The Biotech Rebuild: Finding Alpha After the Drawdown with Chris Clark | #606

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That experience informs the education first approach, including their 351 education center with short videos, visuals, and on-demand resources. On February 3rd, they're hosting a live educational webinar to walk through common FAQs, real-world use cases, and lessons learned from prior 351 exchanges, plus a look at upcoming fun launches designed to address complex portfolios, register using the link in the show notes. Welcome back everybody, we got a fun episode today, today's guest is Chris Park. Chris is a 20-year vet of the biopharma space and was a biotech PM for 10 years at RS investments where he created their biotech strategy and managed over $4 billion. And also, he's another UVA alum and Japanese ski-efficient auto, Chris, welcome to the show. Wah-wah-wah. Thanks, map. Long time first time. This is your first podcast, technically not your first podcast. You've recorded one, but with our buddy Patrick, it was so inappropriate. They couldn't publish it. Is that right? What happened? So that is exactly right. Compliance started editing, editing, editing, and then there was nothing left to edit. Well, the news is today, as you can say anything you want, and we'll publish it, so let's have at it. So we're going to have a lot of fun talking biotech and all the investing public privates today. I thought a good place to start. We recently did a pod with our good buddies, Dan Rousenesson, D.A. Wauk. D.A. was talking a little bit about biotech. You had a fun conveyor belt analogy, so maybe to explain biotech sector, you want to start there? I loved that episode. I found myself speaking out loud as I was listening to it and trying to be the fourth party in the room, and he had some great analogies as did Dan. They were really onto something, and that's when I reached out to you that we can take that, and take that baton and carry it further. So to distill it down, you speak more of a private biotech investment, but he viewed it as a conveyor belt, and that the seed VCs would form a few companies, and they'd advance the products and they'd get further funding, and then they'd advance towards the clinic, which is testing in humans, and then they would get towards going public. And he referred to, we were trying to discuss what's happened at biotech over the last lost half decade, and he said, basically, the conveyor belt stopped, which is true. I as a former public biotech investor, I left our investment victory capital back in May, and the conveyor belt, for me, starts where his stocked, and the conveyor belt continues where typically a company will go public, consume exponentially greater amounts of capital as they advance their products to the market, but ultimately at the end of that conveyor belt is big biopharma. There, at the end of it, just gobbling up, that is the end game for the vast majority of small cap startup biotechs that is their goal. And yes, the IPO, the private conveyor belt stopped really last year or so, completely halted. But that is because M&A stopped downstream, and everything started to get back to the entire ecosystem was thrown into haywire. Just need a little laxative to get it going. You know, it's funny if you were to ask investors, when I think of biotech in general, I have memories of late '90s, where in my head, you know, I think tech, in biotech, somewhat similar, and I think if you were to ask the average investor, say, investor, since the bottom in 2009, stock market's been a 10-bagger, queues have been a 20-bagger. You know, where do you expect the biotech sector, the returns to have been? I think most people would say 10 or 20-bagger, maybe 20, and then the reality is it's like 4. The biotech is interesting, because it's like one of these sectors that every, like, four or so years, you get this kind of facetripper. But this has been a period of, I mean, almost a decade of kind of sideways-ish, does that sound right? Yeah. Which I love. We're kind of drawn to these contrarian, talking about uranium stocks and coal stocks and gold stocks, and all of a sudden, they get their moment in the sun. But let's lay a little foundation. Talk to us about, like, what is biotech, how's the work at a high level? You know, I think when people with your biotech, they immediately just think, like, drugs. But give us kind of the whole kid and commutal. Biotech is, in my opinion, the most diverse industry that's out there, it's really its own sector. And when I say biotech and form, I use those terms interchangeably, it's really semantics. And we'll get into that a little bit later, but they act the same, they pretty much are the same, Gilia is considered a biotech company, they sell for the most part, pills, and Bristol and Merck are pharma companies and their biggest products are antibodies. So going forward, I'm referring to biotech, pharma, it's all the same. So it is the most diverse industry, in my opinion, it's much different than the other part of healthcare, which is generally services, devices, Medtech, tools and diagnostics, those types of things. Biotech, they are trying to cure cancer, make a stinner, obviously, clip ones, they become a big thing, grow biofuels, and make us all look better, you know, trying to do all these different things and doing it in all sorts of different ways. The Russell really doesn't know how to categorize these things, it's kind of a catch-all, but depending on which index, and I tend to look at the growth indices, the Russell growth indices, but it is the majority of healthcare. It is its own sector, it should be treated as its own sector, and what you're generally trying to do is advance a product, an idea, to the market, and it takes, these are incredibly long capital intensive cycles, it can take 8 to 15 years for a product to get to market, you need to first show that it works in animals, first you have to come up with hypothesis, show that works in animals, show that works in man, and then convince the regulators to approve it and then sell it. So there's scientific risk, regulatory risk, commercial risk, and it really is an exponential compounded risk where the small minority of products that start out actually get to market, and when you consider, you know, the survivor bias, and it probably costs explicitly, let's just say, $800 million to a billion to bring any product to market, wide error bars around that. But if you consider the ones that did not make it to market as well, because you should, that's the cost of the industry, you know, it pushes 2 billion. A lot of money, if you look through like traditional phase trials, I feel like it would surprise a lot of people, it's like almost like the CFA exam, but way worse, you know, at each level, phase one, phase two, phase three, there's just a huge calling of the population of drugs, it's just hard to get through, and a lot longer than most people expect. There's a great saying in biotech that the most successful phase two is one that is, you know, a negative outcome that prevents you from running a much more expensive failed phase three. I feel like a lot of people think of biotechs as lottery tickets. Has it just been the case where like there's been a lower batting average, like the products, like there's just not as many good products coming to market or the stocks get way ahead of themselves 10 years ago, are there just, what's going on? I love your asking this, and I love the way that you just phrase that, because these very questions came up at my old fund, is the science getting worse, and the spoiler is, no, the science is not getting worse. The issue over the last five years has been a macro one, and it's all about rates. To confuse things, going back 25 years, every rising rate cycle was actually confirmatory for a positively correlated with a good biotech ticket. And that's because all of the prior interest rates, rising rate cycles were trying to tamp down a hot economy, and in a hot economy, people were doing risk seeking, and biotech is the tip of the tail, as far as risk seeking. And the prior bear markets and prior corrections were on average about nine months, six to nine months, the most was 18. And then February 2021 came on, and post the pandemic, there was the infusion of liquidity. All sorts of companies going public, biotech companies, all sorts of non-erners, and this is the peak mean stock was right around February 2021. And a different interest rate rising rate cycle came on, and that was economy be damned, get inflation under control. And biotech was the economy be damned. That was the tip of the tail, and that started a prolonged bear cycle, which we are just coming out of five and a half years later, it's incredible, but it really is a lost half decade. I feel like a lot of investors, particularly beyond the retail cohort, they'll say, hey, hold on a second, look