ShareSoc Company Seminar - April 2018

Sadly I was unable to attend last month's seminar so I was especially keen to make this April meeting and the chance to learn about four unfamiliar companies. Actually that's not quite true as I had heard of Beeks Financial Cloud on the grapevine but that's about it. All new names here then.

International Biotechnology Trust (IBT)

Kicking off the evening Carl Harald Janson, from International Biotechnology Trust, explained how the trust has been successfully investing in the biotech space since 1994. The reason for focusing on this sector is it's a high growth area (12.9% p.a. over last 20 years) with several growth drivers for the future. In a virtuous circle the worldwide population is becoming increasingly elderly, which means more disease, and a rising number of new drugs are in development to treat these diseases. At the same time the regulatory environment is favourable to commercialising new drugs with various schemes (orphan, breakthrough, first in class) set up to expedite the approval process of exceptional drugs. This all leads to growth in global pharma sales and a market conducive to M&A activity as larger companies gobble up small ones for their intellectual property.

Now International Biotechnology Trust aren't in the business of selecting companies just because they might be taken over but in the past eighteen months 9 of their holdings did just that. What they actually have is a portfolio made up, more or less equally, of large, medium and small companies (where small is <$1bn) with these firms again split between those that are profitable, in drug development or only producing revenue. This diversification is all about reducing the risk of capital loss and the team don't stop there. They also heavily reduce positions before a binary event (such as a drug trial result) on the basis that they'd rather pay a higher price later on (when the result is known) than expose themselves to risk. This approach does lead to a very high turnover (150-200%) but Carl believes that overall the tactic improves returns.

Curiously the trust used to trade at a significant discount to net assets, of around 15%, despite good performance. As a result the board decided to implement a dividend of 4% of NAV back in 2016 and now the discount has entirely closed. Given that this dividend is paid from capital reserves Carl spent some time talking through the sustainability of the payout and how it, obviously, varies with the NAV. Back in August 2017 the trust had £252.7m of capital reserves and so this income should be safe for a long time to come (given that the last dividend cost just over £5m). An interesting investment opportunity if you're looking for biotech exposure.

Impax Asset Management Group (IPX)

Next came Impax Asset Management, another investment manager, although focused on solutions to resource scarcity in energy, water, waste, food and agriculture. Founded by Ian Simm, back in 1998, growth has been slow and steady over the last 20 years with AUM only really taking off (from £1bn to £11bn) in the last decade. What's notable about this growth is that it basically kept going through the last two financial crashes which suggests a lack of correlation to the wider market. As for the next crash Ian mentioned that they are more diversified now, with less retail money, and that even in 2007-8 their outflow was only ~4%! The key difference, from other asset managers, is that they are exploiting global momentum around environmental issues - whether this is awareness of pollution by diesel engines, the Paris Climate Change Agreement being ratified or the water crisis currently afflicting Cape Town.

A step change occurred recently with the acquisition of similarly named Pax World Management in the US for $52.5m (plus $37.5m contingent on performance). This complementary business had worked with IPX for a decade, as a sales hub and distributor, and so when the family owned firm came up for sale the opportunity was there to be taken. Usefully this adds passively managed equity and fixed income strategies to IPX, which are new, along with much greater scale on a shared platform - one that could grow to £30-35bn in time according to Ian. Given that this asset growth should occur with fixed costs rising more slowly there's some real operational leverage there which could boost earnings. I certainly get the impression that financial prudence is important to the board since total operating cost per employee has remained pretty level over the last few years and only $6.1m of new shares were issued for the acquisition (with cash and debt making up the balance).

So this year could be something of an inflexion point for the business as they invest for the future - which means looking for low-capex, steady margin companies that have the ability to scale globally. This doesn't mean putting money into headline names like Tesla either; instead the team invest in the "picks and shovels" businesses which can perform well no matter what happens. This sensible mantra quite possibly extends to the staff, of which there are only 76 with half being support staff, since turnover is a low ~5% and employees own a third of the company (with another 24% owned by BNP Paribas, a key distributor, and the rest being free float). All in all I was impressed by Ian's presentation and the way in which he's followed his personal passion for environmental causes when constructing Impax Asset Management; with the millennial generation being equally concerned about sustainability I can see this sector getting its turn in the spotlight.

