Investec and the healthcare sector: Thoughts from nick keher
1. If you were to be remembered for one achievement in your career, what would that be?
I think I am still too early in my career to be listing achievements that I would expect to be
remembered by, but thanks for thinking I would have! Looking forwards, my ultimate aim is to help
build a franchise at Investec which can punch above its weight and one which we can be
remembered by. We are on the way to achieving this, we have a solid group of corporate clients
and, with Cora now on-board, I believe we are collectively writing some of the most insightful
research in the market which is being reflected by our institutional votes.
2. What is Investec most proud of this year?
I think the Healthcare team can be proud of the fact that we retained our Number 2 rank in Extel
(as voted for by institutional clients) and winning Consort Medical as a new corporate client. For
myself, I have been pleased to see a few stock calls going my way, and I am particularly happy with
my call on BTG. On a personal note I also think the way the company helped a colleague and friend
through a truly awful and traumatic time is something everyone at Investec should be proud of.
3. What do you see as the greatest challenge facing healthcare companies today?
I think this question can be split between the type of company we are talking about (drug,
MedTech or service focus) and the stage of the company’s development. Funding is always the
main issue for those companies at an early stage from any background. Since arriving at Investec I
have consistently come across companies with great technology looking to take their product to
the next level but requiring some funding help, either to build further clinical evidence supporting
use or to commercialise. Debt is often not an option, leaving VC and equity market investors who
will have strict investment criteria, especially for non-listed assets. Thankfully, given the ‘good
news’ we have seen from listed companies like BTG and Vectura, we have begun to see more
equity investors warm to investing in earlier stage assets.
For those that have completed their product development and are seeking to commercialise their
IP the issues may appear less challenging but I think this is an inaccuracy. Commercialisation is not
a given, reimbursement pressures are increasing with payors demanding more for their money,
whilst regulators are continually focusing on selling practices. Competition remains intense given
the highly profitable returns on offer and hence it is important that companies have a clear and
actionable commercialisation strategy in place.
4. What are Investec’s goals this year?
The Investec Healthcare franchise has three goals every year;
1) To provide research material of the highest quality to institutional clients
2) To continue to support and grow our corporate client list, and to bring high quality companies
to market.
5. What do you think the outlook is for healthcare IPOs in the second half of 2014 and beyond?
We have already started to see some companies gear up in preparation for a flotation in the
second-half. How successful these and all healthcare IPOs will be is another question. We saw
many potential floats pulled during 2014 and for many different reasons. Many of those that went
early got away in a flurry of excitement but as the year progressed, IPO fatigue really began
to kick in forcing some to accept a lower valuation or consider other financing options altogether. To
put things in perspective, across the entire UK market in 2014 we have seen some 80 IPOs from January
to August so far, already raising some £14.5bn of cash from investors. These investors have a glut of
options to choose from but some were also forced to sell down existing holdings in order to participate,
raising the bar again for potential IPO’s and enforcing valuation discipline particularly on the assets that
came late to market. That said, whilst the Healthcare sector has seen some big floats during the year
the appetite for truly unique growth assets remains strong.
6. Which financing options do you believe to be viable for healthcare companies today?
Financing options depend entirely on the type of company we are talking about. Early stage life
sciences companies which are unprofitable and have no products on the market are simply unlikely
to attract normal bank debt. These companies have historically been left to seek out VC funding,
which can be expensive. However, we have seen increasing willingness from equity market
investors to look at earlier stage assets which have not yet reached commercialisation, where
previously only the specialist funds would consider research style funding (i.e. before Phase II). In
such a situation investor appetite is only for companies that have management teams that are well
known to investors and the right equity story, i.e. with something unique that is easily
commercialised, or a platform technology that is easily scalable to produce follow on assets. For
these companies then we could review the option of either pre-IPO funding or an immediate
listing. Then there are those companies with products that are ready to reach the market (either
filed or are soon to be) backed up by successful outcomes from large clinical trials. For those
companies the risk profile for an investor is much more attractive as we are talking about
commercial risk rather than clinical risk, opening up a whole raft of potential investors, even
generalists, who feel the science has been de-risked. For these companies, both the debt and
equity markets are open for use and the choice is purely dependant on what will provide the best
return for your shareholders.
7. What three sector trends are investors most excited about at the moment?
a) Immunotherapies and the anti-PDL1 antibodies in particular – It is not just investors who are
excited about immunotherapies and how they could help combat severe illnesses such as cancer,
but this is certainly the hottest topic at present. The question is how best to play into this exciting
area of medicine, potentially through the developer themselves or those helping to bring the drugs
to market.
b) Obamacare – The Affordable Care Act will provide c50m Americans with healthcare coverage
who did not have it before whilst aiming to provide a $1 trillion saving to the US Healthcare budget
over twenty years. This is driving greater efficiencies and enforcing higher quality standards. Whilst
many would see this as a cost-saving exercise that could hurt the profitability of UK Healthcare
companies selling into the US, others are looking for those opportunities that can benefit from the
changing market landscape.
c) Recovery stories – Investors like a bargain and recovery stories often provide the best bargains
on the market. Plus, given they are listed assets, investors are often already well versed on what
the business does and the management teams involved, which provides greater comfort.
8. What are the things which make them most nervous?
a) The story/strategy changing – Fund managers follow a strict investment mantra when they buy
shares in a company, with the management team’s strategy being near top of the list. If this
strategy changes and the reasons are not well communicated, then we have a problem.
b) Investments that have a binary risk profile or over-reliance on a single product/customer- The
binary nature of the life sciences space is often likened with the oil E&P sector, it either wins big or
it fails to win at all. This makes investors nervous and often means they try to avoid the space until
the ‘science’ risk is minimised and we are now focused upon commercialisation. In addition, those
companies which have only one asset in their portfolio or are selling into a single niche will make
investors nervous.
c) Poor communication – Good communication is vital. Investors are rationale, people and whilst
the points below shouldn’t be a reason to make them nervous on their own, this is certainly
something that can be helped with a clear communication strategy.
i. Ability to manage market expectations – This is a simple case of under-promising and overdelivering, but if management teams don’t manage and at least meet market expectations then
this will be reflected in their company’s valuation.
ii. Ability to manage investor expectations on delivering returns – this fits with setting a strategy
and delivering against it. Once the good news has come through from product development and
launch, management teams often seek out the ‘next best thing’ to work on. Whilst this may be the
right option for the long term we need to consider why their investors were holding the shares in
the first place. Many may have been holding stock for very different reasons – often expecting the
current good news to first translate into earnings growth and return of cash to shareholders, before
future investment.
9. What healthcare news in the last year has surprised you most?
I suppose it shouldn’t be a surprise given the financial benefits, but it is the wave of tax inversiondriven acquisitions over the past year.
10. If you have an evening to spare, which city do you most enjoy visiting on business?
It’s either New York or Chicago. There is so much to do and so much to see that you can easily fill
your spare nights and weekends.