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Hazelton Capital Partners 3Q20 Commentary

Hazelton Capital Partners commentary for the third quarter ended September 30, 2020, discussing their top five holdings, which are Renewable Energy Group (REGI), Micron Technology (MU), Caesar Entertainment (CZR), Apple Inc (AAPL), and Berkshire Hathaway.

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Hazelton Capital Partners commentary for the third quarter ended September 30, 2020, discussing their top five holdings, which are Renewable Energy Group (REGI), Micron Technology (MU), Caesar Entertainment (CZR), Apple Inc (AAPL), and Berkshire Hathaway Inc. (BRK-B).

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Dear Partner,

Hazelton Capital Partners, LLC (the “Fund”) returned 11.9% from July 1, 2020 through September 30, 2020 and has appreciated 4.6% year-to-date. By comparison, the S&P 500 returned 8.9% during the same quarter and 5.6% year-to-date.

The Quarter in Review - The “K” shaped recovery

Hazelton Capital Partners ended the 3rd quarter with a portfolio of 16 equity positions and a cash level equivalent to 10% of assets under management. The top five portfolio holdings, which are equal to roughly 60% of the Fund’s net assets, are: Renewable Energy Group (REGI), Micron Technology (MU), Caesar Entertainment (CZR), Apple Inc (AAPL), and Berkshire Hathaway Inc. (BRK-B).

Even though the US economy continued to improve in the 3rd quarter, it still is unclear what kind of economic recovery we can expect going forward. So far, the overall recovery has been described as “V” shaped, declining through March of 2020, then quickly snapping back in the subsequent quarters. For those segments of the economy benefitting from the new work-from-home business model, their recovery looked more like a checkmark – achieving economic growth beyond levels experienced in January and February. However, I think the recent recovery would be best described as a “K” recovery, reflecting the divergence between the different segments within the economy. The rising tide of economic recovery is not lifting all boats. It is hard not to see that restaurants, service professionals, and the travel industry (hotel, airlines, and cruise ships) have been devastated by the Covid Pandemic and will continue to struggle for the foreseeable future. In contrast, online and hybrid retailers like Amazon, Walmart, and Home Depot have strengthened their competitive advantage to source, deliver, or provide curbside pickup from online orders helping to both reinforced and expand their market share at the expense of local or less digitally savvy businesses.

The divergence of Covid’s impact on the economy is not being fully reflected in the stock market creating a disparity between Wallstreet and Mainstreet. Through the 3rd quarter, the S&P 500 was up 5.6%, an acceptable return but even more remarkable when considering that starting in March a large portion of the economy was shut down and people were forced to quarantine. Over the past number of years, technology companies have come to dominate the S&P 500 index. As of the end of September, Apple (AAPL), Microsoft (MSFT), Google (GOOG), Amazon (AMZN), and Facebook (FB) represented nearly 25% of the S&P 500 index. These companies, along with other technology names, were able to operate while their business model benefitted from the Covid/work-from-home environment. Without the contribution of these top five holdings of the S&P 500, the index would have had a negative return for the first nine months of the year.

Hazelton Capital Partners’ portfolio was not constructed to replicate an index and, except for having Apple as our fourth-largest holding, does not have a meaningful exposure to the tech industry. As the market pendulum has swung from fear to greed, the Fund’s top holdings have remained mostly the same. Since Hazelton Capital Partners limits its portfolio membership to 15-20 holdings, pruning takes place when a position meets one of three criteria: the stock has reached its expected intrinsic value, the original investing thesis was flawed/meaningful changes to the business model have taken place, or a better opportunity has presented itself. Over the past nine months, approximately five positions were removed or trimmed to either add to existing positions or make room for new holdings. Alaska Airlines was removed from the portfolio because the Fund no longer had a clear outlook of the kind or timing of the airline industry’s recovery.

Renewable Energy Group (REGI) Current Holding

In the 3rd Quarter, Renewable Energy Group (REGI) grew into Hazelton Capital Partners’ largest holding by a significant margin. Already the Fund’s second largest holding, shares of REGI appreciated over 80% in the first 3 quarters of the year. In the second quarter of 2020, during the height of the US economic shutdown, refiners saw demand declines of 70%, 50%, and 30% for jet fuel, gasoline, and petroleum diesel, respectively. During that same period, REGI witnessed steady demand for its biomass-based diesel, as states like California and Oregon and international markets continued to focus on shrinking their carbon footprint. Because of the economic shut down, sourcing feedstocks (greases, used cooking oil, and agriculture oils) became more challenging but also served to highlight one of REGI's competitive advantages, their ability to source and process multiple feedstocks at the same refinery without slowing their output.

