Expert: Rikki Bannan – Two small caps: Propel Funeral Services (ASX: PFP) and Clarity Pharmaceuticals (ASX: CU6)

Bryce: [00:00:16] Welcome back to another episode of Equity Mates. Or should I say, Hey, welcome to another episode. 

Alec: [00:00:23] Keep it in. Keep it going? 

Bryce: [00:00:24] Or should I say, Hey, welcome to another episode of Equity Mates, the podcast that's the graffiti on the Wall Street walls. We're here to disrupt your notions about investing, just like a stencil on a blank canvas. Now I'm here with my Equity Mates, Buddy Ren, who has nailed my introduction personas to date. This one is a little trickier. 

Alec: [00:00:46] Yeah. Yeah. So you're going for an artist graffiti artist vibe obviously. I mean, you may have just gone more of a general artist vibe, and that's going to trip me up. This isn't my guess, but I'm going to talk through my thinking. My first thought was Marc Ecko, you know, from the clothing line, Ecko, who was a graffiti artist. One of the greatest outrages of my childhood was the Marc Ecko's Proving Ground video game, where you were a graffiti artist was banned in Australia, and yet all the GTAs were allowed into Australia where you could rob banks and hijack cars and all that stuff. How graffiti was banned, but GTA wasn't. Never know. Okay. But I don't think you would have gone that niche. I'm going to say, are you Banksy? 

Bryce: [00:01:37] Very good. Very good. Yes. Banksy, the anonymous graffiti . 

Alec: [00:01:43] No, he got on Masked really well. He's being sued and 

Bryce: [00:01:46] The graffiti? 

Alec: [00:01:48] No, I'm not sure what for. Oh, there's a lawsuit. And someone has been named and they think that it's a lawsuit related to Banksy. So let me find the name, because. 

Bryce: [00:02:01] Well, while you find the name, I'll set up the episode. [00:02:04][2.7]

Alec: [00:02:05] Great. So it's a case of libel in this filed in the UK High Court. Andrew Gallagher is the person's name. 

Bryce: [00:02:13] Who's suing?

Alec: [00:02:15] No. Who is being sued? And the claim is that he is Banksy, I believe. 

Bryce: [00:02:20] All right, well. 

Alec: [00:02:21] I'm just skimming this article. But anyway, do your own research that's not investing advice. 

Bryce: [00:02:26] We've got a great episode lined up today. Each year we are fortunate enough to get some of the amazing fund managers who are 

Alec: [00:02:35] Oh sorry sorry that Gallagher is the guy suing. The person named was Robin Gunningham. 

Bryce: [00:02:42] I think. 

Bryce: [00:02:43] Sounds fake.

Alec: [00:02:44] Honestly, I need to write this whole thing. 

Bryce: [00:02:45] Anyway, Ren, as I said, we're in for a treat today because each year we get the opportunity to speak to some of the amazing fund managers that donate their time towards the Sohn Hearts and Minds Investment Conference. Now, the Sohn Hearts and Minds Investment Conference is an annual investment conference by the Hearts and Minds Investments Ltd, where they get fund managers to come and pitch their highest conviction stock. And then the proceeds from the listed company that hearts and minds have. The stock ticker is HM1. Proceeds from that go towards medical research.

Alec: [00:03:21] To date, they've donated more than $60 million to a number of medical researchers in Australia. So it's a pretty interesting structure and like a pretty cool concept.

Bryce: [00:03:32] Yeah. So 12 fund managers each come and they have just 8 minutes to pitch their highest conviction stock. And this year there are international fundies coming from the UK. The US and Asia alongside some of the leading fund is here in Australia and today we get to speak to one of them. 

Alec: [00:03:51] That's right. We're speaking to Rikki Bannan, who is an executive director and portfolio manager at IFM Investors. They run a whole number of wholesale funds, so retail investors may not have heard of them, but you're super maybe invested with them. They've like $250 billion assets under management. So they're massive. They do a lot of infrastructure investment, fixed income. But Rikki is particularly focussed on small caps and we love small caps. We do hearing about companies that we haven't heard of before. We've asked Rikki to bring two stocks today. So when we speak to her, she's going to give us the story behind the stocks, the pros, the cons. We should be clear, it's not the stocks she's going to pitch for HM1. That is a closely guarded secret. That's like the AFL guarding the Brownlow vote before the big night. 

Bryce: [00:04:46] So if you're interested in going to the conference. It is on November 17th here in Sydney. However, Equity Mates Community has access to the online edition. You get 20% discount available exclusively for the equity mates community. The price of the tickets is $400. There's a link in the show notes and the discount code is EQUITYMATES2023. All one word and reminder that all of the it all goes towards medical research. 

Alec: [00:05:15] You said, However, as if the Equity Mates community doesn't get access to the main conference. You can buy a main ticket. 

Bryce: [00:05:22] It's worth pointing out it's thrown off ground for. 

Alec: [00:05:25] And the discount code doesn't work. 

Bryce: [00:05:27] Not for that.

