Competing for Capital? Absolutely.

If you don’t like getting burnt, don’t play with fire … as the saying goes.

That’s all fine and dandy, and as any 2 year-old will attest, at least there is a clear and understandable causality. Over the past year as I have commented on this site, I have been willing to accept responsibility for my commentary, even sometimes knowing that it could have serious consequences. Consequences for me, for my family, for other colleagues and organisations that I am affiliated with (and who patiently “tolerate” it). Let me tell you, when your wife picks up threat letters from ADO shareholders in your mailbox, you not only know you have hit a nerve, you suddenly realise that Western Australia has sneakily gone off and developed a functioning postal system.

There is something reasonable about action and reaction. You hit, you get hit back.

But the one reaction that I did not expect this week was the criticism:

“I’m not sure that if you’re an executive director of one company, whether you should be commentating on others in the same industry. All these biotech companies are competing for the same pools of capital.’’

This idea got a few little echoes on HotCopper:

“His blog is in fact specifically focused on companies that compete with Factor Therapeutics for essentially the same pool of investors.”

This is the stupidest, most laughable excuse for tolerating crap companies I have ever encountered. Kim Hogan is clearly not a moron (he’s richer than I am, so that’s an evidentiary starting point), but this is an absolutely ridiculous position to take because it strongly suggests that our bioscience community should be a “mediocracy” instead of a meritocracy. Surely the implication here is that with a limited pool of capital, no executives or directors should be outspoken about the variable quality of companies in our industry because it runs the risk of a few snouts not getting an equal crack at the trough? Is that it? Is Australian life sciences supposed revolve around some kind of financial communism, ferreting out a few shekels every year from the same tired investors on some kind of egalitarian basis?

Well, as an investor, that is the last thing I want to hear. As a retail investor, that should make you want to take your money out of any “spec” biotech and stick it under your mattress at night (and if you live in WA, maybe get a gun and a dog as well).

I want to say two things for the record.

The first thing is that innovation and entrepreneurship is alive and well in Australia. I’m bloody tired of attending conferences and workshops and listening to the government and our “captains of industry” rabbiting on about the “problems” in our innovation ecosystem, like the lack of effective academic technology transfer (rubbish, no worse than academia anywhere else), the lack of venture capital (who cares, globally a mostly failed asset class anyhow), the lack of a culture of risk of taking (what???? … look outside your window at the incredible communities that prosper on this wide brown land). No, what is really wrong is that Australian capital markets have simply not been able to offer investors anything better than the rate of return provided by the resources industry for the last two decades, and have therefore established no financial incentive to diversify the economy beyond digging shit out of the ground. As a result, the ONLY reason why there isn’t money gushing at biosciences and medtech in Australia is because our public companies are mostly mediocre and this, in turn, means that entrepreneurs don’t get access to the growth capital they need because the really vast and powerful pools of capital don’t fundamentally believe our bioscience industry is an investable asset class.

And they would be mostly right. Make our public companies competitive and everything changes – top down.

The second thing I want to say for the record relates to my role as an Executive Director of Factor Therapeutics (née Tissue Therapies, ASX : TIS). I deliberately don’t talk about the company or its competitors (and by competitors, I don’t mean the notional “gene pool”, I mean actual commercial competitors). Unfortunately, there is also no doubt that it is virtually impossible to separate personal and professional reputational risk under these circumstances. But I will tell you, being a director of an ASX-listed biotech company – especially the one with the dubious honour of the largest market cap pummeling of 2015 (according to the esteemed Biotech Daily) – has been one of the most humbling experiences of my life. Why? Because until you have had literally dozens of “Mum and Dad” investors call you up to ask when the stock price is going to be “back to normal” because they have school fees to pay and mortgages to cover, you haven’t really thought about what it means to finance an ASX-listed biotech company. What a gift. What an amazing opportunity to have an engaged and supporting populous dip into their savings and super funds to finance Australian innovation – not just because it affords the potential of a massive payback, but because it’s actually good for our economy and the future of our healthcare system.

Besides, who doesn’t know someone with dementia? Who hasn’t been touched by cancer?

