Unknown
Welcome to Pathfinders, a podcast series from RBC Capital Markets, where we uncover the key trends and catalysts shaping the fast moving world of biotech and pharma. I'm your host, Joe Coletti. Today, we're broadcasting from RBC's Global Health Care Conference in New York. And in this episode you'll hear from Chris McCarthy, RBC's Health Care desk strategist in conversation with Vince Aida from Cutter Capital.
Unknown
We're hear a little bit about Qatar Capital's own investments strategy and their approach to markets, but they also hit on some of the big themes of today, including obesity, M&A, the IRA and the opening up of the biotech IPO markets. Let's turn it over to Chris and dive right in. Hello, everyone, and thanks for joining. This is Chris McCarthy, the health care desk sector strategist at RBC Capital Markets.
Unknown
I'm here live at the RBC Global Healthcare Conference with Vince Aida of Cutter Capital. Vince, do you mind sharing your background and anything you'd like about Qatar capital? Sure. Thank you. First of all, Chris, thank you for the invitation. Appreciate the chance to come down here and chat health care with you a little bit. Looking forward to looking forward to the conversation.
Unknown
I'm Vince. You on the founder and chief investment officer of Cutter Capital Management. Just a moment about myself. You know, a native new Yorker by birth, academic scientist by training. Having studied at Columbia University, where I did my my Ph.D. in in market genetics and then 20 years or so experience as a health care investor, the last, I guess at this point, 14 of which have been as a market neutral investor, the last 11 of which were at what we like to call the Centers of Excellence.
Unknown
Millennium and Citadel, and then most recently launched in Qatar. Qatar as a firm are flagship product is a market and factor neutral health care specific long short equity strategy very similar to the overall strategies that are run internally at some of those firms that I had mentioned. But with, you know, a little bit more individualization, being able to run independently as we are.
Unknown
Thanks for that, Vince. So what can you tell me about your investment process? What is unique to investing in health care and what are you trying to accomplish when you attend cell side conferences like the RBC Health Care Conference? Sure. So I think one of the things that's exciting about being a health care investor and what lends itself as a subsector very much to the market neutral approach is that it is the one sector of the market where investors have potentially years of forward visibility into the future cash flow drivers of the companies they're investing in in most other sectors.
Unknown
You just don't get that that sense of what is on the come. But here mainly because these companies are marketing towards, you know, medical professionals and they have to kind of pre-market their products before they launch, mainly because of the way the whole drug development process is conducted in the States. It is a process by which you do get tremendous amount of data on these future cash flow drivers for these companies.
Unknown
And it provides a tremendous opportunity set for investors to try to forward discount the value of these products. And often too often with with massive variances versus what actually is how reality plays out. So you have opportunities both on the upside of innovation, but you also have opportunities on accessing the inevitable failures in the process. And so it's the one subsector where you could look at a tremendous number of of companies that are all trying to execute against the same business plan, but have tremendously varied results in the stock market and trying to execute upon that.
Unknown
So what are we wound up doing? We take a probabilistic approach to looking at investment opportunities. We start with the framework of asking what are the future drivers of innovation in any particular subspecialty in a particular area? What are the key events that are going to, you know, kind of unlock those changes in the practice of medicine and then we ask from probabilistic perspective what's discounted into the various stakeholders for an event already will look from what's priced into the incumbents who might be threatened by a particular innovator.
Unknown
We'll look at the fast bowlers are going to come after and we'll look at all of them to try to honestly develop our own view from a scenario perspective of how the world is going to play out and then ask, is there an opportunity to kind of arbitrage the varied implied probabilities of success that are buried within the equities that are there stakeholders there?
Unknown
So that's kind of the process. Now why does RBC at a conference like this matter and what do we look to glean out of that from a research perspective? But we try to formulate a differentiated view around the probabilities of success or failure in innovation. In this space. There's generally various categories of risk that we are trying to evaluate, that the management teams themselves provide a tremendous amount of input in helping us evaluate from the way these studies are being currently conducted from both a pace and perspective execution perspective.
Unknown
What is known about the profiles of these products? And you can interrogate aspects of that, which is interesting to do kind of with managements. And then you can go back in diligence whether you you agree with those assessments or not. And finally, discussing with them what the target product profiles look like for these products that are developing so that you can go back and diligence whether the you agree with that potential profile this market, but more importantly, whether you think the markets will agree with that with that assessment.
Unknown
And here is an opportunity to get in front of management teams and really kind of dig in and do that diligence. So it's kind of exciting to be here for that kind of stuff. That's a great pivot, I think away from fundamentals for a minute. As a specialist on the sell side, I spend a lot of my time on sentiment and positioning.
Unknown
So how do you balance for those dynamics in your investment process? Well, I think, you know, what I was trying to, you know, hopefully articulate is is an examination of the differences between what our perceived likely outcomes are for the, you know, kind of story arc and event path that these companies are going to have vis a vis individual key catalytic events that they're going through versus what the market implies.
Unknown
And the segments of analysis of what the market implies is multifaceted. Yes, the valuation work and the models clearly matter. Your view on the target product profile and the way that interacts with the TAM opportunity is clearly important, but equally important is kind of understanding where the bodies lie and having conversations to understand from both short interest perspective of from from where the, you know, the hedge fund community might be skeptical versus what that ownership base looks like, what price action in those equities as an overlay to those to inform about what's going on with an equity.
