InvestmentsFeb 23 2015

‘There are large and profound product cycles starting’

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For David Pinniger, an ambition to be a doctor was the unlikely first step towards a career in fund management. The fact that he specialises in biotechnology is perhaps less surprising, though.

“I did all the science and maths A-levels with the view to be a doctor, but I didn’t quite have the courage to do medicine at university so I ended up doing human sciences, which is a mixture of the biological and social sciences,” he explains.

“You’re basically using a variety of methods and disciplines to try and understand humans a bit better – why they are like they are and why they behave like they do – so it included anthropology, genetics, psychology, demography and human ecology. It was great.”

Following his degree, he eschewed the normal milkround route in favour of a year off. This included work experience at Sarasin, as well as the traditional “travelling thing”.

“Before I went away, I applied to various investment management groups and banks and got a job at Morgan Stanley in equity research. Then, before I left, they asked which sector I’d prefer to do and biotech seemed the obvious fit.”

He smiles: “It was around the time that everyone wanted to do technology, so the tech team was rather stuffed. I thought biotech would be a bit more interesting, given my background.”

Not only did his first role at Morgan Stanley provide him with a rigorous training in how to analyse companies from an investment perspective (“a bit like bootcamp for analysts”), it also introduced him to his current colleagues at Polar Capital, Dan Mahony and Gareth Powell. “I’ve sort of come back to the friends I made right at the start of my career,” he grins.

After four years at Morgan Stanley, Mr Pinniger moved from one extreme to the other, leaving a large multinational company for the world of venture capital.

“It gives you the opportunity to look at companies in a much earlier stage of development,” he says. “I was looking at companies from the start-up stage right through to when they become public or get acquired by larger competitors. That allowed me to get really close to the scientists and the entrepreneurs involved, which was great. I did that for three years, then got given the opportunity to run a fund.”

He took on the role of lead manager of the International Biotechnology Trust (IBT) for five years. While he focused on the quoted part of the portfolio, the venture capital investing side of the vehicle failed to deliver over time, meaning it gradually became “sub-optimal for investing in a sector that was going onwards and upwards”.

At around this time, he was approached by Polar Capital to take on the management of its planned Polar Capital Biotechnology fund. He jumped at the chance.

“I joined Polar in August 2013 and we launched the fund in November. It has had a great start and I’ve been out and about talking about biotech, which for the first time in a number of years is an interesting thing to do, and quite a fun thing to do as well,” he says.

“During my time at IBT, biotech was a sector that was out of the limelight. People weren’t really interested and were a bit sceptical. But as all these companies have begun to deliver on the promises of new drugs and technology, people are beginning to realise there is something to biotech, so there is a more receptive audience.”

Biotech as a sector has had a challenging period since he joined the industry. In 2000, he notes, it was just rolling off a bubble phase.

“There was a genomics bubble at the same time as the dot.com bubble and the industry raised a phenomenal amount of capital. But what happened is everyone realised the science was going to take a lot longer to deliver products than perhaps people were led to believe during the enthusiasm phase. Companies were deploying capital into drug-development processes and the drug-development cycle is a long cycle,” he points out.

“So at this point now, 10-15 years on from that, all the capital raised in 1999-2000 is now beginning to generate products that are driving businesses forward. In the past few years, from 2010-11, we have begun to see these products come through – some quite important breakthroughs that make a big difference to serious diseases – and given some of these have serious commercial potential, that’s beginning to attract people’s attention.”

While many still consider biotech to be a risky proposition, the manager points out that at a net level, the industry is beginning to become self-sustaining and profitable.

He acknowledges that this profitability is primarily driven by the larger biotech companies, as there is a long tail of unprofitable companies still consuming cash. He adds, though, that the industry as a whole is becoming less reliant on being drip-fed capital from the markets.

“This is also helping biotech become more attractive. Some of these companies are now larger than some traditional pharmaceutical companies and, given they offer a much stronger growth profile, biotech is increasingly a sector investors have to own if they like healthcare as a theme,” says Mr Pinniger.

“In the past couple of years, the boundaries between large-cap pharma and smaller biotech have become somewhat blurred. So it has become more difficult to identify large pharma and biotech – but for us, biotech tends to be the more development stage, pre-commercial stage companies, hopefully with a much more interesting risk-reward flavour to them.”

The big thesis for the fund is that what has happened in the past few years is just a start.

“There are large and profound product cycles starting now that should last 10-20 years as the science begins to deliver,” he says.

“Companies are changing and evolving, biotech is beginning to generate cash rather than just consuming it and it’s beginning to make people a lot of money. So there is a certain vibrancy to the sector that is predominantly being driven by the product cycle story, but it’s also offering growth in an environment where there is not much growth to be found, and investors are looking for that sort of profile.”

The rigours of launching a new fund mean that Mr Pinniger is rarely able to switch off. Indeed, there is not a major European city he hasn’t travelled to in the past 12 months, given his attendance at research meetings in the US and client meetings across Europe.

He adds that with US markets not closing until 9pm, and companies and analysts constantly putting out reports and further information, “As soon as you wake up, there is material to digest and things to do.

“During the week, it is from when you wake up until you go to sleep, but at weekends everyone stops writing, which is helpful,” he jokes. “Holidays are quite tricky, as you do have to keep half an eye on what is going on, as the fund is ultimately your responsibility and the investment is your responsibility. It is ‘check what’s going on at lunchtime and in the evening’, although it is hard not to get sucked in.”

With the fund now past its first year, he acknowledges that in the early days, it is key to “get out there and be visible and make sure nothing blows up in the fund”.

“Out of the gate you have to be differentiated, you have to have a good start, so the pressure is really on, which makes stepping back from it quite difficult, at least to begin with.”

Looking ahead, however, his aims sound relatively straightforward.

“It is never going to be a giant fund as I don’t think the strategy suits it – we’d probably look to grow it to $350m-$450m in time. The priority is getting the fund up to operating size and to keep performance going,” he says.

“It sounds so simple, but it’s really hard work.”

CV

David Pinniger

2013 – present

Fund manager, biotechnology, Polar Capital Partners

2008 – 2013

Fund manager, International Biotechnology Trust, SV Life Sciences

2005 – 2008

Equity research analyst, healthcare, Abingworth Management

2000 – 2005

Equity research analyst, healthcare, Morgan Stanley