Alec: [00:05:28] Not for the main ticket. Just for the online. Now, Bryce Rikki will be with us soon, but before we get to that, we have to remind everyone that whilst we are licensed and whilst Rikki is an expert, none of us are aware of your personal financial circumstances. Any advice you here is general advice only. We produce these podcasts for education and entertainment purposes, but make sure you're doing your own research. And if you feel like you need professional advice, you seek it. But with that said, Bryce, let's let's get set up and get ready. 

Bryce: [00:06:00] Rikki, welcome to Equity Mates. 

Rikki: [00:06:01] Thank you very much for having me. 

Bryce: [00:06:02] Now to get started, we always do a would you rather. So would you rather have the ability to see 10 minutes into the future or 150 years into the future? 

Rikki: [00:06:14] Oh, definitely 150 years. 

Alec: [00:06:15] Okay. And why is that? 

Rikki: [00:06:17] I mean, just how rapidly the world has changed in the last ten, 20 years just to think about what you know, what it might look like that far into the future would be fascinating. 

Bryce: [00:06:27] Would be pretty amazing. We recently interviewed a guy who's trying to bring back the woolly mammoth from extinction.

Rikki: [00:06:35] Maybe the woolly mammoth is there. I don't know. 

Alec: [00:06:38] Sort of thing. So that would be you're in 1880, you're in the 1880s, basically looking ahead to today. 

Bryce: [00:06:44] Mind blowing.

Alec: [00:06:48] Some good long term investing thematics would come out of that. 

Rikki: [00:06:50] Oh, yeah, for sure.

Bryce: [00:06:53] Now Rikki, you are preparing to pitch a stock at the Hearts and Minds conference? Why is participating in Hearts and Minds important to you?

Rikki: [00:07:01] I mean, look, it's a fantastic event. There've been some incredible speakers participating over the years, but, you know, most importantly, the purpose being to support medical research. By the end of this conference, they would have donated around $60 million to, you know, a number of different charities. So it's hard not to get behind that. And, you know, supporting medical research, that's something that, you know, on a more personal level is close to my heart. You know, I lost my best friend to cancer a few years ago. So, you know, it's something that I'm certainly certainly very invested in personally and also biotech and health care. That's one of the sectors that I'm responsible for in the Anthem Small Caps Fund. And, you know, that's a space we actively participate in. So lots of interest on a few different fronts.

Alec: [00:07:41] It's fascinating. So you mentioned there that you manage the small, small cap fund for IFM investors. How would you define your investing philosophy? 

Rikki: [00:07:50] I suppose my investment philosophy would be, you know, over the long term, I think that the market will price a company fairly, you know, its share price will over time reflect its fundamental value. But in the meantime, there are going to be points where, you know, there's a dislocation between value that the market's describing and, you know, the true fundamental of the stock. And, you know, that could be macro factors, non fundamental market factors. But essentially, you know, what we're trying to work out is what is the intrinsic value of a company and, you know, sort of process builds up to that understanding, you know, what we're investing in, what is the business, what sector is it operating, what's its competitive position? You know, how does it plan to grow? And, you know, understanding management strategy, you know, do we think that they are capable of executing that strategy? All these things sort of filter out filter into arriving at that that sort of view of what real value is for a stock. 

Alec: [00:08:41] And then I guess that turns that long term, you know, over over the long term, the market will reflect fair value. But in the short term there's opportunities to find that is all turned on its head. When we talk about the Hearts and Minds conference, because you're given a 12 month time horizon. So how's that different to your normal process and how have you been approaching this, this pitch? 

Rikki: [00:09:04] Yeah, I mean, as you say, you know, we're generally taking a longer term view. You know, if we're buying a stock, our plan would be to hold it for longer than 12 months. You know, of course, things can change in a 12 month period, both positive and negative. So, you know, you have to be prepared to react accordingly. But being locked into a 12 month window is a challenge. You know, again, macro factors, other exogenous shocks, the faces even just taking longer to sort of play out and for the market to sort of appreciate, you know, what you see in the stock. So, you know, we consider all those things obviously, when we're investing in a company in our fund. But, you know, we can be patient. So we're prepared to write that out. So, you know, got stocks in the portfolio that I've owned, you know, since inception of the fund or since the company appeared. I might own more or less of them at any point in time. But, you know, they're sort of long term holdings. That's sort of what we aim to do. So if it's on, you know, I suppose I'm trying to think about those factors, you know, the macro, which is so easy to pick right now. Everyone's very focussed on the macro, you know, what are the potential, you know, out of left field things that could potentially happen. You know, is there really I suppose, is there a catalyst, is there a positive catalyst between now and. November next year. That means the market's going to rewrite the stock, you know, or scrap high value than it does today.

Alec: [00:10:22] Yeah, it's a funny one. When I think about it, I would go that way, like, is there a catalyst coming up that will say an inflection point or you find something that's had a lot of momentum and you just say this momentum is going to continue, but I don't envy yours.

Rikki: [00:10:38] Thank you. 