Hazelton Capital Partners has shared its investment thesis for REGI frequently (some may say ad nauseum) over the past 6 years, highlighting many of the short-term uncertain headwinds that impacted the company’s runway for growth. Starting in 2020, many of those headwinds have been resolved or greatly diminished. Today, it appears that REGI is beginning to hit an inflection point beyond our original thesis. Use of bio and renewable diesel is expanding globally as both a reliable source of transportation fuel and a proven way to reduce greenhouse gases. Demand for renewable diesel outweighs biodiesel as it is chemically identical to petroleum diesel with greater reduction of greenhouse emissions even when using the same feedstock. Recently, REGI announced plans to expand their renewable diesel operation at its Geismar refinery from 90mmgy to 340mmgy. The company projected that even with their conservative estimates, they expect to achieve return on their investment greater than 20%.

It only took six years after Hazelton Capital Partners initial investment in REGI for the bio & renewable diesel refiner to become an overnight success. During those long and often frustrating six years, the Fund learned a great deal about the benefits of biodiesel & renewable diesel, logistics and feedstock procurement, bio-fuel refining, greenhouse gas reduction, and the benefits of a clear-headed management team. Mostly, the Fund learned the advantage of being a patient and thoughtful investor. Because of Hazelton Capital Partners’ investing strategy and the way it builds an investment over time, it is often early to the party. I often described Hazelton Capital Partners’ investment timing as that “guy” at the wedding helping himself to the buffet table while everyone else is enjoying hors d'oeuvres and cocktails, and then having to wait patiently until dessert is served. That wait can feel intolerable.

In late September and into early October, Hazelton Capital Partners began paring down its position in REGI. The Fund has always prided itself on building and managing a concentrated portfolio. However, as the end of the 3rd quarter grew near, the size and impact of the REGI position was overshadowing the rest of the portfolio. Even after trimming the position by 40% (through October), REGI still remains Hazelton Capital Partners’ largest holding but more in line with the other positions within the top 5. The capital gain generated by the sale of REGI shares was offset by the capital losses taken when money was redirected from Alaska Air and other positions liquidated in the first and second quarters of this year. As REGI expands its renewable diesel production and downstream opportunities, both the company’s margins and long-term intrinsic value will benefit. Hazelton Capital Partners intends to continue to be a long-term holder of REGI shares and may even find an opportunity to add more shares at the right price.

Caesar Entertainment (CZR) Current Holding

In mid-July Eldorado (ERI) completed its $17.3bn acquisition of Caesar Entertainment (CZR), absorbing both its iconic brand and its national properties including Caesar Palace in Las Vegas. Caesar Entertainment is Hazelton Capital Partners 3rd largest position; it may be new to our top five holdings but the Fund has been invested in the casino operator for over three years. In mid-2018, Hazelton Capital Partners significantly reduced its holdings as the company was approaching its long-term intrinsic valuation. During the Funds holding period, Eldorado transformed itself from a Nevada based casino with a handful of regional properties into the largest US regional casino operator with an expanding footprint reaching over 26 properties. In late 2018, as the price of Eldorado’s shares were falling in concert with the rest of the market, Hazelton Capital Partners re-established and expanded its position as the company continued to improve its operations. In June of 2019, Eldorado announced the $17.3 billion acquisition of Caesar Entertainment, a bold move for a regional operator in an industry dominated by global competitors like Wynn Resorts (WYNN), Las Vegas Sands (LVS), and MGM Resorts International (MGM). What made the acquisition both challenging and prolonged, besides the sizable amount of debt needed, was the number of state gaming commissions that needed to approve the deal.

Hazelton Capital Partners was comforted by the impressive track record Eldorado’s management had achieved in acquiring, integrating, and improving operations and profitability from the previous properties they acquired. The same was expected to hold true for the Caesar merger, as management guided annual savings of $500 million, which many believed a conservative hurdle. Most of the savings would come from reduction or elimination from corporate spending, 3rd party professionals, streamlining staffing needs, and leveraging Eldorado’s legacy properties once they are added to the Caesars Rewards program. Before Eldorado had announced its acquisition, Caesar Entertainment had already been hard at work upgrading its properties; an investment that was expected to start paying off in late 2020 and early 2021 and was not part of the announced $500 million savings.

As careful as Eldorado was in planning for the Caesar merger, they could not have foreseen the Covid pandemic or the brutal impact it would have on the gaming industry. Starting in late February and into March, casinos across the nation began to see occupancy fall dramatically as people began to shelter in place. By late March, all the country’s casinos were closed and investors began to worry if the banks were going to honor their debt financing for the Caesar merger. Eldorado’s stock price collapsed from around $70/share to below $8/share in less than 30 days. Even though Eldorado’s management reassure the market that the financing was “locked,” the Coronavirus was forcing regulators to delay their review of the merger adding to the uncertainty. It was not until March 23, when the Federal Reserve announced that it would back the debt market, that Eldorado’s shares began its path to recovery.

