The transcript from this week’s, MiB: Vincent Aita of Cutter Capital on the DNA of Biotech Investing, is below.
You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here.
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This is Masters in business with Barry Ritholtz on Bloomberg Radio.
Barry Ritholtz: This week on the podcast, I have another extra spectral guest. I met Vince Aita at a panel of emerging managers earlier this year, and I thought the work he did and his background was really so unusual and so fascinating he would make for a great guest, and he absolutely did. He comes out of a graduate background at Columbia studying genomics and biotech and decides I don’t wanna be a research scientist the rest of my life. I want to see how I can apply this. Ends up moving to the buy side, eventually goes to Millennium, and then Citadel Capital before launching his own firm, cutter Capital. You’ll, you’ll be amused when you hear what, what that name is based on. Really interesting. They run a market neutral factor, neutral book of biotech, of US and European stocks. Just a fascinating process and a fascinating way to think about the massive changes that are taking place in a space that not only has the potential for explosive growth, but the ability to change your life, the quality of life, and the length of your life. Really amazing, fascinating stuff. I found this conversation to be fascinating, and I think you will also, with no further ado, my discussion with Cutter Capitals Vince Aita.
Vince Aita: Barry, thanks a lot for the invitation. I’m looking forward to it.
Barry Ritholtz: Well, yeah, same here. We, we had you on a panel back in June of emerging managers, and I thought what you did is so fascinating and you have such an interesting background. Let’s start with that. You’re a postdoctoral fellowship candidate at Columbia in the early two thousands at the Department of Genetics and Development. What was the career plan? Were you, were you gonna be a doctor?
Vince Aita: I had thought originally that I was gonna be an academic scientist. I did PhD work at the Columbia Genome Center at a time where we had one of the chromosomes in the genome project. And so we were involved in that first push to sequence the genome. And I had thought that, you know, academics was what gonna carry me forward. My, my individual work was related to the study of actually evolution on a molecular level. There’s a whole rabbit hole that you could go down, you know, kind of chasing that. But suffice to say that I think that Darwin, in his explanation of evolution does not necessarily fully describe the phenomenon that you see on a molecular genetic level. And we were much more in the camp of, I was much more in the camp of following moto kimura’s neutral theory of evolution, which is a rabbit hole if you could go down yourself.
Barry Ritholtz: So, so let me, let me make sure I’m following you. Yeah. In broad strokes, adaptability, survival of the fittest more or less, right? On a species by species level, but when you get down to mitochondria and what power cells and everything at that level, or are you going even further?
Vince Aita: We’re saying, you know, the, the idea is that Darwin was right on a more obvious phenotypic level for some of the things that are very easy to track. But if you’re talking about the actual fuel of evolution, what drive it on a molecular genetic level, it’s much more driven by mutations that really don’t have any impact on fitness and random genetic drift. And so Kimora,
Barry Ritholtz: And there’s a ton of that out there. I mean, you think about all the little things, we’re still trying to figure out what the appendix does at a cellular or, or even smaller molecular level. Molecular level that, that sounds really fascinating.
Vince Aita: That’s, so that was, you know, an initial career path that I was, you know, kind of really intrigued to study. Obviously I still excited to talk about that type of stuff, but I realized that a certain point that science was not gonna be the path for me. It involved further and further specialization in doing work in centers of excellence that are not necessarily geographically where do you’d wanna spend your life. And so I wound up choosing New York, and so then the thought was, if I wasn’t going to be academic, where could I take the knowledge base that I had developed and find a passion to apply it in a different direction?
00:04:41 [Speaker Changed] So, theater, media, real estate, there’s a lot of things.
00:04:44 [Speaker Changed] Sure, absolutely. But, you know, but you
00:04:46 [Speaker Changed] Said finance.
00:04:47 [Speaker Changed] I came to the conclusion that the knowledge base I had, that finance provided an opportunity for me. For me personally, I am a lifelong learner. And one of the things in finance that’s fascinating to me that keeps me going even till today, is that you never stop learning. You never stop trying to become more of an expert at what you’re doing, but just more experience learning from the world. And it’s, and it’s a constant, constant process. And that’s fascinating to me.
00:05:15 [Speaker Changed] I’m totally with you. Autodidacts is wildly underrated, but walk me through this. So healthcare is your focus, your entire career. Describe what that transition is like going from, Hey, I, I’m literally in a Columbia grad school fellowship to, I wanna move into the world of finance. How, how does that happen? I did the same thing. I was practicing attorney miserable and said, let’s see if I can transition to something else. So I’m always intrigued to hear other people’s stories of
00:05:47 [Speaker Changed] This. Sure, absolutely. For me, I thought the knowledge base that I developed, the science itself was evolving so rapidly, you know, know the unlocking of the sequencing of the genome was going to provide this, you know, the thought was gonna be a new golden era of drug development, and it might’ve taken 20 years to come, but the genetic medicines that are being developed now, and the whole approach to medicine today is much more based on what I describe as biology first, as opposed to chemistry first, where previous generations of drugs were really all oral pills that were chemical compounds, that by serendipity they found out a way it might impact the disease. Now it’s much more biology driven. And so at that time with the background I had, I thought, you know, the world of finance might appreciate the domain expertise I had coming out of, coming out of a scientific background, and I could learn the finance side of it. So I went straight to the buy side at that point. So
00:06:48 [Speaker Changed] No MBA no mba. You don’t go for a doctorate in economics. Who, who’d you, who’d you first share your expertise with on the buy side?
00:06:57 [Speaker Changed] Well, like in many things in life, there’s serendipity to finding opportunities. And one of the professors at Columbia who was a mentor of mine and, and I had worked with Izzy Edelman, his son, Joe Edelman, founded Perceptive, which is a firm that has been tremendously successful as, as healthcare investors. And so when I was trying to network and find people in the world of finance, I spoke to Izzy about it and he said, why don’t you talk to my son Joe? And then conversation with Joe, which he was kind enough to give me a portion of his time, opened the door to other people to talk to, you know, inroads into the industry and then just knocking on doors found an opportunity for me.
00:07:40 [Speaker Changed] Huh, that’s really interesting. So what was your first gig in the world of investing?