Bryce: [00:10:40] Now, Rikki, we're hurtling towards Christmas. I'd be good to understand how you see markets as we're closing out 2023. There's been it feels like there's a fair bit of uncertainty going on at the moment. We had a pretty big 2021 followed by a tough 2022 and what feels like an uncertain flat sideways, who knows? 2023 So how are you summing up where we're at in markets at the moment?

Rikki: [00:11:04] Our current market, volatile. Where the strengths are on the right. Well, it doesn't feel that recent anymore, but the reporting season in August, that was a real case in point. You know, there's always going to be big share price moves in reporting season. It's kind of when, you know, the macro amount is less and it's more about the fundamentals. So you're always particularly at the smaller end of the market, you know, you do get some big share price moves, but this reporting season just gone. The number of stocks with a plus or -10% move on the day was more than double what we normally see, which was a lot of fun. And then even soon, some really big day, two and three moves. So you know, which is good because we're an active manager. So, you know, the volatility creates buying opportunities. You know, I definitely, you know, I think that's going to continue. And yeah, as I said, you know, the market's also very macro focussed. It's all about inflation. When does it come back to target levels? What does that mean for interest rates? And you out our view for some time I think has been you know, we did think that inflation was going to be stickier than what the market thought and interest rates were going to be higher for longer. And I think, you know, that's increasingly that view is getting increasingly priced in. So look where to from here. I suppose we've had a decade of ultralow rates, you know, unprecedented injections of liquidity by central banks, you know, and that all underwrote an equity bull market. You know, it was sort of a case of rising tide lifts all boats. You know, beta was strong. I think. You know, from here, though, the outlook, the return outlook is more muted. And, you know, I think that probably makes stock selection increasingly important. So, again, you know, plays into to our capability as an active manager in the small cap fund.

Alec: [00:12:37] Do you guys just rub your hands together and it's like after a decade of passive just being sort of the focus. 

Rikki: [00:12:43] Yeah, yeah. Some of that flow coming back. 

Alec: [00:12:48] We want to, we want to really focus on the small cap end of the market because that's, that's where you are focussed. But I guess before then just one more question on the macro. You know, like the cost of living inflation, interest rates, as you said, they've really been the story of 2023. It feels like the broader economy has held up okay and there were some warning signs from retailers this reporting season that maybe this financial year started a bit flat. And, you know, we always hear that interest rate rises take 12 to 18 months to really flow through, I guess. Does IFM or do you personally have a view on sort of what the next year looks like from a macro and, you know, like I guess like personal cost of living, you know, consumer point of view? 

Rikki: [00:13:31] Yeah, Well, I mean firstly I'll say I'm not an economist yet, although although every small cap manager in the market has has felt like an economist in the last 12 months, I think trying to try to work out, I think it's all going. Yeah, I suppose. Look, we have seen inflation moderate somewhat, but it is, as I said, proving stickier than anticipated and still well above where it needs to be. So interest rates again high for longer I think is what we're going to say. You know, it wasn't that long ago that, you know, some people in the market were pricing in rate cuts, you know, early calendar 24. I don't see how that happens. And, you know, there's still question is the RBA, is the Fed done? You know, is it potentially one more rate hike? And again, I'm not an economist, but yeah, potentially I think, you know I think there could be but high for longer I think is the where to from here and so that is going to filter through to sort of the broader economy. And you know you mentioned cost of living pressures. You know, I think they're going to continue. No signs of easing. So, look, I think fears about a recession in the US and here have receded a bit. You mentioned the consumer through reporting season. And, you know, we've been surprised, too, as to how well the consumer has held up. I mean, what I would say there, though, is, you know, to your point, the impact of higher interest rates. There is a lag effect of that rolling through. And there's also fixed rate mortgages that are still still to roll off. But, you know, it does it does feel like it's going to get tougher for the consumer. And you are hearing that from retailers. And it you know, it is softening. So but, you know, I suppose the question is to what extent is that priced into retail stocks?

Bryce: [00:15:06] So a lot of the community listening at the moment have been, well, passively investing and riding the bull market. At the smaller part of of the market has has been whacked a lot harder than sort of the top end. So for those that are thinking, well, maybe now's a good time to think about Smallcaps, what what advice do you have to sort of early stage investors when it comes to thinking about small caps in their portfolio at the moment? 

Rikki: [00:15:32] Yeah, I mean, as you say, it's been pretty brutal. Small caps has underperformed large caps. You know, this year will really for the best part of the last two years. I think that, you know, that does provide an opportunity. There is, you know, the valuation differential isn't isn't as big. I think the outlook in terms of growth, the small caps is better than for large caps would be sort of a comment on the whole. But again, you know, I think there's always going to be nuances across stocks. So, you know, I'd be, you know, selective about the stocks that you want to own. So, you know, it is still going to be a tough economic backdrop. So, you know, what are the stocks that, you know, have a general sort of structural growth story behind them? They can keep growing, you know, despite the prevailing macro. Those are the sort of stocks that I would be looking at, pricing power as well. You know, high inflationary environment.

