Axial partners with great founders and inventors. We invest in early-stage life sciences companies often when they are no more than an idea. We are fanatical about helping the rare inventor who is compelled to build their own enduring business. If you or someone you know has a great idea or company in life sciences, Axial would be excited to get to know you and possibly invest in your vision and company . We are excited to be in business with you - email us at [email protected]
Is value investing possible in life sciences? This piece uses a set of case studies to show there is the potential to use ideas from value investing to identify and build great life sciences businesses.
Value investing is the practice of determining the intrinsic value of a business and investing at a price well below it. This leads to the next question - what is the intrinsic value of a life sciences company? Its patents? The fashionability of the company’s platform? The SAB? Common knowledge assumes that value investing in life sciences is more-or-less impossible because there’s too much technology risk. This leads to a common approach found particularly in biotech: invest based on momentum (i.e. what’s hot) and get in front of binary events (i.e. clinical trial readouts). This style doesn’t fit my personality and is just a little too risky. It’s like playing poker against Phil Ivey every day; I’d rather play against old college buddies.
A good part of value investing in life sciences means investing in great businesses. This is a tractable problem when compared to other styles. Great businesses have common features that can be analyzed. And case studies are pretty useful to distill these features. More often than not, many of these features are intangibles that are hard-to-value. Things like the founders, R&D capabilities, culture and mission, and more. There are challenges to figure out the real intrinsic value of a business in this field - many life sciences companies have negative cash flow early on and projecting future growth is pretty difficult. However, case studies of great life sciences businesses create models to figure out which companies have the potential to grow despite the early lack of profitability.
With a set of rules that make value investing possible and repeatable, the hard part about it is not knowing the rules or anything like that, it’s having the intellectual courage to come to your own conclusions. Excitedly, the Superinvestors of Life Sciences have shown it is possible over multiple decades to successfully invest in life sciences - https://axial.substack.com/p/the-superinvestors-of-life-sciences
Although I’m not here to tell all my secrets, it’s important to map out the key features of value investing in life sciences:
Find margins of safety
A margin of safety is the ability to fail a few times without dying. In life sciences, this is usually enabled by several shots-on-goal. Whether they are financed by non-dilutive partnerships or through a large financing for a platform technology, the ability to fail is immensely valuable. Warren Buffett describes the concept very well:
“If you understood a business perfectly and the future of the business, you would need very little in the way of a margin of safety. So, the more vulnerable the business is, assuming you still want to invest in it, the larger margin of safety you’d need. If you’re driving a truck across a bridge that says it holds 10,000 pounds and you’ve got a 9,800 pound vehicle, if the bridge is 6 inches above the crevice it covers, you may feel okay; but if it’s over the Grand Canyon, you may feel you want a little larger margin of safety.”