Yes, CEOs, directors, investors, entrepreneurs should ALL be commentating on the state of our industry. We don’t have sophisticated buy-side / retail analysts and commentators informing the markets like in the US, so we therefore need to take an autoregulatory approach. For sure, our industry associations are toothless when it comes to reform because their coffers are dependent on a cadre of docile and satisfied members. Don’t rock the boat here, please. The truth is, for all you retail punters out there (sorry, because biotech is a punt in this country), behind closed doors we all sit together as industry insiders and mock whatever pathetic company just managed to squeeze out another puny raise, or buy its web designer, or whose CEO tested drugs on himself, or watch a crap company buy another crap company in order to try and sell a less crap story, or test it “nth” peptide in some pointless lab experiment. We’ve even had the perverse pleasure of watching some of our “finest” public biotech offerings get absolutely sodomised by US investors.

Don’t you think it’s time to take that conversation out behind closed doors and at least attempt to separate the wheat from the chaff? I do. And for the benefit of retail investors I absolutely want to make it clear that there are a good, solid core group of executives, leaders, innovators and investors in this country that absolutely do want to compete for your capital. They want your money because they (defensibly) believe their investment thesis is going to give a superior return, not because a rights issue is going to keep the gravy train going for another year or two until larger shareholdings can be dissipated into the retail ether. Maybe it’s a couple of decades of working outside of Australia that frames my mentality, but my answer to Kim Hogan is definitively “yes”.

Yes. YES. Y E S.

I do want our best executives to step on every lousy company out there in the quest for capital, because capital should be fought for, valiantly protected and respectfully deployed. Access to capital should never be treated as the mere artifice of being a public company.

And anyhow, who should know better than “Us”?


Image credit : The phenomenal Ryan McGuire. As always, you inspired me when I needed inspiration.

18 thoughts on “Competing for Capital? Absolutely.

  1. Spot on. The lack of good commentary is glaring in Australia. As for the few companies covered by research houses, the quality is laughable – mostly just regurgitating company announcements and presentations, with no critical analysis. I’m not exaggerating when I say your blog has some of the most insightful analysis of anything out there in what is a very difficult sector to cover.

    Liked by 1 person

    • Hi JM,

      Actually, I think that most of the better quality brokerages in Australia do an adequate job of producing “acceptable” sell-side research content. At the end of the day, they have nothing to really gain if they develop a reputation for selling garbage to their client base. I’m not saying that there aren’t notable exceptions to this but the folks I know at Pattersons, Canaccord, Lodge, Morgans, Bell Potter, etc. (and handful of others) who follow biotech make a very solid (positive) contribution to the industry, with David Stanton/Lara Lyons’ (CLSA) coverage of our “blue chip” health/life science companies probably as close as we get to a US-style brief.

      I don’t feel that all “purchased” research is bad either – but we have seen the emergence of some pretty woeful gun-for-hire outfits that really make me scratch my head.

      Thanks for reading.

      Like

  2. Chris, I agree with what you say, and frankly, I don’t see what the problem is provided it is in the open, with possibly the addition that you refrain from commenting on direct competitors (mostly for aesthetics rather than ethics).

    Like

    • Hi Miguel,

      I agree – although I do think it is ethics as well. The loudest voice shouldn’t win, and so if there is no acceptable forum for rebuttal then commentary shouldn’t be allowed in the first place. In truth, I think good quality CEOs shouldn’t feel compelled to respond to “criticism” in public forums, they should be focused on doing their job.

      Thanks for reading.

      Like

  3. Surely if there is competition for funding/capital, these conversations occur behind closed doors with the funders? Probably less politely; I’m sure companies throw daggers at their competitors all the time. Putting the discussion in the open would (I am guessing) not change the way things work – unless capital providers (non retail investors) only take note of HC forums and blogs and don’t actually do any analysis before handing over their money.

    Like

    • Dear Qwerty,

      I sort of see your point, but I think the difference with the ASX (as I have been learning) is that the retail investor doesn’t get the benefit of that perspective and that particular class of investor is a far more dominant “actor” than the institutional investor for many of these companies – at least in comparison with NASDAQ. Privately, a number of CEOs have admitted to me that taking a competitive stance, even in private, hasn’t typically been viewed as the “done thing”. Could this be a case of where Australia’s enforced egalitariansm – a kind of “inverse tall poppy” syndrome – has effect?

      Thanks for reading.

      Liked by 1 person

  4. Very passionately and well argued, Chris.

    In some ways, this dilemma you discuss about the reluctance of people to speak out against bad practice in the biotech sector reminds me of Wilberforce’s plea for Britain to end slavery. Most of the politicians he addressed in those impassioned addresses agreed in their heart of hearts that slavery was wrong. But even so, they couldn’t bring themselves to give it up because slavery was so profitable for the nation and teh people who voted for them.