Alec: [00:16:20] We want to get to some specific stocks, but I guess just before then, like if we just keep it to to Australia, because otherwise we're going to be asking you about a universe of tens of thousands of stocks. But just just in Australia, you know, a lot of people probably think the smaller end of the market is a lot of mining explorers and then maybe a few like great tech companies that sort of come through every now and then give us a view on like what the small cap universe here actually looks like. And I guess if there are any sectors that you think are particularly interesting or innovative or exciting sort of as you look at it today. 

Rikki: [00:16:49] Yeah, sure. So yeah, the small Caps index does look pretty different to the larger end of the market. You know, the top 100, you've got BHP, Rio, the big four banks. It's the breadth and depth of of sort of sectors and businesses is much more diverse, which is why I think small caps is fascinating. You mentioned resources. That's a big part of the index. That's 25, 30% of the index. So it's material and that is a space that yeah, that is the space that we're invested in. One of my co-PMS is a geologist by background. So hey, you know, just picks the eyes out of some of these smaller resources companies. I'm not going to get into not going to get into resources because I'm definitely not near the gun on that one. But yeah, that's a big part of the space. Consumer discretionary is probably about 20% of the index, so that covers sort of retail media, consumer services. So again, material part of the index rates, people are surprised to hear that rates is a big part of the small caps index about 12% and then yeah, you've obviously got tech in there but under 10% now, health care bit under 10%. So yeah, it's a pretty, pretty diverse group of stocks which is why, you know why I love it. So interesting. 

Bryce: [00:18:04] Well let's get to some stocks we've asked you to come in with too. There's probably many more that we'd love to dive into. And you're going to keep the Gem for the Sohn Hearts and Minds pitch. Let's just start with the first, if you can let us know what the company is, how you came across it, what it does, and then we'll dive into the thesis.

Rikki: [00:18:23] Yep. Okay. So two stocks, they are polar opposites, you couldn't get more different. So I've got I've got a biotech and a funeral services business. So I will start we'll start with the funeral services business Propel Funeral Partners. We've owned that since it IPO'd in 2017. So they're a funeral services operator with over 180 locations across Australia and New Zealand. Quality portfolio of brands. Well, what we like about it, I suppose, you know, the funeral services sector, you know, by its nature it's a very sort of stable, steady growing space to two certainties in life, death and taxes. Yes, I don't think there are any sort of tax agents that are listed. So anyway, so funeral services, that's, you know. 

Alec: [00:19:09] I guess it's going to be just like a zero or something. 

Rikki: [00:19:11] Yeah, yeah, yeah, yeah, for sure. So, you know, I think the attraction of the sector is the steady growth. There obviously can be short term fluctuations in the death rate, but it is a case of steady growth over time and there are tailwinds there with an ageing population. You know, the Australian death rate is expected to increase from a 1% in the last 30 years to two and a half percent in the next 20 years. And there's a similar trend in New Zealand. What we like about this business is it has pricing power. Average revenue per funeral grows at about 3% over the long term. 

Alec: [00:19:43] Sorry to interrupt. What is the average like revenue per funeral? 

Rikki: [00:19:47] So it varies, you know, by sector to all bells and whistles, but it can be, you know, 4000. 5000. 

Alec: [00:19:53] Wow. Better start saving. 

Rikki: [00:19:58] Hopefully not going to need it. Yeah. Yeah. So. So we like. We like the pricing power, you know. So you've got volume growth that should over the long term be to two and a half percent. On top of that, you've got price growth averaging about 3%. So that's a good underlying organic growth story right there. The funeral industry in Australia, New Zealand is very fragmented. These guys have started from, you know, from one location and have done a series of acquisitions over their life to now have about 8% market share. So it still still very small market share. Then you've got invoke here. 

Alec: [00:20:29] I was going to ask because I feel like I feel that most people have doubled or at least looked at some point. 

Rikki: [00:20:35] Yes, yeah, yeah. Look, it's been, you know, if you're a small manager that invested, you know, way back in the day, that's, you know, it's been a great, a great investment. So, you know, they've got a bit of a 20% market share and then it's just, you know, a bunch of just small upper. Yeah. Single mum and dad operators. So there's a big opportunity there for people to come in and to acquire. And they've been, they've been very active, they've deployed, I think it's about $270 million of capital since they IPO on acquisitions and they've got a great track record. You know, they're disciplined, the patient, they don't have to pay, they acquiring quality businesses and integrating them into the network. They do have you know, they've got good balance sheet capacity to continue that strategy. They generate good cash, you know, which we like. But I think most importantly, it's a founder led management team. Again, something that we really like, you know, particularly the smaller end of the market. And, you know, you see a lot of that. We like the alignment. So so management, they have about 20% shareholding across across the three sort of key management and also some of the board. You know, in terms of the risks, there is some concern in the short term around the death, right? We sort of had a peak peak last year. 

Alec: [00:21:42] So it's a funny sentence. 

