How to Make a Killing in Gene Therapy
Tom Barton helped build the first multibillion-dollar short-selling hedge fund at Feshbach Brothers in the 1980s, where he exposed dozens of stock frauds. Then he became an early-stage investor, going long on health foods and satellite TV. Now Barton, 65, runs White Rock Capital in Dallas with his brother Joe and is enjoying a renaissance with home-run investments in gene-therapy firms. We spoke about his career and his latest investing passions.
Barron’s: How did you get into the short game?
Barton: After business school, in 1983, I was working for a venture-capital firm in Dallas. It was next door to Rusty Rose, possibly the greatest short seller of all time. Rusty was managing money for our firm and had incredible returns. I liked forensic accounting and understood a lot of industries. Initially, Rusty would give me ideas and I would go do the research.
Bio
| Name: | Tom Barton |
| Age: | 65 |
| Work: | White Rock Capital, a Dallas-based family office; formerly research director at short-selling firm Feshbach Brothers |
It was such a good strategy because Wall Street bucket shops were IPO-ing all types of garbage. There were just hundreds of absolute frauds. I became a short seller because I was fascinated by frauds, not stocks that are just overvalued. Even today, 35 years later, I hate to short an overvalued stock.
Overvalued meaning...?
Meaning it is trading at a much higher multiple than it should be. It’s not a fraud, it is just overvalued. I am a black-and-white analysis guy. The Tesla(ticker: TSLA) short is interesting. I understand why people are doing it. I understand the debt load and the large market cap. But the car is spectacular. Tesla hasn’t yet proven to be a fraud. I bought puts in the lower $300s, after the recent irrational behavior by its CEO. [Put options give buyer the right to sell a stock at a designated price within a specific time period.] But I wouldn’t short a stock with that type of volatility.
How did you go from working with Rusty Rose to joining Feshbach Brothers?
The VC that I worked for gave me a million dollars to short. Four years later, I had turned it into $15 million. Then I met the Feshbach brothers—three highly intelligent guys. They had excellent noses for what’s real and what’s not. So I joined them as the fourth partner of Feshbach Brothers and director of research. My brother Joe joined us in 1988.
You were a great source for Barron’s back then.
I used to talk to [longtime Barron’s editor] Alan Abelson frequently and gave him a lot of stories. Alan and I got along really well, because I only deal with facts. He liked that. I was also providing data to the Securities and Exchange Commission. The SEC was trying to get their arms around financial frauds at the time. I think at one time the SEC was working on around 50 cases that I turned over to them.
One was the medical laser company Endo-Lase, run by a guy named Michael Clinger. It never collected its accounts receivables. We called every hospital in the U.S. that could afford a million-dollar laser. No one had bought this laser. So I called the guys in Endo-Lase and said, “We called these hospitals. No one has it.”
And the guy said, “Just come up. I’ll show you my accounts receivable.” I went in, looked at the books and, literally, they had accounts receivable from all these hospitals we had called.
We found out where the lasers were coming in to the port in New Jersey and had a private investigator follow the truck. He discovered that the company was hiding the “sold” inventory in the garage of Clinger’s grandmother. I called the SEC and said, “You’ve got to get on top of this.” They closed them down.
And you put up great returns by doing this.
Our compound annual returns over nearly a decade were 41%.
So why did your short-only career end?
By ’91-’92, the short business as I knew it was over. In 1991, we had a terrible year. The SEC had figured out how to go after these bad guys—the big problem firms, like D.H. Blair, Stratton Oakmont—that had launched the IPOs. They were all going under. I had also talked to the Justice Department and the FBI a lot back then, because these were criminal activities. After they cleaned it up, and momentum investing changed the risk/reward profile, shorting was no longer as lucrative.
So you and your brother Joe set up your own fund in ’93.
We started managing money for Soros Fund Management. A big mistake at Feshbach Brothers was our passing on a chance to buy 40% of the Lasik market for $1 million. So we started looking at private deals.
The first was a spinout of a business unit of Cirrus Logic(CRUS). We learned about the opportunity from a manager there who helped us on short ideas. The company went public at 40 times our initial investment.
