Unlocking Value From The Inside

Insight by

Behzad Aghazadeh, Managing Partner & Portfolio Manager for Avoro Capital Advisors and Alex Denner, Founder of Sarissa Capital Management spoke with Yaron Werber, Biotechnology Analyst about the importance of human capital for operational excellence, how boards operate, ongoing M&A trends, and unlocking value from the inside by working at the board level as an activist investor.  

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Transcript

Speaker 1:

Welcome to Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.

Yaron Werber:

I’m Yaron Werber, biotech analyst at Cowen. I’m very excited to be joined by Behzad Aghazadeh from Avoro Capital Advisors and Alex Denner from Sarissa Capital Management. In this episode called Unlocking Value From the Inside, we will discuss how value is unlocked, working from the inside as board members, chairpersons, active investors, and how decisions are made at the board level. Behzad founded Avoro Capital Advisors in 2010. He manages Avoro’s $4 billion portfolio of public and private life sciences investments. He was chairman of Immunomedics until its acquisition by Gilead in 2020. Before Avoro, Behzad has a successful track record as an investor and management consultant. Alex founded Sarissa Capital Management in 2013. Previously, he was a healthcare portfolio manager at Icon Capital, Morgan Stanley and Viking Global. He has been instrumental in the sales of Implant Systems, Genzymes, Forest Labs, MedImmune, Amylin, ARIAD, The Medicines Company, Bioverativ and Idenix. Both Behzad and Alex sit on several corporate boards. Gentlemen, great to have you with us and thanks so much for joining us.

Alex Denner:

Great to see you as well.

Behzad Aghazadeh:

Nice for having us.

Yaron Werber:

So we have a lot to talk about, and I got to tell you personally, this is a podcast and I’m very excited. Number one, I’ve known both of you for a long period of time. I have a lot of respect for you, and it’s great too, that you can both come together. You have such a complimentary and in many ways overlapping experience. You’ve both been really involved in catalyzing change really from the outside, right? Coming into companies, both as pseudo operators at the board level, as chairpersons, as board members, and certainly as activists investors. And I would really argue in all cases, these companies really needed that external push, that pressure, an alternative view to look at what’s possible and looked at fresh insights. Alex, you’re chairperson at The Medicine’s Company, at ARIAD, and Behzad, obviously is at Immunomedics. Maybe Alex, to you first, what are the biggest challenges to effective change when you came in? What did you notice?

Alex Denner:

So, every situation is different, I’m sure Behzad will feel the same way. That said, there are a lot of kind of commonalities as to your question. Look, I think, one of the things we look for is to reduce bureaucracy, to empower people, to allow if there are 10 committees, you can probably do it with less than three committees, if there are three committees, you probably don’t need any committees. That’s the kind of thinking that I like to bring to the company. Because usually we’re in a situation where the people who are actually doing the work are doing a good job and there’s value. I mean, we’re investing in a company because there’s some value there. There’s something that’s creating value and they’re either squandering the cash flows that come for that or they’re managing the business so poorly that the value’s is not easily transparent.

Alex Denner:

So it just kind of there’s a lot of stuff that comes to it, but basically the process of fixing the companies is more or less around eliminating bureaucracy. And there’s a lot of subparts that… The other thing I think is important to mention is to focus people on the mission of the company too. Some companies can end up doing 40 different things, many of which do not contribute to creating shareholder value and you got to get everybody focused on kind of, “The mission is to create value, and here is the one, or two, or three ways that we’re doing it.”

Yaron Werber:

So it’s focus on key imperatives and reducing bureaucracy. Behzad, what did you think?

Behzad Aghazadeh:

Yeah, Yaron, for me it started with a tremendous fortune of being able to assemble rather quickly a board that not only complimented my vision and my skills, but also allowed others to buy into what we had thought would be the potential of the company. That got us going, and from there, it was really building a team, assembling it one talent at a time, folks that you can really trust to carry out your vision and then allowing them the freedom to go and execute. And then on my own part, I had to make sure that I was following through with my promises that I made to the organization, that people could see that I’m living the life, leading the path and ultimately just really just showing that I care and being there for them. So a lot on the human resources side, that’s something you’re going to hear, I think, a lot from me, which is very different to how I thought about the world before I wandered into an organization.

Yaron Werber:

Yeah. So you really focused on the operational side.

Behzad Aghazadeh:

Yeah.

Yaron Werber:

People side and the leadership side, and obviously each role was a little different. What was the biggest challenge, Alex, maybe for you, as I’m thinking about ARIAD, or I’m thinking a lot of the companies and we’ll talk about some of the ones you’ve been involved in, The Medicines Company. You were essentially taking on from a strong, durable CEO who’s there beforehand and the company needed to go in the right direction. What were some of the challenges that you needed to tackle first?

Alex Denner:

So often those situations, and each one is unique, but say in ARIAD, the situation was, there was kind of a board in place that in my view was not really kind of representing shareholders. They were sort of working for the CEO, and that’s my opinion. And that’s obviously not their jobs, right? And that’s one of the things that you encounter in a lot of these situations is weak boards that kind of forget their responsibility that they work for the owners, they work for the shareholders, and the management teams are hired in order to accomplish the goals that the owners decide are the right goals. And when you get a situation where there’s many principal agent issues, right? Where the principal is the sort of owner, the agent is the person in charge. And sometimes there things that are good for the agents that aren’t good for the principals.

