Mark Draper

Mark Draper

Saturday, 08 August 2020 08:44

COVID-19 - Vaccine Progress

[Bianca Ogden - COVID 19 - July 2020]

Speakers: GEM Capital, Bianca Ogden, Douglas Isles

Gem Capital: We’re here today with Douglas Isles and Bianca Ogden from Platinum Asset Management, talking about COVID-19. Douglas, I’ll hand over to you to introduce Bianca formally first.

Douglas: Thanks, Mark. Bianca, Dr. Bianca Ogden, in fact, is our Healthcare Analyst and Portfolio Manager here at Platinum. Bianca joined the company back in 2003, so she’s been with us for 17 years looking at the sector and managing money. But more interestingly is Bianca’s background prior to that and most appropriately, given the times that we’re in, Bianca worked as a virologist looking at HIV and cancer research in companies such as J&J and Novartis prior to joining Platinum. Bianca brings real world, real industry expertise, and that’s what really gives us an edge in both understanding the sector and today, more importantly, understanding what’s going on with COVID-19.

I’ll hand back to you, Mark, and I think you’ve got some questions for Bianca today.

Gem Capital: That’s great and thanks for your time. Bianca, thanks for joining us.

We’re talking about the virus today. One of the things that we hear through the media is that the virus has actually mutated at least once, which makes treatment for it and a vaccine difficult. Is that right or what’s your take on that?

Bianca: Viruses mutate all the time. It just depends on where it mutates. So, when you look at what a virus looks like, it’s got basic like a shell, then it has different kind of spikes sitting on it. And those spikes basically help it to get into where it wants to get to.

That’s a bit like the key/lock principle. Basically, the spike is the key and the lock sits on the cell where it wants to get in.

Often, what happens is because over time the lock may not fit as well, or we know it from ourselves, this key, sometimes you have it worn out and then you have to get new ones. And it’s the same there, that this kind of key that sits on the virus tends to change a little bit, but it doesn’t really matter, because it still gets in. Sometimes it mutates towards getting in better. Sometimes it mutates to getting in not at all anymore.

There’s different kind of pressures onto it and it’s a kind of normal evolution that happens.

Then there are other areas where it mutates, which may be a more kind of—could be more of an issue. But on the surface, on this spike, you will always see some mutation. There’s one mutation that basically looks like it may get into a cell easier. So, it may spread a little bit quicker. But it’s not something where a lot of people then say, “Well, we’ve got a therapeutic or a vaccine against that, it won’t work anymore.” That’s not the case.

Unless, you have to think about, it’s always nice when you see the schematic pictures of all of these things, but in reality, these are kind of three-dimensional structures, and that’s more important to a vaccine than actually little tiny bits. So, as long as it doesn’t keep mutating in this area and there are certain conditions that need to be in place, then you’re fine.

But viruses mutate all the time. It just depends on where it is and what it does.

Gem Capital: So, in terms of the mutation that’s taken place to date, has that given you cause for concern that a vaccine or treatment can’t be developed?

Bianca: No, I don’t think so. I think at the moment, the only issues referring to something, I think DU146—correct me, I know it’s D-something—that’s the mutation that people talk about a lot at the moment.

But it’s more worrisome , so at the moment the other thing, when you look at a vaccine, almost all vaccines that are currently in development go after this spike protein. Some go after it in just a certain shape or form, others go now after the MRA like the ones that Moderna and Biotech both go after the full length of this.

That’s as long as the confirmation is kept. As long as it doesn’t look like that it uses something else, some other lock where it wants to get in, you should be okay.

Now, by saying that, the way I look at vaccines is essentially you have a first wave, which is like the first generation, which is essentially, obviously, done very quickly. And then these companies will refine their approach. But what we’re seeing and from the speed that we’re seeing, they can refine that relatively quickly now, so if there is something, they will go back to the drawing board and do that again. That’s not the biggest problem.

When we look at therapeutics, personally I actually think the more interesting part of therapeutics is also again the next wave, which we’ll look at different enzymes that a virus uses to use the host machinery to replicate again. At the moment, most therapeutics go again after the surface, but I actually think there are some enzymes—there’s a couple of companies going after it—that will be much more interesting, which is essentially what we did with HIV. They will also try to go after the surface first because the internal one takes a little bit longer. But once we then had these drugs that go after the enzymes from the virus, we actually turned HIV, or AIDS, into a more chronic disease, where patients now take that lifelong therapy and are fine to continue living as normal.

So, there’s different things going on, but at the moment, I think we are doing the best we can. Coronavirus isn’t known for these kind of escape mutants. So, that’s lucky for us and we’re seeing what happens. But yes, so far, so good.

Gem Capital: One of the other things we hear in the media is if a person contracts COVID-19, whether or not they’re immune to catching it for a second time, what’s your perspective on that?

Bianca: It depends on what you define the time of immunity. So, when you look at—and as a rule, you should always go back to what—so, viruses belong usually to families. So, this particular virus belongs to the Coronavirus family. You then basically look at other members of that family and see, maybe we know a little bit more about them.

There’s four of them around which cause the common cold. We get the common cold quite frequently, really. That means that we’re not immune for a long time.

Now, is that the same for that? I don’t know. But that’s kind of my base assumption.

The question now is, obviously, what we’ve seen what the virus does, some people get very sick, others don’t feel it at all. There is obviously some immune response that prevents them from getting really sick and there’s some discussion about is that—have they already had a very strong immune response to other Coronaviruses and they react better.

I think you will be immune for some time, but I don’t think we will be immune like we are when we get a measles or chicken pox. I don’t think that’s the case. I think Coronavirus is quite different than that.

That’s where my assumption comes in, where so what at the moment we have a pandemic and we’re going to have a pandemic vaccine, but this will actually be an endemic virus that will be around and it almost will be a franchise for a lot of these companies where they’ll then bring out Coronavirus vaccines and you have to get boosters. Like the flu vaccine, really.

The good thing, hopefully, will be that will also have therapies available, because there’s a lot more effort put into than into a flu therapeutic really.

Gem Capital: Yes.

Bianca: And that together will be franchises that will be with us for a long time.

Gem Capital: And we’ll get to where we are in the development part, in fact, seeing some treatments, in a second.

The other question we had was: What have you learned about COVID-19 in the last month or so that hasn’t been reported in the media?

Bianca: Good point. I think one of the things that I’ve learnt—which is maybe not so much—it’s more the immune response to the virus and also how—it’s slowly coming into the press, is how doctors have learnt about actually treating the disease, which is COVID-19.

I think that is something, because initially we thought, look, it does something to our lungs. It’s like a viral pneumonia that’s what people thought that’s what it is.

But what we’re now learning is a lot of more of the immune effects the heart. It really has something to do with our circulation, without blood circulation. Doctors actually treat it quite differently, now they’re treated at the start of this disease. So, initially, everyone thought, oh yeah it a virus whatever. But what now, I think when you triage them, you look at them very quickly and see how is their oxygen saturation in the blood? What’s going on? Basically, a very, very different approach.

That’s something that I’ve learnt over time, a lot, and then also, I think what I’ve learnt, which may not be scientific, but the supply chain of vaccines, how intense that is, and how many things have to go right. There’s one thing to do the vaccine itself, but the other part is getting a logistical undertaking and getting for example sand for making the glass vials, the stoppers to put in the syringes, the whole cold chain that we need. And all of that to put into pieces. It's not very scientific, but it’s something that you are not really aware.

Because at the same time, we’re obviously going into winter in the north hemisphere. They have to make sure they have the flu vaccine at the same time. So, all this capacity that you may have thought you have, you now have to double up or triple up to—you have to make all the other normal vaccines. All of that is a very interesting, fascinating area now to see how companies can mobilise that.

But scientifically, it has been really about probably the virus itself, how interested—the virologists have always interested, how clever they are, they are so kind of very, they are not very complex and have what they have, what they have on board, but they do have complex things that really hijack different things in a cell where they go into and that’s something that I’m not sure the popular press likes to look at this, but that’s something that I find quite fascinating because I can then look at, okay, who’s looking at targeting different enzymes that this virus brings along. That, to me, is not being talked about, but I find that will be very important in the next, I think, 6-12 months.

Gem Capital: You mention the different treatment now, compared to from the start. What tangible results have come from that?

Bianca: I think that the biggest thing is that we’re really trying to avoid blood clots. So, really looking at managing the blood and looking at that and really also looking at heart support straightaway and making sure that that’s there.

Before it was very standard viral kind of lung disease and it was all about in the press about ventilation, ECMO, and all these names that everyone knows now. I think that that is still important, but ultimately, the quick looking at—when people at the start first came in to emergency and people thought, “Oh, yeah, you’ve got the virus,” think that they didn’t actually check the oxygen saturation. Now, that’s the first thing they check and do. There’s little things and it’s interesting, because it is a new disease, and I always, from the start, compared it to AIDS and HIV and it was the same that we are learning about, for doctors, what is this? How do I diagnose that? Or what are the things, what does this virus do? And so, yeah, it’s quite different.

Gem Capital: Okay. So, looking toward vaccines now, my understanding—and I’m not a virologist—so, there’s three types of vaccines. Can you give us background on that and then we’ll move into to where we’re moving toward vaccine developments.

