The Exchanges

Q it together in my head, I scratch my head a little bit. So one is that The conviction leads to concentration. The other is that these probabilities can change over time, and you need to be a little bit dynamic. And then the last is, you know, where you started, which is this is a really volatile space at the stock level. What does a portfolio look like over time?

A Well, I'll tell you how we're positioned right now, for example, and generally speaking. In our flagship fund, we're about 70%, a little bit north of that, net long. We are 90 some odd percent invested, so on the long side. So our gross exposure, if you add long and short, is not that high, right? It's like 90 by 20, and so you net with 70. That is not that atypical for us. I would say our outer bounds are net of 30, And net of 90. And then the high end of gross is probably like one 50. So that's what it looks like just by the numbers. I would say a very important element that we haven't touched on yet is our best ideas, this conviction piece, our very best ideas. Uh, and sometimes we don't even have one that reaches this level in a given year, but we are willing to take up to a five percent loss if we're flat out wrong. So we have to use the art and guess what the worst case scenario is both fundamentally in factoring the market environment. We've been relatively disciplined about that. So you see on that top 10 losers list that we've only had a couple positions that loses more than five percent. If you have those kinds of guideposts in your mind, then you can kind of start to see how the portfolio falls out from that. So we'll have larger positions that are five to 10% plus of the portfolio. That must mean that those larger positions have some kind of base business value supp…

AI assessment note: “In our flagship fund, we're about 70%, a little bit north of that, net long.”

Q So as you look out after this, you know, significant retraction in the space, what opportunities are you most excited about?

A The innovation that we're seeing, especially in drugs, is very broad. We see a ton in cancer. Cancer is always the number one area of drug development. It's obvious high met need is the number two killer in the United States and other developed countries. But now with information in the form of genetic drivers, we're redefining cancer into what it actually is. Not just pointing out that, hey, you have cells that are growing when they shouldn't be. That's cancer. And then pointing out where they found it. Oh, lung cancer. If you think about it, it's so archaic to refer to a disease that way. So now cancer is being redefined into its genetic drivers. That's unleashed a ton of opportunity and innovation. And you have all these new tools like even chemotherapy, for example. The problem with chemotherapy has always been that there's a lot of collateral damage. It kills tumor cells, but it kills you too. And now you have things like antibody drug conjugates Which can improve what we call the therapeutic index by getting that delivered to the tumor cell. So oncology, we're seeing tons of innovation for similar reasons, immunology as well, a lot of unmet need there, a lot of diseases that don't have enough therapies. And then I would say some tissues that have been hard to get to, the brain, the eye, the heart, because of new modalities and their ability to get drugs into those tissues…

AI assessment note: “So oncology, we're seeing tons of innovation for similar reasons, immunology as well”

Q How have you changed the way you thought about the number of positions and the trading as you've grown your assets over time?

A It's evolved around the edges. What I just walked through Fundamentally hasn't changed, but what has changed, I would say the biggest piece is on the tail. So, 80% of our business approximately is public, and the portfolio looks exactly like what I just described, but now 20% is private. And in that private bucket, we're doing mid-delay stage venture type investments. We call it crossover, right, in biotech. And then we're doing some early stage company creation, series A types of investments. So, we've essentially added a A farm team over time, which consists of those private investments, right? A typical year, we're doing 10 to 20 of those, uh, in total. So the goal of that, of those private investments, you get from the name. We call it a farm team. So the goal is actually that they go public, and then we continue to re-underwrite, and from that farm team, we're looking for people to bring up into the majors. The nice thing about that process is It gives us even more time to do deep diligence, waves and waves of diligence, and also to get to know management teams and know what bucket they're in and get comfortable with them so that ultimately we feel more comfortable making a five or a 10% position. I would say that's been the primary change in the portfolio over the last handful of years, which is just that direct consequence of the growth of the private business.

AI assessment note: “I would say that's been the primary change in the portfolio over the last handful of years”

Q Which two people have had the biggest impact on your professional life?