Amryt Pharma (AMYT)

I must admit that I normally shy away from the biotech sector, as I have no specialist knowledge and dislike loss-making companies with a healthy appetite for capital, but COO Rory Nealon definitely caught my eye with his engaging presentation. Unlike many science-led businesses Amryt Pharma was primarily constructed as a commercial operation, just 2.5 years ago, with a very experienced team and a mandate to find promising products. This has led to two key, approved products being responsible for the near-term success of Amryt. One of these is producing revenue and the second could transform the company. Either way there is enough cash to fund operations until Q2 2019 and that might be far enough for them to become a takeover target.

Anyway the first product is Lojuxta, which treats a cholesterol disorder that is inevitably fatal, and this is for a license that covers Europe, Middle East, Israel and Turkey until 2024. While this disease is rare, with an estimated eligible population of just 751 people in the territory, it is also expensive (at €260K per patient p.a.) and required for the life of the patient. This high cost means that the best option for Amryt is for a national reimbursement decision to be made in each country - which means that doctors can then prescribe Lojuxta to any patient that needs it, without further approval, and sales ramp up quickly. Alternatively the drug can be prescribed on a case-by-case basis and while this increases revenue progress is more lumpy. As a result Amryt are looking for partners in most countries to get these decisions sorted out.

The second product is AP101 (based on the approved Episalvan) which treats the horrific disease Epidermolysis Bullosa. Again this is a rare (1 in 17000 live births), genetic condition that drastically shortens life expectancy and currently has no cure. However AP101 appears to meet this unmet medical need very successfully in some initial studies. Thus Amryt are currently running a Phase 3 trial with 196 patients and a final result date of mid-2019. Usefully they also have the option to perform some interim analysis in Q4 2018; this is a massive milestone opportunity as it'll allow them to see whether the trial is going well with no changes needed, if the results are good but they need a larger sample size or whether they should just stop. The first two results would be excellent and the company is likely to re-rate drastically in these scenarios. Fingers crossed!

Beeks Financial Cloud Group (BKS)

Named after a character in the film Trading Places Beeks Financial Cloud is a niche financial services outfit catering to automated trading clients. In practice this means that Beeks co-locate their computers in stock exchange data centres around the globe and allow clients to run their trading programs on these computers. The advantage for clients is that their programs are exposed to trading data with very little lag (meaning that they can react efficiently) without having to worry about infrastructure, resilience or security. The upside for the exchanges is that they can charge Beeks a hefty sum for the privilege of connecting directly to their network in the knowledge that they hold all of the cards in this relationship. One point worth mentioning is that this isn't High Frequency Trading, as carried out by hedge funds, since it's hugely expensive to play in this market - instead Beeks are offering service at the next level down and plenty of people want to work at this level (>170 institutions and ~6000 direct investors to date).

It's worth noting though that the company was only floated in November 2017 (having been formed 2 years earlier) and it's possible that they're just doing well because the real competition hasn't arrived yet? I can't see a real barrier to entry here and so it makes sense that Beeks are engaged in something of a land grab. On the organic growth front they are entering new geographies (China, Singapore etc.), and extending into new asset classes such as equities, along with providing a white-label service for brokers (such as IG and Playtech). I also get a sense that acquisitions are a possibility although I've no idea what comparable business they'd like to bolt onto Beeks. A slight concern, which emerged during questions, is that Beeks don't seem to know whether their end clients are making money or even what they're up to with their algorithms. Without this data I'd have thought that sizing the target market would be a challenge but I don't know for sure. Possibly a question worth putting to the CEO at Mello Derby?

The author holds none of the shares discussed in this article.

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