Once an afterthought, the life science/pharma industry now
glimmers as a large blip on the hedge fund radar despite shortfall
in flu vaccines and Merck headlines partly because aggressive
marketing and pricing have made pharmaceutical companies America's
most profitable industry.
This being presidential year as well, Richard shares with
us about the life science/pharma industry in this capacity
as he joins the dots between India, technology and the life
As a co-founder of Life Science Group Partners, what
are your reasons for starting a hedge fund with such a
niche focus as health care and life sciences?
The market for biotechnology stocks is arguably the most
inefficient in the world. We felt that opportunity combined
with our experience could yield significant long-term
- How would you best describe Life Science Group Partner's
management in terms of style and decision-making process?
We are value-based contrarians. Our shopping list is
usually comprised of stocks that have excellent potential
but are under-followed by today's momentum-based traders.
From my understanding, Life Science Group Partners
uses "valuation-based investing" method to seek
significant long-term capital growth. Can you give us
a breakdown of components that drive this method and why
are they chosen in the first place?
First, we look at management. Most of our best long trades
are companies that recently experienced a setback and
are oversold by the market. A strong management team is
necessary to ensure the setback will be remedied quickly.
Secondly, we look for multiple opportunities to win via
the drug pipeline or other events such as an acquisition.
I can list many other components but they vary from opportunity
We describe ourselves as long term due to the fact that
the stockmarket habitually takes an emotional view to
the biotech sector. Therefore, one must be patient to
reap the rewards of stocks picked based on their fundamentals.
- What do you think is your edge over other managers
There are many talented managers in this field. We do
think that our cumulative experience of the firm's partners
offers our limited partners a solid platform to participate
in the biotechnology market.
- In particular, net returns for the year 2002 sunk
into the red for Life Science Group Partner but strong black
figures were later posted for year 2003. How did you do
2002 was a year that broke all previous metrics for valuing
a biotechnology company. For example, many companies that
we felt had promise were selling for less than 50% of
their cash holdings in 2002. That means investors gave
the company itself no value and did not even see their
cash balance as a store of value. As I described above,
emotion can run rampant in biotechnology.
The rebound was caused by the spectacular reversal in
sentiment to the exact same companies investors deemed
almost worthless the year before. That is a good example
of why patience is necessary to succeed in biotechnology
While many factors interact to ensure success in
the biotech/pharma industry, what two factors remain crucial
to the Life Science Group Partners?
First governmental bodies must not succeed in limiting
the profits a company can make if they develop a blockbuster
drug. That will remove the incentive to provide risk capital
to drug development. Second, let the talented and dedicated
scientists throughout the world do their work unfettered
and exciting medical treatments will continue to emerge
at an accelerated pace.
- Tell us Richard, how do you identify technologies
which merit further development into commercial entities
and is this the single benchmark Life Science Group Partner
use for stock selection?
We keep in close contact with numerous business and scientific
leaders which the partners have befriended over the years.
No, there is no single benchmark that we use for stock
selection. Biotechnology companies are very diverse in
their approach so one must evaluate each company individually.
- What is your maximum and average leverage used on
Life Science Group Partners?
We rarely use leverage and have never been leveraged
more that 1.2 to 1 which is very mild for a hedge fund.
- During this past year, what were the major trends
that Life Science Group Partners invested in?
Our process doesn't lend itself to trend investing.
We look at each opportunity on a stand alone basis.
- We have recently seen some late-stage drug failures
cutting deep into profits. Are these drug failures a character
of the industry or the result of poor development strategy?
Failure is a part of the current process. We do believe
that early testing and modelling methods are getting better
and over the long term, failure rates will be materially
- If the national health care system has a voice, what
will it say?
I want efficacious drugs with no side effects and I
want them for free!
- What do you think are the possible ramifications for
the Presidential elections and (possible) rate hikes again
in the same month of November for the life science/biotech
markets and how are you positioning your fund in anticipation
The biggest ramification for biotechnology will be in
the stem-cell field which does not currently hold many
solid public companies. For drug pricing, a democratic
administration may attempt to regulate drug pricing which
would be a disaster. We do not think that would happen
unless democrats take the presidency and both houses,
which are highly unlikely if you are to believe the current
Rate hikes are a negative for biotechnology and we are
monitoring the trends. As your readers may know, pundits
have predicted a break in the bond market to no avail
so one must keep things in prospective.
- Technology, the great driver of healthcare costs is
also the driver of India's recent bursting economic gains
- how do you reconcile these two and are you seeing possible
synergies between the two?
We do not share the view that technology raises healthcare
costs but rather it reduces the cost per sick patient.
In our opinion, the total rise in expenditures is due
in the fact that more people are gaining access to quality
healthcare. India is a good example of that trend. This
is obliviously bullish for medical technology participants
- Going forward, what is your perspective on the life
science/pharma industry for 2005? Give us some broad strokes.
The international pharmaceutical companies have made
a monumental blunder by not acting much more aggressively
in biotechnology acquisitions. There was a time in the
late 1990s that the market cap of Pfizer was greater than
the entire US biotechnology industry combined. That is
not the case today.
Investors have been much too optimistic about the potential
of EGFR cancer drugs like Imclone's and the eventual fallout
will be painful for them. That may result in a short bear
market for biotech which would create an excellent buying
The spread between valuation metrics of large and small
biotechnology has never been greater in our opinion. We
believe that spread will close over the coming months
and create opportunity for a long/short fund such as ours.
Richard J. Van Steen
+1 203 422 6500