00:07:45 [Speaker Changed] My first gig was at Paramount Capital Asset Management. Paramount was a small boutique biotech firm that had investments in both private equity side and public. They were crossover investors in, in the early days of doing that.
00:08:00 [Speaker Changed] Is that, that’s not Deb Solomon,
00:08:02 [Speaker Changed] That was, does that ring a bell? Lindsay? Lindsay Rosenwald was the founder. Okay. There. Gotcha. And actually, interestingly, Joe was director of research there for a number of years before I moved on to start Perceptive. So,
00:08:11 [Speaker Changed] So, so you began as what a junior analyst?
00:08:12 [Speaker Changed] So I became, as a, I came in as a junior analyst. My role was just to like dig through business plans, dig through drug development, and try to handicap what would work, but equally as interestingly, what’s gonna fail. And I got a lot of reps at seeing different attempts at drug development, rinse and repeat over a number of years to try to get those initial, you know, kind of training on how the drug development process kind of really works and how that interacts with the equity markets. Huh.
00:08:41 [Speaker Changed] Really, really interesting. So that’s your first gig. How long did you stay there?
00:08:47 [Speaker Changed] I stayed there for about three years. I moved on to another firm, Kilkenny Capital, which was a Chicago based firm, also focused mainly in, in biotech, but a smaller cap healthcare investor. And that was the next three years of my career. From there, I really started to get my first inkling of process and thinking about the drug development world in a, in a probabilistic lens. I think previously or commonly, you know, you go about the investment world looking for people who are tremendously successful because they find ideas and they have maximum conviction, and those ideas play out and they look like heroes, which is terrific in those individual success cases, but is littered with failure of people who failed to find that opportunity.
00:09:36 [Speaker Changed] So a little survivorship bias in in what you actually see.
00:09:39 [Speaker Changed] Absolutely. So I thought early on in my career, and it’s been something that, you know, has carried through in my personal style to really kind of look at the world under a much more probabilistic lens where you’re just asking yourself where are there situations where the herd is thinking one thing, consensus has one level of thought, but you’ve got a good foundation to believe why reality has a much bigger percentage chance of not playing out that way.
00:10:05 [Speaker Changed] So, so let’s, let’s stay with that. I love the idea of probabilistic thinking. My prior bias with biotech, especially smaller biotech, is it’s not so much probabilistic as binary, which I guess technically is probability, but it seems either the drug works or it doesn’t. The drug has side effects, or it doesn’t, the FDA approves it or not. Like I’ve always looked at, hey, it, it’s black and white, you’re implying there is some more nuance here. There,
00:10:35 [Speaker Changed] There is. And I think what I’m trying to imply is there’s a lot of informational value that’s already held within the valuations where these equities are trading that you can calculate, you know, a sense of the implied market probability of success for an opportunity for a company. Whether it’s a product embedded within a larger company or whether it’s as you’re referring to a smaller cap, you know, kind of much more deyn credit binary event. And by looking at that information and contrasting that with, you know, an independently formulated view that you may have, if there’s an opportunity that arises between the two to play some sort of kind of arbitrage and probabilities in your, in your portfolio construction, that’s the goal of the style of investing we do. So you’re
00:11:21 [Speaker Changed] At a series of relatively smallish boutique healthcare focused shops and you start developing a sense of there’s a set of probability analyses to be had a lot of the industry or a lot of the crowd. Is it engaging in that? What led you to that approach and then where did that approach take you?
00:11:42 [Speaker Changed] Well, I think where the second part of it is kind of easy to, to kind of start off with here, where it took me was the idea that there’s, you know, mispricings to be found on either long or short opportunities depending on where, you know, kind of market view is on, on a lot of these names. For my own personal style and satisfaction, I didn’t want to have part of the performance that I was measured against, dictated by what the market did. And so I just kind of almost intuitively gravitated towards a market neutral style of investing where I thought any year, year in, year out, regardless of what macroeconomic conditions are, regardless of what the stock market does, if I’m successful at trying to identify idiosyncratic stock opportunities, we could generate returns irrespective of market conditions. And so that was very appealing to me. And so that’s what had me pivot back in 2007 to the first market neutral hedge fund that I worked at. And I’ve been in market neutral investing ever since. Let’s
00:12:48 [Speaker Changed] Talk a little bit about the next phase of your career. After spending time at, at various healthcare boutiques, you joined Millennium in 2011, they are a giant and highly regarded hedge funds. You join as an analyst. Tell us what you did over your three years at Millennium. Sure.
00:13:07 [Speaker Changed] Millennium was intriguing as an opportunity for me because I had been through the earlier part of my career at a few, as you mentioned, smaller hedge funds. And I wanted to have an experience of what was already at that time. This is 20 10, 20 11, we’re talking about the emergence of a few of these larger hedge funds as really centers of excellence as really kind of these multi-strat that were already starting to dominate the landscape. And I wanted to experience, you know, what it is about those places that allow them to kind of consistently outperform. And so Millennium to me was another opportunity for me to expand out of the small cap biotech universe that I had been predominantly involved with for the first, you know, call it portion of my career and move into broader healthcare. So it was my first time covering European healthcare. I moved into larger cap pharma, generic spec pharma, the whole landscape of drug development. It really opened up the opportunity set for me.
00:14:09 [Speaker Changed] Let’s talk about some of the other sectors you focus on. You start with small cap pharma or small cap biotech, get more granular. Where do you go from there? Sure. At Millennium. So
00:14:21 [Speaker Changed] What, what’s really interesting, I started off, as I kind of mentioned before, focused on trying to come up with identification of opportunities in biotech where I felt like risk was mispriced at its heart. That’s what we’re talking about here from a probabilistic lens of asking, you know, what the market is pricing into an equity for an event versus what I think the view is of that particular event. What’s really interesting when you get into the larger, more complicated companies that have robust operating businesses, moving into big pharma, moving into especially pharma companies, investors at the same time have to hold views of the cash flow generative potential of the operating business and the scientific complexity of the pipeline. And depending where they are in the narrative, there’s oftentimes one part of that story might prevail over the other part of the story and lead to a skew in the pricing of that other aspect of the business.