Alex Denner:

And that’s issues that we tackle with almost every situation we get involved with on the activist side, where this divergences. In some cases, those divergence can be very big. And you need to practically kind of change out a lot of directors to do that. And some of the things that we’ve seen over time is sort of, if somebody made a certain live episode about these things happening in corporate boardrooms, I wouldn’t believe it, but they actually do. These absurd things occur. We’ve had directors being threatened, we’ve had all kinds of things happen. So it really is kind of coming into a situation knowing what the fundamental change that’s required is, and just pushing for that. And knowing that there’s going to be lots of hiccups along the way. And usually it’s going to involve changing directors and usually it’s going to involve changing managements.

Yaron Werber:

Yeah.

Alex Denner:

Now sometimes, you can have management teams that maybe the CEO is a good person, but just not in the right role, right? So you can sort of switch him or her into a role that kind of is optimal. But getting good leaders who understand their job is super, super important.

Yaron Werber:

Yeah. Well, I’m going to come back and touch on one of the points. Behzad, what about you? What were some of the key challenges for you?

Behzad Aghazadeh:

I think one of the key learnings… I mean, I agree with the key challenges alex said, getting the right people. One of the learnings, and everyone tells you this, any recruiter will tell you this, the minute you feel you don’t have the right people is the last time you should think about that and first time you should take action. It’s never too soon to part ways with someone that’s not the right person. And you can affect a lot of change a lot quicker if you act decisively. And you could do a lot of damage if you sit on that decision, because once that thought crosses your mind, it’s probably something you’re going to go through with. And the longer you wait, the more you’re going to regret it.

Behzad Aghazadeh:

That I think was one of the… Ultimately led to some of the changes we made. They may not look popular from the outside, they may even increase anxiety. For a while it doesn’t seem like the right decision for outsiders, I would always, when I see these changes, I sort of put myself in that shoe and say, “Maybe that is actually something really good that just happened that I just never knew was a risk.” That I think is one of the… When you talk about making changes to catalyze change, that I think stands out for me. [crosstalk 00:10:09].

Alex Denner:

That’s a great point.

Yaron Werber:

Yeah. And are you talking about the board level? Are you talking about the senior level or both?

Behzad Aghazadeh:

Both.

Yaron Werber:

Yeah.

Behzad Aghazadeh:

I would say both because… And I had the fortune to crossing path with some of the boards that we in the process else that along the way and very thoughtful folks. But at times it is almost a signal you want to send if you have to make a change because otherwise some people will hold on to legacy views. Maybe even question it, undermine it, even if it’s an advertent, even if it’s not intentional necessarily. And it’s a lot easier to make a clean cut and start over again, if that turns out to be. But on the other hand, even on the management side, you want to hold onto some legacy people because they have institutional knowledge that you benefit from as well. It’s striking that right balance. But when you know it’s the right time, it’s acting decisively.

Yaron Werber:

Right. Let’s not touch up, and Alex, you mentioned the role of the board is to oversee the CEO and not work for the CEO. In reality, when you go into a public company, that’s potentially haven’t had a lot of success or is stagnating, the board usually has been assembled by the CEO over many, many, many years. They’re friends, they sit on each other’s boards, they’re all on the same network, and they all tend to have groupthink a little bit. What are the steps to then make that change? Because you got to get them on board, you’re coming in as an outsider, there’s probably going to be barriers, there’s probably going to be a few people who want to work with you, and you got to kind of mesh everything together. So how does that work?

Alex Denner:

Yeah, no, that’s an excellent point. When we come in as activists, it’s usually because the company’s underperforming and exactly that problem exists, right? So the directors… Now, just kind of to start kind of at a high altitude and dive in here, most people who are on boards are good people, right? And the vast majority of directors do not have nefarious intentions to do the wrong thing or to act inappropriately, the vast majority. There are some that do have those. We’ve come across people like that too, but the vast majority of people kind of want to do the right thing. But if you think about it, on a public company board, the individual director, he or she doesn’t usually own stock, and usually doesn’t have the time or resources to do independent work as to sort of assess the company.

Alex Denner:

So, I was put in the lines of a widget factory just to kind of sort of distance it a little from kind of a biotech thing. But the CEO decides, “Okay, we’re going to build a new widget factory.” And he says, “Okay, this widget factory is going to cost a billion dollars.” And you hire some fancy consulting companies to make super nice PowerPoint slides that show you this billion dollars will be the best billion dollars the companies ever spent, blah, blah, blah, blah, blah. And the board, the directors all come to a meeting, having seen this in the board materials a few days before, but really having no background on it, if it’s the first time it’s been mentioned. And then they’re expected to sort of kind of opine on that.

Alex Denner:

Now, if they haven’t done kind of any thoughtful work and they usually don’t, it’s not their fault, but they usually don’t have the time or the inclination because they don’t own hundreds of millions of stock usually. So it’s not worth hiring their own consultants. They’re just going to more or less take the party line there and just go with the idea that the billion dollars is the right place to invest in this widget factory. It sounds bizarre to say, but often the shareholder, the owner of that money, the billion dollars, in this example, doesn’t sit at the table really, right? And it’s sort of easy for people to say, “Well, the management team’s aligned around this idea of building a new widget factory and it sounds like a good idea and they made a nice presentation, so let’s ahead and do that.”