at all these biotechs trading at cash, or in some cases, there's more cash than the market cap or enterprise value, and people are like, well, we should just buy all these, but what they don't realize is, you know, also that a lot of these companies are burning that cash and about it. What's the average amount of cash or biotech has, like a year or two, or three, or what so? So this is where a lot of biotechs got caught up, it used to be, you're trying to feather or thread the needle between too much and unnecessary delusion early on, and having enough capital that you can control your destiny. I think of these companies as defensive business models in the near to medium term, and that raises a lot of eyebrows, but the reality is that a well-funded biotech, that phase three trial that they're running, the assumption that it's capitalized, it's paid for, is going to read out irrespective of what's happening, you know, the grease defaulting, oil futures, Russia, invading, Ukraine, all of those macro factors, liberation day, all that sort of stuff. So in the near to medium term, these business models are defensive. However, in the present, they're a little bit of Schroener's box. You don't know when they're executing this trial, there's not a lot. You don't know where the product is dead or alive until you get the outcome. And then the variable at the end, and this is what changed in the last four or five years, how much you get paid on the back end. And because M&A stopped, you get to the other side, you've developed a product, and then you're like, all right, now what? I'm not going to build a sales force to sell one drug. That doesn't make economic sense. And that is part of this conveyor belt stopping, that if you don't know that you are going to get paid, and you refer to this, use the term lottery ticket, Dan Rasmussen used that as well on that podcast. I think of this more like poker, that this is a game of skill, not a game of chance. And the way I'm trying to look at things is purely expected value. I'm trying to figure out how much am I going to get paid if it works, how much is it going to cost me to participate, how much do I lose, if it doesn't work, so where am I in that reward-to-risk ratio, and it's incredibly asymmetric, surely right now. And then what are the odds of success? Now, unlike poker, you don't have a discreet set of outcomes, and a 52-card deck. There's a lot of qualitative analysis that goes into this, and you have to build error bars into your analysis and any of your figures. But I don't view them as lottery tickets, it is a game of skill, however that unlike poker, you don't ever know exactly how much money is in the pop, and there's also the opportunity to take your money out of the pot or put more in throughout the hand. And then going back to where people are starting to, their interests is peaked, the only quant model that works in biotech is absolutely terrifying, but it's by the blow-ups. If you just are getting odds on your money and you just buy, it's a low-batting average high-slugging percentage quant model within an industry that is low-batting average, high-slugging percentage. And it is an absolutely terrifying-- That sounds scary, I don't-- or scary because there are blow-ups for a reason. And if you read any of the research, it's going to say that there are no prospects for the product. You just have to make sure that they have and we'll come back to cash runway later in this podcast, but you have to make sure that they have a viable path, as I mentioned, that defensive business model is only defensive view of cash. If they have cash to turn over the cards and see if their products work, then, yeah, buy them all and you just know that you're getting odds on your money. It's like buying all of the long shocks in horse racing. I know this is hugely variable to bear with me, but just to give the listeners a little perspective, let's say it's a one-drug company. Is there like a ballpark in my head, you know, is like, all right, this is preclinical, this is phase one, two, three, oh, is it like 50 million, 300 million, a billion, five billion, like in their head, like are there-- I know it's so specific. Massive error bars because of what you're-- however, let's just start from the--let's start with the end and then work backwards. And this is where I'm a keep it simple guy. We kind of skipped over my order, but I have limited biology and chemistry background. The irony is that you have the biology degree, I have the economics degree, and then we were ships in the night and I don't know, come on. So I got into this just purely from the game theory component of it. My first, I just wanted an equity analyst job on the street. I wanted to be on the buy side, and I finally got one. After getting through the first two levels of the CFA, it makes you a little more marketable, and my first job was as a junior analyst with large pharma. And I started analyzing the pipelines and just doing what I was told to do, and it wasn't all that interesting, because it didn't move the earnings numbers by a lot. But I learned that a lot of these products start out as single product entities, small companies that are trying out an idea moving fast and taking risks, and then big pharma would acquire them or partner with them, and then the seed at RS back in 2007 opened up. Then they went at it with the same view that a lot of generals go at it, and they're trying to find, you know, okay, I didn't need to be able to sleep at night, to find me something that's small as we were small cap investors, small cap growing and profitable. And I would draw that Venn diagram, and there was a unicorn in the middle, and not like the billion dollar unicorn, but that doesn't exist unicorn, because you couldn't have all those. You can choose two of the three. It could be small cap and profitable. That means it's not growing. It could be growing and profitable. It is way out of your market cap range, or it's small cap and growing, and they're spending, if they have any revenue, they're spending all of that and some on their pipeline, and that's what investors want. They want these companies to develop new drugs. As we work back, if you get through the phase three, you're probably going to be a billion dollar plus company, right? So this is how I would think of things. You can build a DCF, and you can tweak the discount rate based on how risky you think the program is. I paint all the biotechs in the risk spectrum, they're all kind of the same. So I use the same discount rate right now, you'd use like 20%, maybe 25. And figure out what the value is if they get to their destination, and then discount it back, and then I would handicap it by likelihood to work. That's just how my mind works, just began trying to get it into that poker bit, pot, pot outside thing. You know, years and years ago, I was sitting next to the lily CFO, I don't know, this is the same CFO, but I did acquired one of my favorite oncology companies, and I was like, how do you think about that acquisition? Then he said, five times peak sales. If I can get something at five times peak sales, I know that my reps will make money with it. And if that's good enough for him, that's good enough for me. There is some nuance, he's talking about these, the girls margin on these things, you mentioned tech, very similar to software. These, in the most, the vast majority of products are just salts, different chemical salts. And there are 99% gross margin, something like that. When after, after you've done all of the research, now you can just print these at a plant in India. I guess they're all going to be brought on shore now. But provided it is a small molecule with long IP, five times peak sales. If you have a shorter duration IP, you'll haircut that a bit. If it's something exotic like self therapy that is, you know, more expensive, longer sales cycle and lower gross margin, then you'll haircut that a bit, so, but I'll start with my steak in the ground is five times peak sales. So, billion dollar drive, five billion dollars if they get, that's what we'll pay for it. That's what I'll, in theory, pay for it. And then you want to discount it a bit back by how many years will you take to get to the point where big pharma would pay that multiple, so maybe it's a three year discount rate if they're in phase two. And then there's some great data out there that shows clinical trial phase by therapeutic category and the success rate. So what, as you mentioned, the CFA that was roughly 30% each, you know, each level compounds to 9% success rate, you would see like a 95% chance of, if you, if you file for approval that it gets approved, one in 20 actually get rejected. And a phase three, let's just say 75% of phase threes are positive in advance to the filing and then 40% of phase two's and then like 10% of phase one's in your compound that, but that can be your anchor point, that can