00:15:17 And so while the moves are maybe not as flashy as what you’ll see in small cap biotech, when a piece of news comes out on stocks up a hundred percent, they’re definitely idiosyncratic moves in nature and often have a bit of an asymmetry to them in terms of upside versus downside when that event happens. And so there’s a lot of fuel for investment opportunities throughout the, you know, kind of story arc of larger companies in shorter time intervals. And that’s really kind of what we rinse and repeat and did a lot of when we were at Millennium. So
00:15:49 [Speaker Changed] All the science is fascinating. You’re doing all this at Millennium, which is really known as a very hard charging trading shop. I’m curious, your time at Millennium, you’re there for a couple of years. Do you start to get the bug? Do you start saying to yourself, Hey, I can manage a portfolio, I want to be involved, long story, I wanna start trading some of my high conviction names. How long does it take before you’re an analyst at Millennium, before you say, I really need to start managing money?
00:16:20 [Speaker Changed] Well, I mean that is, that was definitely a big part of the motivation for coming, for going in there and also for eventually for leaving, for going in there, I thought to be a well- rounded investor, I needed to have a wider aperture than just covering smaller cap biotech names. So I moved there to expand my coverage universe. After a few years of following that world, I really felt like I was ready to take the next step and to find an opportunity where I would be given that opportunity to prove myself and start to manage money.
00:16:51 [Speaker Changed] Huh, really interesting. And so you depart Millennium to go to Surveyor Capital, part of investing Giant Citadel. Tell us what that was like.
00:17:00 [Speaker Changed] So again, you know, serendipity plays an interesting role in this. I had a colleague of mine from My Health Core Days, Jeff Green, who was brought on to start a new team at Citadel. And I knew that Citadel has, and I could tell you from having been there for seven years, it’s absolutely true. You know, a culture that tries for an organization that large to really lean into being a meritocracy to evaluate the performance of analysts at various steps of their career and to promote internally people who are strong performers. And so I thought is a bet on myself to go there that if I could be, you know, just as strong as analyst as I could be for the first year or two, that there would be an opportunity that opened up to grow there. And in fact, that’s exactly how it played out. I was an analyst there for two years and then when a opportunity opened up for an internal promotion to portfolio manager in the beginning of 2017, they, they promoted me to that seat.
00:17:56 [Speaker Changed] So talk to us about what that transition was like from being almost, you know, I think of analysts as almost academic researchers to actually running money, having real capital at risk. Tell us about the transition and, and what were some of the, you know, highlights and pitfalls.
00:18:14 [Speaker Changed] Sure. Well, again, one of the things I’d fall back on in terms of the culture of Citadel and how they develop people is at every step of the way, when you’re on your journey, when you’re an associate, they’re training you to do the analyst job. When you’re an analyst, they’re training you to do the portfolio manager’s job. So as an analyst there for a year of my tenure, I actually had a carve out of a smaller sub-sector book that I was able to manage on my own under the, you know, watchful supervision of my portfolio manager. But I had the opportunity to start taking risks on my own in step with that. Citadel has, you know, reputational is pretty well known, a risk framework that I think is probably second to none in terms of how they put guidance in place for you to understand the various risks your portfolio carries. And if you lean into learning that kind of system of investing, it really helps in the transition from going to analysts to portfolio manager. I’m
00:19:11 [Speaker Changed] Really intrigued by the concept at some of the big pharma, the big pharmaceutical companies and their pipeline. How does anyone have any clarity to the dozens of compounds and endless potential drugs that a Pfizer or you know, and Johnson and Johnson or any of the big shops are working on? It’s gotta be fairly difficult to, to look into the future. Must la much less what’s going on right now. Well, what’s
00:19:40 [Speaker Changed] Actually really interesting about healthcare as a sector of the market is I would argue you have more visibility and a longer time period to evaluate the future cash flow generative drivers of those businesses than any other sector. I mean, sure Apple every year might give you a look at what they’re launching that year, but you don’t really have a couple years look into their r and d, right? You really don’t have look into r and d for, you know, utilities companies or you know, what other, whatever retailers
00:20:11 [Speaker Changed] For sure, energy
00:20:12 [Speaker Changed] Companies or consumers, what they’re working on. But the nature of the drug development process mandates that the clinical research for these drugs at various phases of development, starting when the drug is first put into man, gets published and gets presented at medical conferences and the, even the conduct of future studies is publicly posted. So you’re able to then have a lot of information that could help you formulate a view on the probabilities of success or failure and the ultimate end user markets for those products that you can’t really have in other sectors. And it also provides a big opportunity for investors to misprice those assets because they’re taking, you know, kind of behaviorally driven bets on things they love, things they hate. And since you’re years away from ultimately being proven right or wrong, there are a lot of ups and downs along the way. So it’s a, it’s a really fascinating sub-sector to be delving into from a, from an event driven perspective.
00:21:14 [Speaker Changed] Hmm. Really interesting gi given your background at Columbia, I’m kind of intrigued by what’s been going on with genomics and the concept of custom tailoring a sort of set of treatments to your specific genome and whatever specific type of issue is ailing you. How do you have any visibility down that route? It seems like it’s such an immense opportunity set. Obviously I’m not in that space, but I, I can’t wrap my head around just the vast opportunities that have to be coming in that world. Well,
00:21:49 [Speaker Changed] What’s amazing now is we’re finally seeing the realization 20, 30 years later of a lot of the work that was done at the turn of the century to provide those insights into the genetic underpinnings of a lot of human disease. And today, more and more we’re no longer seeing diseases defined by what tissue that they affect or what, you know, organ system is involved, but they’re more and more being defined by the genetic underpinnings of those diseases. Even in cancer these days, before you used to have two types of lung cancer. It was either small cell or non-small cell, and maybe you got granular enough to ask if it was squamous or adenocarcinoma in histology. Today we’re asking, you know, are you alk positive? Are you EEG FR positive? You know, are you Ross positive meaning
00:22:40 [Speaker Changed] Not specific genetic
00:22:41 [Speaker Changed] Component? Yes. And that’s allowing for the creation of much more precise targeted therapies that are not only delivering better efficacy than your former mainly chemistry driven right medicines, but also having a better side effect profile because they’re more targeted to what’s wrong with the disease. So it is, it is tremendously fascinating that this is going on. It continues to emerge. It’s starting to move into cardiology, it’s starting to move into other areas of medicine. The medicines themselves are becoming more genetic in nature, whether we’re starting to utilize, I mean even coming outta the pandemic, an mRNA based therapeutics, but you’re starting to use, you know, target antibody therapeutics. Gene therapy is being approved now at rates that we’d never seen previously, even if they’re for niche diseases. It’s a proof of concept that that’s all on the come. So it’s very exciting time in healthcare for innovation. So, so I
00:23:32 [Speaker Changed] Wanna make sure I’m hearing this correctly from you ’cause it’s really so fascinating. It was chemistry for a long time. Hey, this chemical seems to have this reaction in the body and maybe it helps this disease. Then it becomes biology, which is a little more focused and then ultimately down to the genomic level.