Bianca: Yeah, sure. I think if you step back and basically say, “What does a vaccine have to do? What’s the idea?” The idea is to essentially prime the immune system. So, the immune system knows in advance what to do when this culprit, this bad thing comes and invades you.

The best you can do is you basically show the immune system some parts, and either some part of the virus, or the whole virus in an attenuated like in a weakened form. That’s the basic idea of a vaccine.

What a lot of companies do today is they say, okay, we made the surface, which is obviously the first thing that the immune system sees, we make that artificially. That’s basically what several of these vaccines do. They do it in different ways, but it’s the same thing. They use the spike protein that sits on the surface of the virus and they make it artificially and then inject it.

The other part that some people believe is more effective, is where you basically use a weakened version of the original virus and you give it to the patient. So, it looks very natural, obviously, but it’s still not—it doesn’t cause the infection. So, that’s kind of the key thing that people do.

And then what you usually do, you add some kind of booster element that essentially just gives another spike to the immune system. Basically, come on, everyone, something is happening here. That’s basically the key thing.

Each of the companies that are out there have their own technology in how they produce, for example, the sub unit of the vaccine. One, obviously the fastest ones, have so far been these messenger RNA companies, because it’s much easier to make. Then you have others that make it, again, different shapes of whatever technology they have. They all claim they have some kind of way of alerting the immune system in a certain way.

The important part is our immune system has two arms. One is called the B-cell arm or the humoral arm and the other one is the innate T-cell response. One is the antibody, one is the T-cell. Ultimately, you want to have both. The debate at the moment is when does the T-cell response happen and which antibody response do we really need? Is it fading and what’s happening? There’s lots of debate happening among scientists at the moment and in the end, we will see, probably October, November, roughly, September, October, we will see the latest results of the Phase 3, which are much bigger trials in looking at all of that.

But that’s basically what the vaccines do. Then there’s a third one, I guess, to that, is where people make antibodies that they’re basically used as vaccines, which is not a vaccine, but it basically is imitating what the immune system would do if you just give it to them. For example, hepatitis A, that’s often done when you go on holiday, you just get this so it lasts for a couple of months.

That is an option and I think that’s probably not as talked about at the moment, but I think—because we haven’t seen the data, but that’s going to come out.

So, there’s various activities going on, but in the end, it’s all about telling the immune system, hey, this is going to come, and that’s when you have to mobilise the immune system.

Gem Capital: Okay. There’s over 100 companies working on this from a vaccine perspective. Are you able to give us an overview of where things are at, at the moment, given that where this is coming the end of July, leading into August—

Bianca: Yeah, I can give you—so, there’s lots of them. One of the clear differentiators is who’s got the money and who was able to mobilise a lot of money very, very quickly? The two that basically just on Monday have started Phase 3 is Moderna and BioNTech. Moderna is the US, BioNTech is in Germany. They do it together with Pfizer. Both of them do these messenger RNA vaccines, so it’s a new platform that now has reached—the idea of this platform was, we can make vaccines much quicker, it’s much easier to scale, and will be cheaper.

Now, I think the much quicker and the much faster to scale we’re seeing at the moment play out. I wouldn’t say that they won’t be much cheaper, but we’ll see. They have started. Pfizer was very clear about, so by October we will have the results and then we will move very quickly from there, if it’s positive.

So, those are the two in the race. Then we have the traditional, I guess, vaccine players, which is then you’ve got J&J and AstraZeneca, as traditional, but they both sit behind that and I think they’re basically moving into the next phase very quickly as well.

And then it gets a bit more interesting because you’ve got Sanofi there, a little bit. They’re trying to do different kind of ways of reducing these subunits of the vaccine. One is MRA, the other one is a so-called baculovirus that they’re doing. It’s like an insect cell that produces then the subunit. They haven’t been as vocal at the moment, but they say they will have scale next year. Then you have a lot of hangers-on and a lot of different ones that are trying to do it.

There’s one particular one, Novavax, who is quite strongly supported by the US government. We’re waiting to see some data there.

I think when you then get down lower, it’s very hard to see where they all fit in. They can raise money at the moment, but when you look at the leaders, they’re basically raising money by the 500 million range, so that goes just very quickly.

When you then look at each of them as also to make sure where they get the finish and fill done, where they get basic manufacturing support. In Moderna’s case, for example, they’re using Lonza in Switzerland, as well as Catalent in the US, and then each of them has put their kind of partners out and that will help them to manufacture these kind of amounts that you need. We’re talking here billions of dosages, which is, again, a big undertaking.

Yeah, if you had the money and you move fast, you will get there obviously faster. It will be interesting to see what happens to the later stages. Is there a second wave? Is there a second generation that could go into that? I’m not sure.

We’ve been focusing mainly, because we always liked the mRNA platform anyway, even before the pandemic, that was our idea, and so we always have also invested in our health funds in J&J as well. We have that so we’re not so much in the other. I’m probably more interested in the therapeutic approach now.

Gem Capital: Right, okay. Those companies, Moderna, and I forget the name of the other one.

Bianca: BioNTech, yeah.

Gem Capital: So they’re in Phase 3 trials right now?

Bianca: Yes.

Gem Capital: How long are they expected to last? Because you’re talking really results by September, October, which would imply a very short Phase 3 trial.

Bianca: Yes. So, I give you an example. There’s another German company called CureVac, it’s a German private company. They started their early stage clinical trials, also mRNA, not long ago in Germany. They said, “All we’re going to need is 160 people in our first Phase 1 trial,” and they essentially did that almost within a day because they had about 2,000, I think between 2-3,000 people line up at the hospital in the morning on day one.

And if we’re looking at now, so, this week, Moderna reckons they already had 200,000, so they want to recruit 30,000. They already had 200,000 people wanting to enrol.

The demand is there, you now just have to logistically inject them all. There will be one injection and then another one. So, I think they will enrol them quickly, and it then depends on—so, these are event-driven results basically, so you just have to wait till these people either get sick, or hopefully not get sick. But that’s basically what we see.

Look, they recruited very quickly, we’ve never seen this before. But yeah, there is demand out there and I was just looking at BioNTech and Pfizer, so Moderna only recruits in the US, BioNTech and together with Pfizer, they’re recruiting in over 38 countries. So, I haven’t really figured out whether there’s one in Australia, because I would probably go and get injected. But so I haven’t found—I’ve got to send a friend an email and ask if there are any centres here, but yeah, I think they—it’s remarkable speed that they’ve got to move.

Gem Capital: Typically how long would a Phase 3 trial last for normally? Just for perspective.

Bianca: It depends. It depends.

Gem Capital: Okay.

Bianca: Let’s say you have a cardiovascular trial or diabetic trial that goes on at least 10,000, 15,000 people, that can be several years. That depends. If you look at an event, for example, whether a cardiovascular event or something, that will take a lot longer, several years. It really depends. Final trials are a bit faster because you have very clear end points. You can detect the virus, where with a cardiac event or stroke or whatever, it’s a bit different.

Yeah, those things—I think where are we at? July, they’re definitely—I’m not sure. I haven’t really figured out if they potentially—if they have some interim analysis and it’s a 15,000-event or whatever, there could be something like that where they could speed it up.

But the bigger issue is, the problem you’re going to have is, let’s say these companies come out and say in September, “Oh, yeah, it all works well,” and then they say, “But sorry, we don’t have enough doses for everyone, so please bear with us.” So, they have to make sure that that’s timed almost perfectly. We’re seeing at the moment that the governments are pre-purchasing and doing that. So, yeah.

It's very fascinating how an industry has mobilised while working from home in such a way so that it’s quite remarkable.

Gem Capital: So, a hypothetical question on a vaccine, let’s say Moderna’s vaccine works and the Phase 3 trial comes out perfectly in September/October, when do you think people would expect to be able to be vaccinated after that?

Bianca: I think the US would want it the day after the trial ends.

Gem Capital: Just before the election! [Laughs] Sorry.

Bianca: And they’ve got how much? Moderna has got a billion dollars from the US government, so, let’s see. I think there is—expectations are now for the end of the year that you—and I think you have to stagger it and you then have to look at the healthcare workers and the people that have to deal with infected patients, the elderly in particular. And that’s a big discussion about is this working in elderly patients. Are they okay?

So, I’m thinking that probably comes first and then it gets rolled out. The question, I think for Australia, is I don’t know where we are, to be honest, because I think we’re, at the moment, obviously hoping that the Queensland approach will work. I think AstraZeneca has a little bit of potential they will get some of that allocation, but I haven’t seen anything in terms of mRNA vaccines so far. I tried to get that out of the companies, but they weren’t very cooperative.

Gem Capital: Okay. So, switching now to treatment options, rather than vaccines, what developments have happened in that area?

Bianca: What you usually try and do with viruses is you try and attack something that is just basically part of the virus. And so one thing that they have done is look at the surface and made so-called antibodies against them and that’s basically what we’re waiting for. I think in the next couple of weeks we should see some results from a company like Regeneron to see what they have and whether they work or not.

And that takes a little while because what you have to do is, you obviously have to first have the sequence of the virus, but then you have to isolate the particles that you have and have a look at what’s going on. But what scientists do is they look at the sequence and you can then make the little bits of the vaccine. You can make the spike protein, you can make the enzymes inside, and you can kind of work out which one should we target and then you can start doing rational drug design.