be your reference point, if we're looking at, you know, an infectious disease product in phase two, I know that historically 60% of these phase threes are positive actually in that area, it's higher, like more like 85 or 90. It's the phase two's and infectious disease that are the gates. But I start there and then apply that handicapping to what, you know, big pharma told me they'll pay for this. There's an old biotech joke is that everything kills cancer in phase one, right? You just got to get it through, you know, that does it actually not kill the patient and as a tolerable, you know, I was looking at, there's like 300 biotech stocks out that are like above 100 million market cap and below five billion goes up to almost 500, if you include the kind of big mid large caps, that's a lot of companies. How do you think about even sifting through that? I mean, back when I used to pay attention to biotech, I used to always think of it's almost like mining in my mind where you have some execs and some people where it's like success leaves traces, right? You're like, all right, they've done this one or two or three times that at least cuts off the long tail of some fraudulent nonsense. But how do you make your way through so many, so many securities? Can you be a quantum in the biotech world? It's so difficult to quantify and I'll give you an example. Let's address that while you brought it up, a quantum screen, an example of a quantum screen that would try to put, once you say the Russell 2000 into quintiles, highlighting all the things that you love and your listeners love like ROI, buybacks, expanding margins, revenue beats, all of the hallmarks of great companies going back to what you and I studied in college. There's an example of a 63 factor model that works great for all things non biotech. 54 of those factors were NA, things like accruals and just not relevant, not anything they're trying to do, not anything they're ever going to do. And this is stuff that your friend Dan picked up on on that podcast earlier this summer. Then the remaining nine that actually are measurable are often contraindicators. This is what makes it so difficult is that yeah, sure, we all want buybacks, everybody wants buyback, all that stuff. Nobody in biotech is investing in a company for buybacks and return. Capital raises our part of the business model. And if you are to ding a company for that, now you don't know why in a vacuum, you don't know why the race happened. The race could happen because they're struggling or the race could happen because they just had exciting data and the stocks up 100% and they're going to and it should be up 200% and they're going to advance from phase three to phase three or the whatever positive factor just changed the fate of the company. Operating margins, Dan hit on this. Sure, we all want expanding margins. As you get closer to market as you're advancing this product, everything gets exponentially more expensive. You need to build up inventory for these medicines far ahead of launch. The clinical trials of phase three, phase one might be 10 million or phase three might be 300 million. I wanted to think of these as real estate projects. The mistake of a partially completed real estate project and it's not completed yet. You're not generating rent, but there's some value in getting through permitting, putting the foundation in the ground framing and but things could exponentially more expensive as you advance towards completion. So from a quant standpoint, really all you have to hang your hat on is EV to cash. It's just how much tech value is there and how much cash do they have. And then within that, how long is that cash going to get them? If all the $400 million is not the same to a company that's spending 500 or a company is spending 100 a year. From a screening standpoint, where do you start? In your right, there's 500 or so companies. This is one of my favorite questions for you and this is emblematic. I try to invest in what biotech is and not what I wish it would be. There's some numbers from a little while ago, but small cap growth biopharma, the weight, not the number of companies, but the index weight is 20 percent. Large cap growth, lily and the brethren, 10 percent. What do you think mid cap was? 20 percent small cap, 10 percent. That would be the obvious assumption. Back then it was 3 percent because companies don't live in that space. Yeah, because they hit their milestone or they get acquired. Right. So the assets get from small to large. Very rarely the companies get from small to large. Maybe there are five over my 20-year career that actually still exists. Vertex, Regeneron and El Nilem maybe are the three that are currently public. The vast majority, you have this bolus of companies that are small trying to get their assets to the other side and some sense they themselves are trying to get to the other side. And then you have these companies are there and they're really marketing companies for the most part of my opinion. Then you just have the earth of names in the mid cap space that are kind of in no man's land. Again, going back to why this space is so unique, the profile of those types of companies is vastly different even though they're in the same industry. As we've discussed, small cap companies are the tip of the tail, the highly risky ventures. The large cap companies, large biopharma are the most defensive of the defensives. Actually, like everything you're talking about is why people shy away, they say, look, these suckers are these binary vents, it's so volatile, I'm just going to sit this one out. Does that feel like? Colby, why don't you pull up slide to 11, but this is from Steve DeSanctis at Jeffries. I love this slide. This says so much about generalist managers that over a cycle of a decade, the idea that you would be secularly under way, a sector. The Dinger benchmark, boggles my mind, and they're consistently 20% underweight, the sector, at the peak of the pandemic, when biopharma was 24% to the benchmark, they were 50% underweight. And I would speak about this with our friend Brian Jacobs about how crazy this is because they think that they're being conservative. They think that their risk averse, a conservative biotech is risky, therefore I will not own it. But the reality is they're exposing themselves to tracking error. This is like driving on the highway, being afraid of traffic at 70 miles an hour and therefore driving 30 miles an hour. You are going to get run over. And when this is half to two thirds of the benchmark, this is like a kind of a dirty secret for the consultants out there. And they want to show their equal weight at the healthcare level. When you're 20% underweight, two thirds of the benchmark. When you solve for that, that means you have to be 40% overweight. The remaining share of healthcare, tools, diagnostics, medtech, which trade completely differently. So you have now opened yourself up to all sorts of beta risk and all sorts of tracking error that is unintended. Is this just like some sort of behavioral situation that's just going to continue to persist? And why do they do it? Biotech investment is very much communal. And we see each other at these conferences. We know we'll see each other in San Francisco in January in Boston in March, Miami in December. It's very much a movable. You guys also do a hilarious, it's like the flip side of the Wallach Beth in Park City. Running into you guys, running around Main Street in Park City, too. Yep, there's a lot of ski. There's a lot of risk-seeking personalities, really nerdy risk-seeking personalities in biotech. That's my people. I like it. Yeah. And there's almost like a therapy group for those of us who would have to deal with generalist PMs. There's a group there at one point, the analyst. These are the portfolio managers who are managing the billions of billions of dollars. And they're depending on the biotech analyst or PM for a lot of these. We manage our own specialty fund and then we consult on the broader fund as an analyst. And they were not allowed to use the names of drugs, morning meetings, because the PMs couldn't keep them straight. And it's like, that's just tacit admission that you should not be investing in the space. And it's like, look, you decide how much of this space you want to own. And then just let me pick the stocks. If you deal with the beta, I'll deal with the alpha. But these ideas all die in committee and this irrational risk of version where people call these things lottery tickets. And then I just see them trying to guess Nvidia's next quarter, Tesla's next quarter. Your description earlier makes sense is that if you view the world through a certain lens and a framework and that framework doesn't work for a subset of stocks, you don't know what to do with it. You're just like, well, if I can't apply my lens here, it just looks too variable. You need to be a PhD MD to do it a