    It’s always the old battle between what is the right thing to do and what makes money. But with a little across-the-board lifting of biotech company practice, surely greater success will follow, bringing with it greater financial and health benefits for all.

    Maybe you could pull together a group of respected industry leaders and draw up a simple code of conduct and invite listed biotech companies to sign “the pledge”!

    Like

  5. Damn right. As a left field, though currently topical analogy and similar to Anne’s comments on Wilberforce, this is no different to the current dialog about Stan Grant’s IQ2 speech which recently went viral and has precipitated many followup thoughts from indigenous commentators noting that Stan’s words and sentiments had all been said many times before and on those prior occasions people had thought each was a watershed moment of its day, that real and effective change was imminent. The passage of time has showed that that often didn’t happen, that each new watershed moment was declared to be such because the last didn’t live up to presumed expectations. Perhaps the same will happen with Stan’s speech – perhaps not.

    I’m making no point about indigenous experiences here, rather that in the face of both vested interests and even just complacency, the voices that oppose the status quo have to shout long, loud and hard, and persist with resilience. And the few brave souls that start the effort need the support of every moderate out there that quietly agrees (and yes that’s me too .. so this is a dig at myself 🙂 Chris is a warrior and he’s right to say that “Yes, CEOs, directors, investors, entrepreneurs should ALL be commentating on the state of our industry.” Point taken.

    All strength to you Chris.

    Liked by 1 person

  6. HI Chris – a well argued piece and for my money you are spot on. You’ve declared your own interest and refrained from commenting on direct competitors, thereby avoiding any conflict of interest or more importantly any perception of a conflict. Everybody knows where you are coming from and one has the more than sneaking suspicion that the accusation is nothing but a slightly more subtle attempt at bullying you into silence than the previous one.
    Keep it up!

    Like

  7. Chris,
    This is a quandary.
    As much as I love and appreciate the science around the comments and analysis of the biotechs you choose to mention (as I have noted in the past), my issue is the two Chris’ – one as a senior executive with TIS and the other as a market commentator.
    If you continue to bring the industry up to scratch and I hope you will do so, then my view is that your tenure with TIS is not compatible. The risk is to TIS and they might get dragged into the existing problems. If I was the Chairman of TIS I would be looking to you to make a choice between your two careers.

    It is a tough one but that is where my thoughts lie.
    Best Wishes

    Like

    • Hi Peter,

      You know I have always respected your opinion and I have always welcomed fair and reasoned criticism in this forum.

      1) In an efficient market, I would agree with you. Mainly because there would be no need for commentary. If we had an effective disclosure regime, if we had an independent analyst base, if we had an institutionally driven investment landscape (i.e diligence on behalf of retail) then none of this would matter. But we don’t. So where does that leave us?

      2) I can tell you that my board has struggled with this situation – but they have also known of my commentary from the outset. There certainly is a clear boundary condition, and that is using (abusing) the soap box to either a) spruik stocks that I have a vested interest in (fiduciary or otherwise) or b) beat down stocks that represent a commercial impediment to success because they are competitive. I think that either scenario is not acceptable and well out of order.

      3) Somewhat in line with your concern, I’ve come to the conclusion that the only way to balance a public company executive/board career with my personal desire to be part of reforming the industry – for everyone’s benefit – is to take a more polished approach with this forum. I will elaborate more on this shortly.

      4) Just remember, there is a glaring double standard of “fitness for purpose”. We have several examples of CEOs of companies who are lauded by shareholders for their performance, yet are directors of other companies undergoing major disasters, litigation and shareholder value destruction without any apparent personal or corporate brand cross-contamination. Why should I then be upheld to a different duality of standard?

      Anyhow, these are my personal thoughts and not representative of any organisations to which I may have an affiliation. Also, to be clear, I fully agree with your opening statement. It is a quandry. But it’s not just your quandry, it’s mine too. I hope that my solution (as soon as it becomes apparent) is an acceptable one for all.

      Thanks for reading.