A Don't make me choose. At each stage or each job, I've been really lucky, and I'll have like one or two mentors that then I'll carry forward in my life. So my first boss, Eric, he's just such a great example as a human being and as an academic. My second boss, Wayne, his ability to hone in on what is important and then do deep, deep work is, to this day, I mean, He was one of the great ones. At DK, Scott and Tom, business builders pulled me out of my minutia and made me think about bigger picture, risk and macro. But one person that wasn't my boss, but was a colleague and mentor, Kevin Tang, about 10 years older than me, he really showed me the possibilities to influence and build. And, you know, we did some deals together when I was just dipping my toe into that. And I really learned an incredible amount from them.

AI assessment note: “Don't make me choose. At each stage or each job, I've been really lucky”

Q A couple of thoughts before we get into sort of what's changed over the years. DK, very well-known, event-driven, you think of it as a risk-controlled type place. Obviously, investing in life sciences is generally thought of as quite volatile. How did that fit together?

A Well, that's a great point. I mean, honestly, I think biotech, especially the way we, that I've always done it, which is longer term oriented, is difficult to fit in any larger firm that's not focused only on healthcare. I mean, if you think about it, boil it down, the top-down vol is higher than average. The bottom-up or idiosyncratic, you know, vent-driven vol is way higher than average. And the expertise that you need to get comfortable to speak the same language, it's about as big a gap as you can probably get, right, for at least for long short equity. So from that perspective, I think it's hard to make it work anywhere. I am so grateful to the folks at DK for taking a bet on me to build that business there. And, you know, DK specifically was also on the conservative end in terms of the vol profile of their primary vehicles. So it was especially challenging, but you know, it was great for the, uh, about four years that I was there. We actually built a business that grew very quickly built. I learned how to build a team. I learned how to market. I got wonderful mentorship. At the end of the day, for all the obvious reasons, long-term oriented healthcare strategies, most of them need to stand on their own to be, have a shot at being successful. And I'm also at the end, you know, I realized kind of a Entrepreneurially oriented kind of person , so eventually it became obvious.

AI assessment note: “is difficult to fit in any larger firm that's not focused only on healthcare”

Q Going from stock picking to the other end of the spectrum building companies, what do you need to have in place to make that work?

A The way I think about it is that over the years, we transitioned from a few people with some talents And skills to building an organization with capabilities and organizing those capabilities in a thoughtful way. So we have a few key divisions now. We have people whose primary job description is to analyze things. The way we've approached evolving analysis is that we've said, hey, you know, science has become way more complex. So in analysis, it's been about Developing and acquire expertise that's subspecialized by disease, by modality, things like that. And then in the building part, it's about what functional expertise do you need to do the things that we want to do? You need dealmakers, so transactional people, that's not just ex-banker types, but legal, uh, internally as an example. And then you need builders. So that is really what key roles that would normally exist at a biotech company should we bring in-house? So that we can move more efficiently, so we can create muscle memory, institutional memory, so that we can do those things in a, you know, efficient way. Over time, that's basically what we've tried to build. I think you can make a list and probably do a pretty good job of the things that you might consider that you want in-house, but the trickiest thing, actually, in our evolution that I found was to get it all to work together smoothly. Without the wheels coming…

AI assessment note: “we transitioned from a few people with some talents And skills to building an organization”

Q There's Different levers that'll drive stocks. And particularly in this space, you think about just the science and so that, that binary nature of approval, then you've got the business, the market they're selling into. And then as you just introduced, there's this management element. When you're assessing a position, how do you think about each of those and the interplay between them?

A I think the honest answer is we've always been very analytically focused. So the probability, the size of the opportunity, and then related to that, the valuation piece. I like to say if Warren Buffett were to ever invest in biotech, you know, development stage biotech, maybe he'd use the framework that we would use. Now, of course, I know he never would. But I use that analogy just to make the point that we're fundamentally value oriented and we are looking for asymmetric risk reward. The trick is that you have to overlay that we live in a probabilistic business or one that's binary. So we've always been very focused on those variables. I will say that on the management piece, I kind of make it very simple. I put things in three basic buckets. Low percentage of the time management that is so stellar. That you think they can take a very marginal product, right? They can sell ice to an Eskimo, and there's drugs like that. And they can find a way to get it across the finish line and make it commercially successful. And there's certainly drugs like that. Then the other extreme, also a low percentage of management teams, is those that will screw it up. The execution, and that's extremely frustrating for analytically oriented people. And then the middle bucket, which is most, which is that you have Good management, solid management, knows what they're doing, and it's really about su…

AI assessment note: “we've always been very analytically focused. So the probability, the size of the opportunity”

Q You mentioned the opportunities and challenges of a listed vehicle. What have been the trials and tribulations of that entity?