Rikki: [00:21:46] Yeah it is. It's funny to be sort of Yeah. Talking about it. But yeah, I'd say, you know, in the short term that's a risk, you know volumes they are down this year you know that and we psychopaths that sort of light of this year. So I think it's just it's not something that I'm overly concerned about prepared to look through. And you know notwithstanding that the company did provide guidance for FY 24, there was all which they've never, never normally done. So I think that that sort of goes to, you know, their confidence in the underlying business, the acquisitions that they're sort of bedding down. And yeah, so I think, you know, it's a defensive business long runway of growth ahead. You know, it's trading at two times when you forward pay. Compare that to Invacare, which has been recently taken up by private equity out of multiple sort of closer to 40 times. And you know, whilst Invacare has been a fantastic long term investment, I think more recently it's they've been quite challenged. They have found, you know, the sort of short term volume drop more challenging, but the margins haven't held up as well, you know, and they've got, I suppose, some older assets that probably need some investment. So, you know, I contrast that to a propel and, you know, I think it is high quality.

Alec: [00:22:55] Do you think so? Because when you were expanding the market and it's like you know Invacare 20% propel 8% then a long tail of fragmented operators. After that, I instantly just think like a deep pocketed private equity scripts. It comes and rolls it up. TPG bought Invacare, who are the definition of deep pocketed private equity. How do you think about the you know, it's a propeller going to be trying to roll up TPG, going to be trying to roll up. How do you think about what each will be willing to pay? And, you know, I guess the assertiveness of private equity.

Rikki: [00:23:27] Yeah, yeah, yeah. Well, I suppose the thing with Invacare and this was part of the thesis when people first IPO'd because they do have that big market share and in book is very dominant in capital cities, they actually don't have that much scope to do too much more just from a competition perspective in a lot of their markets.

Alec: [00:23:46] You think like the age of say would stop. 

Rikki: [00:23:47] Yes. I mean, not to say that they don't have acquisition opportunities and they have, you know, kept nibbling away over time. So I'm not saying that that's not going to be part of the strategy with Invacare, but there's sort of less runway there. And the interesting thing about Propel, I don't think they've ever been in a competitive situation against Invacare. Right. When it comes to acquiring the right. And that's what is great about this management team. They have been in the space for a long time. They've cultivated a lot of relationships. Some of these businesses they end up acquiring, they've been speaking to. And they you know, these are like founders. You know, they have a big regional focus, you know, a lot of their acquisitions. So they're the sole funeral services provider in a town. They've done it for, you know, 50 years. Pell's been speaking to them for five years, you know, going and having a cup of tea every six months to check in and, you know, is it the right time? And so it's building the relationships with that, with the sort of the businesses they want to acquire. They're not they're not in a situation ever really where they're in a, you know, a bidding war. And that's sort of who they're acquiring from. They're not you know, they're not sophisticated. I didn't have to think, Oh, you know, I should check out, you know, to check out if I care and see if I can extract a high multiple. They like, you know, they're they're coming you know, they're coming into retirement. They just you know, they want to they want to sort of plan for plan for that. So I think there's plenty of room for both to pursue an acquisition strategy.

Bryce: [00:25:12] What market share do you anticipate Propel to be able to get then? 

Rikki: [00:25:15] I mean, you know, I don't think there's any reason why that couldn't be as big as Invacare over time. It's you know, it's not going to happen tomorrow, the sort of incremental acquisitions. But, you know, I look at Propel today, $500 million market cap. Invacare just taken out for 1.8 billion. And, you know, as I said, I think the assets that Propel has and the management team, you know, arguably a high quality business.

Alec: [00:25:39] And Australia loves a duopoly. So you're.

Bryce: [00:25:43] So, Rikki, it's always good to understand the bear case. What are you looking out for with Propel? 

Rikki: [00:25:50] So the Bear case, I think as I mentioned, it's a short term risk is just that fluctuation in debt volumes. So, you know, are they under pressure this year? That's something you can track. You can say, debt volumes. So, you know, volumes are down. 

Bryce: [00:26:04] By how much, what is the variation like.

Rikki: [00:26:06] So last month, I literally got this data this morning. Someone told me in New South Wales death volumes were down 10% versus PCP. 

Alec: [00:26:15] Really? Is that because we're cycling like a Covid period? 

Rikki: [00:26:18] It was also it was sort of a a post-COVID post-COVID spike that we had because we sort of through COVID, unlike in Europe and in the US, where there was a spike in deaths during COVID. Yeah, yeah, we were obviously in lockdown. There was no flu. So yeah, so you sort of had a situation where the death rate was artificially low in Australia through COVID. And you know, this it sounds terrible, but you can't avoid this variable out there. So yeah, so and that was cycling, that kind of spike. That makes sense. 

Alec: [00:26:49] The other thing that I've read in some of the like smaller health companies commentary is that a lot of some of their volumes were down because a lot of people didn't get care during lockdown. And then now like, that's obviously going to have a flow on effect. It's a very morbid conversation. 

