Dear investors and well-wishers,
The fund declined 12.8% in October. Our 12 month return at the end of the month was ~106%.
Transmedics and Clarity, both amongst our most profitable investments, pulled back this month.
Clarity
Clarity is down about 30% from the high at the end of September.
There were some positive updates.
They are testing their Copper diagnostic head-to-head against the Galium used by Telix in the detection of prostate recurrence at St Vincent’s hospital in Sydney. The first two patients have already been dosed.
Usually companies avoid head-to-head studies when they can: Telix and Lantheus have never put their agents against each other definitively, for example. This suggests strong confidence that their success in prior trials will be repeated.
Telix’s Illucix has been taking market share from Lantheus’s Pylarify in a market that should soon reach $3 billion a year, so the stakes are high. Telix is an $8 billion company today.
Telix’s Illuccix gaining share against Pylarify
Clarity’s key trial is in its 4th cohort. The first three patients in the Cohort 4 saw reduction of PSMA, with one seeing a 98% drop.
Clarity’s most important trial is in its fourth cohort
Over the last few weeks the company dropped to a ~US$1 billion valuation (vs recent acquisitions in the US$2.5-4 billion range). If the later cohorts perform as strongly as the first three, we see a 2.5-4x return in the mid term, which would add 25 - 55% to our current unit price.
Transmedics
Transmedics posted its first quarterly decline. We sold a decent chunk before the result after hitting our first take-profit level, and closed the rest of it at a small profit.
Hedge funds are now tracking its planes, a number of which were out of action for the quarter.
The CEO was defiant in the call, challenging analyst’s perception of reality and standing by their full year guidance, which would imply a significant reacceleration from here.
The market for donors contracted in the quarter, but for some time Transmedics has been growing well in excess of the market, effectively taking market share. The concern is whether the period of ultrahigh growth is over and Transmedics now grows in line with the market.
With one month left in the year, we will soon find out if this was justified.
Regime change
As I discussed in my last note, Trump’s election has mixed up a new set of winners and losers.
And we’ve responded, moving about 30% of the fund into small cap tech.
We built new positions in Root, Hellofresh, Hims&Hers, Square, and bought back some of our e.l.f beauty stock well below where we sold. Each of these new positions has been profitable so far.
Root
Root prices car insurance based on driver quality. Potential customers download an app which gathers and analyse data from smartphone sensors, measuring adherence to speed limits, rate of braking and acceleration, phone usage, and time: late night driving is penalized.
This has been increasingly effective and loss ratios have fallen, helped also by a maturing customer base:
In their latest quarterly result the company posted year-on-year growth 165% and the company reached GAAP net profitability for the first time:
Root is taking market share, but only has 0.5% of the market.
HIMS
Hims&Hers markets direct-to-consumer offerings in sexual health (Viagra), hair loss, mental health, anxiety and depression, womens’ health (birth control) and most recently GLP-1 drugs.
HIMS stock price over the last six months
The stock was buffered by headlines around the changing status of GLP-1 drugs and a new competitive threat from Amazon.
Amazon has tried to enter the health space before, but past attempts have failed, perhaps because people don’t want to enter sensitive health information into Amazon’s website.
Growth has been impressive: subscribers are now at 2 million, up 44% year-over-year, and revenue is up 77% year-on-year, and the company is GAAP profitable. More and more customers are using their personalized offerings which should be far stickier:
The incoming US administration is likely to crack down hard on big pharma, but it’s not all bad news for healthcare: they are also in favour of deregulation and more consumer choice. And Vivek Ramaswamy, a successful biotech entrepreneur, is no fan of FDA delays.
Hims&Hers uses pharmaceutical compounding to manufacture GLP-1 weight loss drugs, which they are allowed to do while the drugs are on the FDA’s shortage list.
Hims has executed well and consumers are voting with their feet. This is the kind of customer support we like to see:
Syntara
There are some critical readouts coming in the next month.
Syntara is one we have owned for a while. Data will be released in early December which will be a material value inflection point. You can hear a rundown of the thesis here.
Syntara stock price over one year
There’s a lot to say about this company, but perhaps it’s best to wait for the trial result. We participated in two capital raisings, at 0.022 and 0.028. This was initially a small position, but after a strong rally is now ~4% of the fund.
Outlook
The Trump trade is in full swing. Small cap tech and growth in particular has performed exceptionally well.
We had a lot of work to do as our largest positions, which were perfect for the prior regime (semiconductors and healthcare) became under pressure, while there were substantial moves in US small cap tech.
Regimes like this can last for months or 1-2+ years, so there’s plenty of opportunity left.
To give one example of which we now have a small position, Square/Block is down 69% from its peak in 2021. Since then gross profits have grown from $3.7 billion to $8.7 billion, about 2.4x.
Block is trading below its peak in 2018.
Companies like this, which are only just recovering from a multi-year bear market, could just be getting started.
Michael