There is something in this virus, it’s got two kind of enzymes that are quite interesting to target and crystallography structure of one of the proteins has been identified quite quickly and so there is, for example, Pfizer is trying to attack that and we can target and I think these are very interesting approaches which have worked for other viral infections like hepatitis B and HIV. That will be the next wave.

These ones are usually the more interesting ones because they’re really going after it. You then have to work out that it’s not as resistant. But if we had something like that, that would be pretty good, because then we would have a vaccine potentially and that and then I think we can breathe a little bit easier.

Gem Capital: Yes.

Bianca: Yeah, so that’s happening but it takes a little while because you have to understand the bits first, how they work, and then you have to develop an assay in your lab that you can actually test it against. Because one of the issues at the moment, if you want to develop something, you’re not really allowed in a normal lab to work with live vaccine and a live virus, that’s terrible. So, you just have to come up with something more artificial but that still does the same thing, to do it on a bigger scale.

The same as diagnostic tests, if you make one, you want to verify, and usually have to then send it to a lab that is allowed to work with live coronavirus of this type.

There’s those logistics issues, but I think we’re now into that kind of—we’ve established these assays and now we can like really screen for drugs to go through, which will be quite fascinating. But it’s not really talked about that much yet.

It will come, hopefully.

Gem Capital: Remdesivir was an early candidate for treatment.

Bianca: Yes. Yes.

Gem Capital: What’s the latest information on that?

Bianca: So, Remdesivir was an idea that goes after a battery of different viruses. So, it isn’t as specific, but it’s ‘okayish’ specific for these , they are called RNA viruses because their genomic information sits on an RNA.

It looks fine. I think one thing with the disease, particularly, so when you think about it, if the virus infects you, and initially it basically replicates in your throat and it’s quite happy doing that and you feel quite good. And then it starts basically to destroy different things. Because what viruses do, they go into a cell and when they replicate, they destroy the cell and come out. It’s a bit like a, I guess a spider, when they hatch little eggs.

So, the thing is, if you then come too late, which at the moment Remdesivir is being tested on and has been used quite late, you actually—the virus is no longer really the issue, it was what the virus did to you, and the virus may not actually be so active anymore because it’s almost exhausted itself. The best thing is to go early and there are studies underway now and it’s interesting because Gilead itself obviously wasn’t planning on doing all of these activities on Remdesivir, they’re now spending about a billion dollars to come up with a different formulation because the drug that we have at the moment is approved as intravenous use and you have to get it at the hospital. They’re looking at inhaled formulations, different formulations, and also using it earlier. And I think then you will see a much better effect than what we see now. We see some effect it does something, but it’s not like how a normal targeted antiviral should do.

There’s a couple of others. There’s another one out there in a similar class we’ve seen, but it’s the best that we have, to be honest, and it’s just, wouldn’t it have just been great if you know you can just, I don’t know, have it in your handbag and can just take it straightaway, but unfortunately, no.

Gem Capital: Turning now to financial markets, at what point in a vaccine development or a treatment development would you become, for want of a better word, more aggressive, in terms of your investment positioning?

Bianca: I think I can—I have to speak now as the healthcare fund manager. I’ve been very happy from the start, so I’ve been quite excited about the mRNA platform and what they can do and also knowing Moderna and how they manage is how they can just work, mobilise, and go through it. To me, it was like—and looking at coronavirus, what the virus is—so, to me, I thought well, we will have something. I can’t totally say whether it’s in September, October or whatever, but it will come within not what people say, it will come much faster.

I’ve been buying all through the pandemic sell-off, but I probably have recently reduced my exposure because biotechs have recovered very well.

Now, I think what I’m probably more worried about is really in terms of travel or those kind of things for what will happen. And I think that will gradually recover and I think that we will adjust to it as well and probably we already have. If I look at some of my family who live in Germany, they’re going on holiday. They’re just so used to wearing a mask that they don’t really—they don’t even seem to worry about it as much.

I think people will adjust to it. So, I’ve probably been really quite a lot invested and now I’ve pulled back a little bit. I don’t know Doug you can answer that more from the other side, but as a health fund manager I’ve been thinking no, I’ve never really seen in my career the mobilisation of the money that’s been basically pushed into this development, as well as the speed.

The funny thing is, someone said to me the other day, “Vaccine companies can’t say now anymore that that needs like years to make a vaccine. That’s the end of it now, if they pull this off, because no one is going to believe them ever.”

To me, the world has to adjust but I think - I don’t know whether a vaccine as such will also solve the issue because initially it might be like the flu vaccine. It won’t be as protective as we may hope for it. It will gradually, maybe it blunts the disease. I think in the end we will have to adjust to this whole way of living that we do, but I think what we’re seeing, particularly in Europe, is people are going on holiday, they’re doing their thing. They go on the plane, maybe not as much. Yeah, over time, but there’s nothing where I can say, yeah, this is the event and I will get fully invested, I don’t know.

Yeah, I also look at some biotechs that I’ve invested in were so cheap where—and I still have some that trade below cash, and you think that’s crazy, so I will keep adding to those. It’s a bit more rational. I don’t know if that answers the question.

Gem Capital: No, that’s a fair answer.

Bianca: Yeah.

Gem Capital: That’s a fair answer. Have you got anything to add to that, Douglas?

Douglas: I look at it in a sort of broader market context as well and I would say that the way we’ve kind of looked at the world and what’s happened through this whole COVID experience, the market has really chased companies that have a couple of different criteria. One is probably such strong growth that they seem to be immune and the other is some group of companies either benefited from the situation and think of, like we’re having this conversation on Zoom. Look at Zoom’s share price, they’ve benefited. But it’s not a new technology. This stuff’s been around for a long time, it’s just something that’s come to people’s attention.

And the same, you know, people are shopping more at Woolworths, etc., changes in patterns.

There’s really two stock markets. There’s a collection of companies, it’s pretty small, that have done very well, and it’s almost an exaggeration of a trend that was in place before COVID. And there’s this other stock market which effectively is pricing in the recession that we’re having and so the way we look at things at Platinum which is quite sort of behavioural, is that’s where you’re going to find the opportunities . Where there is a recession priced, there are companies that are probably somewhat opportunities on a 3-5 year view and that, Bianca touched on travel, that’s probably one of the areas we’ve been buying most heavily. The best companies, the most safest balance sheets that the booking engines and the aerospace engines rather than the airlines specifically. Semiconductors are doing pretty well. They’re powering all the growth themes. You know, the consumer in China is looking pretty healthy.

It's these kind of things where the market is pricing a recession is where I think you’ll find the best opportunities if you’re willing to look through the recession and determine that whether the vaccine comes and, you know, probably late ’20, into ’21, even into ’22, that that doesn’t matter to buying a company on a five-year view that’s priced as if it’s in real trouble. That’s, I think, the way we think about it.

Gem Capital: Okay. Good answer from both of you.

Bianca: I think one of the things that is probably counterintuitive, but I sometimes wonder, once we have the vaccine, and say that is the announcement, maybe people then just leave the stock market and think like, oh, okay, we’re done now, this is it, and everything just goes over the other way. So, I almost wonder what that—because people have been asking this, “When do you think what will happen?” It’s like, well, maybe it’s time to get opposite because that then, what’s the next theme, what’s the next, like where do I go? That was it, now we’ve got it, so what? And now, so I don’t know. It’s weird. I don’t know what will happen. I’m always surprised how every time Moderna puts something out, everyone just shouts about it and everyone suddenly knows this company and it’s like this is a bit crazy for me. [Laughs]

Douglas: And you go back and you look at the beginning of the year and the absolute bottom of the market in March coincided with the lockdowns in, I would say most of the developed world, so there’s New York locking down, it was much of Europe, the UK, Germany, and so on, they were all locking down around that time, and that ended up being the symbol for people to start or to stop selling the market and to start buying it again.

So, the lockdown was perceived to be a big event and whether the vaccine has the same impact, because there isn’t the same fear as there was—when we locked down, we were basically at a high level of fear. As I say, today there are quality companies, Amazon has doubled, Apple has doubled, Microsoft has doubled in the last 12 months, and this is indicative of fear and they’re the biggest companies in the world. So, it may have a different impact.

Gem Capital: Okay. I don’t think we’ve got any other questions at this end. Douglas and Bianca, thanks very much for your time and your insights into what is an amazing time period. Thank you.

Bianca: Yes, it is.

Gem Capital: And good look for the awards tonight. The fund manager of year awards, Bianca.

Bianca: Thank you very much.

Gem Capital: Okay. See you later.

Douglas: Thanks guys.

Gem Capital: See ya.

[End of Audio]

Transcription by bethfys

DISCLAIMER: This information has been prepared by Platinum Investment Management Limited ABN 25 063 565 006, AFSL 221935, trading as Platinum Asset Management (“Platinum”). This information is general in nature and does not take into account your specific needs or circumstances. You should consider your own financial position, objectives and requirements and seek professional financial advice before making any financial decisions. You should also read the relevant product disclosure statement before making any decision to acquire units in any of our funds, copies are available at The commentary reflects Platinum’s views and beliefs at the time of preparation, which are subject to change without notice. No representations or warranties are made by Platinum as to their accuracy or reliability. To the extent permitted by law, no liability is accepted by Platinum for any loss or damage as a result of any reliance on this information.