Then we were looking at a fraud that claimed that they had a small 18-inch dish for satellite TV. They showed pictures of LaserDisc quality because they were from a LaserDisc, not the satellite. But during the research process, we met Stanley Hubbard, who owned a number of ABC affiliate stations and really had invented a direct-broadcast satellite system. We introduced him to Soros who, within 30 minutes, agreed to invest $50 million. Hubbard’s company, USSB, ultimately became part of DirecTV.
Even with all the long and short trading we did, the private-venture deals are where we had the best returns for Soros. After a 10-year relationship with them, we morphed into a family office. That’s what White Rock Capital has been since 2003.
How did you become a biotech investor?
In 2010, a brilliant retail broker and friend opened our eyes to gene therapy and synthetic biology. I was introduced to R.J. Kirk, who is the chairman of Intrexon(XON). He is the smartest guy I have ever met. He knows every single industry as if he was the guy who invented it. He was definitely early on what people would now call gene therapy. We became private investors in Intrexon, which gave us broad exposure, as they are in industrial and agricultural and health care and energy—the gamut.
Your love affair with Intrexon has had its ups and downs.
Intrexon’s stock has been a disaster. R.J. is wearing too many hats. Way too many industries and projects. He needs a Tim Cook type but has never been willing to hire one. We think Intrexon can be a big winner, most likely in energy—turning natural gas into liquid fuels. Its partnership with Ziopharm Oncology(ZIOP)—which we are long and very excited about—can be a huge success if Intrexon gets out of the way and lets them operate.
You have moved beyond Intrexon.
We started to make small investments in other gene-therapy companies. We invested in a stem-cell bank. It turned out it was not going to be successful. So Joe and I suggested that we find a rare disease and change the company’s focus to gene therapy. Out of this, AveXis was formed, focusing on spinal muscular atrophy.
Our CEO found Dr. Brian Kaspar and we licensed his technology from Ohio State University. AveXis then hired great management, built a very strong board of directors, and the clinical results have been outstanding. The company was acquired this year by Novartis(NVS) for $9 billion. All of this came in less than six years from a small company we founded with $3 million.
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A couple of years after AveXis, we became the first seed investors in Agilis Biotherapeutics. We got a license from Intrexon for Friedreich ataxia, or FA. Agilis later broadened its product portfolio to include licensing a program in Taiwan for AADC, an enzyme responsible for the formation of dopamine. Its deficit in this genetic disorder is associated with profound muscle weakness and severe developmental failure. Patients generally die in early childhood.
Our clinical results have been spectacular, and the program has the chance to be the first central-nervous-system gene therapy ever approved. Agilis was just sold to PTC Therapeutics(PTCT) for $200 million, plus future milestone payments which we think may be in the $300 million–$700 million range. Again, this was started with a small amount of capital—$8 million.
So what’s exciting you now?
BioTheryX, which has one of the most successful drug development teams ever assembled. The CEO and founder is Dr. David Stirling, a founder and former chief scientific officer of Celgene(CELG). His BioTheryX team was responsible for five FDA approvals while at Celgene, including their blockbuster Revlimid. BioTheryX’s patented compounds appear to have superior traits to Revlimid, including the ability to treat autoimmune disorders. If I’m Celgene and I had a stock that has gone from $160 to $90—because of the expiring patents on Revlimid—then I’d want to talk to BioTheryX.
BioTheryX also licensed a product developed at Hebrew University for AML, a kind of leukemia. A peer-reviewed study recently published in the journal Cell concluded that this AML treatment has a chance of curing a meaningful percentage of AML patients. It is a huge market. BioTheryX will be in the clinic at the end of this year, so we could know very quickly.
We continue to look at additional investment opportunities. Synthetic biology is still in the first inning and will ultimately replace many chemistry-based solutions in health-care and industrial applications.
These biotech successes—you’re like amateurs who win the U.S. Open.
I’m trying to find out whether this is just the easiest thing to do on the planet or the most difficult thing—starting companies and finding cures when Big Pharma hasn’t been able to do it with their huge budgets. We didn’t start a lab. We are not a bunch of scientists. We like to find brilliant individuals and teams, then use our experience to help guide them.
How long can you do it?
Based on the health of our parents, Joe and I have at least another 25 years more of doing this.
Thanks, Tom.
Write to Bill Alpert at william.alpert@barrons.com
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