      Like

      • I disagree that there is a quandary here or that your role as biotech commentator and Director are incompatible. There seems to be a general hand-wringing angst about “conflict of interest” as if COI was in some way interchangeable with impropriety. That is simply not the case of course, so long as the potential for COI is declared and managed appropriately. Personally I have no problem with your commentary on the biotech industry, and would have no problem even if you were to comment on TIS or its competitors. Since you have declared your potential for COI,your readers can judge said commentary through that lens. I don’t think anyone was concerned with Tony Abbott’s conflict of interest in marriage equality because he has a gay sister.

        Like

  8. All strength to your arm.
    I learnt my lessons long ago from the grandpa of dodgy Australian biotechs: Biota.
    Great science, poor management and Board.
    In fact, it had the kind of compound that should have brought billions to its shareholders and to our country’s taxation wealth, and great jobs for our young scientists. Instead, nada.
    I even went feral/activist and stood for Board election. The part I didn’t (don’t) understand was (is) how fund managers play their cards in the face of such bad behaviour. I thought they would demand the kind of accountability that a retail investor can’t. Alas no.
    In the meantime, sunshine is a good detergent.

    Like

    • My experience, ‘M’ is that fund managers are just as unhappy but most of the time the market cap of these companies is such that if you are a multi-billion dollar fund, the time and effort to push around a $50m market cap company isn’t worth it. That’s what portfolio risk management is for.

      I’m grateful that you demonstrated activism – indeed, I have seen much more of it lately particularly around compensation, which is good. The Biota story is a stunning example of everything can go wrong in this sector.

      Thanks for reading.

      Like

  9. Hi Chris,
    I see critiques of your columns (as presenting some sort of conflict-of-interest) as a form of ad hominum attack. You are careful to point out where commentary might come close to the bone and frankly, the Australian biotech sector needs to suck it up. Your points about the Australian biotech sector generally are spot on. Less scrutiny would leave investors (particularly retail) less informed trying to navigate the swamp of sell-side analysts pitches & company reports. And if you don’t do it, there’s not a lot of others who will. Particularly with such insight and outstanding humour (keep it up!).
    As an example, one might – as a long shot – critique your coverage of Regeneus (ASX : RGS) as having some tenuous conflict of interest with your involvement with Factor Therapeutics (Tissue Therapies, ASX : TIS). But not only would such a critique of you be a stretch, all of your commentary about Regeneus has been anything but random stone-throwing. They have been lengthy, carefully supported and researched critiques. One exception re lengthy in-depth critique might be “Mushroom Shareholders”, but only because what Regeneus were trying to spruik via Edison was such comprehensive bollocks extensive discussion and analysis was not warranted.
    You make a very salient point – this not a joke; it is people’s money. Companies asking to have it handed over to them absolutely require scrutiny. The more the better. Nothing is 100%, so a company might occasionally get an ear bashing from time to time that they don’t entirely deserve. But you are assiduous about pointing out where and when that occurs & “wearing it”. And it is up to the company to respond and refute – that’s how the real world works. Kicking tires is painful for the tire (and sometimes the foot), but is better than a(n ASX) blow out at 100 KPH.

    I would disagree on one point. Australian “tech transfer” from academic research to commercial outcomes and products is pretty miserable, relative to other countries or not. Particularly considering how innovative much of Australian technology development is. Definitely not restricted to biotech. Performance varies between institutions, but I suspect you share some frustration that promising technologies wallow and die in the academic/research institute nexus purgatory. For lack of effective commercial acumen and administration within uni/research inst. commercialization units (as well as poorly managed companies themselves of course). Technology either withers until someone elsewhere develops/runs with it, or the critical staff bail overseas to more dynamic and bigger markets (ones where critiques are not considered out of line).
    My observation is most of the more successful Australian “tech transfer” companies in terms of raising capital & bringing actual product to market (if not their share price lifted) is underpinned by critical R&D staff (eventually) jumping from their organization’s employ – after pulling their hair out being boat-anchored by dawdling (quasi)governmental tech transfer admin. If the technology is to go anywhere commercial they often (and at great effort) drag the technology “out” with them – and then have to deal with the aforementioned bumbling ball-and-chain brigade tripping them up at intervals. Not unique to Australia, but from my observation a major roadblock to commercialization of Australian technologies (along with paltry investment capital mkt).
    Your comment above regarding an “inverse tall poppy syndrome” is also quite accurate. There’s absolutely a relative reluctance of ASX companies to take hard-headed competitive positions compared to the US. Just “not the done thing at the (Australian) club” I guess.

    Anyway, keep up the excellent work Christopher….and don’t let the bas*ards hold you down.

    Like

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