out of the bathwater: we have to be invested in this market. We might run with a bit more cash than we would have done a month ago or two months ago, but we have to give our investors exposure.

Now the exciting bit is, we will get to the stage that I tend to call ‘no mans land’, the position between early 2001 and perhaps early 2003, where life sciences traded. That is the time we need to be adding beta, small cap companies in our portfolio. And that is the time I made most money for my investors. Because babies had been thrown out of bathwaters. There were still companies doing their jobs. There were still pro table companies with low valuations.

That’s when mergers and acquisitions start to kick in. The downside is that is exactly what leads us to the next boom. Last time it was 6 years, from going from mergers and acquisitions activity increasing amongst tangible companies that have products and pro ts, to companies that have dosed a couple of patients having 3 billion, 6 billion dollar valuations.

That up period takes 6 years. The next time it happens I’ll be in there for most of that 6 years, rather than coming out after 4 years!

Andy Smith has overall responsibility for delivering the Group’s commercial objectives and joined the Group in January 2008, supporting Fusion’s investment. Martin has over 18 years’ experience in the pharmaceutical industry and has led the Diurnal team to progress the Company’s lead products, Chronocort® and Infacort®, into pivotal Phase III clinical trials.

Mann Bioinvest is an expert in the life science sector. The company was established to service sophisticated clients seeking advice on the life science sector. Mann Bioinvest provides independent advice based on analysis of opportunities in the life science sector. We indirectly advise on assets of clients throughout the world such as high net-worth individuals, family offices, investment professionals and institutional investors.

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