doctor and these things are too bald or too big of draw downs. And the reality is, if they weren't in benchmarks, most of these funds would not be investing in them. If you go to slide four, showing a bit of what I was just speaking about, I just started out, trying to figure out what it was this industry, what makes it move, what are the knowns, and then let me try to solve how to best invest in it. And looking at what biotech is and not what I wish it would be, we always they were dividend producing high growth stories that, you know, I've 1% volatility in a given month. That's just not the case. So looking at the Russell 3000 and I'm just defining small cap is less than 20 billion in the grand scheme of things compared to this is not the way the Russell defines them, but it's kind of small smid, but relative to Nvidia, these are small caps and certainly compared to Willie 97% of companies in the Russell 3000 are small cap in therapeutics. And biotech is small caps. And then within those 93% of those companies rely on outside funding to exist. Those are the companies that I just referred to that are doing the secondaries every 18 months or so. Where we are in the cycle now, if you go to the next slide, this was making the rounds on LinkedIn. This is an earthen young analysis and this is how much cash and maybe you asked this earlier, you know, I guess like, what's normal for these companies? They used to be that the right answer roughly, that you should go into each event with about 18 months of cash, you know, priorities have about a year of cash historically. This is pre-pin. Milestone driven right in their head, they're like, we need to get through the next thing. Yeah. I mean, the reality is these companies should be private. I mean, they really should be, or we should collectively fund a program to a Milestone, forget about it for a while. And then get the results, all get back in the room to a Dutch auction, figure out what the value is and then advance the company further. But that's just not the way it happens. These companies need exponentially greater amounts of capital, that capital lies in the public markets. That's why these companies go public. So this analysis by Ernst and Young's is the biotech survival index. They've been doing it. I think only as far back as 2016, something like that. But the last six years made the rounds on LinkedIn and people were shot, you know, pearl watching, 60% of companies only had two or a few years of cash. And as someone who's been trafficking in these ideas, when we were going back to the prior slide, that 93% of these companies rely on outside funding to exist. I saw 2020 and 2021 as the allies. The, you know, typically these companies to thread the needle, you don't want to dilute yourself, let's just say that 10 million and 300 million example, phase one, phase three. You don't want to raise $300 million at today's valuations before you know if the phase one works. The sweet spot used to be about 18 months of cash. You'd never want to go into it with less than one year and two years seemed a bit too much. There are rare examples of people pushing companies to return cash to shareholders because they weren't going to need it for the next few years. That's pandemic. The goal post shifted as the conveyor belt backed up. And the world started to require more capital that the two and a half years became the new 18 months to the point where, and this is a great slide, we go all the way to slide 14. This is the unsolicited advice, you know, part of the way is of low fee, paying mutual fund, portfolio manager, part of the way that I would get my access in the biotech world is to be an active participant that we were never going to pay Morgan Stanley as much as their prime brokerage relationships get. So to get in the room for any of these meetings, I would be an actor for that's been, and I took a lot of testing the waters meetings and the testing the waters meeting is a company that's thinking about going public, and they'll want to speak with prospective investors and get feedback on their pitch and find out if you're interested. So this is my unsolicited advice to all of these managers, and this comes from Jim Pergino who is a banker of Barclays, and he had this back when he was at Wells Fargo. He spoke to me, he relayed this to me at lunch, and I kind of drew the curve. So these aren't exact data, and so don't quote me on these numbers, but he said they looked back this post pandemic at share price responses to positive data. And that is a be up to suspend your disbelief for a moment that we're trying to hold constant positive data across all these different therapy to categories, three different phases, what is positive, what isn't, and but to the extent we could hold constant, these were positive data. What was the share price response? And if you had less than one year of cash, your shares went down by 40 to 50%. You did your job. You advanced this scientifically. But now you have a highly to now it's the dog chasing the car and catching it. Now what? Great. You ran this phase two trial. Where are you going to get the ex, think again about the real estate analogy? Where are you going to get the money to finish this project and the people who come in and take over this distressed, suddenly distressed project are going to get it at a discount. One that this is what was surprising to to Jim and me is the people that less than a year of cash always were punished for a telegraph financing. The one to two years, this used to be the sweet spot. And this is when you just asked the question my colleague, Paul asked this question years ago in a meeting and he said, is the science getting worse? And to anyone who's in the weeds and seeing the advancing and see advances in sequencing and what's happening in the, you know, publishing world about scientific advancements, of course not. However, it's an entirely reasonable question to ask because every stock is going down in spite of this quote unquote positive data. And again, that's because the capital markets were shut up. So even if you were in the sweet spot where you would thread the needle or between irrational delusion and having not enough money, your shares would still go down. And that one to two year. What's the answer is just take your medicine and raise more money. 100% and that's what we're starting to see. There was a period where people were wondering if this was a transient situation and you did not want to be the fool who, you know, raised during this panic situation. And there are, there are some of these companies that just happen to do their raises in every global freak out, like every, whatever cycle they're on, there's a one week freak out. But what's happening and one of the reasons that the biotech markets are healing is that there's being, there's consolidation around a certain amount of companies that are going to survive and go forward. And M&A has opened up a bit and companies are realizing that they're not going to be the only one to do this delutive race. And I wrote this little piece on LinkedIn just trying to talk to operators saying, like, look, I know you see this as delutive. But the reality is it's a creative if it gets you from under two years to over two years and then you can get value on your data that you're waiting, waiting on one of the challenges for a lot of people. They want smooth sailing and biotech on one off is binary for many of these, which is scary. And as the industry is a whole feels super volatile, also scary. So maybe you have the behavioral bias against it. Like what do you say to people that are all these active managers and folks that are scared off by this world? So there's a perception reality, but if you could pull up slide six, this is an example of a drawdown. This is going back to January of last year or two years, roughly two years of data here. But this is Apple. And this is what low did you touch after a 52 week high? So this is an example of an 18% drawdown and a 35% drawdown. Just in the, you know, this is my last year and that's obviously that most recent drawdown is on liberation day. What do you think, ma'am? The tip is incredibly consistent data. The main and the median are essentially exactly the same. Going back 25 years, the Russell 2000 growth. What do you think, the typical drawdown in the typical year, in the typical stock, all sectors, this, if you want to stock, your stock is at a hundred. It is likely to touch what we got 20, 25% that is a typical response and it makes a lot of sense. The answer is 50. I'm thinking my head, maybe I'm thinking of the index, I feel like the index is usually the average is like a down 15 or 20, all right, so down 50, average is 50. Okay. Okay. So now, what do you think biotech is? 80. Yeah. So that's a very worse than 50, worse than 50. It's absolutely right. Of course it's got the worse than 50. So it's 60. If you go forward to slide