A It's been a really Interesting adventure. There are a lot of really positive things about a listed fund. I think the challenge is that UK in general, and then specifically for listed funds, there's not a deep audience and there's not a lot of liquidity for that. So that's one challenge for sure. The other is it's not a familiar product for people. So like a lot of people now want to allocate to biotech, but they're just not familiar with With that structure. And some folks, you know, they don't want something that's marked to market every day. Um, so there's just some interesting dynamics that make it a little bit more challenging in some ways, but I really do think the strengths of the vehicle are such that it's worth us to continue to invest in it.

AI assessment note: “there's not a deep audience and there's not a lot of liquidity for that”

Q So from that natural path to science, how did you go off the rails?

A That's an interesting way to put it. The, you know, the funny thing was, as I was falling in love with life science, and kind of drifting away from hard science, Or abstract science. At the same time, I took, you know, an econ course, a couple econ courses. This Harvard prof, Gregory Mankiew, I think it is, he wrote the most used intro microeconomics textbook in the country. And I fell in love with that textbook. I mean, back then, you could have called me like a cult follower or something. So I fell in love with econ at the same time. And so very early, I kind of had both interests that were growing. And so even when I applied to med school, I was thinking, you know, med school and business school. I can't say that any idea what career path, you know, if I try to put myself back in my shoes at the time, maybe I was thinking administration and practice kind of thing. But that's just because I didn't know any better. You know, business school is great. I interviewed for everything you could imagine. And then it all kind of crystallized when I met the guys I ended up working for my first job at Callen, which was equity research. You know, when I met them, Uh, it's like looking in the mirror and it just felt right. And so, uh, that's how it happened.

AI assessment note: “I fell in love with econ at the same time.”

Q So let's circle back to your starting RTW. What was your original intent on starting the business?

A When I started, I have some beliefs about how to invest in healthcare optimally. That kind of looks like run a moderately concentrated portfolio, take bigger bets, have edge in two basic things, right? At that point in my career, call it mainly talent or whatever, or the beginnings of a process where I thought I could assess the likelihood of, of success better than the market. So the probability piece, and then two, Size those opportunities better than the market. So at the end of the day, the strategy was find those things that offer high probability asymmetric risk reward over a medium to long duration and build a portfolio out of those things, recognizing that great drugs that are underappreciated by the market should be hard to find. So that should be a moderately concentrated portfolio. I had confidence at the time because of the experience that I had for a few years at DK. When I started, I was still basically a stock picker at heart, but I was starting to get the itch of, oh, can you do more? Can you be more involved, whether it's transactionally building things? Those were just ideas at the time. There wasn't like a plan. I like the idea of being an independent firm, having the freedom to do that someday.

AI assessment note: “When I started, I have some beliefs about how to invest in healthcare optimally.”

Q What are your favorite tools or processes that you now have in place that you think are really impactful in making that work?

A Yeah. It's funny because when you're first doing this, you tend to overdo things. So like, you know, one, just as a small example, we got religion about using slides as part of our process, uh, structures, our meetings, you know, uh, forces people to be clear with their communication and, uh, At one point, you know, a good deck, quote unquote, you know, in RTW was probably 30 to 50 slides long. And I remember we had one, one offsite where I bet we presented 300 slides. And we made people sit there and listen for four hours, you know, to 300 slides or whatever. And then you make progress. And now, what is a great deck? A great deck is probably four slides. So we added a bunch of tools. They're all some blend of falling under the buckets of structure or process. And then it was a process of taking the tools like PowerPoint decks and just using them to the point where it's optimal. Not weighing the organization or teams down and building those things, but just to facilitate the job that needs to get done. And so now I think that's where we are. You know, a lot of it's also On the structure piece, organizing the firm well. It's basic things that you don't think about when you're a small firm, like making sure you have people reporting into the right people, making sure you have managers that are competent to deal with their direct reports, and those kinds of basic things. So if you…

AI assessment note: “I would say very short PowerPoint decks, and I would say Gantt charts.”

