Idea Brunch with Daron Evans of PoC Capital
Daron Evans shares his views on drug development, life sciences investing, and his top ideas
Welcome to Sunday’s Idea Brunch, a weekly interview series with underfollowed investors and emerging managers. We are very excited to interview Daron Evans!
Daron is a life sciences executive and investor. Daron is currently managing director of PoC Capital, his family office that focuses on small public life sciences companies. In addition, Daron is Chairman of the Board of Specialty Renal Products, a private company developing a hemodiafiltration device; and CEO of AlloRock, a private company developing a therapy for hypertension and heart failure. Daron is also a scientific advisor to Nephros (NASDAQ: NEPH), where he served as CEO from April 2015 to August 2020. Previously, he was CFO and COO at Nile Therapeutics (NASDAQ: NLTX – now CAPR) from January 2007 to November 2013.
Daron, you are unique in that you’ve both grown successful companies as an executive and backed many as an investor. What are the necessary ingredients for a winning investment in the life sciences space? And can you please give us a little background on how you spend your time?
At the end of the day, success in life science investing is calculated luck. Plants and animals exist because the cells and groups of cells have figured out a way to not die. There are probably millions of ways for large groups of cells to die on any given day, which means we probably have millions of cellular subroutines that focus on not dying. The life science industry’s purpose is to reduce the odds that large groups of cells die. It is audacious to believe that we can achieve that purpose perfectly every time. When looking at any given life science investment, it is important to understand how a therapy works and why it has a chance to help one or more of our don’t-die subroutines while not preventing other don’t-die subroutines from working. To dig into an investment, I first need to understand the biological mechanisms.
Once I have a baseline understanding of the mechanisms and believe that the science has some chance of success, then comes the meat of the diligence:
Does this team have the ability and will to move the science rationally forward? “Kill programs fast” is the mantra in big pharma to allow them to focus $$$ and employees on the programs with the best chance of success. In small companies, because they generally only have a few programs, management does not always design studies to try and “kill programs fast.” I like to understand their preclinical and clinical plan, with a focus on trying to understand where they are trying to elucidate data on the program killers.
Does this company have the ability to fund the programs? The market is brutal. The market for small-cap companies is set at extreme death mode. Small, development-stage life science companies live from funding round to funding round. It is important to understand how much value they can create between rounds, and if the market can actually recognize that value has been created. The more small companies do non-traditional equity offerings, the more they generally need to keep doing more extreme non-traditional equity offerings. Ideally, a company will create a coalition of the willing who can help buffer the extreme death mode tendencies of the market. I like to be part of a coalition. In the absence of a coalition, I tend to be more of a hedged trader than an investor. Opportunities exist in both situations, but the risk is lower if the company does not need a bank to raise funds – rather it calls up a few banks at the last minute to add to the cover of a fully booked deal, mostly as a thank you for the sell-side coverage and non-deal roadshows.
As for time, I spend more time supporting my day-job companies than I do looking for, and working on, investment ideas. Life science companies do not have actionable events on a daily or weekly basis. Once diligence is done, and an investment idea makes the cut, it usually takes months, and sometimes years based on the expected timing of data and financings, to find the right entry points to get up to a full position. Patience is key.
Short-termism and groupthink are becoming more common in markets and seem antithetical to the drug development process. What are some common mistakes you’ve seen investors make when looking at the life sciences field?
It is not a sure bet that people, even with infinite money and infinite time, can figure out a therapeutic biological pathway, and not be tripped up by one or more redundant pathways that have kept us alive for so long. It is also not a sure bet that an early study in a small number of patients will transmute equivocally into larger studies. Core to the space is understanding when the key risk, biology, is decreasing. Investor enthusiasm or pessimism for any given event can be widely off, especially now that meme-investing is happening.
When I see a company get rewarded by announcing that they have dosed the first patient in a trial, cured cancer in mice, or some other operational fact that says they are doing the right things but have not actually decreased the biological risk question yet, then I tend to stay away or think about how to short the company if it ran up an obscene amount, or hedge my position if I own the shares. The enthusiasm/pessimism tends to wane and a new normal is found. When a company has a PDUFA date or trial data set announcement coming, and the stock runs up before the announcement, I think about how to hedge or start to unwind a position prior to the date. There have been too many sell-on-the-news events in this space to want to hold a full position into an event if the stock has run a great deal already. MIRM’s drug was approved for Alagille syndrome and went down 20% in the month after the approval, after running up 30% in the month prior to approval. When there are no events in the near term, then there is a decent probability of a slow drift down. If the science is good and the bank balance is okay, then the drift is a great time to accumulate. BLU traded in the $3-4 range in the six months of waiting for news on the ongoing trial. Investors were rewarded with a positive interim report in September, and the price is now running up into the final data expected in December. When things are boring, but the science is good, and the gas tank is full enough, there can be good opportunities to accumulate.
In the small-cap life science space, the financing risk can, unfortunately, trump the biology risk at times. Keeping one eye on the cash balance, and getting to know the management so you can predict when a financing event will come, is helpful. It is also helpful to have a relationship with a number of the smaller banks in the space and let them know who you like, so you get the phone call when the stock goes on sale. I did not see the value in the science of BBI, which worked, but I was scared of the financing risks of not raising enough money. BBI initiated a Phase 3 trial for Primary Axillary Hyperhidrosis in the fall of 2020, and reported positive results in the fall of 2021. During that time, they created a death-by-a-thousand-cuts scenario with financings in June 17, 2020 - $20m @ $1.15, Oct. 22, 2020 - $15m @ $0.72, July 22, 2021 - $8m @ $0.62, and Oct. 28, 2021 - $10m @ $0.38. The biology seemed to work, but the fiscal risk destroyed the shareholder value.
The management team is not the largest factor in making an investment decision for me. The best management teams don’t matter if the biology is off. The worst management teams, however, can kill a program through operational delays and bad financings. In my view, there are not really any extra points given to a good management team, only negative points for ineffective operations or capital market naiveite. Boards are the same way. If board members do not have skin in the game and help management navigate the financial markets, then they are a liability and should be voted off. As an example, the JAGX board has approved so many terrible financings that management has been able to destroy all future value of the company, even if the retail investors do not know it yet.
What are one or two interesting companies on your radar now?
I will briefly discuss two long ideas and two small short ideas. For the long ideas, they both have the same theme. Their NDA application was rejected — given a complete response letter (CRL) — because of manufacturing issues, but have no comments about the clinical package. From my experience running drug development programs, I believe that CMC (chemistry, manufacturing & controls) issues are ones that are very fixable, once fully understood. If the company has the money to get through the changes, then it is just a matter of time. Portola Pharmaceuticals (PTLA) was a perfect example of this pattern.