Contrarian investing, or being greedy when others are fearful as Warren Buffett says, is a difficult concept for most US equity investors.
“When you’re working for a large bank like Oppenheimer, you’re being compensated well and you are really treated with respect. And there’s just that platform that is amazing. But I wanted to do my own thing, to invest in myself and my own business.
So, I founded Tecumseh Partners. And what Tecumseh Partners does is advise biotech and financial firms on valuation, communication, and strategic positioning.”
Hartaj Singh, Founding Partner, Tecumseh Partners
Hartaj Singh is a Founding Partner of Tecumseh Partners, advising biotech companies on valuation, strategy, and investor engagement. He also writes The Biotech Capital Compass, a newsletter focused on biotech market trends.
Mr. Singh’s 30+ year career spans biotech equity research, hedge fund investing, and consulting — previously at firms like Oppenheimer, BTIG and Lehman Brothers.
With an MBA from Duke and a background in computational neurobiology, Mr. Singh brings a science-driven approach to biotech investing.
“There’s a lot of medical tech that’s exported to China.
So, I think wherever there’s a manufacturing-intensive CDMO model — and I believe WuXi (OTCMKTS:WXXWY) and other firms participate there — those could have some initial headwinds.
Firms that really depend on a global supply chain as a way of operating, for example those firms with Chinese fill and finish or API sources — those could be really impacted.
And then I’m not a medical device analyst, but I do imagine that there’s probably going to be some counter tariffs from China back to the United States.
So, if there’s anything from the drug side, more likely medical device and diagnostics that are going to China, they will probably get hit.
And then the second portion of this is from a biotech perspective.
There has been a lot of licensing acquisition both from the U.S. going to China and China going across the United States.
And that might slow down. Things may cool considerably in terms of boardroom appetite for cross-border deals.”
The contrarian investing thesis for biotech and pharmaceutical companies is a wide area for Hartaj Singh.
“High quality names — and in biotech, what I mean by high quality, is that I think of it as mentally picturing a diamond.
And a diamond has four points when you’re looking at it.
And for biotech, the top point of that diamond is revenues, the bottom part is earnings.
To the right is future competition and to the left is the pipeline.
So, I think companies where you can check those boxes, for example, like a Gilead, like a Regeneron, or like a Vertex (NASDAQ:VRTX), with good revenue growth, and good earnings growth.
Neither of them is perfect — to the right, not a lot of competition in the future, or muted competition, at least in the next five, 10 years.
And then to the left, a good pipeline. These companies check those boxes.
On the smaller cap side, United Therapeutics (NASDAQ:UTHR) definitely checks that box.
There’s a Chinese company we like called Akeso (OTCMKTS:AKESF).
They kind of hit the four points of that diamond.
So, I like those companies because they’re just quality names and you can buy them and keep a low cost base even if they’re being impacted by this tariff volatility.
We also like U.S.-centric commercial companies.
Most commercial-stage biotech companies have 70% to 90% of their revenues from the U.S., which shields them from much of the tariff risk.
So, you actually do away with all that tariff stuff.
Once people get a little bit of time to calm down and away from this tariff volatility, biotech will become a very attractive sector, because the vast majority of commercial companies have more than two-thirds of their sales in the United States.
What’s not to like about that setup?
We also like strong balance sheets and near-term probability, near-term catalyst, PDUFA events.
So the biotech model for large caps and small-to-mid caps won’t be really impacted once this tariff induced volatility calms down.
Because if your clinical catalyst works, or you get a drug approved, or your sales are better than expected, that stock will work, and we like that.
So as an example, we like this company called Avadel (NASDAQ:AVDL).
They’re the second company launching into narcolepsy and with just a very strong execution on the launch of their product called LUMRYZ.
It’s a strong specialty pharma model.
They’re second to Jazz (NASDAQ:JAZZ).
But McKinsey published a study just a few years ago showing that even second-to-market companies captured 25% to 40% market share.
We like Regeneron, in our diversified U.S.-heavy revenue base.
You look at Eli Lilly (NYSE:LLY), people talk about obesity and diabetes.
But the thing is, this company is going to grow multiple double-digits for the next two, three years.
What’s not to like about that?”
Contrarian investing can also be applied to large cap, dividend paying drug companies.
“If you look at the larger cap side, you can definitely see an aging population.
These biopharma companies are looking at Alzheimer’s, arthritis is still big, cardiovascular disease.
But Alzheimer’s and cardiovascular disease especially.
Biogen (NASDAQ:BIIB) and Lilly have made very large investments in Alzheimer’s.
Sales maybe aren’t doing great right now, but once they start picking up, as we saw with biologics 10, 20 years ago in oncology for example, it becomes a huge area for investment.
So, I like to look at Alzheimer’s, cardiovascular disease.
Novo (NYSE:NVO) and again Lilly are seeing therapies for weight loss and an aging population.
The obesity epidemic, GLP-1 growth for Lilly, Novo Nordisk, ripple effects in NASH, sleep apnea, CV — for the larger biopharma companies that’s the area of interest I’m looking at.
For rheumatoid arthritis, there are seven approved anti-TNF medications, and even the seventh one is doing about $1 billion to $2 billion in sales.
I believe that’s the UCB (OTCMKTS:UCBJY) product.
So, when you have a large area like obesity, you can have four, five, six companies do very well in the long run.
And then lastly mental health.
In that area, increasing demand for neurology, even smaller companies are going there.
On the small cap side, when I look at VCs, AI is the rage.
In biotech, AI is just another tool for us. We’ve been doing what’s called “in silico drug development”; that is drug development on a silicon chip.
That’s been a term for 40, 50 years as opposed to in vitro, or in vivo.
So in a petri dish or in a living thing.
In silico drug development will catch a pretty rapid tailwind with AI.
We’re already seeing that.
And the smaller companies, VCs are going to look at that not just in terms of, for example, designing drug molecules or finding diseases where current drugs could be more useful.
But in advancing X-ray techniques and imaging techniques.
Imaging is actually very amenable to AI.”
A contrarian investing case study can be made for Moderna.
“We were long Moderna in 2020, 2021.
Then we downgraded in 2022, and we held there until early 2024 when we upgraded again. But that was based on the idea that their sales, which they thought would be $3 billion, $4 billion last year, would continue that way. And actually, sales numbers just keep on coming down for Moderna.
If the pandemic hadn’t occurred — and Moderna hadn’t generated $15 to $16 billion in vaccine revenue at its peak — then 2024’s $3 billion-plus revenue run rate would actually look quite impressive.
They did their IPO in late 2018. So now, seven years later, it grew to $1 billion to $2 billion in sales, and getting closer and closer to breakeven.
Companies like Vertex, Regeneron, Genentech — how long did it take them to become breakeven?
Closer to 10 years.
We actually did that analysis when I was at Oppenheimer, published that note that it takes biotech companies about 10 years from the point of an IPO to becoming breakeven.
Moderna is right on track.
I think the nucleic acid vaccines will do great.
And they will continue to get more products approved in therapeutic vaccines.
At some point the current negative sentiment will shift and this will become a pretty big buying opportunity.
But right now, first and foremost, the company has to prove that their revenue estimates can’t keep on coming down.
They’ve got to show us a few quarters and one to two years of increasing revenues and getting products to market.
And I do think Moderna management is among the best.
But there’s been a little bit of overpromising, and underdelivering over the last two, three years. What they need to do now is underpromise and overdeliver.”
Get all of Hartaj Singh’s contrarian investing picks and pans exclusively in the Wall Street Transcript.
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