Q For some of the firms that haven't made it and have come and gone, what are some of the lessons that you've learned of, you know, mistakes that others have made?

A One of them is the transition that we talked about from small to scalable. People always said, oh, you know, the firm's actually way riskier when you're, when you cross a billion dollars. And before I went through it myself, I didn't understand it. And now I really get it. It's very hard, especially when the wiring of your leadership, everything that's gotten them to that point are the same things that will cause their business to fail. Being a lone wolf, not embracing teamwork, not embracing structure. I think that's one key thing that's caused firm failure. I think another key thing is falling in love with science and And not doing the risk management part of the job properly. You know, there's a saying, right? Doctors can't balance their checkbooks. Of course, there's some truth in a lot of sayings. And there's truth in that one. A lot of people get into this business because they are passionate about science, number one. And that's true of a lot of the folks here, too. But it's tricky to bring both of those things together and have discipline and Especially with risk management. But even if you've sized things appropriate, to have a very sober view, objective view of truly what is the worst case, easy to say, hard to do. So that's caused a lot of failure.

AI assessment note: “Being a lone wolf, not embracing teamwork, not embracing structure. I think that's one key”

Q When you're doing your research with the team, what are the things that you get conviction in or the signposts of that conviction, both that you think the drugs are going to work and that you have a differential view from the market?

A It's a very straightforward question. But, um, yeah, the answer is actually big. I mean, I think at the end of the day, what it's about Is about doing different types of exercises, research or analytical type exercises that you're confident are going to be predictive of the future, right? That's the name of the game. And it depends on the investment type, the situation, and where the misunderstanding is. So, you know, I'll give a couple of different examples. Sometimes the misunderstanding is people don't understand statistics. And so you can have edge by doing it properly. So there was a wave a bunch of years ago of constipation drugs in development. And the end point for constipation studies is how many bowel movements you have. Obvious. Because that's the goal. And the nature of drug development tends to be when you progress from early stage trials to late stage trials, the regulatory agencies like FDA make you do longer studies. Initially, you don't have that much safety information. You don't have a lot of toxicity data. And so they're like, okay, test it for a month. Do your phase two for a month. And then when you prove yourself and it looks like an interesting drug, then in your phase three, we want you to do six months, right? Because we want to be sure that it's safe. So in constipation, the way this plays out is people do proof of concept studies over a month, and yo…

AI assessment note: “Sometimes the misunderstanding is people don't understand statistics. And so you can have edge”

Q For you to get through that period of time after you've cut the costs and kind of make it to the other side, what do you remember that allowed you to do that?

A When young folks ask me what they should think about, you know, before considering to start their own thing, I always give this example, which is that, like, you can't plan that things are going to go up in a straight line. There's no straight line in anything. So If you're going to make a decision based on planning, plan for a not straight line and don't make it a two year plan, make it a five or a 10 year plan. That's number one. And then number two, don't do it for bad reasons. And a bad reason is if the only reason is to make money. And for me, the most important reason I was able to persist was because in that moment I was, the glass half full view was I'm my own boss. And that was very, very important to me at the time. And as long as I can pay my bills, pay the rents, I loved my job, I enjoyed what I was doing each day, then that worst case scenario, that's okay. So it wasn't that I was going to turn this thing around and we were going to be a great success. Especially, you know, at that point, you're always at your least confident and you really can't plan for success because it looks so far away. It's the obvious things. Be passionate about what you're doing, enjoy it for what it is, and plan for the long term.

AI assessment note: “the most important reason I was able to persist was because... I'm my own boss.”