00:00Crystal, let me start with you and have you kind of set things up here.
00:03What are the activist investors who are targeting this sector and specifically, what do they want?
00:09So they are identifying a very specific set of criteria.
00:12So they're seeing companies, biotech companies specifically, that are listed.
00:17They have a lot of cash, but the cash is smaller than the market cap.
00:21So in other words, it's a negative enterprise value.
00:24And that is to say that these companies also have very little prospect of developing a successful drug.
00:30And the investors, not just one, but like a group of investors from various places are saying,
00:35these companies are better off returning this cash to shareholders instead of keep on trying in the market,
00:42burn the cash and try to develop that drug when you don't have a lot of prospect.
00:46So, Elizabeth, in looking at the companies that these activist investors are targeting,
00:51they're looking mainly at the cash levels and the share price.
00:54Which one takes precedence?
00:55Well, if you take a step back, activist investors are really looking for a value proposition.
01:02So when you see a lot of cash on the books, that's an easy quantifiable asset that is more than what the trading price is.
01:11But activists need to know that they can unlock that value.
01:14There needs a pathway in order to make sure that if I invest low, I'm actually going to make some money on my investment.
01:21When we talk about activist investors targeting this particular sector,
01:25what type of activist investors are finding these biotech stocks most attractive?
01:29I mean, is it the big guys like Elliott or is it smaller players?
01:32I think it's a mix.
01:35You're probably not going to attract a lot of Elliott unless it's a big mega cap company that is in the news a lot.
01:42But, look, activism is growing as such an attractive investment strategy that you're getting new players in constantly.
01:50But with biotech companies, you really do need to have sophistication in understanding the business.
01:56So if you're looking at a target and you're saying, what's the best value to get that?
02:01What's the best strategy to get that value unlocked?
02:04Is it a sale?
02:05Well, you better know who the players are in the industry to buy those assets.
02:10If it's a quick liquidation, you don't need as much sophistication.
02:13But generally speaking, you need to have a little bit of understanding on biotech stocks.
02:17OK, so there's a specialization that's required here, Crystal.
02:20Does that mean you're seeing other more general activist investors also eyeing the space,
02:24thinking that there's room for them to come in?
02:26So what we're seeing are mostly small players.
02:29And these players tend to focus on health care.
02:31Health care, biotech itself is a very specific and knowledge intensive sector.
02:36And we're seeing actually new funds raised just to target the strategy.
02:41It's interesting because, you know, it's one of those strategies that you can sort of apply en masse on multiple different companies,
02:47but essentially the same idea.
02:50But so far, we're not seeing the big guys, the Elliott, the starboard going after this.
02:55So, Elizabeth, success begets success.
02:57If there are some early wins, that definitely always encourages other investors to look in as well
03:02and raise new funds to specifically target the sector, too.
03:05What's the difference between that, a copycat situation versus a complete pylon?
03:10It's the sophistication and knowledge of the industry because this is a very capital intensive industry, right?
03:17They're spending a lot on R&D in order to try to get to their end product.
03:22And where they don't get to that end product, you have to figure out, what do I do then?
03:27And so some of these new players, there's a time period on when they can enter, right?
03:32So you don't want to enter with a ton of cash on the books, but the company is not quite ready to stop the trials.
03:39And the cash gets depleted, and then your investment inherently goes down.
03:44So there is a time crunch on when are we going to enter, when are we going to be able to strategically engage with the company
03:51to achieve your end goal, which is unlocking that value.
03:54And where would you say we are right now in that, or it just really depends on the company that is being targeted?
03:59Exactly. It depends on the company.
04:01You have to look at the governance structure.
04:03If you've got a classified board, that makes it very difficult for an activist to come in, build a position, and change the strategy.
04:11Remember, if you don't get board control, you're probably not going to be able to do the strategy you want,
04:17liquidation, sale, and get that cash out.
04:20Crystal, when you talk to investors who are targeting this sector in particular,
04:24how much time are they ready to commit to this sector?
04:27So different players have different strategies.
04:29Some of them are just straight out saying every position that they go in, they push for liquidation.
04:34But some of them are actually allowing more time.
04:36They want to try to help the science turn around, help put their people or operators who have the knowledge
04:42or who understand the approval process to turn the science around to maybe hope for that development of that blockbuster drug.
04:51But actually, most of the time, it's not as patient.
04:54It is reminiscent of what Saba Capital has done with close-in funds, where they go in and almost immediately they're asking for the liquidation of the fund
05:03because it's trading at a discount to underlying asset values.
05:06So you can think about it like that.
05:08And obviously, some of them, if you have a board fight, if you have a proxy battle, that drags out.
05:12Right, right.
05:13And of course, you mentioned that this is a very capital-intensive business.
05:16After COVID, there was a lot of money plowed into biotech.
05:19Has that spigot completely been turned off?
05:21I don't think so.
05:22If you have a good idea, you can often fundraise on the prospect that you'll have even bigger upside.
05:28You know, there's certainly some funds that are putting more money in, not on the activist side.
05:33The activists are always looking, though, for new opportunities.
05:36Everyone's looking at the same screens.
05:38They're looking for, you know, what's my next big target?
05:42But again, there needs to be the pathway to unlocking that value.
05:45And that's really going to be, you know, the most determinative.
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