I learned to pay a lot of attention to disruptive innovation when I was a young analyst.
Or let's put it this way-- I wanted to be a young analyst.
I was in economics.
I started in the business in economics.
But I knew I wanted to do equity research.
And so I was at a wonderful firm, Jennison Associates at the time, who gave me the opportunity
to do just that.
Except I had to find my own universe.
The analysts at Jennison really were there for life.
So I had to scrap around.
I often say I was like a little dog under the table, just picking up scraps.
So what were those scraps?
Well, database publishing came along.
So that's Reuters and Telerate.
And no analysts thought that that would be worthy of their attention.
So I said, I'll do it, I'll do it.
And what do you know, it evolved and evolved into the internet and social media.
The genomic revolution really caught our attention as the first human genome was being sequenced
or near the completion of sequencing.
This was part of the tech and telecom boom.
And it also was part of the tech and telecom bust.
And unlike the internet, which came back pretty quickly, the genomic revolution, we think,
has been held under wraps by political uncertainties, especially funding and reimbursement, and
so forth.
We think the time is ripe.
And we think that the genomic revolution is going to transform health care completely.
Kite Pharmaceuticals was trying to come up with a therapy to treat aggressive non-Hodgkin's
lymphoma.
Now, aggressive non-Hodgkin's lymphoma is very serious.
The patients in the trial-- they were only allowed in the trial if they had failed at
least three, if not four other lines of therapy.
In other words, they were on their deathbeds, and this was their Hail Mary pass.
So Kite Pharmaceuticals started experiments-- and I've just described the patient population.
In August of 2015, one of the patients in the trial died, and they didn't stop the trial,
but the stock dropped 40% to 50% right there.
And my question to Manisha Samy, our Genomics Revolution analyst, was, well, why haven't
more died?
Only one died.
And this is a patient population of 100 to 150.
Isn't this telling us something good, not bad?
And so we loaded up on that stock.
And sure enough, that was the right answer.
Today, with that therapy-- this is CAR-T therapy-- we are seeing roughly 50% complete remission
rates.
50% complete remission rates after nine months in the trial.
So this is what we have to look forward to.
Those patients were on their deathbeds and their tumors have now melted.
Why?
Because their own immune systems attacked the cancer in their bodies.
God bless the health practitioners, doctors, nurses, researchers, others.
Until recently, they didn't have the information they needed to make decisions.
They didn't have the science.
We thought they did, but they didn't.
There's an analogy here too-- and I'm not trying to make light of this-- but there is
an analogy to the advertising world.
In the old days of advertising, say Mad Men, the 1960s, we used to hear from chief marketing
officers, you know, I know that half of my advertising is working.
I just don't know which half.
And of course, what companies came along to answer that question?
Google, Facebook, Twitter, the social media, generally.
We think the problem is worse in health care.
We think that much of the decision making in health care is a function of either guesswork,
or experience, or gut.
And we think that as we learn more and more about the human genome, that the answers are
going to become more precise.
And the cures will then follow.
The genomic revolution is going to change health care as we know it.
Partly because it's deflationary.
The health care sector has never experienced the good kind of deflation.
All health care analysts know about deflation is patent cliffs, and that's really, really
bad.
Technology usually brings with it good deflation.
So what we're seeing from DNA sequencing is costs falling about 30% to 40% per year.
And the first human genome sequence for a cost of almost $3 billion and took 13 years
of computing power.
We're now down to well, less than $1,000 per human genome in a day or so.
And by 2021, we think we'll be at $100.
So that DNA sequencing will become part of our annual physicals.
And DNA sequencing will be able to identify where our genes have mutated and why we have
certain kinds of diseases.
We're also, with CRISPR technology and CAR-T technology, going to learn about ways of actually
curing disease.
Either unleashing our own immune system against diseases like cancer, or actually editing
our human genome, editing out the programming errors, the equivalent of programming errors,
and curing disease with CRISPR technology.
