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.