Unknown
But then also clearly conversations around the watercooler in this case around the conference for what you think peers both buy and sell side are saying and how that message is resonating itself vis a vis stock price movement. You focus a lot of your time on therapeutics and I wanted to hit a few hot topics obesity, IRA, the IPO market and M&A.
Unknown
Let's start with obesity. So I think it's really interesting at this point when you look at the influx of interest from perhaps broader than the health care community into the to the duopoly right now that exists, you know, because obesity has always been a because of the, you know, obviousness of the size of the TAM and the way it could capture the imagination of investors outside of health care, it's always been like a holy grail indication, if you will, to go after.
Unknown
And so it's not necessarily that surprising that investors. Right now will look at the duopoly that's there in price in the TAM, almost completely fully into those names. But if there's one thing that pharma knows how to do, above all else, it's being copycats and innovating upon proven innovation. And so longer term, the thought that this is going to remain a duopoly between lillia novo and that they're going to be able to maintain exclusivity on the market is pretty unlikely, I would say.
Unknown
And so right now it's just a question of which of the fast followers and and novel comments actually have a chance to have an impact on these markets. And that's that's the really interesting exercise now. So it's all about kind of those second generation players of what's been priced into them. That's a much more fascinating evolution of this market.
Unknown
I think, you know, kind of the Glip trade is done for the most part, if you will, you know, except for maybe being told that to the holders of these these mega caps. But yeah, it's it's a fascinating area. Let's move to your latest thoughts on M&A in therapeutics. I think there has been and will always be a secondary market in this sector for these equities from larger pharma acquirers.
Unknown
That's the case for for a couple of different reasons. But, you know, mainly it's driven by the fact that there is not enough productivity out of R&D money spent out of those companies, not all. And the odds of success for any individual novel product from those companies is low enough that your return on investment cannot fully support the growth that you need.
Unknown
So they have to look for innovation externally. What's fascinating on an M&A note is if you looked at the publicly reported evidence in 2023 of the top 17 largest pharmaceutical and biotech companies, we did this exercise. So, you know, or I might have pulled it from a report, but the the source is valid regardless. You can kind of run through the case and Qs, it's a little over 300 billion of EBITDA that's generated by these top the top 17 pharma companies call it.
Unknown
And last year if you look at the actual conducted so that's, that's 300 of that. And then I should also mention there's a little over 300 billion of debt in the aggregate balance sheets of these companies. They're there around one turn levered. And if you look at last year's M&A and last year seemed like there was an uptick in M&A, it was about 150 billion of M&A that was done last year, inclusive, a couple of big deals.
Unknown
You know, Horizon and and Sajjan, that's half a turn of actually that's half a turn of the EBA that these companies generate in a year. So there is really so much more firepower on the sidelines to keep doing this that it's almost, I think, an inevitability that we will still see a continued pace of not an acceleration of M&A in this space.
Unknown
It's it's almost, you know, as inevitable as the search for innovation itself. And how about Ira? So I'm I'm hopeful as a health care investor that IRA turns out to be more bark than bite. But the bark is loud. I mean, I can understand why from a journalist perspective, you'd be afraid to come into a sector that is trying to be turned into more of like the utilities and trying to have governments step in and put price caps on on the most successful products so that just at the time of which you are looking to get excited about obesity, then Senator Sanders is going to have a hearing on the price of those drugs.
Unknown
So I can understand those fears. But we have there's really still a lot of unknown about how this is going to play out. That actually could be in the favor of these companies, because it feels like there's a common misunderstanding between gross prices that are the listed prices that IRA is attempting to cut down on versus the actual net prices that any payer actually pays for these products, which is often, you know, a fraction of what the listed prices for.
Unknown
This is almost like nobody pays a listed price unless you're unfortunate enough not to have insurance coverage. And that's a different topic altogether than the price of the drug. So, yeah, it'll be fascinating to see how it winds up playing out, but I still think we're in more of a more bark than bite for the actual impact of what this will be.
Unknown
And once this plays out over the next, call it year or so, we see what the first products look like, an actual discount. So we could model in what the actual impact is to sales. It won't be as big of a concern as it is today. Last one, The biotech IPO market and window now. So I think the IPO market in itself is always a fascinating look at the health of the healthcare equity markets in general and maybe not necessarily as much of a look on the quality of future innovation that's going on.
Unknown
I mean, by all reports, there's a tremendous sized queue of private companies looking to come out. At this point, it's just a question of whether the market can absorb them. And so when this window opens up, I'm almost like I'm more interested in what that means for the health of the market than individual excitement over any individual. One of those players, you know, with all due respect to the title holders who are really excited about their particular kind of child being born, it's much more the fact that the window is open that's going to be very bullish on because it shows, you know, that there is an underutilized demand for these type of stories in the market. It's very bullish when there's a healthy IPO market out there. So I kind of look at it more as like another one of those softer qualitative measures of health of the market. Vince, a congratulations on Cutter Capital and all its success. Thanks so much for spending time with me here at the RBC Health Care Conference. I hope you enjoy the rest of the conference.
Unknown
It's great. Thank you. Thank you very much for for the conversation. That's all for this episode. Thanks again for listening to Pathfinders and BioPharma brought to you by RBC Capital Markets. Please remember to subscribe to get more great content and be alerted about future episodes. This episode was recorded on May 14th, 20, 24. If you'd like to learn more or continue the conversation, please visit our become forward slash biopharma.
Unknown
See you next time. This content is based on information available at the time it was recorded and is for informational purposes only. It is not an offer to buy or sell or solicitation. And no recommendations are implied. It is outside the scope of this communication to consider whether it is suitable for you and your financial objectives.