Rikki: [00:27:05] Yeah. Yeah. No, it's an issue in across health care, as we've seen from, you know, a number of the listed players, you know, pathology players, radiology companies as well. Is these. Yeah. That sort of volume posts post-COVID as has found it hard to recover that kind of trend so. But yeah look I mean that's for Propel it's not something I'm overly concerned about. You know, there is, you know, potentially a short term earnings risk, but, you know, happy to look through that book for what is a long term growth story. 

Alec: [00:27:34] I mean, the other risk and like this is probably not something that factors into the thesis, but just something that I often wonder is like there hasn't been any innovation in how we do end of life care since cremation. Really. And you've got two choices. You get buried or you get cremated. Really? And where I live, there's massive cemeteries around and it's just like they're full. Like it just doesn't feel sustainable. It feels like at some point something's going to have to change in that space. Yeah, I don't know what that is and I don't know who does it, but it's not really a question. It's more just something to do.

Rikki: [00:28:09] I mean, you're thinking about like longer term thematics and you ask before what the average cost of a funeral is. And, you know, it's not a small amount of money. You know, in some markets, you know, people will say, oh, look, there's a trend to sort of low, low cost funerals. You know, people don't need the big ceremony and all the bells and whistles. You have a quick cremation and, you know, do something elsewhere. It's just not something that they're saying in Australia.

Alec: [00:28:35] All well and good to say that in the abstract, in theory, but then when it's like it's your family member and stuff like that. [00:28:40][5.6]

Rikki: [00:28:41] Exactly right. And which is why, you know, when it comes to, you know, the argument about pricing power, you know, they're not trying to gouge anyone, but they're saying input costs go up by a certain percent, they pass them through. And it's just not a situation where people are very price conscious because it's the last thing you do for a loved one. It's why you know this. They're willing to pay it up. You know, people don't shop around for it for a cheaper funeral. You know, they go to a brand that they know and trust in, and it's about the experience. So.

Alec: [00:29:09] Well, Rikki, I think we've had enough of the morbid conversation about funerals. Let's take a quick break. And then on the other side, let's talk about a company that is working to extend our lives. 

Rikki: [00:29:19] So really, it's a really nice sort of symmetry there. 

Alec: [00:29:23] We'll take a quick break. Welcome back to equity mates. We're speaking to Rikki Bannan, an executive director and portfolio manager at IFM Investors. Rikki will be speaking at the Hearts and Minds Conference on the 17th of November. You can pick up a ticket for the in-person session or for the online session. I believe there's a discount code.

Bryce: [00:29:48] Yes, there is. We'll put it in the show. 

Alec: [00:29:50] Is it just equity mates? One word.

Bryce: [00:29:51] You're testing me.

Alec: [00:29:52] Okay. We'll have a look at the show notes. It will be there. But Rikki, where we're doing a bit of a deep dive on two stocks we've just spoken about Propel Funeral Services. The second company you mentioned was a biotech company. So let's start general again. Tell us about the company and what it does. 

Rikki: [00:30:10] Okay. So it's in the radiopharmaceutical space. Some people might be familiar with a company called Telix Pharmaceuticals. 

Alec: [00:30:19] I can't say I am. 

Rikki: [00:30:20] Well, it's now a $3.6 billion company. It's really a true Aussie biotech success story. It's one we've owned since IPO. I'm still in today and I still very much like Telix. This is a mini Telix and both companies would hate me saying that, but that's the simplest way to explain it. The company is Clarity Pharmaceuticals, the stock code CU6. 300 mill market cap it listed a few years ago. So being an investor in Telix was something that I sort of looked at. We bought a position earlier this year. So maybe stepping back what is radiopharmaceuticals and I don't have a biotech background so you know I can explain this how I understand it as well. So it is a form of precision medicine. What they are doing is they're taking a radioactive isotope. They're attaching it to a specific molecule, and that molecule is able to bind to cancer cells in the body because cancer cells express different proteins, different cancer cells express different types of proteins. So it's about matching the right molecule to the protein that it's going to bind to. And you've got a radioactive payload there. So it's used in two ways: as a diagnostic and as a therapeutic. So for the diagnostic, what you're doing is you're injecting into the patient and because the molecule is seeking out the cancer cells attached to the cancer cells, then you image the patient and the body lights up wherever there's a cancer cell. Wow. So compared to traditional methods of imaging, this is much more accurate. 

Bryce: [00:31:59] Wow. 

Alec: [00:31:59] fascinating. 

