[REPLAY] Andy Acker - Empty Rooms: Investing in Biotech at Janus Henderson (Capital Allocators, EP.274)

Episode Summary

Executive Summary: Ted Seides interviews biotech portfolio manager Andy Acker on why healthcare and biotech remain fertile but misunderstood “empty rooms.” Acker explains the scientific breakthroughs, the commercial and regulatory hurdles, and his disciplined investing framework built around identifying undervalued drugs, managing binary trial risk, and exploiting volatility. He also outlines recent sector stress, signs of a bottom, and emerging opportunities in gene therapy, NASH, and obesity treatments.

Main Topics: Acker’s path into healthcare investing (Priority: 5/5): Acker describes growing up in a family of physicians, studying biochemistry and economics, briefly pursuing medicine, and ultimately choosing investing as a way to have broader impact. He moved from Morgan Stanley to Janice Henderson and has spent over two decades in healthcare investing. Scientific innovation in biotech and pharma (Priority: 5/5): The conversation highlights dramatic advances in genomics, vaccine development, precision oncology, RNA therapies, cell therapy, antibodies, and antibody-drug conjugates. Acker argues innovation has accelerated and now produces therapies that would have seemed like science fiction a decade ago. The 90-90 rule: clinical and commercial risk (Priority: 5/5): Acker’s core framework says 90% of drug candidates fail in clinical development and Wall Street is wrong about 90% of commercial launch estimates. He explains how investors must assess both trial probability and post-approval adoption using science, business, and market research. How healthcare stocks are valued and traded (Priority: 4/5): Healthcare and biotech are highly volatile, with stocks often moving far more than underlying value. Acker uses discounted cash flow, intrinsic value estimates, and event risk sizing to build portfolios, trimming strength and adding to weakness when fundamentals remain intact. Portfolio construction, risk control, and management quality (Priority: 4/5): Acker discusses concentrated but diversified portfolios, position sizing limits around binary events, and a barbell approach balancing defensive large-cap healthcare with higher-upside biotech. He emphasizes that management teams can materially create or destroy value. Private crossover investing and sector intelligence (Priority: 4/5): Janice Henderson invests in private biotech before IPOs to gain early insight into innovation and potential disruptors. Acker cites BioNTech as a successful example and says private investing improves both opportunity access and public-market monitoring. Current opportunities, risks, and signs of recovery (Priority: 5/5): Acker highlights gene therapies, NASH, and obesity as major growth areas while noting drug pricing, reimbursement, and political scrutiny as risks. He sees “green shoots” in positive clinical readouts, capital raises, and a resumption of biotech M&A.

Key Arguments: Biotech is an “empty room” because many investors avoid it due to complexity and binary risk, but that creates opportunity for specialists who can price science better than the market. Scientific progress has materially improved the industry’s productivity: genome sequencing, vaccine speed, and targeted modalities have expanded the addressable medical opportunity set. Drug development should be analyzed as a two-step risk problem: first, the chance of clinical success; second, the chance of commercial adoption after approval. The market often treats all drugs as average, but deep research can identify candidates with 70%–80% odds of success or failure, creating edge versus consensus pricing. Commercial success depends on aligning physicians, patients, and payers; if any one of the three Ps is misaligned, launches often disappoint. Volatility in biotech is not just risk but a source of return, because prices often overshoot both on the upside and downside relative to intrinsic value. Management quality matters significantly; good teams can rescue or improve assets, while poor teams can waste strong molecules. Current sector distress has created opportunities in early commercial companies and undervalued assets trading at or below cash, though the best names require careful differentiation. Private crossover investing gives early access to innovation and helps the team anticipate future public-market winners and competitors. The sector may be turning as good clinical data is being rewarded again and M&A has picked up amid large pharma patent cliffs and abundant biotech cash.

