James Gale, Founding Partner & Managing Director,

SIGNET HEALTHCARE PARTNERS

"We see a risk of rationing of capital by biopharma companies leading to a pullback in the amount of funds being spent in R&D."

What have been the key milestones for Signet over the past year, particularly with the company’s Fourth Fund (Fund IV)?

Signet has made several investments in Fund IV. We completed the investment in Ascendia Pharmaceuticals in the first half of 2021. We participated with Novo Holdings in acquiring Altasciences, a fast-growing, well-run clinical research services organization. We also made a strategic investment into Juno Pharmaceuticals, a Canadian marketer of complex generic injectables. Signet is hoping to leverage relationships with our portfolio companies and other entities to find products for investment and to create partnership arrangements. In early 2022, we acquired the consumer health contract manufacturing business of Fagron, a Dutch personalized medicine pharmaceutical company. This acquisition was done not through Fund IV, but rather through a special investment vehicle and fits in with Signet’s theme of investing in consumer health.

To what extent do you see the general correction of market activity as an opportunity for the industry?

Signet’s thesis is that interest rates will rise. Rising interest rates will have an effect in two parts. First, there is generally a rotation in the investment market away from high-tech growth and futuristic earning streams towards companies with revenues and earnings today. The decline in public share prices of biotech companies over the past six months reflects that pivot towards value. Second, if interest rates climb, the cost of capital climbs. This has a converse effect on multiples – meaning multiples come down as the cost of capital rises. If this happens, perceptions of valuation begin to shift on the buy and sell side. However, multiples often slowly decline, which induces a period of disintermediation between buyers (who sense it has become a buyers’ market and offer lower prices), and sellers (who still have a memory of higher valuations and hold their ground). It is then difficult to bridge the gap between bid and ask unless people are becoming more financially desperate to sell. We could thus see a protracted period of lessened activity before we see the M&A markets start to build again.

How have these trends impacted Signet?

We build our investment models around particular investment situations, paying careful attention to terminal values and exit multiples. We assess the climate relative to historical norms under different interest rate environments. Additionally, as we build an investment case, we are often risk adjusting management’s robust projections to consider downside scenarios. This includes the prospect of a delay in the recovery of financing for biotech companies. We see a risk of rationing of capital by biopharma companies leading to a pullback in the amount of funds being spent in R&D. We are cautious with our portfolio companies about rapid increases in personnel or capital expenditures in capacity until we have better visibility about the future utilization of that capacity. We thus have a wary eye about the impact of a slowdown in biotech financing on R&D spend and CDMO profitability.

How do you view the feasibility of reshoring efforts for American manufacturing of pharmaceuticals?

India’s actions recently have raised questions about the security of drug supply from that country, traditionally a reliable partner. At the start of 2020, they temporarily placed an export ban on 27 critical medications and in 2021, redirected Serum Institute to reprioritize the production of the AstraZeneca vaccine for their domestic market. More recently, India’s tilt towards Russia in the Ukraine-Russia war further raises questions about their alignment of interest with the US.

We clearly need to secure drug supply in the US. That said, the market structure in the US, particularly for the purchase of generic medications which account for 80-85% of all prescriptions, disincentivizes onshoring of production. While branded pharmaceutical companies would prefer to keep production closer to the markets they serve to mitigate potential supply chain disruptions, the generic industry is still highly dependent on India and China.

What key trends do you see driving growth for Signet over the next few years?

Signet’s investment strategy is guided by determining which technologies will be potential winners. We also track complimentary services that can create a more comprehensive offering to customers. While Signet is a commercial stage growth equity fund, technology guides our investment decisions.