In the midst of the Coronavirus and the months since the merger, Caesar (the combined entity) has demonstrated its ability to reduce expenses and improve margins. The company is taking advantage of the Covid operating restrictions (limited occupancy, no buffets, no nightclubs and entertainment, and limited dining) to re-examine its cost structure and profitability by segment & property. The Casino operator is redesigning its operation to be profitable at a lower occupancy by eliminating promotional costs and subsidies, reducing less profitable table games, expanding its rewards program, and reducing customer acquisition costs. The impact of these moves is expected to be seen more clearly when occupancy levels rise.

In late September, Caesar Entertainment announced its plans to purchase British-based sports betting and gaming operator, William Hill for $3.7 billion. The acquisition, which Caesar will partly fund with $1.7 billion of newly issued shares, will expand the casino operator into the fastgrowing segment of online sports betting and gaming. Already partners with William Hill’s US operation (20% partner from Eldorado partnership), Caesar plans to buy the entire company and divest the international segment to focus solely on the US market. Currently, legal sports betting only accounts for less than 8% of gaming revenues, but as more states legalize it, many expect sport betting to eventually overtake live casino gambling and represent over 35% of total gaming revenues. Sports betting has been a mainstay of the Las Vegas casinos for many years and Caesar runs one of the largest and best-known sportsbooks on the strip. But as states are relaxing restrictions around sports betting, it has recently turned into a land grab with companies like Fan Duel and Draft Kings competing with William Hill for share of the mobile market. With its 60 million active Caesar Rewards Members, Caesar Entertainment recognized that mobile sports betting and gaming was another way to engage their reward members when not visiting their casino, build loyalty, and gain a larger percentage of their gaming wallet. The acquisition is expected to close by the second half of 2021.

Hazelton Capital Partners believes that the newly combined Caesars Entertainment will not only be successful but will yield a much stronger and more profitable brand with a national footprint and mobile presence. Even with all its benefits this acquisition expects to achieve, the casino industry is facing an uphill battle to regain its footing. Before the Covid pandemic, the casino industry was already dealing with an aging market and attempting to make gaming relevant to the Millennial and Gen Z demographics. Sports betting and online gaming will help drive younger traffic to become Caesar Reward Members and into their casinos, but in addition, Caesar has also begun diversifying into hosting eSports tournaments. By 2022, Goldman Sachs expects dedicated eSports viewership to increase to 276 million and generate over $3 billion. Over 79% of eSports viewership is 35 years old or younger, a demographic that is highly coveted by the gaming industry to build loyalty, collect their data, and monetize them for years to come. It will not be hard to envision eSports being a strong segment of sports betting at some point in the future. Essentially, the Millennial and Gen Z generations are just as likely to gamble/bet as their parents’ generation, but unlike their parents, the type of gambling (sports betting and online gaming), where they gamble (mobile platforms), and how they gamble (smartphones) is no longer restricted to a casino’s gaming floor.

Apple (AAPL) Current Holding

Apple is another long-term holding that, like REGI, was pared down in the 3rd Quarter. When Hazelton Capital Partners began investing in Apple over 6 years ago, the iPhone 6 was the latest model, Apple Pay was the most recent feature, and revenue was topping $183 billion. Smartphone sales represented over 60% of Apple’s revenue, with Macs, iPads, Services, and Accessories (renamed Wearables, Home and Accessories) accounting for the remainder. Together, Services and Accessories accounted for 13% of total revenue. Today, thirteen years after the launch of the original iPhone, unit growth has slowed considerably. No longer a novelty and lacking a constant flow of new and “must have” features, Apple’s iPhone upgrade cycle has expanded from 18 months to nearly 4 years. It is estimated that 420 million of the 1 billion iPhone users have an iPhone that is three years or older. In last few years, Apple increased the prices of its iPhones with a starting price of $700 for an entry level and rising to $1100 for the top of the line model. The new pricing served to increase the average selling price per unit, which, in turn, has helped offset the slowing growth of iPhone sales. In addition, Apple focused on expanding its Service and Wearable segments to offset plateauing iPhone sales by launching: Apple Music, Apple Watch, AirPod, AirPod Pro, Apple Credit Card, Apple TV+ streaming service, Apple News+, Apple Arcade, and an upcoming fitness app, Apple Fitness+ (due out late 2020). The focus on Wearables and Services has helped to pivot away from product silos, establishing the iPhone as the focal point for all new Wearables and Services, while seamlessly integrating the smartphone with the Mac and iPad product lines. The increase in Wearables and Services also reinforces Apple’s brand, expands its ecosystem, and complements the user’s experience and reverence for Apple and its products.