seven, this is the perception reality. So here I've carved out non-biopharmal, which is when you pull the biopharmal out, it goes from 50 to 48 and a half percent to non-biopharma as a 40% drawdown in a given year. Biotech has a 60% drawdown. Pharma, which is why, as I mentioned earlier, that I think of these as the same and when people say they want revenues, so they want in their therapeutic companies, so they want to sleep at night. Pharma is more likely to have revenues. You don't get any downside protection. So what I say is, yeah, small cap biotech is volatile. Absolutely. However, the first two words, small cap, drive 80 to 85% of that volatility. And to invest in these stories with asymmetric upside, you're only taking on another 12 to 20 to 20 to 25% more volatility to have the opportunity to make bags on bags on bags of money. So do we just sit around and say put in the orders down 60 for every biotech and that goes back to your comment earlier? So now let's go to the anatomy of one of these drawdowns. So this is one of my favorite stories. This is like a bond villain disease. These patients have a genetic mutation where they have this photosensitive toxin in their bodies that if they go out in the sun, they get excruciating pain. And as companies developing, they also have serious downstream issues, I believe it's liver toxicity. Companies also developing later on, they're developing or earlier stage, they're developing some anemia products, but for the most part, it's all about this product in EPP. And the anatomy of one of these drawdowns, the first one is phase two data that came out. It was just a misinterpreted street expectations were ahead of what they put out. There was a placebo effect, which would be easily sorted in phase three. You just do what's called a run-in. You put everyone on placebo for a month and then you randomized so that you get that placebo effect out of the way. But the share price was, you know, cratered on what was really good phase two data as history would bear out. So this was your buying opportunity. And if something's down 60%, what that tells me as a stock picker, I don't even have to be a world-class stock picker, to have assuming the shares for cover to be able to make 150% of my money if I'm just buying these fear events. And sure enough, in this example, the data came out, started to talk with the FDA about the path forward. And what you see that next gap up in a few months later, I think that's towards the end of last year, the FDA actually said, yeah, come on and file. File on the phase two data and we'll worry about phase three later. You made your 170% recovery company really should be more valuable than it was going in because they de-risked this program. And then all along comes the macro issues. So the first was company specific. And the second was Liberation Day that we saw that Apple traded off 35% over this period. You know, there's a higher beta story. Of course, it traded off more, none of its own faults, but just because it was similar to all the other stories, not because it was different. And again, you got just a fantastic buying opportunity. And then as of this morning, they had a good voucher presented to them as being a meaningful medicine. And that's, they get some money in their pockets and it shrinks the time to market. You get a 200% rebound from the April lows. This is anatomy of a drawdown. I feel like the best reminder who we had on the podcast and we've done a fair amount of work with over the years, talking about a lot of this research. He's got some great charts. We'll put the show notes, links, listeners, talking about successful companies. And this isn't limited to biotech, but Chris was talking about Apple, but the drawdowns they faced over time. And I think the staff for Apple is that every year it's been around. It's had at least 150% drawdown. And this is the biggest company, one of the biggest companies in the world. So it's interesting the opportunity this presented every year in a lot of these names. I mean, looking at this one, it's like you get your shots if you want them. Yeah, I think Nvidia was 50% just earlier this year. Yeah, 150 to roughly 40%. You get your opportunities. Now, let's talk about the broader market because not only are you getting, you get your odds on your money. This is why, yes, 100% should be starting. This is the time to invest in biotech in my opinion. The bottom is in, we're starting to see healing, M&A is starting to happen. The IPO markets will open, however, there are bargains on bargains out there and those goal posts of shareholder expectations of how much cash you need on your balance sheet. Now that the capital markets are open, now those can start to shift back and that chart that we put up with the, maybe you don't need two years of cash on your balance sheet to see a positive return because investors are confident that you'll be able to fund that next event. Colby, if we could put up slide 10, fourth quarter last year, but it's not that much different today. So this is, as I mentioned earlier when we're talking about quants, the only thing that you can really hang your hat on is EV to cash. So a player on top of this would be to buy cash by runway to see how many years of cash you have. That would be the fantastic way to do this, but this is just EV to cash. How much valuation is there relative to cash and small smid caps? Again, Jim Burtrenow at Wells Fargo started this, or when he was at Wells Fargo and I kept this going for a bit, but this is just the aggregate set that they were following. Where are they from an EV to cash 10 point, and we would view as a buy signal any time it would dip below that lower red line. And it's small funds. Roughly three times. Yep. Roughly three times. So this is again courtesy of Brian Jacobs layering on top of former podcast alone, Brian Jacobs, who's now at Aptis listeners, you can find his old podcast in the archives. All right. Keep going. We've found former returns from one of these points in time, and this is just valuation. If you're buying above those two red lines, you're seeing really 0% forward return. If you're buying between them, you're getting market-like returns. And if you buy the market below the red line, you get outsized returns. It's 17% compounded. Of course, that made 2021 look like a buy signal, and 2021 was a buy signal, not because of price, but because of cash. There are two ways to get on this chart, and there are two ways to solve this chart. You can either price come down or cash go up, and then going forward, you could have price go up or cash come down. So never did I think, my biotech investment career started in 2007. Or did I think we would see one of these generational opportunities like 2002. Then we got one. That's the good news. The bad news is that it stuck around for three to four years. But we're seeing the healing. There's all sorts of signs that the healing is going on. So the wind is at our backs. This is the opportunity to start putting new money into biotech. I can remember Brian Ransom from where we are, 1.7 to 3, you have like an 80% move before you start the 17% compounded returns. For the non-fros out there, say you're a financial advisor, say you're an individual. Are there any good resources or how can they even think about this sector? I mean, there's obviously the big two ETFs, the big weight and IBB, BBH are very heavy and the amgins of the world. I think they're market cap-weighted. Is there any way to think about it differently or resources if they even want to try to do it on their own or you don't do it? It's incredibly difficult. It's just an underserved space. There is no ETF that is really representative of what this sector is. For your contra-indicators, the XBI actually changed their inclusion criteria not that long ago to go up-cap and higher liquidity at exactly the time that you should be going down-cap and making committed long-duration bets. What the worm needs is more rational, long-duration, evergreen capital to invest in this space. The consultants are pulling folks in the opposite direction. If I had my money in a diversified fund or a diversified strategy, I would tell them that's in everything except biotech, because it's such a specialist area and then let me get my specialist, my biotech investment elsewhere, and the VCs are the ones who have the scientific knowledge and their LPs have the risk tolerance. This is really the same asset class and maybe this would be a good opportunity. Colby to go to slide two. The reality is that private biotech companies and public biotech companies are not that different. They're far more similar than different. We're trying to bring novel medicines to market, generate returns for investors, definitionally because there are a lot of them are seed investors that private investments skew earlier stage, VCs are later stage, but when you go public, it's really just