Mr. Amsellem: In terms of the smaller caps - companies under $10 billion or under $5 billion in market cap - typically we focus on specialty pharma companies with significant brand businesses. Our focus is mainly outside of generics for now. We typically like companies that have managed their product life cycles well. In other words, they have the ability, either through development or acquisition, to sustain cash flow growth even after key top-line drivers have seen their patents expire. So companies that have been active on the acquisition front, companies that have been active in terms of deepening their R&D pipeline to where they can really sustain their business models over the long term, those are companies that we tend to be more favorably disposed towards. The reality in the specialty pharma business is that assets have finite lives. In the biotech space, biologics have much greater patent protection, much greater market exclusivity, especially when compared to small molecules. I'm thinking about where biosimilars will be, and it's going to be much tougher for generic competitors to really make a major dent into biologics the way they have in small molecules. So for specialty pharma, the goal for companies is to continually find ways to reinvent themselves. That is the challenge, and it's a big challenge, and it's one of the reasons that the multiples for spec pharma companies typically trade closer to, say, big pharmas than they do to big biotech.
TWST: What do you mean?
Mr. Amsellem: The challenge with specialty pharma is terminal value, right? You have a product that's generating cash flow, but it goes off patent and in three years, five years, seven years - whatever it is - it's a finite life, whereas biologics don't have that kind of issue yet. That is being legislated now though. Now for a spec pharma company, five years down the road - maybe earlier, maybe later - you can see a significant decline in revenue and a significant decline in earnings power. That dramatically impacts terminal value. So on one hand you have businesses that generate very significant cash flows. In terms of value and cash flows, these are stocks that are pretty cheap by and large. But there is the challenge of terminal value. So that's why you've seen this kind of multiple compression. You've seen that with Big Pharma as well. In terms of this idea of finite patent life and generic competition on the horizon, that's probably the single biggest reason for multiple compression in the space. And this is just something you just don't see - or haven't seen historically - with biotech.
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