00:23:51 [Speaker Changed] Yeah. Genetic medicines being the next, being the next wave of, of innovation in healthcare
00:23:55 [Speaker Changed] And, and what does this mean for managing future diseases? What does this mean for fighting cancer and what does this mean for longevity?
00:24:04 [Speaker Changed] Longevity is, is still an open question ’cause of so many different things you’ve gotta tackle all altogether. And that that pulls into it a lot of other lifestyle related and more, you know, kind of metabolically related issues. And so that’s almost delving more into the world of nutrition and health. So it’s, it’s hard to go down that route.
00:24:22 [Speaker Changed] Wait, I’m, I’m waiting for the little nano robots that are gonna take care of my cholesterol or whatever. I
00:24:28 [Speaker Changed] Mean, shooting them with lasers, right?
00:24:30 [Speaker Changed] That’s right. Even better. Oh, that’s, that’s phase two, that’s science fiction. Yeah, I’m, I’m right there with you. That’s,
00:24:35 [Speaker Changed] Yeah, I think that’s a little bit far field, but in terms of healthcare innovations impact near term it’s driven more so by taking what was previously viewed as, you know, kind of, kind of very loosely defined conditions and narrowing the definitions of them based on the underlying biology of that disease in a tighter, more well-defined, biologic defined subgroup of patients and then developing therapeutics that target that. And that’s, that’s where we’re headed and it’s, it’s fascinating to be, you know, a witness to that and get to invest along the way.
00:25:11 [Speaker Changed] So, so we’ve been fighting the war on cancer since Nixon was president. It sounds like the tide is really beginning to turn, I know survival rates have gone way up for very specific types of cancer and I know things that used to be fatal are now very treatable. Where are we in this process?
00:25:32 [Speaker Changed] I think it’s going to be very variable based on the underlying type of cancer because some of ’em are still much, much more amenable to intervention than others. So for example, pancreatic cancer, which is slow to really kind of have improved outcomes on Right. It’s really because the ability to diagnose it early is so difficult, right? Right. Ovarian another one where it’s so difficult to diagnose early, whereas cancers that kind of show up a little bit more readily, breast cancer, a lot of different forms of blood cancers, we’ve had much more of a headstart in trying to develop new therapeutics for, and so I think, you know, CLL might be on the verge of chronic lymphocytic leukemia might be on the verge of becoming one of the first diseases that’s no longer, you know, actuarily different in your death prognosis than an age matched unaffected person. So in other words, you’re no longer dying of that disease
00:26:29 [Speaker Changed] And that’s like lymphoma and other related.
00:26:31 [Speaker Changed] And so this is starting to happen where you’re seeing, you know, survival rates pushed out so far that it’s converting them into livable diagnoses.
00:26:41 [Speaker Changed] So let’s talk a little bit about launching Cutter Capital. Right. In November, 2022, not a bad time to launch post pandemic stocks were had just bottomed after an awful 2022. How fortunate was that? Was that timing? Well,
00:26:59 [Speaker Changed] I, I would like to try to take more credit for the timing than maybe I can. A lot of it was dictated by the timing of my decision to leave Citadel. But at the same point, you know, when I left Citadel, I hadn’t escaped my attention that we were in the midst of a significant regime change in the market. And it’s not a bad time to c it out if you’re gonna pick a time to Citadel. Yeah.
00:27:19 [Speaker Changed] To say the very least, was it a challenge raising money during 2022? That was a pretty rough bear market even though it only lasted, you know, less than a year.
00:27:28 [Speaker Changed] So I think it’s hard to necessarily speak for, you know, kind of the broader fundraising environment at large. I think for myself, I had the benefit of an experience set that was very attractive to the market on the heels of significant outperformance that Citadel and Millennium were having relative to other peers at that time. I am willing to admit that pedigree probably helped start the pro at least open the doors. Sure. And then the conversation I is what follows, but you know, that that allowed to have the initial conversations get started. So I think I probably benefited from their performance in retrospect.
00:28:11 [Speaker Changed] So speaking broadly about the healthcare industry, a lot of interesting things going on coming out of Covid. You, you mentioned mRNA. Tell us a little bit about what you were seeing in that space at the time as the pandemic was kind of lifting.
00:28:27 [Speaker Changed] Well, I think one of the unique attributes of, of healthcare among the others that we’ve kind of discussed here is that there’s never want of news flow. And so, you know, the strategy that I’d been running for a while previously and looked to emulate at the start of Cutter is really the harvest thing of volatility around the healthcare drug development process on both the long and the short side. And so I’m not really necessarily looking to take a bet that innovation in general is at a certain, you know, peak or Nader. I’m just happy that it’s happening so that there’s an opportunity set for us to get involved with.
00:29:07 [Speaker Changed] Well if we look at the pandemic era, there were a lot of, you know, remote work work from home stocks, everything from DocuSign to Teladoc to Peloton, that all had these huge moves. What is Peloton 97% off its, you know, highs. And I always assumed something similar was happening with all the companies that got those giant contracts to manufacture the Covid vaccine or, or the variations of them. What did that space look like to you at that point? Yeah,
00:29:41 [Speaker Changed] Absolutely. I think that it was probably driven by a search for, you know, any sort of thematic lens that could drive returns that had investors crowding into anybody who was helping while everybody else was being hurt. The difficulty in that investing at the time was people putting, you know, multiples of value longer term on what was inherently a short term stop gap contracting. I mean, you know, realistically those contracts were really only worth the profit they generate in near term and putting a multiple on them didn’t make sense because there’s no annuity value, it’s not
00:30:24 [Speaker Changed] The pandemic.