Alex Denner:

Now if you go out and talk to the people that own the stock, they’d be like, “Oh my God, there’s so many other important things to do with that money.” Right? But there isn’t a mechanism for most directors to even hear that, right? So that’s an important starting point. I don’t want to make this particular discussion too long. I don’t want to drag on here on, but I think that’s an important starting point on kind of how you start with directors. So most of them are not bad people, but they easily fall into the company line because there is nobody that comes up at the board meeting after the widget factory presentation and says, “Here’s the counterpoint. This is why we shouldn’t do that. I have another use for the billion dollars.” That very rarely if ever happens.

Yaron Werber:

Yeah.

Alex Denner:

Right? So, then you say, Okay, well, as activists we have to kind of create what we call a Socratic dialogue, right? And so we have to have that Socratic dialogue where people say, “Wow, there’s two sides to this. We can spend the money here, or we could spend it somewhere else, or we could give it back to Cheryls, or we could do something else with it.” It’s not just that the widget factor is the only solution. And at the same time, you have to do that in a way with this assumption that most people are not bad actors in a way that doesn’t rub their noses in the sort of the mistakes of the past. So, it’s a little bit of a balancing act where you sort of have to be respectful to the decisions that have been made in the past that we probably think were the wrong decisions, but they made them.

Alex Denner:

So you want to point out that they’re wrong, but you don’t want to rub their noses in and say, “This is terrible.” Because then they’re less likely to kind of work constructively. You just want to get them to work constructively on the future and have a Socratic debate about that.

Yaron Werber:

Yeah.

Alex Denner:

And it takes a little time, but usually we can kind of get there with talking with directors. Now there are many variables that determine how quickly that happens. And one of the important ones is how vociferous the CEO is. And if he or she has just kind of got one way, it’s my way is a highway, type person. And they have a bunch of directors that have been working with him or her for 20 years, and their kids know each other, and there’s all this kind of personal connections, then that’s a much harder kind of system to break into.

Yaron Werber:

Yeah.

Alex Denner:

So, that’s where we would look to kind of bring on more people onto the board more quickly.

Yaron Werber:

Yeah. Behzad, can you talk about, do boards dual track the future? Something we talked a lot about on Wall Street, right? Having a backup plan. Prepare for success, but plan for failure. What happens in boards?

Behzad Aghazadeh:

I mean, I think, the experience that we’re talking about in my case with Immunomedics, we don’t talk about a real sophisticated or large business with multiple outs. So I don’t really think you really plan for sort of backup, to the backup, to the backup. Your head down, executing, recognizing there’re risks. And it’s mostly the focus of the board in our instance was ensuring that we have contemplated all aspects as much as we could, prepared for it, be vigilant, and monitor, and react if anything goes wrong. Of course, you look at the cash, the one way budget, et cetera, to ensure that you have the ability to get to the finish line. But I don’t think other than sort of, as part of just standard course, maybe recognizing that things may not go according to plan and in a severe way, there’s not much you can really do in a company the size that we were now worth.

Behzad Aghazadeh:

Had we remained independent, and the topic of pipeline, and sort of the next generation programs versus various strategies that we were contemplating. If those would’ve continued to mature, there would’ve certainly been a place in time for these kinds of conversations around how do you manage risk, balance it, do certain things as back up. But honestly, in our instance, we were sort of one task at hand with 95% of focus dedicated to that. And the rest was sort of kept for another day, which fortunately, or unfortunately never came.

Yaron Werber:

Yeah. And Alex, from your vantage point in big, more complicated, multi-product companies, how much planning do they do for the backups for the unexpected?

Alex Denner:

Very little and not enough. So I think it’s very hard for a company to have multiple plans, right? So there’s a mission and this is we’re going to take this hill metaphorically or we’re going to get a certain level of revenues or we’ll get the drug through phase three or whatever. There’s a mission, and almost all goals and almost all public companies in corporate America, which by the way, I think the whole goal setting thing is not constructed well, but almost all goals are just kind of unitary. There aren’t sort of like, “Oh, there’s a backup plan.” Or, “If this happens, that happens.” And they have bezier, and sort of trees that it’s just too complex from a goal setting perspective. It should be done more, but it isn’t.

Yaron Werber:

It’s not, it’s not practical. Behzad, let me ask you, pharma is sitting on sizeable cash positions. And if you looked at deal volume last year, it was actually up year-over-year from 2020, but total deal amount was down obviously Celgene or an Alexion kind of sways the needle in either direction or a big deal. Why are we seeing more deals now?

Behzad Aghazadeh:

Yeah. I mean, I think my view is there’s been a bit of a perfect storm that’s allowed the pharmas to sit on the sidelines, or perhaps encourage them, or perhaps even force them to sit on it, whether it’s tied to the political backdrop of the uncertainties around drug pricing reform and posturing by the FTC where there was going to be added scrutiny for any pharma merger for sure and perhaps even pharma biotech merger. But also some company specific uncertainties around commercial prospects of a given asset, the competitive of positioning of those assets. And of course, what we’ve all been hearing up until very recently, perhaps not as much anymore is the inflated valuations of these assets.