Rikki: [00:32:00] So as I said to Telix is sort of an Aussie biotech success. They were second to the market with a prostate imaging product last year. The other company, Lantheus Nasdaq, listed, you know, big US biotech. They were the first. So this those two first to the market with prostate imaging products. So the spice is getting a lot more attention. So that's on the diagnostic side. From a therapeutic perspective, it's exactly the same concept, but you're attaching a bigger radioactive payload. And so that is going into the cancer cell. It's attacking the cancer cell, impacting the tumour without impacting healthy tissue. So contrast that to what happens today with external beam radiation. If you're receiving radiation to treat cancer, that you're getting a beam of radiation. And yes, it's targeting the tumour, but it's also impacting healthy tissue on the way through. So hence my comment earlier about it being precision medicine. So clarity, as I said, there are clinical stage company, so they don't have any approved products today. They've got three assets, they have eight clinical trials underway and seeking to diagnose and treat a range of cancers. So, you know, from prostate cancer, neuroblastoma, neuro endocrine tumours and potentially a much broader application, it's differentiated from site helix or Lantheus in that it's using copper as a radioactive isotope for both the diagnostic and the therapeutic. And you know, why is that important? There are a number of benefits for using copper over other isotopes. So to Helix and Lantheus they use gallium, for example, fluorine, copper has many benefits being manufacturing footprint and supply chain. It also has a longer half life and that's important just in terms of you don't have to dose the patient and imaged them straight away. You could dose the patient and it be next day, day one, day two where they get imaged and that, you know, they'll still light up like a Christmas tree if it is. 

Bryce: [00:33:58] Hopefully not. 

Rikki: [00:33:58] Hopefully not. Hopefully not. But if there's cancer in the body, you know, there are challenges with the current two products on the market in that, you know, from a patient scheduling perspective, you know, you've got to dose them. And you mentioned very quickly, I like clarity because they've kind of overcome the challenges of copper. Copper has always been of interest in a medical setting, but there's been challenges being getting commercial scale supply. So cloud has solved that. And also the issue with copper is not stable in the body, but they've come up with some technology where they essentially create a cage around the copper isotope to stop it leaking into the body. And they're the only ones in the world who have done it and they only pay on that. So it's a pretty exciting story. They there's a number, as I said, they've got eight clinical trials underway, a number of catalysts in the next six, 12 months with trial readouts. They're about to start a Phase three trial in prostate imaging early next year, and they've got a good cash runway to fund that. And, you know, there has been a lot of corporate interest in the space. Just last week, Eli Lilly, the US pharmaceutical company, they made a bid for Point BioPharma and other pharmaceuticals play out for those US 1.4 billion. Well and you know I think there's a very positive rate for the value of not just clarity's assets but the helix as well. So definitely a lot of corporate interest in the space you could not rule out.

Bryce: [00:35:20] So there's been a lot of conversation in the Equity Mates community about the developments in biomedicine in the small cap space recently. And one of the things that's sort of common with a lot of the, I guess, innovators is the cost of the new treatment or diagnosis or whatnot is more than what is currently in market. So how does that what they're doing at the moment compared to just your traditional, I guess, radio treatment or diagnosis? And what's the response been from industry? 

Rikki: [00:35:49] I mean, the response has been extremely positive. You've just seen an absolute explosion in prostate imaging using these drug satellites called LU6, Lantheus this drug as well. And the uptake has been much, much quicker than what people expected. You know, there is a cost associated with that. Obviously, these drugs aren't cheap. But on the flip side, if you're catching the cancer earlier, if you are able to identify lesions that traditional imaging wouldn't have, then, you know, there is an argument, a cost sort of argument down the line. Earlier intervention is, you know, not just better for the patient, but actually would save money over time. 

Alec: [00:36:31] So you mentioned that you're not a chemist or pharmacist by trade, not a biomedical expert. When you come across a company like this, you know, you hear that story and it's compelling. Like they've sold some problems that the industry was struggling to solve. The area of medicine, that's interesting. And there's a clear use case. There's corporate interest from some of the bigger pharma players. It's interesting, but they don't have a product in market and they've got a number of clinical trials and. Clinical trials can be expensive, but they're also uncertain. So how do you as a fund manager then build the confidence in the technology and the clinical trials and the stage? There are and I guess also the balance sheet that they have to fund, the clinical trials they need to do. How do you get from this is an interesting idea to this is an investable idea.

Rikki: [00:37:19] Yeah, it was a really tricky one. You know, I suppose I would always be hesitant to get involved at too early stage. So you know that phase one stage where it's really just sort of a, you know, in animals. No, no human trials, etc.. That poses a greater risk. So I suppose with clarity, having first met them sort of at the IPO and kept an eye across, you know, the last couple of years, they've done a great job at hitting a lot of milestones, which is very rare when it comes to biotechs and clinical trials. Like they they always take longer than what you would expect. I think they've done a really good job of hitting all the milestones that they've said they've had. You know, they're still at an early stage, a sort of, you know, phase one for some assets, phase two for others. They are about to commence a phase three early next year. But there's been some really encouraging data coming out of their trials, both on the diagnostic side and the therapeutic side. So that gives me that gives me some comfort. I guess the way I think about investing in a biotech, though, I own a lot more of propel I do with clarity. So, you know, when it comes to when I think about portfolio construction, I have a much smaller weight in something like this. Given it is inherently risky, you can have all the confidence in the world that this drug is going to work for whatever reason. But it is a very binary outcome at the end of the day. So yes, I suppose from a portfolio construction perspective, I'm happy to take some risk, but it's a much smaller position in my fund than, you know, propel.