Wednesday, 08 July 2020 08:31

How to profit from electric cars

Australian investors would be forgiven for largely ignoring the prospect of electric cars in their investment decision making with only 6,718 new electric vehicles (EV) sold in Australia during 2019 (includes fully electric EV, and plug in hybrid EV).  For perspective, the total number of new vehicle sales in 2019 was 1,062,867.  Astute investors however, are aware of the electric vehicle tsunami that is coming and are positioning to profit from it.

Alasdair McHugh (Director, Baillie Gifford) highlights “that currently only around 1% of the global passenger car fleet of 1.4 billion vehicles are electric.  Therefore the opportunity for EV’s to replace the remaining 99% of passenger vehicles is substantial.  Even against headwinds of ride-sharing, public transport developments and cycling/walking to work, the shift away from internal combustion engine (ICE) vehicles to EV’s leaves a vast market to penetrate.”

Nick Markiewicz (Consumer Analyst, Platinum Asset Management) believes that the size of the EV market “will ultimately depend on the end goals of Governments and regulators, adoption rates of EV’s among consumers and how automakers choose to meet their targets”.  While there is a wide range of views from credible pundits and automakers about EV penetration rates ranging from 10 – 60%, given the automotive sector is USD $2 trillion industry by turnover, even small adoption will still result in a large, high growth industry.

The most sophisticated market so far is China, which accounts for 47% of EV sales last year.  The Chinese Government has a goal for 40% of all new car sales to be EV’s by 2030 according to Baillie Gifford.

The chart below shows new car sales by region over the past 15 years.


Elsewhere in the world France has announced a ban on the sale of ICE vehicles from 2040 and in the UK, the ban will take effect from 2035.  

Investors can seek to profit from the EV boom not just by owning high profile automakers such as Tesla, and Chinese automaker Nio, both owned by Baillie Gifford.

Markiewicz believes that traditional makers “like BMW and Toyota still have a relatively bright future, and do not deserve to trade at their current multiples.  Both have deep electric vehicle expertise, with Toyota producing its revolutionary hybrid in 1997, and BMW launching the i3 in 2011.  Unbeknown to many, BMW and Toyota are already two of the largest electric vehicle producers in the world”.

While the manufacture of EVs requires fewer mechanical parts than ICE vehicles, it does need many new electric and electronic components and batteries.  Baillie Gifford like Samsung SDI in the battery supply chain and Platinum like LG Chem, who are battery producers. It is also interesting that EV cars are heavier resulting in increased tyre wear compared to conventional cars.

Some opportunity exists in Australia in owning resources companies who produce nickel, lithium and cobalt, which are used in battery production, alternatively investors can invest in managed funds to gain broader exposure to growth in electric vehicles.

The biggest threat, according to McHugh, to investing in the EV industry “is the emergence of a new type of energy efficient ‘fuel’ that could power cars, for example ‘electrofuels’.  One possibility is hydrogen gas (H2) made with renewable electricity.  At the moment there are scientific barriers to entry for this technology; storing the gas within the bodywork of a car is difficult and could be dangerous, and therefore expensive”. 

Second order effects of EV’s that investors need to consider is the impact of EV’s on the demand for oil, and the oil price.  Markiewicz says that the impact is “likely to be at the margin – there are 1.4bn passenger vehicles in the global car fleet which account for 20% of crude demand today. EVs are only 2% of new vehicle sales, and the global fleet only turns over every ~15 years. As a thought exercise, even if EVs were 50% of all new vehicle sales today, it would still take 15 years to displace 10% of the world’s oil demand (0.7% demand destruction per year). At the same time, oil demand will grow elsewhere. Hence, even under bullish scenarios for EVs, changes to oil demand are likely to be quite small – impairing growth, rather than absolute demand”.

Owning EV manufacturers may be the obvious investment for this thematic, but investing in other related components in the EV chain may be just as interesting.


This article was written by Mark Draper (GEM Capital) and featured in the Australian Financial Review in July 2020.

Wednesday, 10 June 2020 08:28

Making sense of the rally

Wednesday, 10 June 2020 08:04

Cheap Bank Shares - not risk free

Investors holding the banks as a safe yield play have had a wake up call courtesy of COVID-19.  NAB have cut their dividend by over 60%, ANZ and Westpac have deferred their interim dividends and decide in August whether to make a payment.  

Bank share prices have fallen by around a third since the February 2020 peak, but investors need to ask themselves whether they are in fact cheap, or do better opportunities exist elsewhere.  The bank bulls would point to Australian bank shares trading at a lower book value than they have historically been, a common measure to value a bank.  

Book value is determined simply by subtracting the banks liabilities from its assets and then dividing by the number of shares on issue.  Nathan Bell (Portfolio Manager Intelligent Investor) highlights that Australian banks trade at a premium to their US and European peers on a price to book value.  For example CBA currently trades at around 1.5 times book value, and 5 years ago traded at over 2.5 times book value.  European Bank, ING trades at a book value of around 0.4 times.  While Australian banks are trading at lower price to book values than they have been for some time, they are not necessarily cheap by global standards.

Matt Williams (Portfolio Manager, Airlie Funds Management) highlights that forecast Price to Earnings ratios for Australian banks in 2021 are 11.1, which makes them more expensive than UK banks at 8.2 times earnings and US banks at 10 times earnings.

One of the major risks to any bank relates to bad debts.  The COVID-19 crisis now adds the spectre of a serious bad debt cycle.

It seems universally accepted that COVID-19 will cause the first Australian recession in 30 years.  Recessions increase unemployment and when people lose their jobs, their mortgage repayments can be at risk.  The RBA is forecasting the unemployment rate to rise to around 10% during 2020, a level not seen since the 1990’s recession, and not even reached during GFC.

History of Australia’s unemployment rate

To put current provisioning for bad and doubtful debts into historical perspective Williams says “bad debts peaked at around 1% of gross loans following the 1990’s recession which compares to present day consensus forecasts for bad debts peaking in 2020 at 0.4% of gross loans.  The current provisioning is materially lower than what happened in the 90’s recession and the GFC.”

The base assumptions around current consensus bad debts assume a multi year ‘U’ shaped recovery.  Williams adds “If the recovery is more ‘V’ shaped and unemployment outcomes are better than feared then the banks are on the cheap side of fair”.  Conversely, if unemployment outcomes turn out to be worse than expected, bank shares would most likely fare poorly.

Bell sees the small business sector as the source of the greatest risk to consensus forecasts on unemployment and bad debts.  Small business is defined as those businesses with less than 20 employees.  According to the ATO’s 2019 annual report, of the 4.2 million small businesses that operate in Australia, 800,000 of them had entered into a payment arrangement to pay their tax liability.  That implies almost one in five small businesses couldn’t pay their tax bill, and that was before COVID-19 hit.  

According to Australia’s Small Business Ombudsman report in 2019, Small business contributes around 33% to Australia’s economic output, and employs around 44% of all Australians.  What happens to the small business sector matters a lot to the economy and to the unemployment rate.  Unlike listed companies who can raise capital through the share market, small businesses have limited options which usually revolve around the owner mortgaging their home.

Bell says “we won’t know the final position until government support falls and loans stop being extended and we see the real impact of COVID-19 on the economy, particularly small business.”

He adds “the bull case for banks rests on investors being willing to pay a premium over book value despite single digit return on equity figures due to low interest rates.  This has not been the case in major markets overseas, so it would be our version of Australian exceptionalism.”

Williams says the best environment for banks consists of slowly rising interest rates, low unemployment, strong migration resulting in economic growth, but those days appear over.

So while bank shares are cheaper than they have historically been, they are clearly not a risk free trade.


This article was written by Mark Draper (GEM Capital) and appeared in the Australian Financial Review in June 2020

Wednesday, 13 May 2020 07:53

Property Trusts after COVID-19

Following the most savage sell off in REIT’s since GFC, investors are left to decide whether to buy the lower prices or sell on the basis that COVID-19 has forever changed property.

During the month of March, the REIT’s index fell 35%.  While the sector fared worse during GFC, this sell off has been fast and brutal. 

Investors need to understand that not all REIT’s are created equal and they generally fall into 3 sectors:

  1. Retail
  2. Office
  3. Industrial

One of the major risks for property investors is vacancies and COVID-19 may cause vacancies through business bankruptcies.  The retail property sector is at the epicentre of this risk.  This risk would appear to be in current prices and Hugh Dive (Portfolio Manager Atlas Funds Management) is of the view that “some of the sentiment towards retail appears excessively bearish.”  He makes this point by backsolving the current share price of GPT Group’s property portfolio of retail, office and industrial assets.

The table below shows that at current prices, GPT investors are assigning GPT’s 12 shopping centres a value of $650 million.  According to Dive “this appears to be unlikely for a collection of assets that generated profits of $326 million last year.  If you demolished the shopping centres, the land value is most certainly worth a lot more than this.”