another venture round. This line, I've drawn a straight line between the privates in public. The reality is that it's really a muddied fade and over cycles during the pandemic pre-clinical and phase one companies, we're going public right now, nobody can go public, so privates are holding later stage assets, but we're really trying to do the same things. An IPO or another podcast alum, Tim Leahy, our friend is at CFL. He would refer to a tech IPO which is generally an exit as a conflict of interest, where you're on these two paths that intersect at one moment in time, everyone's interests are aligned on the day of the IPO and then T+1, they start to diverge. That is true for tech, for biotech, an IPO is an entrance, an IPO is an opportunity for new investors with different durations to come in and help this product along on its journey down the conveyor belt to hopefully M&A. It's an entrance, it's not an exit, it's an on-ramp and what we need now, there's this wide golf between privates who are trying to keep their existing companies alive and the generalist who have withdrawn in really the M&A, the folks who are on the M&A side, and filling in that gap, with a combination, it's a perfect extension for venture capital money to offer the access to or to essentially the same asset class at a compelling, generationally compelling valuation. And see, outsides gains as the conveyor belt starts back up. I like it. You see a fair amount of, like I'm sure you do, a fair amount of crossover funds in the biotech world or is it tend to be pretty segmented between the private and the public? There were a bunch, there were too many going into the, because it was free money, going into the, you know, in the pandemic, during the pandemic and when I'm talking to the pandemic right into kind of 2021, the industry was more interested in creating public companies than creating the next product, you know, that was the front end of the conveyor belt. And crossover funds were clipping, you know, 30%, funding a mes round to, you know, boost the balance sheet ahead of going public and knowing that they could get liquidity on this and, you know, I think like another three months or whatever it was, but they were just printing. Now again, because the prior bear cycle was max, bear cycle for our generation was 18 months and now we're just coming out of four and a half years. The folks who thought they were long duration found out that they're not. And then the next group that thought they were long duration found out that they're not. However, for those who have been on the sidelines waiting for the, I wouldn't go so far as to call it the all clear signal. However, and I've said, I've said this in a few meetings that I'm still waiting in my career for someone to say the easy money is ahead of us. What I've strung together with the valuations where they are and healing market cycle, that if you have the duration, if you are able to sit down at a poker table where everyone has been there for a long time and they are very stressed and they got to go home and they're on tilt. And you sit down with the new big stack, you can clean up the duration is the big stack of the poker table. And if you were to combine that, you know, I rely on wisdom of crowds, you know, I'll talk to 20 KOLs and figure out a KOL, sorry, a KOL Stanford key opinion leader. These are the smartest folks and a lot of times they're the folks who decide whether a drug will get approved or not, but they're the smartest folks in a medicinal specialty. So I'll talk to 10 or 20 of these and get their feelings for the likelihood of a drug, having positive phase three data and you learn that they have their own biases, they never say 100, they hate extremes, they'll never say 100% even if they think it, they'll never say 0% even if they think it, you get moral outcomes, you get your responses, you get 25%, 75%, but on the whole, you'll get a pretty good representation for what the odds are of success. That a lot of times are really different than what the market is pricing him. And then because this is all qualitative responses, this is not counting cards like you and I used to do up in Tahoe and this is not, you know, playing poker with a discrete set of outcomes or only one card coming on the river, but these are qualitative outcomes. You know, I'll look for eight to one reward to risk. And then for a safety standpoint, I can cut that in half with my assumptions are off. I'm still making odds on my money. If I could, someone like me, who could be teamed up with some scientific medicinal statistical experts to hone that number and to reduce those error bars and to increase the confidence in what's coming out while understanding how the world works and that you're going to get these opportunities, things are really set up well for someone with that type of strategy going forward. And there are some VCs who are doing it. Some of the ones who are getting a VCs operate in this spend a dollar once, IRR, world view, that doesn't really work well for biotech or certainly for public markets. You end up looking for a very specific type of outcome, which is really a double to bagger over the next 18 months, like that's what solves for, but you get these perverse incentives with a model like that and the spend a dollar once. If it names down 90%, but you know, it's worth zero, you should be selling to save that last 10%, but if you have to return that and that gets marked against your other products, your incentivize to just let it ride conversely, you know, let's just say you have this mapped out where something's worth 10 bucks at phase one, 20 bucks at phase two, 50 bucks at phase three, and you take a stake and all of a sudden it moves up to 20 and phase one. And so you're getting phase two, money on phase one, you should do, definitely you should take some money off the table. But again, if you need doubles to make the math work, you won't do that. So there are folks who are, or you see them that they start out with their first fund is really their opportunity funds, their extensions, they're either funding their prior names that are struggling a little bit or it's an extension of the same pool of capital that they have. Do they have to follow this IRR, spend it all or once platform or strategy when they raise fund two, they hone that a little bit when they run fund three, they further optimize it. But really what you need is long duration evergreen capital that's committed to the space. You know, this is the endowment money. This is the stuff that I know you love, sovereign funds, it could come in and invest in this space of confidence where they can write out some of these cycles again, knowing that you're getting in at a generational low. We're going to have to name this episode, the easy money is in the future. I'm definitely going to use steel that and try it on TV the next time I go on, you know, I had a similar pet peeve comment where people always said in these volatile markets in these uncertain times and I'm like, bro, when does anyone ever come on here and said, you know, in these mellow times, these low volatility, I mean, for a while, the VIX was pegged at like 12. I'm like, you can't call these volatile times like these are the least volatile, the most certain times. So I tried it once and the hosts, you know, half time are paying attention. So I said, look, in these kind of low volatile certain times that I went on with my statement and nobody paid attention, but I was quite proud of myself. So next time on is the easy money is soon to be made. That's going to be crazy. Easy money is in the future. Easy money is in out of us. The other one that I love is I wouldn't buy a position today, but if you already hold it, hold, hang on to it. That's another one of my favorites that the trading costs are really what you're worried about between buying something today and we've been trying to like people that this giant behavioral bias that we've been dealing with for this year or there's so many people that have made a ton of money on a stock, a group of stocks like the mag seven. And because that's what's brought them here, they don't want to sell it. They're like, well, I should hold a concentrated portfolio. Then you show them the historical research on why you should absolutely not hold a concentrated portfolio. And it's a terrible idea on average, you know, there's always the outliers. And you ask people say, look, here's your portfolio. Let's say you got 10 million in video and it's like your whole portfolio. And let's say magically you could sell all of it, defer the taxes and you look at your account tomorrow, your shrub account, got 10 million cash. Would you go by 10 million in video and not a single person ever would ever say yes. They're like, no, are you crazy? I'm just going to put, I'm going to yolo all my money in the Nvidia. You're like, well, that's what you currently are doing, my