Behzad Aghazadeh:

I would also say however, that the sector hasn’t really done much in terms of helping themselves, given the series of relatively high profile, large late stage setbacks, including very, very recently I experienced. And I think those all give management team and business development teams time or room for pause, but at the same time, I’m sure you’re going to be probably talking about the outlook. I think they can only wait so long given the outlook that they’re facing. But that perfect storm, I would say is also coming a little bit to an end because we are getting some resolution, perhaps not what people were expecting completely. But drug pricing, I think there is a general consensus that it will be manageable if anything, even it it materializes the FDA change in leadership seems to be palatable for the industry and various other, even the FTC has not really flexed much of a muscle when it came to bio pharma transactions. So I think perhaps those reasons are also the excuses that have kept people on the sidelines are beginning to vaporize or be fully addressed. Valuation certainly has been addressed in the past few weeks.

Yaron Werber:

Yeah. Sadly.

Behzad Aghazadeh:

And whether… Yes sadly. How this then needle from here on plays out, I think it might take a turn from here on.

Yaron Werber:

Yeah. I’ve changed my screen color. So when the stocks go down, they’re actually green now. [inaudible 00:23:06].

Behzad Aghazadeh:

They send a snapshot.

Yaron Werber:

Everything’s green today, I’ll tell you that. Alex question for you on, we are seeing again, I guess you can argue a good amount of deals we’re just maybe not seeing as many big ones. The reason maybe that we’re not seeing even more deals, is it valuation still? Or has that been the issue? Or is there just a doth or lack of willing sellers?

Alex Denner:

I think Behzad hit it right on in all those factors. I would sort of double emphasize the valuation one though. And we just joked that sadly they’re down. You might argue it’s obviously disruptive, but it might actually be good for society, and for humanity, and for the biotech industry, to kind of get valuations, to be a little bit more reasonable. In my view, things had gotten to a place where companies perceived their cost of capital to be zero, right? We dealt with a bunch of small companies. So I think great people with great technology, right? Great people with great technology. And it was kind of like, “Okay, we’re going to do the B round on the first Tuesday of February. And then we’ll do the C, and then we’ll IPO. And we’re not sure if we’re going to IPO on Wednesday of April.” That kind of thing, right?

Alex Denner:

And people were really kind of talking that way. I mean, we heard this. And as we all know, the three of us, just having seen this in street for a while, that’s not how things work and it kind of cracked. And I think that’s good, actually. It causes pain. And our portfolio causes pain in many companies. And I don’t mean to suggest that it’s a painless thing, but it brings things into a little bit more into reasonableness where you’re going to see more collaborations, more M&A deals. So I think, in this coming time, there’ll be a lot more of those. Now, what does tend to happen when valuations go up a lot, companies for a while remember, right?

Alex Denner:

Whether it was a private company or public a company, if your stock was at a hundred and then it fell to 40, I’m kind of like, “Well, I remember it was a hundred. So if some big giant pharma comes and offers me, 80, which probably is a great deal in an absolute sense if I DCF my business, I’m kind of like, “Well, geez, a little while ago it was a hundred. I probably shouldn’t settle for less than 125.” And that does take a little while, but I think that the volatility that we’re getting now kind of causes that to fade relatively quickly. So, I have no predictive capabilities in terms of what the market’s going to do, but I do think that the large companies need product. There’s immense wonderful innovation occurring at small companies. And it should happen if there’d be more collaborations in M&A. And by the way, there’s a lot of small companies that are replicating kind of functions that would just be more efficient if it would be done together.

Yaron Werber:

Yeah. Yeah. And in case people listen to this podcast in 20 years, just so you know, it’s February 24th. Russia literally just invaded Ukraine and the stock market has been collapsing for about four months. So this is kind of where we are. To put this in context, this podcast would’ve been very different four months ago.

Alex Denner:

That’s right.

Yaron Werber:

Maybe, at the board level, how do companies decide… Is there a real decision tree process to figuring out, “Hey, we want to stay independent.” Versus, “No, our goal is to sell.” Does that go on or is it a decision to sell triggered by a phone call, obviously, an incoming approach? Or how does the process come to be based on with you?

Behzad Aghazadeh:

Yeah, I mean, in our instance, we knew exactly what needed to get done when we initially took over, which was some very critical tactical steps with respect to compiling a B of A, filing manufacturing challenges that I think everyone understands, commercial build team. All the elements that go into that and launching a drug. Up until that point, we could sort of sketch it out from a resourcing standpoint, from a capital needs standpoint. And I would perhaps argue, especially once we got a little momentum that we were already in the best position to do that, as opposed to handing it over to a new parent and allowing them to take over it. It’s easier to sort of land the plane that you took off in and you have a good understanding of all the buttons than handing it over mid flight. However, the closer we got to that finish line with respect to getting ready for commercial, and then obviously getting the approval and launching the drug, the focus starts shifting towards what’s next? Where do we expand geographically? Where deal with the pipeline collaborations which we had signed up for.

Behzad Aghazadeh:

But then the execution aspects of that did start to look quite daunting. And I think there comes a point in our case, it was very natural where you just start really almost seeing that challenge, that wave coming and seeing, look, I could just about get to this point. But from here on, this requires the next level of competency, of infrastructure, of tools that we have to continue to invest in. And really the further you go, the more punishing it could be if you miss a step. And in parallel to that, obviously pharmas became very interested in the asset. And while everyone shared the common view of the potential, they start seeing the challenges for small companies to execute versus what they could accomplish if they took it over. And that’s where the conversations almost naturally evolve from a partnership, whether it’s geographic or otherwise to, “Well, this requires a heavier lift, a bigger mandate. And doesn’t it make more sense for us to take over.” And obviously valuation comes into play. And we got certainly what we felt was a fair price. And the rest is history.