Pete Morrissey (CEO Real Estate Securities, APN Property Group) says that “COVID-19 is a catalyst to speed up the tenant turnover/bankruptcy and rent reversion cycle that was likely to continue for several more years into a compressed period.  While this may bring pain to landlords and tenants it could also see the emergence of a more vibrant, customer focussed retail sector.  Those properties that are well located with owners focused on meeting consumer needs will continue to drive solid return outcomes once markets stabilise.”

Dive summed up his views on retail property with “human beings have consistently enjoyed shopping and dining in public areas for two and half thousand years since the agora was built in Athens in the Fifth CenturyBC and it is hard to make the case that COVID-19 in 2020 totally changes that behaviour”.

A common theory with office space is that COVID-19 will permanently change the demand profile for office space as companies move their employees toward working from home.  

Morrissey says “While we don’t disagree entirely with this we do question whether corporates will be willing to forego the obvious gains from staff networking efficiencies and personal interactions/collaborations across their organisations.”  He also introduced the prospect that tenant space savings from staff working at home could be offset by social distancing requirements being introduced to the office.

Dive believes “that COVID-19 will reduce the demand for office space and rents will fall, but we don’t see a fundamental decline in value of office real estate.”  This is largely due to the tight vacancy rates in Sydney and Melbourne that should provide some support to rents over the coming years.

Industrial property would seem to be the most insulated sector from the impact of COVID-19.

“Industrial property, in particular logistics is likely to see a minimal impact from COVID-19 as their tenants are likely to see solid demand through 2020” according to Dive.  

Morrissey agrees and adds “increasing infrastructure spending, growing e-commerce, and a renewed focus on shoring up local supply chains will be an ongoing tailwind to drive industrial property demand.  Low vacancy rates across the sector indicate that industrial property is not over-supplied”.

Those investors who remember the highly dilutionary capital raising’s from REIT’s during GFC should take comfort in the low gearing of the sector today.  Average gearing today is around 28% compared to GFC levels of around 40%.  Dive is of the view that while we have seen a few small opportunistic capital raisings in 2020, we are unlikely to see a large number of jumbo ‘life or death’ capital raisings in the REIT sector like we saw during GFC.

Investors can gain access to REIT’s by either purchasing them directly via the ASX, or through diversified property funds such as those offered by Atlas Funds Management and APN Property Group.  ETF’s are another way of gaining property exposure, but investors should be aware that the property index is dominated by retail property if choosing to index their property exposure.

It is said that it is always darkest just before the dawn.  Long term investors could well make good long term returns from sifting through the REIT wreckage.


This article was written by Mark Draper (GEM Capital) and was published in the Australian Financial Review on Wednesday 13th May 2020.

The investment team at Montgomery Investments have put together another informative report that covers various aspects of the current investment landscape.

In this report the team looks at:

- Is it time to get back in

- How should you think about cash?

- Looking through market volatility for opportunity

- 4 criteria to consider before buying shares in this market


To download your copy of this report, click on the report below.


The COVID-19 (coronavirus) pandemic has shaken the global population to its core. The personal toll is enormous, and the fear, immense. In this special feature I will explain what the virus is, what makes it unique and the progress that has been made in developing a treatment and vaccine. The collaboration between pharma, biotech and medtech companies, as well as researchers has been astounding and gives me great confidence that we will win this fight.

Within a very short period of time, the world has shifted its focus to a virus that measures roughly 50-200 nanometres1. Suddenly, we have all become familiar with scientific terms such as viral spread, PCR testing capacity, antibodies, viral shedding and many more. Economists have become epidemiologists hoping to model the outbreak, while we have also witnessed the limitations of many healthcare systems.

Viruses are a part of life. There are plant viruses, animal viruses and viruses that infect bacteria. Over time, outbreaks occur and can be devastating. Polio was an example of a seasonal, frightening viral epidemic in the 1940s and 1950s that was eventually eliminated by vaccination. There is no reason to believe that we will not be successful combating SARS-CoV-2, the new coronavirus.

SARS-CoV-2 is a member of the Coronaviridae family, a rather large clan with two subfamilies (Coronavirinae and Torovirinae) that can infect humans as well as animals. These subfamilies have several members and there are four coronaviruses that we have all most likely had exposure to. They cause mild symptoms, such as the common cold and require no diagnostic testing. However, occasionally we see a coronavirus that causes very unpleasant diseases, such as SARS (2002/2003), MERS (2012/2015) and now COVID-19.

This latest virus outbreak will change our view about this viral family, vaccination, pandemic preparedness and antiviral therapeutics. It is highly plausible that we may require vaccination against this culprit with additional booster shots annually. Given what we are seeing today, this new coronavirus is here to stay.

Viruses are simple but sophisticated creatures. They have an outer shell and sometimes an inner one as well. Inside, is the viral genome, often with some viral functional proteins attached to it. The outer shell tends to have family-specific characteristics that determine which and how the virus infects its host. Coronaviruses like respiratory and gastrointestinal tracts. So-called spike proteins that sit on the outer shell of the virus have a high affinity for proteins localised in our throat, lungs and gut. It is this outer shell that disintegrates when it contacts soap, hence the reason why washing our hands is so crucial. Similarly, we as the host, are crucial for the survival of the virus. Viruses cannot replicate by themselves, they need the host’s ‘machinery’ to multiply. Viruses are masters at exploiting the host’s machinery and they know how to adapt, so it is essential we deny them any opportunity to find another host by practising social distancing. Some viruses are very clever, they have worked out that causing mild disease is better as the host keeps socialising, which guarantees survival of the virus, while the more aggressive (not so clever) viruses cause devastating diseases and hence eliminate themselves quickly. SARS-CoV-2 falls into the sophisticated category as it replicates in the upper respiratory tract (e.g. throat), causing mild symptoms vs. its cousin SARS-CoV that settles deep in the lungs. Transmission from the throat is much easier and hence requires drastic actions to slow it down and stop its spread. Scientists are closing in on this virus a lot faster than we have ever seen before.

What we learnt from HIV

Thanks to the advanced scientific tools we use today in the laboratory, we have been able to identify and study SARS-CoV-2 and its lifecycle at a rapid speed. It is worthwhile revisiting the AIDS/HIV epidemic in the 1980s to understand how far we have come. In 1981, the US Centres for Disease Control and Prevention (CDC) started to see patients with diseases that occurred due to a malfunctioning immune system. However, nobody knew what was causing this immune deficiency. A year later, the disease was called AIDS (Acquired Immune Deficiency Syndrome). In 1983, French scientists postulated that a retrovirus could be the cause of AIDS, which was confirmed by US scientists the following year. In 1985, the US Food and Drug Administration (FDA) approved the first commercial HIV blood test that detected antibodies in a patient’s blood. A molecular test, similar to what is being used today to detect SARS-CoV-2, was only available for HIV in the mid-1990s. The first antiviral drug was approved in 1987. Compare this timetable to the current pandemic. Late last year, news emerged from China about a respiratory disease that did not test positive for any known respiratory pathogen. It quickly emerged that it was due to a new coronavirus. The genome of the virus was rapidly sequenced and distributed to scientists globally and molecular tests were established. Biotechs and pharmaceutical (pharma) companies quickly looked inside their drug cabinets for potential therapies as well as how their technologies could be applied to make specific drugs and vaccines for this new virus. It has been a phenomenal global effort. Currently, we are awaiting clinical trial data for the first repurposed antiviral therapy (Gilead Science’s Remdesivir, which was originally developed to treat Ebola), while the first vaccine is also already being tested in humans. It may feel like a long time but it has only been months.

The virus itself is being studied intensely by several groups around the world. The spike proteins that make up the outer shell have been analysed and scientists have elucidated the structure of one of the viral functional proteins called protease, which is immensely important, as it will allow scientists to develop anti-protease inhibitors, which were crucial in treating HIV.

Scientists are simultaneously studying the immune system’s response to the virus and have identified Interleukin-6 (IL-6) as a key mediator, hence Roche’s IL-6 Antibody Actemra is being used to treat COVID-19 in some hospitals, while clinical trials are ongoing. Meanwhile, Sanofi/Regeneron’s IL-6 antibody has also just entered clinical trials for COVID-19.

We know from previous viral outbreaks that patients who have recovered from a virus will have produced antibodies that neutralise the virus, so Japanese pharmaceutical company, Takeda has started collecting plasma from patients who have recovered from COVID-19 to give to patients currently suffering from the disease. CSL has recently joined Takeda to work together on such a plasma-derived product.

Regeneron, a US biotech, is using its antibody engineering capability to find antibodies that target the virus. Those antibodies should move into human testing later this year. Alnylam and Vir Biotechnology are working on a long-acting small interfering RNA (siRNA) therapeutics targeting the virus. Vir is also working on antibodies with GSK.

The ability to explore and investigate so many different drug modalities was not possible during other viral outbreaks as we did not have the technological capability.

Global collaboration

There has been a lot of debate about the lack of testing capacity, but overall, the scientific community, including biotechs, pharma and medtechs, have all shown great leadership in this pandemic. The collaboration and sheer speed in detecting the virus and developing a treatment have been unprecedented. Not that long ago, pharma and biotechs were in the political crossfire regarding high drug prices. In this pandemic, the industry has the opportunity to set the record straight and show their full capabilities. In years to come, this industry, along with the medical profession, will be viewed through a very different lens.