CRISPR technology, CRISPR-Cas9 specifically, is gene editing.
Now gene editing is really not new.
In 2009 I believe, we had a gene editing technology called zinc finger nuclease.
And that has achieved some success, but it's extremely expensive.
About $5,500 per base pair of DNA that's additive.
Today, CRISPR-Cas9 can edit at $30 per base pair.
So a huge drop in the costs.
Gene editing is exactly what it says-- editing.
It's cutting, activating, silencing, regulating.
We call it the molecular Swiss army knife.
In essence, gene editing can reprogram the mutations in our DNA.
Our DNA starts out usually just fine.
And then mutations happen along the way.
And now we have a technology that can edit them away.
To give you a sense of how important this is, only 5% of the monogenic diseases-- so
the disease caused by one gene-- only 5% of them are treatable today.
With gene editing, all of them, potentially, will be treatable.
And then beyond that, monogenic is only 2% of all the genes out there.
So if I were to tell you that if we were able to solve all the problems for people with
monogenic disease, that that's a $2 trillion opportunity, can you imagine how big the polygenic
opportunity is going to be?
This is really one of the most exciting investment ideas we have ever experienced.
Cas9 is a DNA cutting protein, and when attached to a guide RNA, it can search through the
DNA in a cell to find sites that match the RNA sequences.
When the sites are found, the complex binds with the DNA and the Cas9 protein cuts a double
stranded break in the DNA.
The cell will try to repair the break in the DNA helix, but the process often introduces
mutations that disable the gene.There are other applications for CRISPR technology.
Agriculture is a big one.
Livestock as well.
So germ resistant or disease resistant animals, and plants.
Fish that gestate in half the time they do now in the wild.
So salmon, instead of three years, one and a half years.
We have determined from our research at Arc that we will be able to feed, because of these
breakthroughs, 800 million more people by the year 2025.
And wouldn't you know, that's about how fast the global population is going to grow.
So pretty exciting there.
Investing in CRISPR may seem difficult, and the reason for that is these are not household
names.
We have focused on those companies with the best patent positions in the CRISPR-Cas9 space.
There are three companies that have those patents primarily.
They are Intellia, Editas, and CRISPR Therapeutics.
They're involved right now in a lot of patent fights or disputes.
And what we believe will happen for the good of mankind, and because it makes good business
sense, that this phase will be characterized now or soon by a lot of cross-licensing activities.
So we don't think it's going to be as fraught as many other investors do.
And these are some of our biggest positions today.
Winner takes all or winner takes most.
We think that if there is such a phenomenon in this space, it will be those three because
of this crosslicensing arrangement.
You know, both Kite Pharmaceuticals and Juno both were big positions in our portfolios.
Both have been taken over by big companies-- by Celgene and Gilead.
We think they're going to invest tremendously in this space.
And we do think it's for the good of mankind.
So many other countries are interested in these breakthroughs and are doing a lot of
research as well.
China has become very determined.
At one point, it bought a company called Complete Genomics, a US company, and was going to develop
a DNA sequencing platform especially for China-- hopefully to be exported to the rest of the
world.
They have failed in doing that.
Illumina is the DNA sequencing company with 90% share of all the base pairs of DNA sequenced
in the world today.
That includes China.
China is accelerating its investment now.
It has the Beijing Genome Institute-- I believe has stated that for every human genome sequenced
outside of China, they would like to sequence one inside of China.
So we think China is pouring a lot of research and investment dollars into this space.
And in fact, they have conducted the first CRISPR trials on human beings.
In the United States, we will see the first human trials this year.
China started in 2015.
Now we haven't heard what, if anything, has gone wrong with those trials.
We have heard the good news.
And the good news is patients in China are being cured of cancer thanks to CRISPR technology
and DNA sequencing technology.
We are not facing the same ethical concerns as we faced with GMOs, genetically modified
organisms.
And those were applied to crops.
Europe just banned those completely very early.
Europe has been the first to accept some of these studies and actually approved crops
that have been modified with gene editing.