In its most recent quarter, Apple’s Service segment had grown to represent 22% of total revenues. Services’ contribution is even more meaningful when factoring in that their margins are nearly double that of Apple’s Product segment, as the inclusion of Wearables and slowing iPhone sales have been weighing on hardware margins. Apple’s Services segment is made up of sales from the App Store, licensing, Apple Care, Apple in-house subscriptions (iCloud, Apple Music, etc.), 3rd Party subscriptions, and Apple’s credit card. Over 70% of Apple’s Service revenue comes from the App Store, Licensing, and Apple Care with subscriptions accounting for most of the remaining revenue. In July, Apple announced that it expected to grow its paid subscriber base to over 600 million subscribers across their various services by years end. It is important to understand that most of the projected 600 million subscribers come from third party subscriptions that are used on Apple’s platform of which Apple takes a small portion of the monthly subscription. Apple does not release metrics on its in-house paid subscribers, but it is estimated that iCloud has over 200 million subscribers with Apple Music coming in around 80 million. During its September product release updating the Apple Watch and iPad, Apple announced a new subscription model called Apple One. Until now, subscription services like Apple Music, Apple Arcade, iCloud, Apple TV+, and Apple News+ were ala cart. Starting in late 2020, Apple is bundling those and other services into a monthly subscription model with three different option plans: Individual, Family, and Premier. Plans begin at $14.95/month/person (Individual) and top out at $29.95/month for up to six family members (Premier).

None of Apple One’s subscription services are unique. Netflix, Peloton, Spotify, Dropbox, and many others offer similar services and apps that can be used on Apple’s platform. What Apple One provides is convenience and a lower bundled price (up to 45% savings vs. ala carte). Apple’s ambition is not to dethrone the likes of Netflix or Spotify but to provide relevant services to its one billion users that will engage and retain their interest, expand Apple’s ecosystem, while gaining a greater share of their wallet. A back of the envelope calculation gets a combined monthly subscription for iCloud and Apple Music in the range of $5.75 - $6.50/month. As new and current monthly paid subscribers transition to the Apple One platform, Apples Service segment and overall profits will continue to benefit. At the time of Hazelton Capital Partners’ initial investment, Apple revenues were growing annually at a rate of 25% with a net cash position of $120 million (20% of Apple’s market capitalization). Because iPhone and hardware sales were responsible for most of the company’s revenue and earnings (Services accounting for less than 10%), Apple has historically been valued as a products company at 10-15x its earnings. With the rollout of the 5G network, many expect the iPhone upgrade cycle to be meaningful over the next few years, as over 40% of iPhone users have a phone that is 3 years or older. Hazelton Capital Partners agrees with that outlook but believes Apple’s future growth will be driven by it’s Services segment. As the iPhone maker continues to expand its Services segment while continuing its transition into a lifestyle brand, a growing portion of their revenue will be recurring with more meaningful margins. In turn, shares of its stock will be rewarded with higher earnings multiple, and a runway for growth.

Administrative: Investing in Hazelton Capital Partners

Hazelton Capital Partners was created as an investment vehicle, allowing those interested in long-term exposure to the equity market to invest along-side me. With a substantial portion of my own capital in the fund, I manage Hazelton Capital Partners assets in the same manner in which I manage my own capital. The best source of introduction to potential investors has come from those that have invested or followed Hazelton Capital Partners progress over the years. Introductions are both welcome and appreciated.

If you are interested in making or increasing your contribution to Hazelton Capital Partners or just learning more about The Fund, please feel free to contact me at (312) 970-9202 or email me bpasikov@hazeltoncapital.com. Questions, comments and concerns are always welcome.

Warm Regards,

Barry Pasikov

Managing Member

The post Hazelton Capital Partners 3Q20 Commentary appeared first on ValueWalk.

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I created a ‘cosy game’ – and learned how they can change players’ lives

Cosy, personal games, as I discovered, can change the lives of the people who make them and those who play them.

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March 13, 2024

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Cosy games exploded in popularity during the pandemic. Takoyaki Tech/Shutterstock

The COVID pandemic transformed our lives in ways many of us are still experiencing, four years later. One of these changes was the significant uptake in gaming as a hobby, chief among them being “cosy games” like Animal Crossing: New Horizons (2020).

Players sought comfort in these wholesome virtual worlds, many of which allowed them to socialise from the safety of their homes. Cosy games, with their comforting atmospheres, absence of winning or losing, simple gameplay, and often heartwarming storylines provided a perfect entry point for a new hobby. They also offered predictability and certainty at a time when there wasn’t much to go around.

Cosy games are often made by small, independent developers. “Indie games” have long been evangelised as the purest form of game development – something anyone can do, given enough perseverance. This means they can provide an entry point for creators who hadn’t made games before, but were nevertheless interested in it, enabling a new array of diverse voices and stories to be heard.

