What themes has Signet honed its investment theses around for Fund IV?
We are now nearing the completion of the investment period in our Fund IV. The modalities that we invested in have had a tendency towards large molecule, as opposed to traditional smaller molecule. There has been more of an emphasis on newer technologies. The reason for the shift toward larger molecules, including cell and gene therapy, is due to the revolution presently taking place in medicine. Some of the gene therapy and cell therapy products have proven in clinical trials now to cure disease as opposed to just addressing the side effects. There is a paradigm shift taking place right now in the research resources being allocated. Those companies who are providing services to support that research are well positioned for substantial growth.
To what extent have you seen valuations shift over the past year, and do rising multiples impact the pace at which you deploy capital?
In the first half of 2020, valuations plummeted and a number of M&A transactions that were in process, ground to a halt. Buyers were concerned about business conditions and the longevity of the effects of COVID on the economy. Sometime into the third quarter, the M&A market and venture capital market regained confidence that the economy was returning to normal. Consequently, valuations rebounded and transactional activity sprung back to life. There have now been elevated valuations over the course of the last nine months, and it has made deal making a little bit more difficult for value buyers like us.
Do you believe investors will show interest in building more early-input capacity around APIs in recognition of the bottlenecks revealed by the pandemic?
Security of drug supply has now become a public policy question. There was a real risk in Spring 2020 that there could have been serious shortages of supply of life saving generic drugs. This near crisis has directed attention to the need to move the supply closer to home. That has been reiterated recently due to the recent export bans on supplies of COVID-19 vaccine from India and Europe. It is clear a disruption in any nation’s supply chain can have enormous effects on the population. But, if the US is to create a domestic supply, will the market support it? Who is willing to pay the price associated with US production versus cheaper product from India? The current structure of the US generics market will have to be changed. Presently, there is little incentive for the distributors to support this national goal. I do not see economic players who are willing to finance repatriation of the drug supply chain to the US.
Do you agree with the notion that ensuring all drugs go generic without undue delay would be smart policy for the competitiveness of our healthcare system?
If the US wants to remain at the forefront of medical research and continue to develop these exciting new medications that are going to transform life in the next half century, we need to allow for adequate returns on those investments. There is a sanctity of this patent system that is essential. There has been considerable litigation and regulation over the past several decades which has created a framework around patent expiration. I am not sure how advisable it is to alter this system of rules that has been based on market interaction. That includes the ability of an innovator to extend the patent estate around their products. But, the legal test is whether these are true innovations or anti-competitive tactics. It is in that area that I think we need tougher standards to prevent a branded company from preventing generic entrants to the market.
I think the bigger issue concerns the way therapeutics are distributed. We should consider the allocation of the final consumer price to the various parties in the supply chain. There is enormous waste in the money being paid to distributors, retailers, PBMs and other intermediaries. A major solution to lowering US drug costs is in improving these intermediation costs. We should ask why parties who have not invested in innovation nor taken development risks, are taking a big portion of the price that the consumer pays.