Data Points: Years at Janice Henderson: 23 years - Acker says he joined in 1999 and has been at the firm for over two decades. Human Genome Project cost: $3 billion - He cites the original cost to sequence one human genome as an example of how expensive early genomics was. Human Genome Project time: 13 years - He notes the first genome sequencing effort took 13 years. Current genome sequencing time: Hours - He says human genome sequencing can now be done literally in hours. Current genome sequencing cost: Hundreds of dollars - He contrasts modern sequencing costs with the original $3 billion effort. COVID-19 vaccine development time: 10 months - He says two effective vaccines were developed in 10 months during the pandemic. Historical fastest vaccine development: 4 years - He notes the previous fastest vaccine timeline before COVID. New medicines approved in the US in the last five years: 256 - He uses this to illustrate accelerating innovation. Increase vs 10 years ago: Over 100% - He says recent approvals are more than double the pace of a decade earlier. Clinical development failure rate: 90% - Core of the 90-90 rule: most drugs entering human trials never reach market. Phase 3 success rate: About 50% - He says pivotal trials are essentially a coin toss on average. Typical stock move on trial success: Up 50% to 100%+ in one day - He describes strong upside when a drug succeeds in a binary event. Typical stock move on trial failure: Down 50% to 90% in a day - He explains downside magnitude when a trial fails. Wall Street launch estimate error rate: 90% - Second half of the 90-90 rule: consensus sales estimates are usually wrong. Portfolio risk limit per event (healthcare strategy): 1% - He limits downside risk on any one event to 100 basis points. Portfolio risk limit per event (biotech strategy): 2% - He allows a bit more risk in the dedicated biotech strategy. Top 10 holdings weight: 30% to 35% - He says the top 10 stocks typically make up about one-third of the portfolio. Typical position size in biotech: 5% to 6% - He says his largest biotech positions are generally in this range. Typical position size in healthcare tail: 30 bps - He says smaller, higher-risk names may be around 30 basis points in the healthcare strategy. Healthcare portfolio size: About 100 stocks - He says the healthcare strategy is diversified across roughly 100 names. Biotech portfolio size: About 50 to 60 stocks - He says the biotech strategy holds fewer names focused within biotech. Biotech sector decline Feb 2021 to Jun 2022: 64% - He says the sector suffered one of its worst bear markets in history. Biotech decline relative to healthcare: About 75% - He compares the sector’s drawdown versus healthcare. Development-stage biotech value loss: 70% - He says development-stage biotech lost most of its value over that period. Companies trading below cash: 200 - He says this was highly unusual and signaled extreme pessimism. Discount below cash: 50% to 80% below cash - He describes how deeply some names traded below balance-sheet cash. COVID-19 products sales in 2021: $75 billion - He cites industry revenue from vaccines and treatments. Managed care?: Not specified - No direct numeric data tied to this theme beyond general sector discussion. Annual sales of Oxbryta: Around $300 million - He uses Global Blood Therapeutics as a management-quality example. GBT acquisition price: Over $5 billion - Pfizer bought Global Blood Therapeutics for more than $5 billion. GBT trading level before acquisition: Closer to $2 billion - He notes the company traded well below the takeout price. Private investment success rate: More than two-thirds - He says the team has made money in private investments over 66% of the time. Genetic diseases with no treatment: 7,000 diseases / 95% untreated - He highlights the large unmet need in gene-based therapy. NASH response rate: 77% - He cites a once-weekly injection that resolved NASH in 77% of patients after six months. Obesity prevalence in the US: 100 million people - He frames obesity as a major unmet medical need. Obesity prevalence worldwide: 500 million people - He broadens the market opportunity globally. Expected weight loss from new incretin therapies: 15% to 20% - He compares the latest therapies to bariatric surgery-level outcomes. Out-of-pocket cap for seniors under IRA: $2,000 per year - He says the Inflation Reduction Act limits annual spending for Medicare seniors. Prior out-of-pocket burden for some seniors: $5,000 to $10,000 - He cites previous annual costs for life-saving medicines. Drug negotiation timing (oral therapies): 9 years - He says Medicare negotiation begins after nine years for oral drugs. Drug negotiation timing (biologics): 13 to 15 years - He says biologics are negotiated later, near patent expiration.

Pivotal Quotes: "We think we can identify some that might be 70%, 80% likely to work, and similarly, identify ones that are 70%, 80% or more likely to fail." — Andy Acker: Explaining his research edge over the market in evaluating binary clinical events. "Biotech stocks have been crushed despite significant advances in drug development, making it a proverbial empty room with only specialists and contrarians left standing." — Ted Seides: Framing the episode’s central investment thesis and opportunity set. "The world is full of brilliant failures." — Andy Acker: A lesson from his father about effort, humility, and persistence in investing and life.

Implications: For investors, healthcare and biotech remain highly specialized, volatile, but potentially mispriced due to complexity and fear. The current setup may favor disciplined stock pickers who understand science, commercialization, and capital markets, especially as innovation, M&A, and new therapies accelerate.