Vaccines, the holy grail to combat infectious diseases, are also experiencing immense activity by traditional vaccine companies and also by biotechs who use new transformative technologies, such as messenger ribonucleic acid (mRNA).

The concept of a vaccine is simple. A venture capitalist recently described it in the easiest possible way; likening a vaccine to sending a “wanted criminal dossier” to the immune system, that shows the immune cells what to look out for and prepare to capture the ‘criminal’. Sometimes, the immune cells are able to see the picture of the criminal just once to ensure the immune cells can fight off the criminal, other times, they need to be reminded again i.e. get a booster.

The criminal dossier can come in different forms. It can be very detailed (a weakened form of the virus) or it may only have some very poignant features of the criminal (parts of the virus that are very immunogenic).

It takes time for laboratories to make a virus that replicates the criminal dossier. Firstly, scientists need to figure out how best to make it, or which part of the virus they should focus on. Manufacturing then has to be scaled up, which all requires a significant amount of money. The vaccine then needs to be tested at length and many millions/billions of dosages have to be manufactured. Today, four companies dominate the vaccine industry (GSK, Pfizer, Sanofi, Merck) with Australian company, CSL a distant fifth and Johnson & Johnson always keen to participate.

The potential long lead times and significant upfront costs have, however, not deterred Sanofi and Johnson & Johnson from applying their more traditional vaccine-making approach. Both companies are actively working on the criminal dossier and Johnson & Johnson is due to start trials later this year.

Platinum has followed the vaccine space for more than a decade and we have long hoped that technology advances would one day change the way vaccines are made. Using cell lines (where a permanently established cell culture multiplies indefinitely) has been one significant step along this path, but overall, the vaccine industry has remained a tight oligopoly.

In recent years, the potential to use mRNA as a therapeutic treatment and as a vaccine has emerged. We have been following the progress closely and invested in two companies in this space, Moderna and BioNTech, some time ago. The pandemic has placed mRNA and both companies firmly in the global spotlight. US-based Moderna was able to start clinical trials within 63 days of receiving the genomic sequence of the new virus. BioNTech has been slightly slower, but recently expanded its partnership with Pfizer and also entered a partnership with Chinese company, Fosun to develop its vaccine candidate. Curevac, another privately- owned German mRNA biotech backed by SAP co-founder Dietmar Hopp, is also busy developing a vaccine, while Sanofi recently expanded its alliance with biotech, Translate Bio.

Using mRNA for vaccine development is quite an elegant approach and Moderna and BioNTech have invested considerable effort in designing and selecting the best possible mRNA molecule for a respective protein of interest. It remains to be seen if it works, however, both companies have received support from the Bill and Melinda Gates Foundation and have large partners for various pipeline products. Some established vaccine makers are sceptical, but Moderna has been the first to take their mRNA to the clinic.

mRNA explained

mRNA is a molecule that functions naturally in our bodies as an intermediary between our genes and our proteins. It is the blueprint for our proteins and essentially a copy of the gene encoding the protein. If designed and delivered correctly, cells will recognise the mRNA and start making the protein. For vaccines and therapeutics alike, the mRNA can be quickly designed (by the right team of scientists) in the lab once the scientists know which is the correct viral particle to make. Usually, several mRNAs are made and scientists quickly assess which one is the most suitable. Manufacturing these chemical molecules (or information molecules, as Moderna calls them) can be done with a much smaller manufacturing footprint and also at a fraction of the cost of making traditional vaccines or protein therapeutics, as it is not a protein, it is the information to make the end product. In the end, the 'active’ product, the vaccine or the therapeutic protein, is made by the person who receives the mRNA injection. Humans essentially function as the manufacturing site for the mRNA vaccine.

We are convinced that these multiple vaccine efforts (traditional and modern) will result in a product, potentially as a first-generation product that will give companies time to refine their efforts and develop the next generation of longer-lasting vaccines.

A global logistical exercise

Apart from the scientific approach that is being undertaken to combat the virus, this pandemic is also witnessing large- scale crisis planning and management in different countries.

Molecular testing has been a key pillar in managing the viral spread. It is clear, however, that the supply of these tests cannot fulfil demand. Each country has taken slightly different approaches to testing. Some countries are actively looking for asymptomatic infected individuals, while others are struggling to keep on top of the symptomatic patients. Testing guidelines will undoubtedly change over time and serological testing, whereby a test determines antiviral antibodies in a patient's blood, will complement molecular testing in the future.

In a pandemic, facts determine your management plan and as the facts change so should the plan. Many people worry when plans change, but in the crisis we are experiencing today, it is paramount that countries adjust their plans to address the changing dynamics.

Our knowledge of the SARS-CoV-2 virus and the COVID-19 disease has rapidly grown and changed as physicians in different countries gained first-hand experience. Throughout this pandemic we have drawn on a number of sources, including the New England Journal of Medicine (NJEM), a weekly medical journal published by the Massachusetts Medical Society, Dr Anthony Fauci, one of the lead members of the White House Coronavirus Task Force in the US, the German federal government agency and research institute, Robert Koch Institute, along with a German virologist Professor Drosten (coronavirus specialist) and several of his colleagues.

These learnings and the exchange of these experiences is vital to form response plans. One of the key learnings in recent months has been the fact that this coronavirus can spread very quickly. This is due to its preference for residing in the upper respiratory tract, as highlighted above. This means it often causes milder symptoms that can go undetected. The biggest challenge is to break this rapid spread and protect vulnerable individuals. In an ideal world, everyone would be tested. A swab kit would arrive in your mailbox (similar to the bowel cancer test kit), you would take a swab, it would be collected by a courier and the results emailed to you in a matter of hours. What would be even better though, would be a molecular test that people can do themselves at home. This would quickly identify who is infected and who needs to self-isolate.  Unfortunately, these tests are not available to us today, so the next best option is what is currently being practised in many countries; quarantine, social distancing, drive-thorugh testing facilities, and tracing potential infections practively.  Sophisticated piont of care testing that could be done at home or at the local medical centre is emerging rapidly, with companies such as Roche, Qiagen (soon to be part of Thermo Fisher) and Cepheid (now part of Danaher), key platers developing this technology.

At the core of this pandemic, due to the rapid spread of the virus, is the ICU capacity of hospitals. In the current phase of the pandemic, the focus hence needs to be on ensuring we have enough ICU beds and ventilators. Globally, we are seeing different ICU capacities and thankfully we are seeing a move to central ICU bed co-ordination. Germany, for example, is moving to real-time monitoring of its ICU beds as well as transporting patients from neighbouring countries. All hospitals have to work together, which has been a challenge, particularly in the US. We have learned from Italy’s experience that it is important to have COVID-19 treatment centres protecting non-COVID-19 patients. This pandemic is as much a logistical and planning exercise as it is a scientific endeavour. It will highlight very quickly the shortcomings of our healthcare system along with our past desire to be as supply chain efficient as possible.

However, there will be a next phase to this pandemic, and that will be when we start to return to our offices and gradually begin to socialise again.

During the next phase it will be about recovered patients and keeping on top of regional outbreaks and next-generation diagnostic tests that identify antibodies to the virus. Many of these tests are currently receiving media coverage, however, I would caution that these tests are not yet ready to be used widely. The potential for false negatives is not a risk we want to take currently; it takes days to develop antibodies and hence molecular tests remain the best approach to detect an infection early.

However, the presence of anti-SARS-CoV-2 antibodies in the blood means the person has been infected sometime in the past and hence are now regarded as being immune, which will be important when we are ready to return to work. In Germany, for example, the debate is currently about issuing “immunity certificates” for those who show positive antibody titres in their blood. It is still unclear, however, how long this immunity will last. In the months to come, detection of the virus and our immunity will remain paramount until we have therapeutic options and a vaccine.

At Platinum, we have long believed that diagnostic tests will become a key pillar of healthcare, be that in oncology, inflammatory diseases or infectious diseases. The aim in healthcare should be prevention, which requires tools to detect changes in our body early with precision. This is the same with the current virus, if we can detect it quickly, we can prevent it spreading. This pandemic challenge has placed the healthcare industry squarely in people’s minds. It has shown how limited our arsenal of antiviral therapies is and highlighted how our approach to vaccine development has to be overhauled. In the world we are living today, with all the digital factory technology that is available, manufacturing vaccines strikes us as 'old style’. Given we have seen several coronavirus outbreaks in the last 18 years, it is more likely than not, that this coronavirus family will continue to cause us harm and hence having a vaccine, or possibly an annual coronavirus vaccination booster would be worthwhile investing in. We are firm believers that current events will change healthcare systems and most importantly, will highlight what a vital role biotechs play today.

The biotech industry is relentless in its search for new technologies and new therapeutics. Bankruptcies are rare and failure does not demotivate them, to the contrary, it motivates them.

For now, as Germany’s chancellor Angela Merkel recently said, the best therapy we have for SARS-CoV-2 is to stay at home.


This article has been reproduced with permission from Platinum Asset Management.  The article is written by Dr Bianca Ogden (Healthcare Portfolio Manager Platinum Asset Management).  