point of view. What are you doing? So, yeah, it's a reality in the biotech world as well. The people have that there is a shocking amount of, you know, buying high and selling low. Because you have these uncorrelated moves and you're like, well, mine is here and I'm looking at the other one that's going up there. The benchmark weights play into this. We can get into some stories. But there is a flywheel effect that keeps a lot of these companies going. Mentor, you've been on the the equal weighted versus market cap weighted hill for a long time. And I agree with you in so many ways. There are so many generalists who look at an elevated market cap and associate that with a lack of risk that if we're looking at two companies that are in the oncology space, one is four billion, the other is two hundred million, the two hundred million dollar one is the risky one. And it's the reality is that the four billion dollar one just has further to fall if things go wrong, assuming, you know, other things are roughly equal. And they often have a non-committal shareholder, shareholder base that they've, the specialists have moved on. I see this a lot where they move to the next emerging biotech and the company has a setback and they're just in this no man's land between maybe they have a year delay in approval and they just get overly punished because the generalists are like, whoa, I thought that I thought this thing was de-rest and the specialists have moved on and these opportunities just are presented to us. Tell me a little bit more what you've used the same as a class, some of the different perspectives VC, public PM. I'll tell you a funny story. I was down in Mexico at this group of primarily San Diego based operators and VCs do a surf-based retreat every year in Cabo, the Cabo surf hotel. I was invited to it. It was one of the only investors, it's really not a lot of investors, it's primarily for private VCs and operators and I was invited the incredible surfers. So you've seen me surf, actually you might never have seen me surf because I'm usually riding on my stomach on a wave, but you've seen me slosh around in the water. These guys are world class surfers and they're also incredibly intelligent folks and some huge and important companies that come out of this group. So I'm coming off of three days there and I'm actually like excited to decompress, I get on to the plane and the MCC next to me fills up with a guy named Amir Nausha and Amir was one of the three heads of the group, he's a VC out of Boston, an incredibly intelligent and thoughtful gentleman, MIT educated and he just wants to talk. He loves to talk. He asks great questions and I just want to stare out the window and I was so intimidated being at this conference. This is probably 12 years ago now, some of these guys are my best friends but including Amir. Amir asks me, how do you think about investing in companies? So I went through everything that I've been laying out for you here that I'm trying to think of it as a poker hand that I'm trying to figure out that last card, what are the odds that it's a jack of spades that I need to complete my hand? How much is it going to cost me to see that card and what do I get paid if it is and what do I lose if it isn't? And he thinks about that for a second and he goes, huh, you know what I do is do everything in my power to make sure that when that card gets turned over, it is the jack of spades. And your worldview is entirely probabilistic and my worldview is entirely deterministic. And that is the difference between between the privates who have board seats and are committed and they see underneath the hood and the publics who well we're doing is we are training. We are accepting imperfect and imperfect information set in exchange for liquidity. And as a consequence, we have to deal with these issues being marked to market every tick mark of every day, which they shouldn't be, but they are. And you know, that stuck with me, Colby could put up slide three because I tried to show this, this, this, these two just diametrically opposed viewpoints that are really trying to accomplish the same goal, advance these medicines, see them in theory and really in practice. We are a community of biotech investors, you know, we were not so different you and I, the privates and the publics, but we are a community of investors who are arbiters of meaningful medicines and helping ensure that the most exciting medicines generally defined as valuable monetarily, but the most exciting medicines are the ones that get the capital and the attention to get to market, but we're doing them from completely different points of view. So you know, as we talk about biotech, I feel like most people in their heads are thinking you ask, but as we've seen with NOVO and other biopharmaceutical companies and, you know, this is a global market, how often do you look outside our borders and what do we think about China? Yeah, so you tip my hand with that last part of the question, but until let's call it six months ago or a year ago, the vast majority of innovation is happening in the US and even NOVO, yes, NOVO is the European company, but ADR, a lot of these companies, the European pharma companies are headquartered in or do a lot of their business in New Jersey and vast majority of the trains and ADRs and your US exchanges. There, I would actually say that it disproportionate of money that I lost over my career was on ill liquid ADRs, European and Australian, so it's just safer to invest in the US where investors, I would just say are more savvy and we all agree roughly on what these companies are worth. There is a bit of an arbor that you just don't get the value in Europe, but if you list in the US, you can bump your multiple a bit. There are some weird acquisition rules and limits in Europe for some of these companies, so they can't be acquired in the same way that the US companies can. So it's just there's enough opportunities in the US that we really don't need to look elsewhere, except for China of late. So more and more you're seeing in licensing of companies or of products from China, you know, there's me two types up, there's also really good innovation going on and the FDA is increasingly accepting of research studies that are performed in China. Summit Therapeutics is a great example of very successfully mentioned earlier about these trails of investors that have made money. The guy, Bob Duggan, who is behind Pharmacyclic, which is one of the biggest, most successful stories of our generation, great book for blood and money that folks can go out and read and see what it's like to invest in biotech companies. He's doing it again with a Chinese asset, a version of Merck's KTRETA PD1 Cancer Drop. It's by specific and out of China, in license it, the rights and now it's a, geez, I don't have to look it up, but it's like a 25 made by Duggan, actually, maybe much more than what Stuart is, that $15 billion company that kind of had a nowhere. Anything got you hot and heavy for categories within biotech? I feel like, you know, you see certain product pipelines and ideas and developments or anything you particularly would avoid as well. Well, in general, you're looking for low capital intensive, predictable results. So, what we would refer to, high capital intensity is science projects where there's a lot of overhead. We don't know what we're really solving for to technology and search of a use as opposed to single product stories in an existing therapy to category where you are meaningfully moving the ball, you are advancing the ball, but you're not plowing the road yourself. And the market likes single product stories, the specialist investors like single product stories. I believe the generalists over value platforms and they over value multi product stories. We're really looking for things that are going to get acquired. I mean, that's the end of the day when a story gets acquired, it can't have a 50 or 60 percent drawdown or moral like we mentioned happens typically. So single product, small molecule, bi-specific antibodies are having a day, things called antibody drug conjugates, which is antibodies are very good at targeting something, but they don't do a lot when they get there. If they can carry a payload like a chemotherapy, that's the best of all worlds where you're getting the chemo only to the tumor, but nowhere else in the body, no chemotherapy as a treatment really as a scorched earth, try to, you know, harm everything in the body and the tumors not going to be able to bounce back the way healthy tissue will, well, if you mount this onto an antibody, then you don't to worry about that contagion or collateral damage. On top of that, there's radiotherapies. So beyond a chemotherapy, now you can deliver a radioisotope directly to a tumor. And then anything that triggers or harnesses or wakes up the immune system is always interesting because it's a catalyst