In May 2020, near the start of the pandemic, the small poetry game A Solitary Spacecraft, which was about its developer’s experience of their first few months in lockdown, was lauded as particularly poignant. Such games showcase a potential angle for effective cosy game development: a personal one.

Personal themes are often explored through cosy games. For instance, Chicory and Venba (both released in 2023) tackle difficult topics like depression and immigration, despite their gorgeous aesthetics. This showcases the diversity of experiences on display within the medium.

However, as the world emerges from the pandemic’s shadow, the games industry is facing significant challenges. Economic downturns and acquisitions have caused large layoffs across the sector.

Historically, restructurings like these, or discontent with working conditions, have led talented laid-off developers to create their own companies and explore indie development. In the wake of the pandemic and the cosy game boom, these developers may have more personal stories to tell.

Making my own cosy game

I developed my own cosy and personal game during the pandemic and quickly discovered that creating these games in a post-lockdown landscape is no mean feat.

What We Take With Us (2023) merges reality and gameplay across various digital formats: a website, a Discord server that housed an online alternate reality game and a physical escape room. I created the game during the pandemic as a way to reflect on my journey through it, told through the videos of game character Ana Kirlitz.

The trailer for my game, What We Take With Us.

Players would follow in Ana’s footsteps by completing a series of ten tasks in their real-world space, all centred on improving wellbeing – something I and many others desperately needed during the pandemic.

But creating What We Take With Us was far from straightforward. There were pandemic hurdles like creating a physical space for an escape room amid social distancing guidelines. And, of course, the emotional difficulties of wrestling with my pandemic journey through the game’s narrative.

The release fared poorly, and the game only garnered a small player base – a problem emblematic of the modern games industry.

These struggles were starkly contrasted by the feedback I received from players who played the game, however.

This is a crucial lesson for indie developers: the creator’s journey and the player’s experience are often worlds apart. Cosy, personal games, as I discovered, can change the lives of those who play them, no matter how few they reach. They can fundamentally change the way we think about games, allow us to reconnect with old friends, or even inspire us to change careers – all real player stories.

Lessons in cosy game development

I learned so much about how cosy game development can be made more sustainable for creators navigating the precarious post-lockdown landscape. This is my advice for other creators.

First, collaboration is key. Even though many cosy or personal games (like Stardew Valley) are made by solo creators, having a team can help share the often emotional load. Making games can be taxing, so practising self-care and establishing team-wide support protocols is crucial. Share your successes and failures with other developers and players. Fostering a supportive community is key to success in the indie game landscape.

Second, remember that your game, however personal, is a product – not a reflection of you or your team. Making this distinction will help you manage expectations and cope with feedback.

Third, while deeply considering your audience may seem antithetical to personal projects, your game will ultimately be played by others. Understanding them will help you make better games.

The pandemic reignited the interest in cosy games, but subsequent industry-wide troubles may change games, and the way we make them, forever. Understanding how we make game creation more sustainable in a post-lockdown, post-layoff world is critical for developers and players alike.

For developers, it’s a reminder that their stories, no matter how harrowing, can still meaningfully connect with people. For players, it’s an invitation to embrace the potential for games to tell such stories, fostering empathy and understanding in a world that greatly needs it.

Looking for something good? Cut through the noise with a carefully curated selection of the latest releases, live events and exhibitions, straight to your inbox every fortnight, on Fridays. Sign up here.

Adam Jerrett does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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KIMM finds solution to medical waste problem, which has become a major national issue

A medical waste treatment system, which is capable of 99.9999 percent sterilization by using high-temperature and high-pressure steam, has been developed…

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March 13, 2024

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A medical waste treatment system, which is capable of 99.9999 percent sterilization by using high-temperature and high-pressure steam, has been developed for the first time in the country.

Credit: Korea Institute of Machinery and Materials (KIMM)

A medical waste treatment system, which is capable of 99.9999 percent sterilization by using high-temperature and high-pressure steam, has been developed for the first time in the country.

The Korea Institute of Machinery and Materials (President Seog-Hyeon Ryu, hereinafter referred to as KIMM), an institute under the jurisdiction of the Ministry of Science and ICT, has succeeded in developing an on-site-disposal type medical waste sterilization system that can help to resolve the problem caused by medical waste, which has become a national and social issue as the volume of medical waste continues to increase every year. This project was launched as a basic business support program of the KIMM and was expanded into a demonstration project of Daejeon Metropolitan City. Then, in collaboration with VITALS Co., Ltd., a technology transfer corporation, the medical waste treatment system was developed as a finished product capable of processing more than 100 kilograms of medical waste per hour, and was demonstrated at the Chungnam National University Hospital.