Yaron Werber:

Yeah. Alex and you’ve been involved in multiple, multiple deals, ARIAD, Medco, Genzyme, Amylin, MedImmune. I think in many of these cases, what’s so interesting is ImClone. I was covering these stocks usually with a negative, one of the only cell ratings and made me not so popular. And most of the time you proved me wrong. Because at the end, the stock would go up. It would be painful for a while, but it would work at the end. Hopefully I wasn’t always at a sell at that point. But how does that decision come to be? It’s time to sell.

Alex Denner:

First of all, when we make an investment, we rarely, if ever kind of the main plan is to sell the company, right? We make an investment because we think that the DCF, if the company is run properly, the company is run for the benefit of the shareholders, is much higher than the price we’re paying for it, right? That’s why we make an investment. And whether there’s another buyer that’s going to buy the whole company or not is an interesting discussion, but it’s not sort of part of the fundamental analysis that leads us to make an investment decision. Now, just to cut to the chase empirically more than half of the deals we do end up getting sold in some way to a larger company, or a pharma, or whatever. So it’s a kind of common way that value is created, but it’s sort of, we don’t get into it with the plan.

Alex Denner:

We have this thesis that we look for stocks that the DCF, that they’re run, their capital allocation is bad, and their operations are bad, such that if they’re fixed and they’re run in the interest of shareholders, their DCF will be meaningfully higher. Generally we say more than two X. Depends on the underlying risk, but something like that. And then sort of, it takes a while to get control of the company. Behzad did an awesome job with Immunomedics. That was an A+ kind of situation, just kind of getting control so quickly. But that’s hard to do when that was partly a situation of how deep those people had dug themselves into a mess before you kind of took over and things.

Alex Denner:

Just the practical reality is that, probably we’re going to take an investment, we’re going to get a couple board seats, and we’re going to work with the company. And we think about it like a multiyear process. We don’t think about an investment will pay off in months. If it does, and it does sometimes, it does actually reasonably frequently, but that’s something that’s great, but we would never assume that would happen. So then it becomes, you fix the company. And you go about fixing the company and that should just improve the DCF. And our models as such, we’re only investing in companies that we can do that. Now, all that said, in many instances, the DCF is higher to a larger company that maybe is already participating in the same therapeutic area, right?

Alex Denner:

So one of the areas that we’re particularly interested in now is things like cardiovascular metabolic primary care gastroenterology. Unfortunately, cardiovascular disease is number one cause of death in the United States. We think it’s a very interesting area for research, but it’s not as sexy as some areas that have much less kind of morbidity and mortality. That’s just kind of how the industry goes up and down on certain things and also has to do with the commercialization that’s required in the large trials. And we know why those things are. So we basically will build the business, a great business to be there. And then what often happens is it’s kind of like that little aphroism, great companies whether they bought or sold, right? Kind of.

Alex Denner:

Because we don’t actively try to sell it. We’re just open to selling it if it’s above our risk adjusted assessments as to the value. And when the risk becomes lower, in other words, after we fix some of the underlying problems, the risk is lower to a pharma company, which are very risk averse buyers, right? The buyers in healthcare are very risk averse. They don’t want to buy messy things by and large. They want things that are all clean and nice. They might even overpay a little from the perspective of the owner of the business, because there are other strategic implications for them. For instance, if you sell a cardiovascular or let’s say a cardiology product to a company that’s already in cardiology, the incremental cost of selling a new drug may be the cost of the brochures for the one drug.

Alex Denner:

So, we basically build businesses, not planning to sell them, but kind of maybe hoping that that is one of the possible outcomes and it does occur a lot. But it’s very important, I think, as an investment strategy and not sort of have all the chips on that kind of outcome, because you can’t control it.

Yaron Werber:

You can’t control it, especially timing.

Alex Denner:

Right.

Yaron Werber:

Behzad, you’re investing in private and public. You recently started a VC fund about a year, a year and a half ago, so, which ones are easier? Which ones are more fun? Which ones are more efficient at shareholder value? And I’m not talking about February. Take February 2021 out of the equation. Everything was fun, everything was easy, everything went up five or 10 publics. So let’s not talk about that one.

Behzad Aghazadeh:

I was going to say tech, but even that’s not true anymore. I mean, obviously we have a much longer history and certainly also in terms of yield volume on the public side. On the private side, we’re perhaps because we want to limit our time commitment and be very thoughtful where we are going to get active, the number that you can take on is very, very few at a time. So I don’t share the view that you can broadly deploy capital in private companies and pepper it in a large number and still be thinking of yourself as someone who’s really creating value. Capital is easy to come by than it was until recently. I do view the private investing as an opportunity to bring more than just capital to the table. But that’s very time intensive. I think they’re fundamentally too different. You ask which one is more fun, it’s always the other one that you’re not working on. So that’s that one.