00:30:24 [Speaker Changed] Right. It’s
00:30:25 [Speaker Changed] Not permanent once the pigs through the python, that’s it.
00:30:27 [Speaker Changed] Exactly. Huh. And so I think there was a lot of that taking place at the time, driving companies like Moderna and Biota and even Pfizer at that point, Pfizer trading off a multiple that is derived from a huge proportion of its revenue coming from Covid just didn’t make right. You know, valuation sense,
00:30:47 [Speaker Changed] Right. Either you’re betting Covid was gonna stick around in a much broader way than it did and continue to drive profits, but then the rest of your portfolio has other issues. Right. And it was sort of either we come out of it and everybody can get back to normal, but that means the pharmaceutical companies that did so well and a, a lot of them began rolling over before that was obvious. Right.
00:31:08 [Speaker Changed] Sure. I I think there was a little bit of a realization ahead of time that this was its own type of bubble and that that was gonna wind up passing.
00:31:16 [Speaker Changed] So since that point in time, we’ve seen all of these new weight loss drugs, the GLP one drugs, that not only are people talking about these as as treatments for diabetes and weight loss, but it seems every day I read a different headline, this is good for alcoholism or drug addiction or, you know, go down the list of all of these things that you wouldn’t have thought were somehow related to diabetes. But the biochemical mechanism that’s being used to, I guess feed more dopamine, if you can interrupt that, you create a reduction of demand for what whatever that addictive substance is. Tell us a little bit about what you’re seeing in the GLP space.
00:31:58 [Speaker Changed] So I think that that’s correct. I think that there’s, there’s two phenomenon that are going on there. One is an understanding that obesity itself is such a integral risk factor to a number of different seemingly potentially unrelated conditions. That when you reduce that burden of obesity, you’re reducing its impact in a number of ancillary disease states.
00:32:23 [Speaker Changed] So when you say unrelated
00:32:24 [Speaker Changed] Apnea, you know, I mean there’s always thought that obesity was a risk factor that might have an increased occurrence of sleep apnea. Oh really? But it’s now demonstrated that by reducing obesity, you’re actually improving sleep apnea outcomes. Huh. As one vignette. Exactly.
00:32:39 [Speaker Changed] Like I immediately, when I hear obesity, I immediately think blood pressure, cholesterol, cardiac, diabetes, hey that should be enough to do damage to most people. You’re seeing it goes far beyond that. There,
00:32:53 [Speaker Changed] There are definitely other elements of, of related, they call it a metabolic disorder and it’s a broader stroke of things that can be, that can be positively impacted by this, I should say. It’s not necessarily clear that they’re impacted because of Glip one versus being impacted because you’re losing weight. Right. But the net net of it is still a positive.
00:33:13 [Speaker Changed] So, so when you look at the GLP drugs, what are you looking at? What companies do you find interesting? What’s happening in that space? Has this gotten ahead of itself or is there still plenty of runway for this to keep ramping up?
00:33:28 [Speaker Changed] So I think that by and large for the incumbents, Eli Lilly and Novo Nordisk, you know, a lot of the easy money on this is done right. You know, they, they’ve already reached levels that, you know, in terms of both multiples and market cap that you haven’t seen. You know, I think there was a portion of time this year where Novo Nordisk had a larger market cap than the GDP of its host country. So, you know, it’s, that’s impressive. It’s impressive. And a lot of that’s already kind of baked into the expectation there. What’s fascinating now if pharma does absolutely nothing else, well they’re very good at being copycats and knowing that this mechanism works and has this potential, has everybody chasing a better version. And what’s really interesting right now in terms of the investment world are the second generation obesity drugs that can look at how the successes of Novo and, and Lilly and iterate on it.
00:34:28 And there’s a wealth of that in development now and, and those are really fascinating. One example of that is a company, another Danish company Zealand pharma who are developing a amylin based therapeutic, which is related in overall biology, but not quite the same target as Glip one. And they’ve shown some of the first data over this past summer of weight loss levels that are comparable but with a better tolerability profile. And the goal here is gonna be able to make these drugs experientially better for patients. And that’s not just a vanity perspective or convenience perspective. It’s gonna help patients stay on these drugs longer and tolerate the whole therapy.
00:35:10 [Speaker Changed] You know, I recall it wasn’t that long ago, I wanna say a decade ago there was sort of this sense, hey all these big pharma companies, you know, they’ve shot their, well, their best days are behind them. They’re, they’re not developing new drugs, they don’t have the new technologies, they don’t, they’re not into the genomics aspect. They really are being left behind by what’s happening. That turned out not to be all that accurate. It seems like the big farmers still have more than a few tricks up their sleeves.
00:35:45 [Speaker Changed] They do. And I think that the pharmaceutical industry right now in general has reached a really good balance of sourcing, of having competition for sourcing products internally and externally. And they’re targeting their r and d efforts more and more in specific areas of expertise where they have previously shown successes and they have the infrastructure built and are no longer trying to be one stop shops that do research on everything they have internal r and d on what they’re good at. And then they look externally at bringing in other products that could have the benefit of helping their growth rate and long-term value creation for their shareholders, but also really leverage their internal commercial capabilities and regulatory capabilities to aid these smaller companies in getting over the finish line. So it’s a really good symbiotic relationship that’s going on in these,
00:36:40 [Speaker Changed] So either through acquisitions or licensing, they can find new molecules, new drugs, new whatever, and build on it. So you run a long short portfolio. I’m kind of curious, given this wide ber of new technologies and, and companies and, and drugs that are coming along. First of all, do you run, you know, 1 20 20 or 1 30 30? Or is it more opportunistic? How do you structure your, your book? So
00:37:08 [Speaker Changed] The goal at Qatar when we came out was looking at, if you take the experience base that I had had previously at the multi-strategy funds that I had worked at and the industry in general, if you expand it to the BNIs and point 70 twos and, and everybody else, there is this convergent evolution of interaction with the market that these firms have all developed to have teams of a certain size sector specialists managing certain amount of capital in that sub-sector in a market and factor aware type approach. And we thought at Cutter, why not democratize that a bit and allow the broader investor community to plug and play in their portfolios one of those high performing teams and be able to take that expertise in-house to their own personal portfolios if you will. You may not be able to get a spot as an allocation in Citadel, but you could get a spot, an allocation in someone who runs a citadel style equities portfolio, which is the what we do. So our risk parameters market neutral and factor neutral are very similar to what you would have inside one of those other firms such that if you kind of dropped our strategy into one of those firms, we wouldn’t have to change what we’re doing. Right. So
00:38:21 [Speaker Changed] Let’s define some of those terms. For some of the lay people may not be familiar. Market neutral means your long half, your book or some percentage you’re short. And it doesn’t matter what the market does, if the market goes up, your lungs go up. If the market goes down, your shorts do better. And the expectation is over the fullness of times your longs will outperform the equity market while your shorts will ultimately go in the right direction, even if it’s not down as much as the market has gone up.