Dr Bianca Ogden, MBio (Tübingen), PhD (University College London), has been the portfolio manager for the Platinum International Health Care Fund since 2007 and leads the healthcare sector team. Molecular biology was Bianca’s first love before she discovered the joys and challenges of investing. After spending some time at Swiss pharmaceuticals company Novartis researching new HIV drugs (one of which has been approved and is in use today), Bianca went on to complete a PhD at UCL, investigating Kaposi’s sarcoma-associated herpesvirus. She then migrated to Australia and joined Johnson & Johnson as a molecular biologist, researching new drug targets in oncology. Bianca embarked on a career change and joined Platinum as an investment analyst in 2003. Her rich knowledge base in molecular biology and first-hand insights into the pharmaceutical and biotech industry give her a unique ability to delve deeply into the fundamentals of healthcare companies and identify those with a solid foundation in scientific research.



COVID-19 has challenged the assumption that infrastructure investment offers defensive revenue characteristics that tend to hold up during periods of economic stress.  

Investors need to appreciate that not all infrastructure assets are the same, and that each sub-sector will react differently to COVID-19.

Infrastructure can broadly be separated into at least 3 categories:

  1. Regulated assets, including electricity transmission lines, gas pipelines and water distribution systems.
  2. Transportation assets, including toll roads, tunnels, bridges, seaports and airports.
  3. Communication assets, including radio and television broadcast towers and wireless communication towers.

So far during the COVID-19 crisis, the revenues and share prices of regulated assets and communication assets have shown great resilience.  This makes sense as a business such as Spark Infrastructure, who provides the power line infrastructure to supply electricity to homes in South Australia and Victoria, will continue to be paid to transmit electricity with or without COVID-19.

The infrastructure sector that has seen the most disruption through the lockdown of populations has been the transport assets which includes toll roads and airports.  Transurban (tollroads) and Sydney Airport have seen share price falls of around 25 – 40% since the end of February 2020.  These assets would seem to provide investors with great opportunity for future profit, due to the high level of uncertainty that is currently reflected in their share price.

There has been much made of Sydney Airports debt, however if the airport closed tomorrow, it has enough funding to cover all expenses and refinancing requirements for at least a year.

Clearly passenger numbers at Sydney Airport will be down for some time, however analysts can arrive at a valuation materially higher than the current share price even allowing for some dramatic falls in passenger numbers.  A model we have read includes a 90% fall in international traffic for the next three months and then a 50% decline for the remainder of the year.  This scenario assumed for domestic passengers a 60% decline for three months and a 20% decline for the remainder of the year.  Short term earnings fall by around 40% under this scenario, but shareholders have over 80 years remaining of a 99 year lease over the Sydney Airport, which makes short term earnings movements less relevant.

What is more relevant is whether Sydney Airport is likely to breach any of its debt covenants, and whether it needs to raise capital by issuing new shares at discounted prices and diluting existing shareholders value in the process.

Sydney Airport’s debt covenants are not publicly available, but analysts are of the view that they are no more onerous than those originally set out in 2002.  Under the above modelling, Sydney Airport would be unlikely to breach its debt covenants.

Transurban, which is an owner of multiple toll road assets faces some risk of particular roads breaching debt covenants, but as a group Transurban looks to be well capitalised and not likely to need to raise capital on the basis that the lockdown period lasts for 3 – 6 months.

The key risk facing investors with respect to transport infrastructure assets revolves around knowing how long the population lockdown will last for.  The modelling outlined earlier shows that Sydney Airport would be unlikely to need to raise capital if the lockdown lasted for 3 months, but a lockdown of 6 months would intensify pressure on debt covenants and a capital raising.  The length of the lockdown in ‘unknowable’ at this stage but the message is clear, the longer the lockdown, the more damage is done to earnings and to valuations.  

Investors would be best served to think in terms of scenarios, rather than absolute points at this stage and remain flexible in their thinking to accommodate new information as it comes to hand.

Out the other side of COVID-19, as with past disruptions it is highly likely that airport traffic and toll road traffic recover to reach new highs. A case could also be made for greater motor vehicle transport as commuters could seek to avoid the health risks associated with public transport.  Lower bond rates could also provide a tailwind to infrastructure valuations.

While no-one knows how COVID-19 plays out yet, what we can say with certainty is that that toll road traffic should return faster than air travel passenger numbers.  This means that toll roads should offer less earnings risk than airports at the present time.  


This article was published in the Australian Financial Review during April 2020.

Wednesday, 01 April 2020 13:23

Alibaba - why the smart money likes it

Chinese CurrencyWith the Chinese middle class population forecast to double to over 600 million over the next 5 years, which in turn increases consumer spending, it is not difficult to see why the ‘smart’ money is investing in Alibaba, one of China’s largest companies that is likened to Amazon, eBay, Paypal and Google all rolled into one.

Alibaba was founded during the 1990’s by Jack Ma who realised at that time China lacked technology in the business world.  Alibaba, now one of China’s largest companies, listed in 2014, and today is highly profitable with a market capitalisation of over US$580bn.  This is about 6 times larger than Australia’s largest company CSL.

Alasdair McHugh (Product Specialist Baillie Gifford) is attracted to Alibaba due to their very strong position in ecommerce transactions in China where their market share is over 60% by gross merchandise value and likely to rise further.  He also likes the fact that the original co-founder and visionary Jack Ma is still involved in the business.  

According to the China Ministry of Commerce, total retail sales across China increased 8% in calendar 2019, for a total of RMB 41 trillion (AUD $9 trillion).  Consumption contributed over half of China’s economic growth.  Online retail sales for the year was RMB 8.5 trillion (AUD $1.87 trillion) up 19.5% from the year before.  It is clear that consumption is now a major driver of economic growth in China, and online retail is an important driver of consumption growth. Alibaba’s dominant position means it is well placed to capture this growth.

The scale of the opportunity is extraordinary and underestimated by certain investors, particularly some from the west who still consider China as a risky emerging market.  But McHugh suggests that those who still treat China as an emerging market are overlooking the fact that the addressable market for Chinese consumer spending is 1.3 billion people.  

Illustrating this point was the recent ‘Singles Day’ held in November 2019 where another record was broken with total sales of RMB 268.4bn (approx. AUD $59.2bn).  Almost 1.3 billion packages were delivered by Alibaba from ‘Singles Day’ orders and of those 960 million were delivered within one week.  This is equivalent to 2.3 times the combined online sales of Black Friday and Cyber Monday in the US.  It reflects the strength of Alibaba’s digital economy and of Chinese consumers consumption power.

Joe Lai (Portfolio Manager Platinum Asset Management) says that “mobile monthly average users on Alibaba’s retail marketplaces in China reached 824 million in December 2019, an increase of 39 million from the previous quarter”.  

Beyond the ecommerce business, Alibaba operates the largest cloud computing business in China, Alibaba Cloud.  Many believe that this business can ultimately become the largest division within the company despite it presently representing less than 10% of overall revenue.  Revenue from Alibaba Cloud grew by 62% over the year to December 2019.

A fascinating aspect of Alibaba’s recent quarterly earnings update related to the company’s involvement in procuring and delivering 40 million units of medical supplies worth around AUD$100 million to Wuhan which has been impacted by Covid-19.  This shows a company that is so much more than an online retailer. 

Lai points out that “The Alibaba ecosystem keeps delivering new sources of value to shareholders.  Amid the Covid-19 lock down in China, Alibaba’s new enterprise communication app, DingTalk, has achieved new prominence.  Alibaba introduced a new digital health check in feature on DingTalk, which as at February 2020, had recorded more than 150 million daily health check ins.”

While currently investors are obsessing over Covid-19, Alibaba management said “17 years ago, the ecommerce business experienced tremendous growth after SARS.  We believe the adversity will be followed by changes in behaviour among consumers and enterprises and bring ensuing opportunities.  We have observed more and more consumers getting comfortable with taking care of their daily living needs and working requirements through digital means.” 

With the huge growth in China’s middle class and online commerce in coming years, combined with Alibaba’s dominance across retail, financial and computing businesses it’s clear to see why the company is in Platinum and Baillie Gifford portfolios.  Investors can of course buy Alibaba directly either on the Hong Kong or US exchange and can also gain access to it through managed global funds.


This article appeared in the Australian Financial Review during March 2020 - written by Mark Draper GEM Capital

Wednesday, 01 April 2020 13:04

Solvency and Debt in time of crisis

This article was written by Hugh Dive - Atlas Funds Management and he has generously authorised its reproduction ..... Thanks Hugh!


Alongside the worldwide devastation as healthcare systems struggle to cope and deaths are well into the tens of thousands, the COVID-19 crisis is having a chilling impact on Australian corporates. Many companies are removing profit guidance given less than a month ago, cancelling dividends, raising debt, and in the last five days attempting to raise capital. Eleven years ago during the GFC many companies raised equity, often at deep discounts to their share price, as nervous bankers put pressure on management to shore up weakened balance sheets. In some situations, companies were forced to raise equity as their bankers were unable to refinance loans that had become due in a frozen credit market. 
In this week’s piece we are going to look at the various debt measures that we examine to assess a company’s solvency. These measures provide insight into whether management will be forced to raise equity during times of stress.