Behzad Aghazadeh:

Easier probably also the other way. Because once you’re inside a company, you really realize the challenges, the operational aspects of it, which I think are just fundamentally misunderstood and underappreciated. Whereas from the public side, when we invest this passive investors, if you will, as equity shareholders, you don’t really get broadly into the nitty gritty and you almost entrust that to happen and you’re just looking for the results, and the meeting of the various milestones, and catalysts, if they go your way. So I think arguably that while they should be very, very similar, on one hand, just because you can only control so much in one instance versus the other, they tend to actually be quite different in investing style and effort. And I think they’re just very different. I wouldn’t say one is easier, and I wouldn’t say one is more fun. They just bring a different vantage point, and I think, for us is actually more on the side of learning from both and becoming better on one side, learning from the other and vice versa.

Yaron Werber:

Yeah. So that actually leads me into the next question. What are some of the biggest learnings for you that helped you become a better investor from serving as a board member or as a chairman?

Behzad Aghazadeh:

I think one of the things I… I don’t want to repeat the same point over and over again, but I think the human resources aspect was something that I historically neglected. I always thought of an investment in our spaces is more investment in science. And if I believed in the science, the rest would find its way and sort its way out. And I have come to realize perhaps too late in my career that is probably not necessarily the right way of going about it and perhaps more emphasis need to be placed on the people side. So I look for things like how long has the team worked together? Have they navigated a challenging time together? Have they stuck together and then successfully seen it through? That certainly is important. I do look at operational execution. I mean, I happen to be acting as an interim CEO or the CEO of Immunomedics, right? When COVID was hitting.

Behzad Aghazadeh:

And it was kind of interesting, in hindsight, how I as a portfolio manager of the fund was thinking about the world, versus as the operator of the company thinking about the world. I was there in our warehouses asking questions like, “Do we have gloves? Do we have test tubes? What’s happening to this patient? Or that shipment?” One of the batches was meant to come from Italy on a plane and that was right when Trump had stopped the international flights. And we were sitting there mapping a road route to get a truck from Italy to, I guess, Germany, and then cross into UK, which still was allowed to fly for a few more days to the US. And then doing that in the cold chain with all the bells and whistles. But that level of operational detail could really make or break a company.

Behzad Aghazadeh:

And if we hadn’t done that in time, we couldn’t have met the badge testing or whatever the topic [00:40:17] was, but it was very critical to get that done. That focus on operational execution can sometimes really be make or break. And we as investors don’t really have access to that. You can’t really ask the question, “Hey, did you make your flight?” You don’t even know that there was a flight to be made. And often, even if you had, whoever thought to ask the question, you get the answer, we don’t comment on that publicly. So what do you do with that? But at least trying to find ways to test if your team that you are investing in as a public investor, do they demonstrate competency? Are they aware? And I remember as the CEO, I was then as an investor asking the same question of all my portfolio companies, “Hey, do you have any exposure to China? Because from what I hear, the supply chains are getting really difficult.”

Behzad Aghazadeh:

And it was interesting to see different responses. Some CEOs were entirely dismissive of it and some were very acutely aware of what ramifications that might have. I wouldn’t, by the way, suggest that ultimately translated into their outcomes of the folks that worked closely. But it was just a different vantage point that I just frankly would not have appreciated had I not had the opportunity to play that role.

Yaron Werber:

Yeah. Absolutely. And one of my biggest learnings from when I left the sales side and was an operator interacting with companies and being on the operating side is how much of a different vantage point we have sitting on our side, now outside the company. Of understanding what that company would look like over time and how little decisions and execution moments will be big triggers into where they end up in 18 months. The people on the ground rarely have that vantage point. They haven’t sat at the satellites, following, planning, analyzing maps and following journeys, over, and over, and over again. And they tend to miss things which kind of huge consequences. And I totally agree with you the South Side, the Wall Street, doesn’t see that, sitting where we’re sitting. Alex, what about you? What were some your biggest learnings that made you [inaudible 00:42:24].

Alex Denner:

Just to agree, I can maybe say a couple of other things. But just to agree with that, I think that’s a fundamental, really important point you guys are both making, I think. I’ve often found it interesting that the South Side and from the first time, you’ve been very, very good about understanding businesses holistically. But often it’s just about the data, right? And you get really sophisticated analysis of clinical data and more sophisticated probably than, well, sometimes in the company’s analysis of it. But then everything else, well, can you make the drug? Who’s it going to be sold to? All these kind of issues are sort of kind of just left up in the air.

Alex Denner:

So I think that’s something that matters a lot to companies and the successful companies kind of do it right. In terms of learning, look, we’ve made many, many mistakes and learned so many things. I think one of the things that I just realize now, I mean this in a very kind of modest way, but we try never to underestimate how incompetent some of the decisions or how poorly thought out some of the quote, unquote, important decisions that a company can be. So a company can make a decision, we’re going to buy this new research area, or we’re going to launch this product here, or we’re going to do this or that. And you’d hope that some of the smartest people at the company and hopefully even the world, would’ve gotten a table and discussed it. And I get to see that happen.

Yaron Werber:

Yeah. Yeah. I got to say, that’s one of the things that I think we instill in all our associates all the time is, think about the luxury that we have, having a team of whatever it is. 2, 3, 4, 5, 6 people who just spend hundreds of hours, diligencing, thinking, stress testing, double guessing, talking to everybody else, getting consultants, debating what’s going to happen. And what’s the data set. And if you sit next to a company and they give you a completely different view, you better really understand what do they know that you don’t. Because if you’re thinking you’re going south and they’re telling you they’re going north, and they can’t explain to you why they’re going north, they’re probably ending south. It took a long time until I became an operator to understand that we have a luxury of time and resources that people inside a company don’t really have.