Moreover, the installation and use of this product have been approved by the Geumgang Basin Environmental Office of the Ministry of Environment. All certification-related work for the installation and operation of this product at the Chungnam National University Hospital has been completed, including the passage of an installation test for efficiency and stability conducted by the Korea Testing Laboratory.

Through collaboration with VITALS Co., Ltd., a corporation specializing in inhalation toxicity systems, the research team led by Principal Researcher Bangwoo Han of the Department of Urban Environment Research of the KIMM’s Eco-Friendly Energy Research Division developed a high-temperature, high-pressure steam sterilization-type medical waste treatment system by using a high-temperature antimicrobial technology capable of processing biologically hazardous substances such as virus and bacteria with high efficiency. After pulverizing medical waste into small pieces so that high-temperature steam can penetrate deep into the interior of the medical waste, steam was then compressed in order to raise the boiling point of the saturated steam to over 100 degrees Celsius, thereby further improving the sterilization effect of the steam.

Meanwhile, in the case of the high-pressure steam sterilization method, it is vitally important to allow the airtight, high-temperature and high-pressure steam to penetrate deep into the medical waste. Therefore, the research team aimed to improve the sterilization effect of medical waste by increasing the contact efficiency between the pulverized medical waste and the aerosolized steam.

By using this technology, the research team succeeded in processing medical waste at a temperature of 138 degrees Celsius for 10 minutes or at 145 degrees Celsius for more than five (5) minutes, which is the world’s highest level. By doing so, the research team achieved a sterilization performance of 99.9999 percent targeting biological indicator bacteria at five (5) different locations within the sterilization chamber. This technology received certification as an NET (New Excellent Technology) in 2023.

Until now, medical waste has been sterilized by heating the exposed moisture using microwaves. However, this method requires caution because workers are likely to be exposed to electromagnetic waves and the entrance of foreign substances such as metals may lead to accidents.

In Korea, medical waste is mostly processed at exclusive medical waste incinerators and must be discharged in strict isolation from general waste. Hence, professional efforts are required to prevent the risk of infection during the transportation and incineration of medical waste, which requires a loss of cost and manpower.

If medical waste is processed directly at hospitals and converted into general waste by applying the newly developed technology, this can help to eliminate the risk of infection during the loading and transportation processes and significantly reduce waste disposal costs. By processing 30 percent of medical waste generated annually, hospitals can save costs worth KRW 71.8 billion. Moreover, it can significantly contribute to the ESG (environmental, social, and governance) management of hospitals by reducing the amount of incinerated waste and shortening the transportation distance of medical waste.

[*Allbaro System (statistical data from 2021): Unit cost of treatment for each type of waste for the calculation of performance guarantee insurance money for abandoned wastes (Ministry of Environment Public Notification No. 2021-259, amended on December 3, 2021). Amount of medical waste generated on an annual basis: 217,915 tons; Medical waste: KRW 1,397 per ton; General waste from business sites subject to incineration: KRW 299 per ton]

As the size and structure of the installation space varies for each hospital, installing a standardized commercial equipment can be a challenge. However, during the demonstration process at the Chungnam National University Hospital, the new system was developed in a way that allows the size and arrangement thereof to be easily adjusted depending on the installation site. Therefore, it can be highly advantageous in terms of on-site applicability.

Principal Researcher Bangwoo Han of the KIMM was quoted as saying, “The high-temperature, high-pressure steam sterilization technology for medical waste involves the eradication of almost all infectious bacteria in a completely sealed environment. Therefore, close cooperation with participating companies that have the capacity to develop airtight chamber technology is very important in materializing this technology.” He added, “We will make all-out efforts to expand this technology to the sterilization treatment of infected animal carcasses in the future.”

 

President Seog-Hyeon Ryu of the KIMM was quoted as saying, “The latest research outcome is significantly meaningful in that it shows the important role played by government-contributed research institutes in resolving national challenges. The latest technology, which has been developed through the KIMM’s business support program, has been expanded to a demonstration project through cooperation among the industry, academia, research institutes, and the government of Daejeon Metropolitan City.” President Ryu added, “We will continue to proactively support these regional projects and strive to develop technologies that contribute to the health and safety of the public.”

 

Meanwhile, this research was conducted with the support of the project for the “development of ultra-high performance infectious waste treatment system capable of eliminating 99.9999 percent of viruses in response to the post-coronavirus era,” one of the basic business support programs of the KIMM, as well as the project for the “demonstration and development of a safety design convergence-type high-pressure steam sterilization system for on-site treatment of medical waste,” part of Daejeon Metropolitan City’s “Daejeon-type New Convergence Industry Creation Special Zone Technology Demonstration Project.”

