Volatility in the holdings and positive news from Initiator Pharma

Performance

Adrigo Small & Midcap L/S Class A and Class C fell 2.66% and 2.65% respectively in June, net of fees. The Carnegie Small Cap Return Index Nordic rose by 0.5 % in June.

The fund’s larger holding in Bonesupport (medtech) provided a good contribution whilst our positions in Pierce (eCommerce) and Online Brands (eCommerce) had negative contributions. Our mid-sized positions in Initiator Pharma (biotech) and Nordic Semiconductor (technology) contributed nicely. Dolphin Drilling (oil service) had a significant negative effect due to an equity issue in June. Our short positions had a negative contribution in aggregate. 

Adrigo Small & Midcap L/S Class A has returned 53.8% since inception, net of fees. The compounded return has been 7.9% per year since inception. In the same period, the benchmark STIBOR 1M rate has returned 1.6% and the Carnegie Small Cap Return Index Nordic gained 68.4 %.

Market comment & the companies

June was, from a global perspective, a strong month for the stock market. MSCI World jumped 5.7 % while EURO STOXX 50 rose 4.4 %. The Nordic markets were lagging; Sweden, up by 2.1 %, was the best market. We noticed that quite a few companies took advantage of the strong market and issued new equity. We continue to see the need for balance sheet improvements and expect this trend, particularly from smaller companies, to continue. 

Initiator Pharma (biotech) published two important releases in June. Initiator announced headline data from its Phase 2 study in psychogenic erectile dysfunction. Although the study only included 24 patients, the company showed material results for the active treatments compared to the placebo. It is worth highlighting that it was a cross-over design, i.e., the same patient received both placebo and active treatment. Patients included were also non-responders to the standard of care PDE5 inhibitors. Both design and patient population strengthen the result.

In addition, Initiator Pharma has fully recruited its Phase 2b study in organic erectile dysfunction (120 patients) in line with the previously communicated schedule. It is a fast read out and top-line results will come at the beginning of Q423 at the latest. Erectile dysfunction is a huge problem where 30 to 50% of patients do not respond to Viagra or other PDE5 inhibitors. Initiator Pharma will target the non-responders. Viagra’s sales peaked at USD 2 billion (approx. 50% market share) before generic alternatives entered the market. We believe patients’ willingness to pay, and eagerness to try, new alternatives is high. The patient population is large, and the market potential is probably in line with Viagra's peak sales. Unfortunately, the stock has traded weakly after the results. Microcap biotech clearly does not attract new investors in today's market climate. We find the stock extremely cheap trading at a market cap of SEK 370m.

Getinge (Medtech) delivered a profit warning that took us, and the rest of the market, by surprise. The management had previously indicated that the on-going production problems within certain products would have a rather limited impact. This proved to be wrong. Getinge has historically had quality problems but, it appeared that CEO, Mattias Perjos, had solved most of these issues. However, this was obviously not the case and a great deal of market confidence has been lost, The share trades at a significant discount to its international peers. Thus, the upside is considerable, if or when the problems have been solved. 

Dolphin Drilling (oil-service) has been a portfolio holding since the autumn of 2022. Late June, the company announced a capital raise, in order to finance two semi-submersibles from Transocean. Negotiations had been on-going since late last year. Before the closing of the deal, Dolphin had managed to sign an LOI for an extension of the current contract for one of the rigs, for an additional three years from September 2024. Pay-back time on the transaction was around two years. However, the stock market was quite reluctant and the company had to accept a more than 30 % discount for the new shares. Our fund's performance was significantly impacted by this. We are not happy with how the transaction was conducted. Having said that, we still see a huge upside in this stock which belongs to our top five holdings. 

Our exposure in Pierce and Online Brands (e-commerce) had a significant negative impact on our performance during the month. The shares have traded down on thin volumes. Pierce announced that the temporary CEO was replaced by external recruitment. We see this as a sign that Verdane, Pierce's largest shareholder, shows further commitment and determination to turn around the company.

We have returned to an old favorite of ours, ArjoT (medtech). The stock is down some 70 % over the last 18 months. However, after a declining earnings trend for over five quarters, we believe the earnings trend will turn around and move upwards during Q2. We have initiated a mid-sized position.

Finally, we would like to thank you, our co-investors, for your continued trust!