December Update

Dear investors and well-wishers,

The fund returned 17% in November, and we’ve had a decent December with a few days left. It’s been a frustrating period nevertheless, with Australian small caps and biotech lagging this year.

The silver lining is that these are possibly the most promising areas in financial markets right now. There are profitable companies with revenues in the hundreds of millions trading at <0.5x sales.

We wrote that a low might be in for biotech two months ago. So far that seems to be playing out, with the biotech index turning from steep losses to marginally positive for the year (+5%). The recovery is still ahead.

CRISPR companies in particular look ripe, with CRISPR Therapeutics winning its first approval, Intellia Therapeutics sitting on cures for at least two diseases, and Beam, leading the next generation, with a substantial investment secured from Eli Lilly. I expect we will see more of these deals next year as big pharma revenues (not least from GLP-1s) are recycled into emerging companies.

Beyond these platforms there are drug companies with excellent data that are still trading as though they have little value at all. Those that have built strong clinical evidence over the last two years may count among next year’s biggest winners, and I suspect there will be more than a couple in Australia.

Finally, a new regime

Inflation has come down in official statistics, with headline inflation at 3.2% and PCE at -0.1%, which is quite literally deflationary.

This has led to calls for rate cuts next year, and a corresponding fall in interest rates, which puts us firmly in a new regime. In the United States, this month we may have finally seen the much anticipated ‘pivot’.

There is still an enormous amount of money sitting in money market funds.

We have continued to concentrate into our largest positions, which include Transmedics, MercadoLibre, Nubank, Celsius, AMD, Camplify, and Schrödinger. These represent a ~53% weighting. Our largest sector exposures are to healthcare and semiconductors.

Clarity Pharmaceuticals

This is the most exciting company I’ve come across in Australia lately. Clarity has been steadily releasing data from patients treated with their copper therapies with late stage prostate cancer.

I will send out a note on the space shortly.

Current players include Novartis, which entered the space through their US$2 billion acquisition of Endocyte, Lantheus, which offers a radiodiagnostic, and Telix which is rapidly gaining diagnostic share from Lantheus. The whole space itself is growing fast and expanding into new areas.

M&A activity has been intense.

Two days ago Bristol Myers Squibb bought RayzeBio for US$4.1 billion, with early stage data for their alpha-particle emitting Actinium-based radiotherapy targeting gastroenteropancreatic neuroendocrine tumors. The company is enrolling patients in a Phase III trial.

And Novartis paid $2 billion for Endocyte in late 2018 with only Phase II data. This has proved a big winner, with first year revenues for their first product Pluvicto forecast at over US$1 billion.

Point Biopharma, in partnership with Lantheus, was itself bid for by Eli Lilly for US$1.4 billion - again with only Phase II data. Last week Point’s data came in a little soft, leaving open space for new entrants like Clarity.

This is going to be a large market. In prostate cancer, the trend is towards increased monitoring and (where possible) fewer surgeries and hormone therapy, which involves the unwelcome side effects of incontinence, impotence, low testosterone and depression.

These companies are focused on heavily pre-treated patients. But the hope is that these targeted treatments, with their milder side effects, will move further up the treatment timeline, which could double or even triple industry revenues.

This will take time, given the high hurdle for changing standard-of-care, but is looking more likely than ever today.

In the meantime, a steady rise in the incidence of prostate cancer, combined with an increase in monitoring, suggests the market will expand significantly regardless.

In a space where companies with promising data are being acquired for billions of dollars, and Clarity’s early indications look best-in-class, the company’s post-runup US$340 million valuation looks cheap.

Transmedics

As we wrote in our last note, Transmedics posted 159% growth and is guiding to a 4x increase in the number of transplants they handle by 2028 (which is creeping up all too quickly). As an added benefit, their new logistics business will allow them to capture more revenue per transplant, as well as offering a better service.

Nevertheless, this year the company’s multiple has compressed significantly, and the year-to-date return (27%) has been far lower than their growth rate.

Transmedics is founder-led, has minimal stock dilution, and is already breakeven excluding acquisition costs. This is a ~10% position and we are targeting a 40-80% portfolio return.

Schrödinger

We chose Schrödinger over other AI drug discovery stocks like Recursion and Exscientia due to their significant software revenues, which derisks the business, and offers upside if biotech funding picks back up, and with lower rates this is increasingly possible. Low churn in a tough market has been impressive.

Also in favour, Schrödinger has already realized substantial cash returns from its AI-designed drug programs. Founded in 1990, this company has certainly come of age.

2023 was the year multiple revolutions came of age. The first AI chatbot had mainstream success, GLP-1 weight loss drugs were used by millions and became household names, and the first CRISPR therapy was approved in humans only weeks ago.

These were decades in the making, but 2023 was the breakout year.

As rates come down, profits from the ‘Magnificent Seven’ may soon be pouring into other parts of the market. The last few weeks suggest this has already begun, and our corners of the market have started to see some life.

I have a number of posts sitting in my drafts folder which I’ll be sending out over the coming weeks.

I hope you’ve all had a relaxing holiday break.

Michael