Gearing is the most commonly discussed measure of a company’s debt. It indicates the degree to which a company’s business is supported by equity contributed by shareholders, as opposed to debt from banks and bondholders. Gearing is measured by dividing net debt by total equity (assets plus liabilities).  During times of buoyant business conditions, companies with a high level of gearing generally deliver higher returns to investors. However, when the tide turns, highly geared companies have a riskier financial structure and have an increased chance of going into administration or having to raise equity to retire debt.

Most companies on the ASX have a gearing ratio between 25% and 35%. However, the level of gearing needs to be assessed in the context of the industry in which the company operates.  Utilities such as Spark Infrastructure with regulated revenues can “safely” have a higher level of gearing than a highly cyclical stock such as Myer or Qantas. The latter two have more variable earnings and thus a variable ability to meet interest payments.

The key weakness in using gearing alone to measure a company’s solvency is that it assumes that the company’s assets can be realised for close to what they are valued on the balance sheet. The shortcomings of this approach are especially apparent for companies with a large proportion of intangible assets on their balance sheet, such as goodwill stemming from acquiring other businesses at prices above their net asset backing. In 2019 AMP’s gearing increased rapidly after the financial services company wrote down the asset value of its troubled wealth management and life divisions by $2.5 billion. Shortly after writing down the value of its assets, the highly geared AMP both cancelled its dividend and conducted a $650 million equity raising at a 16% discount to the share price at the time.

Companies such as Medibank PrivateJanus Henderson and A2Milk are in the fortunate position in 2020 of having no net debt on their balance sheet. As a result, each has a negative gearing ratio and is facing no anxious discussions with their bankers. By contrast AMP, Pact and OohMedia (which raised $167 million last week) all have high levels of gearing.

Short-Term Solvency

Short-term solvency ratios, such as the current ratio, are used to judge the ability of a company to meet their short-term obligations. The current ratio divides a company’s current assets by their current liabilities (i.e. liabilities due within the next 12 months). Firms can get into financial difficulties despite long term profitability or an impressive asset base if they can’t cover their near-term obligations. A current ratio of less than one would indicate that a company is likely to have trouble remaining solvent over the next year, as it has less than a dollar of assets quickly convertible into cash for every dollar they owe. A weakness in using this measure to assess the solvency of a company is that the current ratio does not account for the composition of current assets which include items such as inventory. For example, winemaker Treasury Wine reports a robust current ratio. However, a large proportion of current assets are inventories of wine which may be challenging to convert into cash at the stated value during times of distress (panic buying of wine notwithstanding).

A further limitation of the current ratio in assessing a company’s financial position is that some companies such the ASX, Coles and Transurban which have minimal inventories or receivables on their balance sheet. This occurs as they collection payment immediately from their customers, but pay their creditors 30 or 60 days after being invoiced. These companies will tend to report current ratios of close to 1. Alone, this figure would indicate that these companies may be in distress. Indeed Coles has a current ratio below 1, which far from being alarming is due to the nature of the grocery business. Suppliers such as Kellogg’s and Coke are paid on terms between 60 and 120 days after they deliver their goods which creates a large current payables balance, while the receivables balance is small when customers pay for their cornflakes or Diet Coke via direct debit. This favourable mismatch between getting paid and paying their suppliers allows Coles and Woolworths to report an alarming current ratio that is effectively a loan from their suppliers to fund the grocers’ working capital.

Interest Cover

A debt measure that we look at more closely than gearing is interest cover, as this measures cash flow strength rather than asset backing. Interest cover is calculated by dividing a company’s EBIT (earnings before interest and taxes) by their interest cost. The higher the multiple, the better. If a company has a low-interest cover ratio, this may indicate that the business might struggle to pay the interest bill on its debt.

Before the GFC, I had invested in a company that had significant asset backing held in the form of land and timber. Using gearing as a debt measure alone, Gunns appeared to be in a robust financial position. However, interest cover told a different story. The combination of a rising AUD (which cut demand for its woodchips) and weak economic conditions resulted in Gunns having trouble servicing their debts despite their asset backing, and the company ended up in administration.

As interest rates have trended downwards over the past decade, it has become easier for companies to pay their declining interest bills, so in general, the interest cover ratio for corporate Australia has increased. Across the ASX companies such as JB Hi-Fi, Goodman Group, Wesfarmers and RIO Tinto all have an interest cover of greater than ten times. At the other end of the spectrum Nufarm, Viva Energy, Boral and Vocus all finished 2020 with interest cover ratios less than three times, which is likely to result in some worried discussions with their bankers. Nufarm has since sold its South American crop protection business with the proceeds going to pay down debt.  

Tenor of Debt

A very harsh lesson learned on debt during the GFC was not on the absolute size of the debts owed by a company, but the time to maturity – known as the tenor of the debt. The management of many ASX-listed companies sought to reduce their interest costs by borrowing on the short-term market and refinancing these debts as they came due. While this created a mismatch between owning long-dated assets that were refinanced yearly, it was done under the assumption that credit markets would always be open to finance debt cheaply. This strategy worked well until global credit markets seized up in 2008 and a range of companies such as RAMS and Centro struggled to refinance debts as they came due.

When looking at a company’s solvency during times of market stress, one of the critical items to look at is the spread of a when a company’s debt is due. If the company’s debt is not due for many years, management teams may not be forced by their bankers into conducting dilutive capital raisings during a period of difficult economic times. In the ASX over the next year Seven West Media, Downer and Southern Cross Media all have significant levels of debt to refinance, which may prove challenging in the current environment.

After the GFC many of the larger ASX-listed companies have sought to limit refinancing risks by issuing long-dated bonds in the USA and Europe. Toll road companyTransurban does carry a large amount of debt, but as you can see from the table below, the maturities of these debts are spread over the twenty years with an average debt to maturity of 8.4 years.

Similarly, at the smaller end of the market, the supermarket landlord SCA Property has minimal debt due over the next three years after issuing long-dated bonds in the USA. While COVID-19 is disrupting SCA Property’s business in March 2020, this spread of debt maturities positions this property trust better to ride out the current storm.



Covenants refer to restrictions placed by lenders on a borrower’s activities and are contained in the terms and conditions in loan documents. These are either affirmative covenants that ask the borrower to do certain things such as pay interest and principal, or negative covenants requiring the borrower not to take on more debt above a certain level – for example; gearing must stay below 60% or an interest cover above three times. For investors, covenants can be difficult to monitor since, while companies reveal the maturity, currency and interest rate of their debts in the back of the annual report, disclosure on debt covenants is generally relatively weak.

Debt covenants were something that received little attention before the GFC when a covenant linked to Babcock & Brown’s market capitalisation triggered the collapse of the company. In June 2008, Babcock & Brown’s share price fell such that the company’s market capitalisation fell below $2.5 billion, and this triggered a covenant on the company’s debt that allowed its lenders to call in the loan.  After this experience, very few borrowers will include a market capitalisation covenant in their debt, as this leaves the company vulnerable to an attack by short-sellers. More recently in 2019 when Blue Sky Alternatives breached covenants, bondholders called in the receivers to protect their loan.

In 2020 amid the COVID-19 crisis, debt covenants are once again in the minds of investors, particularly in the hard-hit media and listed property sector. In the media sector, a fall in TV advertising revenue of 10% is likely to trigger Seven West Media’s debt covenant of 4 times EV/EBITDA (enterprise value divided by earnings before interest, depreciation and tax).

In listed property, the embattled shopping centre trusts have more breathing room, as they entered 2020 with a lower level of debt. The key covenants for Scentre are gearing (less than 65%) and interest cover (higher than 1.5 times). For the gearing covenant to be breached, the independent valuation of Scentre’s assets would have to fall by 60% from December 2019; for the interest cover to be breached, earnings would have to fall by 60% assuming no change to Scentre’s cost of debt.


In the context of debt, hedging refers to the addition of derivatives to limit the impact of movements in either interest rates or the currency in which the debt is denominated. Many Australian companies borrow in Euros, US dollars and yen – both to take advantage of the lower interest rates in these markets, but more importantly to borrow money for a longer-term.  In 2020 the Australian dollar has fallen 12% against both the Euro and the US Dollar.

Companies that have significant un-hedged debt – such as building materials company Boral – will see their interest costs increase, especially if the company does not have enough foreign earnings to service their debt. This situation occurred in 2010 for Boral and required a dilutive $490 million to keep the company within their debt covenants. In December 2019 Boral’s debt was A$2.8 billion, but currency movements over the past 90 days have added $340 million to the struggling building materials company’s debt pile.

Our take

The upcoming year  will be tough for Australia’s companies as the sudden step change in demand is very different to the falls in 1987,1991,2000 or 2008/09. While demand for goods and services fell during these previous times of stress, some companies are now facing a government mandated shut-down in their businesses.

On a more positive note businesses are also likely to find more sympathetic bankers in 2020 than they faced in previous recessions, as well as massive government support. During the GFC,  the banks themselves were not well placed to help businesses, as issues with the global banking sector were at the heart of the crisis. The banks were de-levering their own balance sheets, while struggling to explain collapsed credit markets and the problems created by complex financial instruments to hostile politicians. Given that the shutdowns from COVID-19 are a temporary state of affairs and in light of the massive fiscal stimulus, we would expect the banks to give many struggling firms a degree of leeway over the next year.



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