00:38:55 [Speaker Changed] I think that’s a good description of it. I mean, what we’re trying to do is really focus on this thematic style of investing that is really trying to harvest the inflection points in innovation in medicine and how that impacts the related equities to that and take kind of market dynamics out of the mix. Take exposures to different style factors in the portfolio out of the mix. So things like momentum, things like a growth versus value bias and et cetera, et cetera. Pulling their exposures outta the portfolio and really leaning into the bets you’re making on a scientific basis. So we ask the question at Qatar over the next 3, 6, 9 months, what are the inflection points in the practice of medicine and who are the winners and losers in that? And we try to build thematic trades that will be constellations of winners and losers that allow us to kind of hedge some of those other exposures and really accentuate our exposure to the, to the scientific driver of performance in those names. So
00:40:04 [Speaker Changed] Let’s talk about the difference between the long half of your book and the short half of your book. My assumption, or let me just ask you this way, on the long side, you’re looking for companies that are potentially putting out a new product that you think the rest of the marketplace hasn’t recognized either the likelihood of success or the potential upside. I’m reluctant to use the word value play because it really is less of a, hey we think this drug, this technology, this new approach has this sort of commercial application and it’s not reflected in stock price. Is that a fair way to describe how you think about long?
00:40:46 [Speaker Changed] I think so. It’s, it’s, it’s pretty close. The one thing that I’d layer on top is it’s not so much, I wouldn’t say that we’re so much solely driven by a value mindset so much is we’re driven by recognizing the potential for upside optionality, right? And so sometimes companies that in their current market conditions, you wouldn’t call cheap, right? But they have additional accelerators on performance, they have additional upside in their pipelines that could continue to have them outperform, that might not be fully appreciated by the market, will still be interested in those names,
00:41:21 [Speaker Changed] Right? Just ’cause something’s expensive doesn’t mean, and it
00:41:24 [Speaker Changed] Can’t get more
00:41:24 [Speaker Changed] More. Right. And I’m always fascinated, people seem to think shorting is a mirror image of going long, but it really isn’t. It’s a very different sort of experience. Tell us what sort of screens you do to make downside bets. I mean, how much of it is hedging the long book and how much of it is just, hey, we think this stock is wildly misunderstood and there’s a lot more downside than upside,
00:41:48 [Speaker Changed] If you’ll indulge me for a moment. Sure. Cutter capital itself is a baseball reference. I’m a big sports fan. The cut fastball is a pitch that Mariano perfected that’s equally effective on left hand hitters and right hand hitters depending on how we delivered it. For the US that represents our research process, which by doing the same type of analysis over and over emerging from that are opportunities where we find events as they’re reflected in the underlying equities to be either indexed to over enthusiasm or underappreciated. And when there’s over enthusiasm in a situation when, you know, equities are reflecting fully an expectation that this innovation’s gonna work, that provides you an opportunity to find shorts. Because if that doesn’t work out and everybody’s gotta change their view on the opportunity, you know, those equities are gonna, are gonna suffer. So
00:42:41 [Speaker Changed] How, how do you deal with the timing and the technicals of shorts? Because you could be right and a little early and it’s very painful on the short
00:42:48 [Speaker Changed] Side. No, a absolutely. That’s why I think part of the, the style of investing we have looks at individual investment opportunities through more of a thematic lens where we will then look at constellations of winners and losers and put them together in one trade. So our trades are often three, four positions that are combinations in a particular therapeutic class. Incumbents, innovators, fast followers that are all gonna have different le varying levels of their value influenced by these news events. And by pairing them up long and short, you’re hoping that while you’re waiting for that event to play out, you’re hedging some of your market exposure. So to put it your way, if that short is the short, which is the key to the trade is going up with the market, hopefully your longs are protecting you and making enough on the upside while you wait to get paid for the short.
00:43:44 [Speaker Changed] Do you, are you restricted to only the healthcare sector or like, when I first started reading about LPs, what immediately came to mind was Yum brands and McDonald’s and Dunking Donuts and hey, how are supermarkets gonna deal with this? The, you know, the food in the perimeter of the supermarket, meat, poultry, fish, fruit, vegetables, dairy, their lowest profit margin stuff, all the junk in the middle that GLP users are not gonna be consuming. Hey, does this mean Kroger’s is a GLP downside play? And I have no idea, but it just, it’s a fascinating thought process.
00:44:24 [Speaker Changed] So I I I would say we, we stick to our domain expertise and we have a team that’s highly specialized and focused in their, in their career history and path to be healthcare specialists. And so we prefer to kind of, kind of stick to where we have that, that level of domain expertise. And then beyond that for a second, I would just say that the Glip ones are an exciting introduction to the broader investment world into what we do in healthcare every day. But it’s relatively few and far between the type of drugs that have such an impact on a macro level that you could thematically bet outside the sector on their impact. So, you know, we have a preference to remain in the healthcare world.
00:45:06 [Speaker Changed] So you also like to play in European pharmaceutical and healthcare stocks. Generally speaking, over the past couple of years, European values were much cheaper in the United States and hey, if you were betting on that mean reversion 10, 15 years ago, we’re still waiting. How do you look at the way things are priced in Europe and are the same discounts that we see in banking and other areas in Europe are they taking place in in the healthcare sector?
