Notes From Next Wave Sohn San Francisco 2016: Rende, Kaufman, Drescher, Melsom ~ market folly

Thursday, October 6, 2016

Notes From Next Wave Sohn San Francisco 2016: Rende, Kaufman, Drescher, Melsom

Today we're posting up notes from the Next Wave Sohn San Francisco 2016 investment conference that just took place.  This features emerging fund managers presenting investment ideas to benefit charities.  We've also posted notes from the main Sohn San Francisco 2016 conference as well.

Notes From Next Wave Sohn San Francisco 2016

John Rende, Copernicus Capital Management

  • Focused on life sciences and services
  • Manages $85mm AUM
  • Positive performance 15 out of 16 years
  • Idea: Biomarin Pharmaceuticals (BMRN)
  • Enzyme replacement therapies for rare diseases 
  • $16bn market cap
  • 5 commercialized drugs = $1.1bn in product sales in 2016
  • Thearpeutics category
  • Leader in orphan drugs (affecting less than 200k people in the US)
  • Why we like orphan drugs?
    • Expedited regulatory path
    • Limited competition
    • Small sales force needs
    • Motivated patient population
  • Business model advantage
    • 7 year marketing exclusivity 
    • Tax credits
    • FDA motivated to approve these drugs
  • 2014-2020 CAGR of ~17%
  • Biomarin makes 5 orphan drugs; Strength in Vimizim and Kuvan - raised revenue guidance recently
  • Sustainability of revenues for rare diseases
  • Vimizim - treats Morquio A disease - impacts population of 3,000 in the developed world with 20 births/year in the US
  • Annual price/patient = ~$350k
  • Kuvan - Phenylketonuria - inherited disorder which caused the buildup of the amino acid
    • Works in conjunction with a low phe diet
    • Annual price/patient =~$150k 
  • Three near term pipeline products expected to add $400mm in product revenue by 2020
  • Corporate pricing strategy has always been conservative; they've been kept out of the crosshairs because they don't represent a large portion of a given insurance company's costs given low number of patients impacted; also FDA understands that orphan drug companies need a financial incentive to continue to develop orphan drugs
  • Over $4bn invested in R&D over past decade
  • Base case = $130 price target; Upside case = $170 price target; Downside case = $80 price target

Neal Kaufman, Hillair Capital Management

  • From a non-traditional background - formerly operated businesses - CEO of publicly traded small cap company - a supplier to the railroad industry
  • Invests in publicly traded small companies

  •  Idea: Sysorex (SYRX)
  • Value added reseller transitioning into a product company 
  • Moving to Saas/recurring revenue business model
  • Hillair has $5mm invested in fixed price convertible debenture with preferred share equity kicker 
  • Convertible at price significantly above current market
  • Technologies
    • Airpatrol: Detects cellular, Wifi, RFID, and Bluetooth deices, applications
    • Lightminer: World's fastest analytics platform
    • VAR business comprises the lionshare of revenue
  • Announcement on contract with Top US mall operator and Airpatrol installations
  • Valuation
    • VAR business worth $14bn based on comps
    • Security business is worth $26mm based on comps
    • Value per share of $0.89 versus current price of $0.31

Joel Drescher, Drescher Capital

  • Focused on TMT and consumer
  • BA from Stanford and MBA from Cal Berkeley

  • Idea: Signet Jewelers (SIG) 
  • 15% ROE, 7 year of double
  • Owns Kay, Jared and Pagoda and Zales store brands
  • Three divisions
  • Market for wedding and engagement rings is very stable
  • 15% market share in the mass jewelry category; no competitor has more than 1%
  • Zales had 3% operating margin before it was purchased versus Kay and Jared at 17%
  • Stock beaten down due to a diamond swap scandal that was published on Buzzfeed, concerns around rising charge-offs
  • Credit is an asset not a liability; can be sold off
  • 62% of sales done on credit at an average FICO score of 660
  • Mid-teens yield on credit portfolio
  • Signet could get $1.1bn for the sale of their credit portfolio; could sell it with a minimal impact to EPS, proceeds can be used to buy back stock
  • Third party would have more stringent credit standards but would result in minimal loss of sales
  • Company announced that it is exploring the sale of its receivables
  • $139 per share fair value; 85% increase from current market price based on $7.40 EPS x 10% growth, +1.13 EPS from credit sale portfolio x 15 P/E multiple

John Melsom, Omni Event Fund

  • Risk/merger arbitrage fund; 20-25 names in portfolio
  • $350mm AUM; launched three years ago
  • Investment criteria: hard catalyst, low correlation to equity markets, liquid
  • Focused on N. America, Western Europe and Asia
  • Beta to the S&P of 0

  • Idea: Syngenta (SYT) ~ $40bn market cap 
  • One of the big six agro chemical firms
  • Focused on crop protection and seeds
  • Agricultural input sector facing headwinds; costs are increasing in R&D and crop prices are in decline
  • A lot of consolidation in the sector
  • ChemChina has a deal to acquire Syngenta
  • ChemChina is China's largest chemical company - state owned 
  • Terms of the deal: $465 USD + CHF 5/share special dividend
  • Expect broad shareholder support for the deal, need Chinese regulatory approvals - but it is a very strategic deal for China given China's desire to increase agriculture output significantly 
  • Swiss government has blessed the deal; CFIUS - US body has approved the deal
  • Potential 20% return before CFIUS deal; Post CFIUS approval, there is a 7% spread - annualizes to 28% based on closing date
  • Spread driven by concerns of antitrust and Chinese buyer.  Market share issues can be easily solved
  • Highly confident that the deal will close

Be sure to also check out the presentations from the main Sohn San Francisco 2016 conference as well.

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