Bryce: [00:38:51] And so then what's the Bear case like? What are the red flags that you look out for as these type of companies progressed through that period of clinical trial and then coming to market? 

Rikki: [00:39:00] Yeah. So I mean, the biggest one is that they have a data readout that, you know, they fail to meet a primary endpoint in one of their clinical trials. That's the single biggest risk. Clarity does, as I said, have three different assets. So it's not a case of all their eggs in one basket that there's sort of three distinct assets. But yeah, the clinical trial risk is the biggest number one. You know, the second one, as you said, you know, these drugs that cost a lot of money to get to market and, you know, they're expensive to run. So funding is the other risk. When the market starts feeling like we see an end of the cash runway, are they going to need to raise capital? You know, that can often put pressure on a share price. So that would be you know, that's the other sort of concern. As I said, they've got plenty of cash to get them, you know, well into the latter part of next year. And in the meantime, you know, I expect you know, I do expect there to be some positive announcements around clinical trials that should see a positive share price reaction. But, look, you know, if they're going to progress these assets through phase three, that they will at some point need to raise more money. 

Alec: [00:40:08] Okay. So the eight trials, are they all in the US or are they in Australia or.

Rikki: [00:40:14] Most of them are in the US. I do have they do have one in Australia but yeah, most of them, most of them in the US.

Alec: [00:40:20] Yeah. This is one thing that like internationalising medical trials would save a lot of companies a lot of money and probably speed a lot of drugs to market. 

Rikki: [00:40:29] Yeah, yeah. But the FDA, the FDA likes to see trials in US patients and then equally, you know, a drug could be approved in the US, but then the company will need to run a different clinical trial in European patients or Japanese patients. You know, it just regulators have sort of different ways of looking at these things and deployments. 

Alec: [00:40:53] So, you know, we've spoken about long term investing a few times. If these companies are able to execute through the trial phases and then everything, what does it look like in ten years? Does it just look like an operating subsidiary of Eli Lilly? 

Rikki: [00:41:10] That's the dream. That's the dream. Yeah. As I said, you know, you've got Telix there with 3.6 billion of market cap, you know, phenomenal company. And, you know, it's actually it's amazing to have a success story like that in the Australian listed market because, you know, it does feel like it's been an easy space, easier space to avoid, you know, with some of the you know, the likes of a as I bloss etc. over the years. So yeah I mean that's that's the dream either that they, you know, they have great results out of their clinical trials, they raise enough money to commercialise it themselves or big, big US pharma comes knocking and takes it out for a valuation much higher than it is today. So yeah, it's sort of one of those things. It's if it works, it's, you know. Multibagger. If it doesn't. 

Alec: [00:42:01] It's a bit more of a binary outcome. 

Rikki: [00:42:02] It is. It is. Hence. Hence why, you know, you think carefully about how much you'd be investing into a stock like that versus something that's more stable and a long term sort of value creation story like a propel. 

Alec: [00:42:15] Yeah, it's just like just taking it out of just one particular company. I just remember like when we're at uni and stuff, we would hear about all these new cutting edge cancer treatments that were coming. You'd see articles in The Economist and stuff. Yeah, this is coal, but the investment, like the companies just weren't really there. Sort of. Fast forward ten years and it's like now the companies are starting to be there and it's just really exciting that I guess our futures. 

Rikki: [00:42:42] It's, it's super exciting. And as I said, you know, I'm very passionate about it. You know, having had that experience with my best friend passing away from cancer. And, you know, I always just think, gosh, if you know, another five, ten years, you know, there would have been you know, it could have been a treatment to save her. So, you know, I do like, you know, feeling like I'm, you know, investing in, you know, some of these stories and supporting new drugs to market here in a small way. I'm, you know, one of many, many shareholders. But yeah. 

Bryce: [00:43:12] Well, Rikki, you're also supporting the work that the Hearts and Minds guys are doing through the investment conference. Good luck with your pitch. Thank you. Looking forward to seeing. And if you're interested in attending the conference, it is Australia's leading finance conference and they do support Australian medical research. You can grab a ticket for the in person event or online and we've tuned in so the last three years and then there's been some awesome stock picks. Highly recommend if you are able to grab a ticket doing so. Information will be in the show notes for our discount code for the online and also for buying tickets in person. 

Alec: [00:43:51] And we should say if you want to learn more about the impact that Hearts and Minds are making and where the money is going and what the medical researchers are doing with it, Our Hearts and Minds actually have a podcast that they've just launched where they speak to some of the fund managers and to some of the scientists. So if you search hearts and minds wherever you're listening to this podcast, you'll find it. But that will give you more colour on what they're doing.

Bryce: [00:44:16] Well, Rikki, it's been an absolute pleasure. Thank you so much for your time and looking forward to seeing you at the conference. 

Rikki: [00:44:21] Great. Thanks for having me.