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The Korea Institute of Machinery and Materials (KIMM) is a non-profit government-funded research institute under the Ministry of Science and ICT. Since its foundation in 1976, KIMM is contributing to economic growth of the nation by performing R&D on key technologies in machinery and materials, conducting reliability test evaluation, and commercializing the developed products and technologies.

 

This research was conducted with the support of the project for the “development of ultra-high performance infectious waste treatment system capable of eliminating 99.9999 percent of viruses in response to the post-coronavirus era,” one of the basic business support programs of the KIMM, as well as the project for the “demonstration and development of a safety design convergence-type high-pressure steam sterilization system for on-site treatment of medical waste,” part of Daejeon Metropolitan City’s “Daejeon-type New Convergence Industry Creation Special Zone Technology Demonstration Project.”

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IFM’s Hat Trick and Reflections On Option-To-Buy M&A

Today IFM Therapeutics announced the acquisition of IFM Due, one of its subsidiaries, by Novartis. Back in Sept 2019, IFM granted Novartis the right to…

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March 13, 2024

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Today IFM Therapeutics announced the acquisition of IFM Due, one of its subsidiaries, by Novartis. Back in Sept 2019, IFM granted Novartis the right to acquire IFM Due as part of an “option to buy” collaboration around cGAS-STING antagonists for autoimmune disease.

This secures for IFM what is a rarity for a single biotech company: a liquidity hat trick, as this milestone represents the third successful exit of an IFM Therapeutics subsidiary since its inception in 2015.

Back in 2017, BMS purchased IFM’s  NLRP3 and STING agonists for cancer.  In early 2019, Novartis acquired IFM Tre for NLRP3 antagonists for autoimmune disease, which are now being studied in multiple Phase 2 studies. Then, later in 2019, Novartis secured the right to acquire IFM Due after their lead program entered clinical development. Since inception, across the three exits, IFM has secured over $700M in upfront cash payments and north of $3B in biobucks.

Kudos to the team, led by CEO Martin Seidel since 2019, for their impressive and continued R&D and BD success.

Option-to-Acquire Deals

These days option-based M&A deals aren’t in vogue: in large part because capital generally remains abundant despite the contraction, and there’s still a focus on “going big” for most startup companies.  That said, lean capital efficiency around asset-centric product development with a partner can still drive great returns. In different settings or stages of the market cycle, different deal configurations can make sense.

During the pandemic boom, when the world was awash in capital chasing deals, “going long” as independent company was an easy choice for most teams. But in tighter markets, taking painful levels of equity dilution may be less compelling than securing a lucrative option-based M&A deal.

For historical context, these option-based M&A deals were largely borne out of necessity in far more challenging capital markets (2010-2012) on the venture front, when both the paucity of private financing and the tepid exit environment for early stage deals posed real risks to biotech investment theses. Pharma was willing to engage on early clinical or even preclinical assets with these risk-sharing structures as a way to secure optionality for their emerging pipelines.

As a comparison, in 2012, total venture capital funding into biotech was less than quarter of what it is now, even post bubble contraction, and back then we had witnessed only a couple dozen IPOs in the prior 3 years combined. And most of those IPOs were later stage assets in 2010-2012.  Times were tough for biotech venture capital.  Option-based deals and capital efficient business models were part of ecosystem’s need for experimentation and external R&D innovation.

Many flavors of these option-based deals continued to get done for the rest of the decade, and indeed some are still getting done, albeit at a much less frequent cadence.  Today, the availability of capital on the supply side, and the reduced appetite for preclinical or early stage acquisitions on the demand side, have limited the role of these option to buy transactions in the current ecosystem.

But if the circumstances are right, these deals can still make some sense: a constructive combination of corporate strategy, funding needs, risk mitigation, and collaborative expertise must come together. In fact, Arkuda Therapeutics, one of our neuroscience companies, just announced a new option deal with Janssen.

Stepping back, it’ s worth asking what has been the industry’s success rate with these “option to buy” deals.

Positive anecdotes of acquisition options being exercised over the past few years are easy to find. We’ve seen Takeda exercise its right to acquire Maverick for T-cell engagers and GammaDelta for its cellular immunotherapy, among other deals. AbbVie recently did the same with Mitokinin for a Parkinson’s drug. On the negative side, in a high profile story last month, Gilead bailed on purchasing Tizona after securing that expensive $300M option a few years ago.

But these are indeed just a few anecdotes; what about data since these deal structures emerged circa 2010? Unfortunately, as these are mostly private deals with undisclosed terms, often small enough to be less material to the large Pharma buyer, there’s really no great source of comprehensive data on the subject. But a reasonable guess is that the proportion of these deals where the acquisition right is exercised is likely 30%.