00:45:37 [Speaker Changed] So I, I think what’s interesting about investing in Europe for us might not necessarily be directly related to a view we have on the discounted valuations there, although what I would say about that is, by and large US investors tend to be more speculative at earlier stages of development. Being more willing to credit companies for future cash flows well in advance of the realization of whether those products will come to market or not.
00:46:10 [Speaker Changed] Meaning American investors tend to be more speculators and gamblers than their European counterparts.
00:46:16 [Speaker Changed] They tend to be more aggressive in their willingness to price in early data as proof of concept. I mean there was even a time period during the height of the, you know, kinda low rate biotech boom where, you know, we used to sometimes joke that, you know, proof of concept was having a concept, you know, these things just ran as soon as companies announced they were working on things. European investors by and large a generalization, but European investors generally wanna have a more solid proof of concept before they start pricing in those opportunities to those equities. And so there is interesting opportunity there for you to get ahead of that curve and, and bring a little bit of US style speculation to European biotech and look at some of those, those names. So that’s an interesting reason to be in Europe. Another quick vignette and why it’s interesting to be in Europe is in US particularly for, you know, kind of the market neutral world where we’re living, there are times where whether you wanna call it positioning or crowding in names or unwind regime, however you want to describe it, where US equities tend to act together in a de-risking, you know, kind of mode and it’s based on what’s properly owned by the major hedge funds and they’re de-risking themselves.
00:47:36 Europe in general doesn’t behave in the exact same lockstep with the us So if you have a relatively robust European book, it allows you to hedge yourself from some of the US crowding exposure because you’re in a different world of investors and a different mindset and different, you know, drivers of those equity markets. So it, it provides a little bit of diversity to the approach in portfolio.
00:47:59 [Speaker Changed] Let, let’s talk about another difference. What is the regulatory environment for new drugs, new procedures, new ways of, of applying the science to healthcare in Europe versus the us? How, how do they compare and concern?
00:48:14 [Speaker Changed] So it’s interesting the, the, the way I described the US equity markets and the earlier speculation and success that we see here, I almost see an analogy in the way the regulators think on a drug approval process because the US FDA in recent years has become much more active in allowing drugs to get approved based on, so-called surrogate markers of efficacy. In the past for a drug to be approved, you had to demonstrate against a tangible clinical endpoint that your drug worked. And now we’re moving more and more in the interest of getting drugs to patients faster, right? To approve drugs based on predictive markers of efficacy and confirming they work later in follow-up studies. Whereas Europe is still kind of old school and wants to see more proof of clinical benefit before you know, the government payer starts doling out cash to pay for these things. So there’s actually I think a little bit more willingness to be speculative in the approval process here in the US than there is in Europe.
00:49:30 [Speaker Changed] So it sounds like you’re suggesting private insurance is allowing the FDA to be a little more aggressive in hey maybe this save some people, let’s try it, versus you have a government saying, we don’t wanna pay for this unless we know it’s safe and effective. And so far you haven’t demonstrated that
00:49:48 [Speaker Changed] A hundred percent and in the past that was FDA’s mandate also. Right. And I would imagine if you have fda, you know, administrators in front of you, they would try to insist that’s still their mandate. But you know, as a matter of of just observation, there are more and more drugs that are getting approved on the basis of predictions of their efficacy rather than proof of their efficacy. What
00:50:11 [Speaker Changed] About all of the off-brand approvals we see at the beginning, which really is what the GLP began, right? The most famous example is Viagra was supposed to be a cardiac medicine or a blood pressure medicine. How does that play into what the FDA is doing in terms of, hey, let’s get it out there at least if it’s safe, we’ll find out if it’s effective only after it’s out there for a while.
00:50:33 [Speaker Changed] Right. That’s, it’s an interesting part of, I think just the, you know, the cultural differences between America and Europe and kind of how, you know, we embrace, you know, certain levels of freedoms here that we talk about as Americans and one of them is the concept that, you know, once drugs are approved by FDA physicians have the ability to use them in ways that they think are appropriate. Whereas in Europe, you know, to really be able to use a drug outside of its prescribed usage is gonna be difficult ’cause the government’s not gonna pay for it.
00:51:06 [Speaker Changed] Question on cutter, you know, when we look at out in hedge fund land, we know allocators tend to buy brand their safety in numbers. I’m looking at big shops like not just Millennium and Citadel, but go down the list of of Oak Tree or Bridgewater or you know, whoever you wanna think of that’s a a a large reputable shop. You were previously at a multi-manager shop. Now that you’re on the other side outside of Citadel, how are you managing dealing with the consulting worlds and the institutional investors as a single strategy manager?
00:51:43 [Speaker Changed] One of the things I think when I embarked upon that was an unknown to me that I’ve been somewhat pleasantly surprised to the upside of as now a launched manager is there’s a relatively robust infrastructure of support that has developed around emerging managers such as us to provide a lot of the tools, a lot of the operational infrastructure that you’re accustomed to at one of those larger firms as third party vendor services. And so while we are independent of, you know, what is a well-developed infrastructure at one of those larger firms, we were able to replicate substantive portion of that enough to have a robust investment process through identification of, of other vendors who realize the value of providing that service and provide it to a much broader community. So it’s, it hasn’t been as bad as I first feared when we came out.
00:52:42 [Speaker Changed] Really fascinating stuff. Vince, let’s jump to our favorite questions that we ask all of our guests. Starting with what’s keeping you entertained these days? What are you either watching or listening to
00:52:53 [Speaker Changed] In terms of streaming content? I just wrapped up Season three of The Bear, which is a terrific show. I actually lived for a few years in Chicago, so that kind of pulls at my, you know, reminiscences of being there. Even
00:53:05 [Speaker Changed] If it was season three wasn’t as good as season two, it was still really
00:53:08 [Speaker Changed] Good. No, it was still terrific. Yeah. And now I thought some of the
00:53:11 [Speaker Changed] Reviews kind of missed the point.