Alex Denner:

That’s right.

Yaron Werber:

Funny enough. Or they have it at their disposal, but they can’t really conglomerate them together because that’s not what it’s about. They need to execute and do whatever they need to do that week. And that’s their job.

Alex Denner:

That’s right.

Yaron Werber:

I want to ask maybe a final question, Alex, maybe to you first, and then Behzad to you, turnaround stories. When you look at a story, for other investors, what are the critical items that will really differentiate between a success and a disappointing item or outcome with a turnaround story?

Alex Denner:

Okay. So turnaround stories are something we think a lot about. I think, for an individual investor, one has to have their estimate as sort of the DCF, if it’s kind of run properly and also what needs to be done. An individual investor may not know all the details of what needs to be done, but big picture, you can usually figure it out. For instance, you have a company with 300 million in revenues, and yeah, maybe it’s going to grow to 400 million over the next couple of years, but they have 475 million in SG&A. That’s not going to work, right? That’s not going to work. I mean, unless there’s something else hidden in the basement of the company, right? I mean, just simple things like that. And we all know there are many biotech companies that kind of live on year by year like that, right? “Oh, we’re going to raise money.” And, “Oh, don’t worry. We got something new in phase one.” And blah, blah, blah.

Alex Denner:

So, I think, looking fundamentally, does this make sense? Kind of, is it something that can be fixed? And then metrics to follow. First of all, turnarounds take a long time, right? So I think one has to be patient with this kind of thing. You can get lucky in that somebody can come in and buy it, or there can be some sort of a usually exogenous event that changes the value in a positive discontinuous way. But one should plan for it to take time. And then it’s looking at, is the board changing over? Are the management teams changing over? And are they setting up goals and meeting those goals? It’s important questions for directors, what are the right metrics to track? When a problem comes to a company, I don’t usually ask the management team, what’s your solution? I say, how are you going to track whether we’re getting to the right solution or not?

Alex Denner:

So I think that each person, as an individual, individual investors can come up with that kind of stuff. And we do that. So it’s all about you just track it. Look, if there aren’t a lot of changes on the board, you might ask why? And it might be that their governance is such that that’s kind of how it’s going to be for a couple years. And that could be totally fine. Or it might be that there’s unexpected resistance. And it’ll take a little longer than people expect. But I think turnarounds, when you have a competent management team can be great investments. I actually like the area of turnarounds to create alpha, to create value as one of the best, because people linearize everything. And when things are not going well, they linearize it kind of going down to zero. And sometimes it’s not that hard. I’m speaking in a sort of a philosophical sense. It’s very difficult, but maybe not, since you don’t have to invent new science to kind of fix it.

Yaron Werber:

And then Behzad, for you, what’s your sweet spot investment wise?

Behzad Aghazadeh:

I mean, on the topic of turnaround, if that’s where the focus of the question is, I would say… And sort of, I would start where Alex actually ended, which is, can I see what the problem is? And can that be readily fixed through… I mean, not to sound modest, but I have repeatedly said what we did at Immunomedics was just bring some competent execution to the table. We didn’t create the science. That was all there before we got there. There was good science, it was well thought out, it just wasn’t done in the right way or it wasn’t on a path to be executed. And all we did is bring people that I thought had the wherewithal. We put the right capital behind it to enable them. And then we saw it through. Along the way we might have made one or two good decisions, along the way we got lucky more than once or twice, we almost got unlucky.

Behzad Aghazadeh:

But you have to have a good understanding of what’s wrong. And is it almost worthwhile to try and fix it? because the fix can take a lot longer. You need the right people. If you don’t have them already in place, they’re not waiting there to just come in and follow you right through that door. For me, I think as appealing as the investing could be, I feel one often underestimates the effort involved and overestimates the reward that could be had on the other side.

Yaron Werber:

Yeah.

Behzad Aghazadeh:

Now in the one instance that I did it, I think the effort was certainly underestimated. And one of the things I was immediately thinking when we got seated to the board is, “Boy, what do we not know about this company?” Which is not a heck of a lot. Everything is whatever management had chosen to share publicly. And who knew if all of that was exactly as advertised. Much of it turned out to be actually thankfully correct. But nevertheless, you could have walked into situation and the FDA communication was very different. The data might have looked slightly different to what we ultimately had. And so you have to really think about, “Is this going to be worth the effort? Is the juice worth the squeeze?” And they’re more often than not. Because we get often approached now that we’ve done it once, there’s a view that we might be able to do it repeatedly, which is probably far from the truth as well.

Behzad Aghazadeh:

But one of the first questions I ask is, “Well, what do we get by doing this? What’s the effort?” Because I know what the effort is now that I’ve done it once. I just don’t know what the reward is. And I think that it’s not as straightforward. It’s just a function of taking out costs that are over inflated, profitable company that’s been validated by a nurse in young Pricewaterhouse that might be easy to do on an Excel file, and maybe one can execute that. But if it’s something that is a little bit more involved, I would not underestimate it and as a result that informs our decision of whether to invest or not.

