Drugbaron Blog

June 10, 2013 comments

Did I say asset-centric? I meant team-centric!

In many Buddhist traditions there is a dislike of naming things.  A name can be very limiting: it often focuses on a particular property of the thing, and as a result ignores all the other infinite complexity of the item or concept in question.  Worse, it can lead the listener to assume properties that are altogether alien.

Like all names, then, the tag ‘asset-centric’ applied to the strategy of life science investing pioneered by Francesco De Rubertis and Kevin Johnson at Index Ventures, carries unwanted connotations as well as capturing the essence of the idea.

This was highlighted when DrugBaron heard a colleague refer to the opposite of asset-centric investment as ‘team-centric’.

The implicit suggestion that asset-centric investment involves backing the asset rather than the team somehow misses the central thesis of the asset-centric approach.

So let’s be absolutely clear: asset-centric investing depends on backing the team first and foremost – because of the complexity of drug development, the success of any investment in biotech depends on the quality of the team.  An average asset with a stellar team will out-perform a top-notch asset in the hands of a mediocre team.

Since “backing the best team” is the sine qua non for successful investing, the unique selling point of asset-centric investing was something altogether different from replacing the team as the most important component for success.  The defining element of asset-centricity is having only one asset.

It is the word ‘one’ rather than ‘asset’ that is underlined.  ‘Uni-centric’ rather than ‘Poly-centric’.

Why is that so important?  Because it ensures the highest possible stringency of decision-making regarding the fate of that one asset.  All the returns of your stellar team depend on the outcome for that asset, and such focus improves execution and ultimately improves decision-making.  The high opportunity cost for an asset occupying the only ‘slot’ in your agenda is much higher than having multiple arrows in the quiver.

With several assets, the tendency is to keep going even when the water turns from choppy to tempestuous because the asset might still have some residual value, and if it does things will turn out well for the team.

Asset-centric and Team-centric are the same thing

But, it transpires, the money spent on these zombie-assets, long after they should have been killed, is what turns drug development from a profitable enterprise into something wholly uneconomic.  Even if the technical hurdles can be overcome, that is no guarantee anyone will buy the eventual product.  More and more, to be a commercial success, product candidates have to be game-changers.  As assets lose their lustre (long before they become tarnished) they become highly unlikely to fulfill such lofty demands.

Asset-centricity simply says to the team “once you suspect the chance of success for this asset has fallen below the chances of success for a new, exciting but untried and untested asset then its time to throw in the towel”.  And provided they have done a good job proving the asset was inferior, despite the hopes and dreams both investors and management once had for it, then they simply move on to the next asset and hope for better next time.

The countervailing arguments for ‘poly-centric’ companies has always been the hedging that is achieved.  If the lead asset fails, then the high quality team (that was the reason you backed the company in the first place) can move seamlessly onto something else.  A good team will win eventually, but not necessarily with the first thing they picked.

True enough.  But where is the benefit in such hedging?  Investors hedge at the fund level anyway, with a portfolio of investments in different companies.  An additional layer of hedging inside the company offers only the disadvantages of reduced stringency in decision-making.

Sure, say the doubters – but management teams don’t have portfolios.  Surely one asset at a time diminishes their returns?  Actually, it’s the opposite – since great teams are the rarest and most precious asset of all, the asset-centric investor quickly recycles the team, as they select a new asset not from the limited pool of “back-ups” already in the company but from the entire universe of opportunities.  So an asset-centric team is no more exposed to failure than the management of a “platform” company with several assets.

The best analogy is the lottery – forced to pick six numbers from fifty to win millions, always pick a sequence like 38,39,40,41,42 and 43.  It is no less likely to win than any other combination, but at least if it is your lucky day you are less likely to be sharing your winnings with others (since the public at large shun such sequences believing them highly implausible – which indeed they are, just like every other combination in a millionaire lottery).

So too with asset-centric investing.  With one asset at a time, you are, perhaps. no more likely to be successful than you would have been had you had two or three shots inside the same company, but when you do hit the target it is more likely to be the bullseye.  Less money went into the company, so the return on capital will be proportionately greater leaving more room to reward management.

Money spent on zombie-assets, long after they should have been killed, is what turns drug development from a profitable enterprise into something wholly uneconomic

From a theoretical standpoint, then, the judgment is clear-cut: one asset at a time wins.  Enough people have been putting this idea into practice for long enough that the data is starting to accumulate to support such claims in the real-world although it is still too early to present a definitive analysis (if indeed there are ever enough exits of life science companies in a short enough period to allow a definitive conclusion of any kind to be drawn!).

So hopefully that clears up one misunderstanding – asset-centric and team-centric are the same thing.  Since it is the focus on ‘one asset at a time’ that defines asset-centricity DrugBaron briefly wondered if ‘uni-centric’ was a better tag for the concept… but it would not be long before someone misunderstood that too, supposing it represented an investment strategy around university spin-outs.   It seems the Buddhists had it right – naming things is pretty tricky.


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