Again, we're just editing the crop itself-- it's its own DNA.
There are no foreign organisms involved in this.
And so we think this is much less fraught, ethically.
We also think that the research on pluripotent stem cells is very important.
This takes away embryonic from the debate.
I think some investors are interested to know that with the technology today, we can take
skin cells and turn them into heart valve cells.
Again, because of this new pluripotent stem cell technology.
The discoveries here, the big breakthroughs took place in Japan.
Professor Yamanaka at Kyoto university won a Nobel Prize for this breakthrough.
And it's making a huge difference in research around the world now.
We do not think that investors are pricing this face correctly at all.
And the reason is it seems to us that because of in the US, the pre-election campaign rhetoric,
and even the post-election rhetoric, and the political will to drive down drug prices has
infected all of health care.
And we think that investors are treating some of these breakthrough therapies and technologies
like they would treat many me-too pharmaceutical drugs.
That's going to change.
I just mentioned that the revenue opportunity for monogenic stem cell therapy is in the
$2 trillion range.
And polygenic, how however many trillions.
No one's thinking about these numbers.
And that's because in the public equity markets, the investing time horizon has become so shortened
by the crises we went through, both the tech and telecom crisis, and the global financial
crisis of '08, '09.
So time horizons became very shortsighted, we would say.
Our time horizons are five to 10 years.
That's the time horizon you have to have.
And if you have that kind of time horizon, what you will understand is that the stocks
that we're investing in in the genomic revolution are actually deep value stocks.
They may be losing money now, but the kinds of cash flows that they're going to generate
over time are phenomenal.
And we do not believe the markets understand this opportunity.
The timeline for this space is, we would say, the next 20 years, 20 to 25 years.
We think that the next 10 years, we're going to see many investors experiencing aha moments
as more of these cures actually start to make the headlines.
And they may start in China.
They've already started in China.
And slowly move their way here.
But our FDA-- it's very interesting.
The new FDA commissioner has two goals.
One, yes, is to drive drug pricing down, but not in the way many investors and others think.
It is by accelerating the approval of generic drugs.
Not just small molecules, but also, biosimilar.
So biotech companies who used to beprotected from generics are no longer going to be.
So that's one of his objectives.
This is Scott Gottlieb.
And the second objective-- and we think many are dismissing this or are just not paying
attention-- is to approve, as fast as possible, these new breakthrough technologies so that
we can cure cancer and other diseases over time.
So in terms of all of our innovation platforms, DNA sequencing being one, we are looking at
them through the lens of the saddled S-curve.
And typically, that means a hype phase in genomics that would have been the tech and
telecom boom in the late '90s.
The technologies were not ready then.
The ideas were big, and they were right.
They were just 10 to 20 years too early.
So we had then many years of the fall out and the fall from grace, ending in the valley
of despair.
And I would say that was in the pre-election campaigning season 2016.
And then we have coming out of that, the sweet spot of the S-curve.
That's what we're looking for.
We think that the genomic revolution, with some of these breakthrough therapies and technologies,
is entering that space.
The reason we know we're not in a bubble is because of the deep values that we see when
we do our modeling going out 10, 15 years, and discounting the cash flows.
The other way we know we're not in a bubble is most of the investors do not or did not,
know which companies were making the big breakthroughs in CRISPR-Cas9 technologies.
So Intelia, Editas, CRISPR Therapeutics-- when they are in the news and in the headlines,
then maybe we'll think we're beginning a bubble.
But we're so far away from that.
I feel like I'm a dog underneath the table picking up the scraps again.
And we lie in wait for the next controversy to pummel these stocks, which are not in indexes.
And that is why they get pummeled in risk off periods.
Because investors today think their safety is in the big indexes.
We would submit that some of the biggest value traps traditional pharma, traditional biotech
are in the traditional indexes.
And that's where the risks are.
We believe that the opportunities are in the stocks in our genomic revolution fund, which
is all about the future, not about the past.
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