00:53:13 [Speaker Changed] I mean, they missed the point of what it is. It really was a year of just delving into the background of these characters in a, in a, in a richer way than most shows spend the time doing. That’s right. That’s right. And so right now working our way through Bad Monkey, which is oh really? You know, I think sometimes you need a little bit of lightness and levity in terms of what you’re watching Vince Vaughn on Apple tv. That’s right. And it’s just a really easy watch. I mean there nothing, I find it so amusing to, there’s nothing fascinating about it. It’s just a very easy watch and I’m looking forward to season two of Pachinko. It speaks a little bit to my Korean heritage. Season one was just a fascinating immigrant story of a Korean family based on a terrific book
00:53:51 [Speaker Changed] I I saw that go by in previews and I never got around to seeing it strong endorsed for
00:53:57 [Speaker Changed] Yeah. Worth to watch for sure.
00:53:58 [Speaker Changed] Huh. Really, really interesting. I’m gonna definitely check that out. You hinted but didn’t really dive into a lot about your early mentors. Tell us who were some of the people who helped shape your career.
00:54:10 [Speaker Changed] Sure. So I think that probably one of the most talented healthcare investors the world hasn’t heard of is Jeff Green, who really I spent years with at Health Core and who was my first portfolio manager at at Citadel. And what Jeff brought to me was this ability to really appreciate the power of the rate of change in a store. The second derivative of movement in a narrative. And he had the ability to look at very, very complicated stories, very complicated topics, complicated drug development studies, and kind of point out, if you understand this, it’s the key that unlocks the view of the whole trade if you understand this portion of the income statement, this portion of the tam. And so he was able to go from story to story and really kind of hone in on all other things being equal. This is what you need to know. And so I learned a lot from working with him more recently in the launch of Qatar. I have to say that a mentor for me is actually my fiance who runs her own business and who in times where I faced a little bit of self-doubt or challenges about going down this path had this relentless attitude of where failure was not an option and you know, pick yourself up and carry the next day because you’re gonna do this.
00:55:32 [Speaker Changed] No tapping out.
00:55:33 [Speaker Changed] No. Yeah. And she’s, she’s terrific at that,
00:55:36 [Speaker Changed] Huh. Let’s talk about books. What are some of your favorites? What are you reading right now?
00:55:40 [Speaker Changed] So right now reading Marshall Goldsmith has his book The Earned Life. He is a life coach for a number of executives. He’s written a ton of books, just kind of about, you know, the whole self-discovery process. I think he incorporates some takes from Buddhist philosophy that I kind of feel speak to me. And in particular it’s about defining your own success. We are in a world where you can get very, very much focused on, you know, what certainly what other people make or what other people’s performance are, or just in general comparing yourself to other people in this field. And I feel like it’s important to have perspective on the definition of success being something you define for yourself and being satisfied, you know, in terms of your own personal journey, which is unique to everyone. So that’s really fascinating. In terms of prior books that I read that I have to discuss that are influential, Annie Duke’s Speaking Bets is really one that I think spoke to me in terms of resonating with our investment process. Understanding that for her and her career in poker, there was really nothing to be gained from just dwelling on bad beat stories. And there’s really nothing to be gained from, you know, kind of worrying about success of failure of an individual hand. It’s really about the process,
00:57:03 [Speaker Changed] Right? It resulting as failure. You have to, if you’re, if you’re only looking at the outcome, she’s great at that. So that’s terrific. Thinking in bets is really tremendous.
00:57:11 [Speaker Changed] And, and yeah, thinking in bets and, and I’d have to say the, the last book I would mention, which I know has been mentioned numerous times in this podcast, but there’s a reason for that is if you’re in this business, it, it’s almost like a cult need to read reminiscences of a Stock Operator. It comes up over and over and there’s a reason for it.
00:57:28 [Speaker Changed] It was one of the first things I read when I began on a trading desk and you, it really arguably was the first behavioral book. ’cause it was not about buy the sell that it was about, here’s how traders go wrong. It was, it’s really fascinating and it, it still holds up a century later.
00:57:46 [Speaker Changed] Absolutely.
00:57:46 [Speaker Changed] All right, our final two questions. What sort of advice would you give to a recent college grad interested in a career in healthcare investing?
00:57:56 [Speaker Changed] I would say, and I’d broaden this, you know, for a moment to whatever type of avenue you’d want to go down. It really helps to spend time at this point of your life speaking to a college grad to become more of a domain specialist in whatever area that really fascinates you. You can pivot into the finance world later. The finance skill sets are the basics. You’ll have to learn. Their training is very, very fungible, and it’s almost commoditized to kind of know what it takes to be informed on the bi underpinnings of finance. But really your expertise is gonna come from finding something you’re passionate about and learning as much as you can about it. Immersing yourself in that world and coming out of that, you’ll think better about how to make investments in something you have that level of domain expertise in.
00:58:40 [Speaker Changed] And our, our final question. What do you know about the world of investing today? You wish you knew 20, 25 years ago when you were first getting started?
00:58:48 [Speaker Changed] I would say 30 years ago, I would tell myself that the idea that a good successful investor leans in on conviction and intuition as their guideposts is kind of like false idolatry. I think, you know, if you take any talented investor in general, and you ask them to give you your 10 best ideas for the next year, if they get seven, eight, correct, terrific. But then if you tell ’em to rank order them. It’s not eight, nine, and 10 that fail all up your conviction scale, you fail. So I think I would tell myself previously, it’s much more important to develop a robust set of guideposts in investing, a robust process of investing, rather than just worshiping this idol of like, look, I need max conviction on an idea that’s gonna be, you know, career setting.
00:59:42 [Speaker Changed] Quite fascinating. Vince, thank you for being so generous with your time. We have been speaking with Vince Aita. He is the founder and chief investment officer of Qatar Capital Management. If you enjoy this conversation, well check out any of the previous 500 or so we’ve done over the past 10 years. You can find those at iTunes, Spotify, YouTube, wherever you find your favorite podcast. And be sure and check out my new podcast at the Money short, 10 minute discussions with experts, experts about issues that directly affect your investing and your money, earning it, spending it, and most importantly, investing it at the money in the Masters in Business Feed, or wherever you find your favorite podcasts. I would be remiss if I did not thank the crack team that helps us put these conversations together each week. Steven Gonzalez is my audio engineer. Anna Luke is my producer. Sean Russo is head of research. Sage Bauman is head of podcasts here at Bloomberg. I’m Barry Schultz. You’ve been listening to Masters in Business on Bloomberg Radio.
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