Yaron Werber:

Yeah. We’re going to move to my favorite part of the podcast. It’s a little personal touch and humor. Behzad, maybe with you, tell us one thing about you that no one knows. And it’s totally a secret, we’ll just keep it between the three of us.

Behzad Aghazadeh:

Yeah. Well only between the three of us.

Yaron Werber:

Liquid and Spotify.

Behzad Aghazadeh:

The one that comes to mind is when I walked in to take over as CEO of Immunomedics, if you made a transition to the CEO that I brought in, I thought I need to go in with some humor. So I’ll use the same. So there’s about 200 people that know this, but one of the things that people don’t know about me, it’s very hard for me to sneak up on people. I have this click in my ankles that gives it away as I’m approaching you. So I always when I entered the room with managing us, so you never have to worry about me sneaking up on. You’ll know when I’m around the corner.

Yaron Werber:

It’s funny. Because half my life, my purpose on the earth is to scare my family. That’s literally what I do all day long. You have a tick tock thing in your ankle.

Behzad Aghazadeh:

It essentially preannounce my arrival.

Yaron Werber:

Yeah. Alex, what about you? And I know you raise the bar by the way. So that-

Alex Denner:

Yeah. Well, I was going to just mention… Maybe this is a little bit more boring, but I love chemistry and I have kind of a home chemistry lab. I mean, nuclear engineering, chemistry, I spend a lot of time sort of, not related to experiments, not related to creating therapeutics, but I collect elements and I just find kind of elements in chemistry itself quite interesting. In our office… And both of you are welcome to come, and others I think have seen it, although it just got installed not that long before the pandemic, so maybe it is a secret. But we got a big periodic table, a large, large periodic table that’s actually made of… We have a cube that’s about so big of acrylic, and inside we have a sample of the element.

Yaron Werber:

Oh wow.

Alex Denner:

And different salts and different compounds made from that element. Obviously we don’t have plutonium and there’s certain things that are kind of hard to obtain, but we have a really kind of cool collection there.

Yaron Werber:

Yeah. That sounds awesome.

Behzad Aghazadeh:

I’m sure you put extra security around the gold box today.

Alex Denner:

Yeah, exactly.

Behzad Aghazadeh:

It seems to be increasing in value.

Alex Denner:

Yeah. I mean, there is a little gold there, but the amount of gold is smaller than the value of the plastic that contains it.

Yaron Werber:

I’ll never forget, one of my first classes in college was chemistry. And the professor showed up, he was wearing a starch white shirt and those thick black glasses from the fifties, it looked like Larry Bud Melman, if you know who he is, the comedian. And he showed up in this huge auditorium, everybody’s premed probably. And the chemistry students whoever got lost and couldn’t get out. And he shared this long balloon. And he showed up, didn’t say a word, walked right to the center with this balloon, let the balloon go. And he had this long, long string. And he lit up the bottom of the string of the study going up. And he goes, “Chemistry is about mixing chemicals until the damn thing explodes.” The ballon blew up, and we’re like, “Wow, we’re awake now. Class is going to rock.”

Alex Denner:

Exactly.

Yaron Werber:

It definitely rocked us.

Alex Denner:

That’s fabulous.

Yaron Werber:

That was awesome.

Alex Denner:

Cool hydrogen, or something like that. That’s fabulous.

Yaron Werber:

Maybe, Behzad for you, what’s the biggest goal for you for the rest of your career, for the next 20 years, or the next 10, or whatever it’s going to be? [crosstalk 00:55:44].

Behzad Aghazadeh:

Yeah. If it stays, I doubt it’ll be anywhere close to those numbers. I would be proud if I could invest in people in my organization now on the fund side that will continue to carry on maybe a legacy of how I think about investing, how I think about partnering with companies and helping them understand our views, firmly communicating that. But then also be willing to stand by the side of these companies to be supportive in executing on the business. I think that would be a proud outcome for me.

Yaron Werber:

Legacy. Yeah. Alex, what about you?

Alex Denner:

Yeah. I mean, for me, I love what I do and I don’t hope to retire. I really intellectually enjoy it. I feel like I want to do investing where it keeps all of our learning curves steep and that’s intellectually stimulating for me. And as Behzad said, I think what I want to put more effort into is growing. I’m honored to work with a great group of people at Sarissa and sort of kind of growing everyone together. So we really can have a bunch of people that can do this sort of thing. The type of investing we do at Sarissa, it’s not scalable. You can’t do a hundred of these at once, as I think Behzad would agree. It just sort of, there is… I don’t know, if hours in a day, and days in a week. But I think that the more people that are holding management teams to account, the better off we all are as a society, the country, the industry, everything. So just more people thinking like that is always good.

Yaron Werber:

Yeah. Well, terrific, Behzad and Alex. Thanks so much for joining us. Always insightful, entertaining, and highly illuminating. Really appreciate it.

Alex Denner:

Thank you.

Yaron Werber:

Thanks.

Alex Denner:

Thank you, Yoran for having me. Thank you, Behzad for joining in it. Wonderful speaking with you guys and health and happiness to everyone.

Behzad Aghazadeh:

Likewise. Nice to be on the call with you. Yaron, thanks for inviting me.

Speaker 1:

Thanks for joining us. Stay tuned for the next episode of Cowen Insights.


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