This estimate comes from triangulating from a few sources. A quick and dirty dataset from DealForma, courtesy of Tim Opler at Stifel, suggests 30% or so for deals 2010-2020.  Talking to lawyers from Goodwin and Cooley, they also suggest ballpark of 30-50% in their experience.  The shareholder representatives at SRS Acquiom (who manage post-M&A milestones and escrows) also shared with me that about 33%+ of the option deals they tracked had converted positively to an acquisition.  As you might expect, this number is not that different than milestone payouts after an outright acquisition, or future payments in licensing deals. R&D failure rates and aggregate PoS will frequently dictate that within a few years, only a third of programs will remain alive and well.

Atlas’ experience with Option-based M&A deals

Looking back, we’ve done nearly a dozen of these option-to-buy deals since 2010. These took many flavors, from strategic venture co-creation where the option was granted at inception (e.g., built-to-buy deals like Arteaus and Annovation) to other deals where the option was sold as part of BD transaction for a maturing company (e.g., Lysosomal Therapeutics for GBA-PD).

Our hit rate with the initial option holder has been about 40%; these are cases where the initial Pharma that bought the option moves ahead and exercises that right to purchase the company. Most of these initial deals were done around pre- or peri-clinical stage assets.  But equally interesting, if not more so, is that in situations where the option expired without being exercised, but the asset continued forward into development, all of these were subsequently acquired by other Pharma buyers – and all eight of these investments generated positive returns for Atlas funds. For example, Rodin and Ataxion had option deals with Biogen (here, here) that weren’t exercised, and went on to be acquired by Alkermes and Novartis (here, here). And Nimbus Lakshmi for TYK2 was originally an option deal with Celgene, and went on to be purchased by Takeda.

For the two that weren’t acquired via the option or later, science was the driving factor. Spero was originally an LLC holding company model, and Roche had a right to purchase a subsidiary with a quorum-sensing antibacterial program (MvfR).  And Quartet had a non-opioid pain program where Merck had acquired an option.  Both of these latter programs were terminated for failing to advance in R&D.

Option deals are often criticized for “capping the upside” or creating “captive companies” – and there’s certainly some truth to that. These deals are structured, typically with pre-specified return curves, so there is a dollar value that one is locked into and the presence of the option right typically precludes a frothy IPO scenario. But in aggregate across milestones and royalties, these deals can still secure significant “Top 1%” venture upside though if negotiated properly and when the asset reaches the market: for example, based only on public disclosures, Arteaus generated north of $300M in payments across the upfront, milestones, and royalties, after spending less than $18M in equity capital. The key is to make sure the right-side of the return tail are included in the deal configuration – so if the drug progresses to the market, everyone wins.

Importantly, once in place, these deals largely protect both the founders and early stage investors from further equity dilution. While management teams that are getting reloaded with new stock with every financing may be indifferent to dilution, existing shareholders (founders and investors alike) often aren’t – so they may find these deals, when negotiated favorably, to be attractive relative to the alternative of being washed out of the cap table. This is obviously less of a risk in a world where the cost of capital is low and funding widely available.

These deal structures also have some other meaningful benefits worth considering though: they reduce financing risk in challenging equity capital markets, as the buyer often funds the entity with an option payment through the M&A trigger event, and they reduce exit risk, as they have a pre-specified path to realizing liquidity. Further, the idea that the assets are “tainted” if the buyer walks hasn’t been borne out in our experience, where all of the entities with active assets after the original option deal expired were subsequently acquired by other players, as noted above.

In addition, an outright sale often puts our prized programs in the hands of large and plodding bureaucracies before they’ve been brought to patients or later points in development. This can obviously frustrate development progress. For many capable teams, keeping the asset in their stewardship even while being “captive”, so they can move it quickly down the R&D path themselves, is an appealing alternative to an outright sale – especially if there’s greater appreciation of value with that option point.

Option-based M&A deals aren’t right for every company or every situation, and in recent years have been used only sparingly across the sector. They obviously only work in practice for private companies, often as alternative to larger dilutive financings on the road to an IPO. But for asset-centric stories with clear development paths and known capital requirements, they can still be a useful tool in the BD toolbox – and can generate attractive venture-like returns for shareholders.

Like others in the biotech ecosystem, Atlas hasn’t done many of these deals in recent funds. And it’s unlikely these deals will come back in vogue with what appears to be 2024’s more constructive fundraising environment (one that’s willing to fund early stage stories), but if things get tighter or Pharma re-engages earlier in the asset continuum, these could return to being important BD tools. It will be interesting to see what role they may play in the broader external R&D landscape over the next few years.

Most importantly, circling back to point of the blog, kudos to the team at IFM and our partners at Novartis!

The post IFM’s Hat Trick and Reflections On Option-To-Buy M&A appeared first on LifeSciVC.

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