that gives the body to heal itself. I like to, you know, I love my analogies, but, you know, cancer is just something that's growing that is avoiding detection. It's either avoiding detection by the immune system or it's, it is detected, but the immune system is not activating against it. So there are things called T cell engages, it's a, you know, a bi-specific antibody will grab onto the tumor and it will grab on to the immune cell and it will bring them together. It'll be like, look, you fool, the tumors right here in front of you. And then maybe if you put a pinch of some other cytotoxic agent in there that will just break the, the tumor up, now all of a sudden it will recognize some of those bits as foreign and you'll get a great immune response. We are in the golden age of biomedical advancement and that will last until tomorrow and will be an even better age. Science is advancing incredibly rapidly when we would invest in companies like Illumina and the ecosystem that is helping to develop these drugs. I would refer to it as Moore's Law, running on a moving train, that because you're getting the computational benefits of Moore's Law and then all that they're figuring out the chemistry and now it's really become a big data problem. There was a period back when we were doing our Illumina investments where the fiber, the networks, the fiber optic cables were not big enough for Harvard to talk to Stanford and they would have to mail. We had a 10 gentle investment, I wish I knew the name, but it was these solid state hard drives because they were mailing petabit drives from Boston to Palo Alto and back and we made some good money on that 10 gentle investment. But now it's returning biology to bits and it's a big data problem. Where does AI fit in? It's something that's obviously soaking up like 80% of the VC dollars. It's obviously a lot of hype. Is this something that tentacles kind of making its way into the biotech world? Is there an excitement about AI as a potential accelerance to drug development or is this still a 10, 15 year problem is just going to generate more leads? The answer to everything that you just said is yes. It's an accelerant, it's not a panacea. Of course we're excited about it, but I've also been hearing about AI for five or ten years in the space at the end of the day, you still need to run the trials and show that they were in man and they're just the gold standard of a double blind placebo controlled trial is not going away anytime soon. There are some nuances right to try as a thing. We're being a little more thoughtful about look if it's safe and we think it works. Let's start giving it to patients and but continue to monitor them and collect data. No benefit for AI is going to be in drug screening and molecule creation and a bit of heavy thought of this and then that's on the front end. In the middle it will have some benefits in trial design and trial execution. What I mean by that is it used to be that big pharma was not interested in finding the 10% of patients that their drug worked in because the other 90% would stop using their drug. What's the goal? Why am I going to drop my, if I can give, I'd rather give my pill to all the patients and then it works in the 10% rather than just that 10% where the market is headed in regulatory environment is headed and has the working towards like no, let's just look at these specific drugs and they put financial incentives in. Let's just what is the subset of patients it works in and let's just study them and let's give it to them. AI is going to be helpful in identifying those subsets of patients. So in theory a trial that had 70% chance of success without AI will have a 77% chance of success with AI because you're getting the right patients in and you're keeping the wrong patients out. The problem is that every one of these trials is an end of one. It's a two to four year cycle. So it's not like you get a lot like what really is the difference between a 70% chance and a 77% chance of success when you only get one shot. Yeah, throughout my career I would handicap things at 80% they would work and then you get an out of boy and you're like, all right, but was my work right? It might have been 20% chance to win and I just caught a good card and on the flip side something was 30% chance to work and it didn't or it did and you can't, you just don't get enough reps in a large enough data set which is also what makes it just a forever continually interesting and fascinating space for me to invest in because I love that. And it's optimistic, you know, I mean I think spending time studying some ad company that's optimizing ads is a little less exciting than getting to spend time on life changing ideas. Regulatory obviously plays a role with kind of going on with drug pricing. I feel like it's always in the news. I imagine that mostly affects the downriver sort of larger caps products with sales currently. What would any general thoughts? Yes, so there are two major things that are going on in the as far as regulatory uncertainty and the markets obviously hate uncertainty and again, biotech is the tip of the tail. So any uncertainty, the shocks, biotech feels them more than others and the two primary issues are the inflation reduction act IRA going back to Biden's administration and that was changing the rules on IP duration or friend in our example of the large pharmaceuticals who's willing to pay five clients, peak sales, he's only doing that if he knows he's going to get 10 years of sales out of the product. Once you start to change those rules, the calculus changes. So that is part of the reason that M&A stopped is that what we don't know if we're going to get our money back on these things and we don't want to be the one to just pay it up in our cot, you know, paying for yesterday's rules when they've just changed. The other that's more current is Trump talking about most favored nation pricing and essentially what that means and I'll bring it to speed pretty quickly here, but drugs are developed for the U.S. market. I just learned that that cabaya retreat we have content and one of the speakers is unpricing and they said that when they used to do their calculus on the value of a drug the U.S. was like 50% of the total value. Today it's 80% and that's primarily because prices have increased in the U.S. and they had not increased elsewhere, but from a Game Theory standpoint, if you're developing a drug that 99% gross margin product for the U.S. and you make all of the math work on the U.S. and if you can sell it in a discrete market, a segmented market, you should, you could sell it for anything and make money because it's a 99% gross margin product at this point and it's not and it's not able to be if you remember from Hillary who talked about drug reimportation this is by some of us would get our medicine from Canada and wherever we go seek things out or when I'd be in India for work, I'd bring some medicines back for me and my family. What Trump is saying is look, whatever you are charging for any lowest price in the world we're going to get here and that is incredibly disruptive. You saw fires were just cut a deal to try to solve some of this. What I think is interesting about that, well there's two things that go on. The immediate reaction, if 80% of the value is the U.S. and you're talking about that, you don't want the tail to wag the dog, so if that 20% could ruin my 80%, I just won't launch products outside of the U.S. that's easy, that's going to happen. So now there's going to have to be some level of negotiation from other countries and whatnot. The other thing that's very interesting and it's getting this M&A wheel going again, the flywheel going again is that it's the products that are the products that are developed during this period of uncertainty, those are the ones that are going to be affected. Once the rules, once this is all sorted out, these other assets you're going to be able to, you're just going to come up with the most rational price and the most rational geographic areas to launch these drugs, it will get sorted and the uncertainty will abate and the multiples will return and the conveyor belt again to continue that analogy will continue to hum. What's interesting for me, sitting as a therapeutic size, we hear about drug prices. So as I'm a headline and it's because it's easy to run for Congress on lower drug prices for your sick babies and your sick parents, what share of healthcare spend in the U.S. is pharmaceuticals, do you think? I was going to say, 20% you did not get it within 10%, it's nine, nine. I was going to say 10 and then I was like, there's no way that's right and I was trying to think of like, within once I said 20, I was like, oh no, it's going to be like 80 because I was like, what are we, I then I was like, oh no, a lot of hospital, a lot of late life care. Yeah, it's like 40% of healthcare spend is on end of life care. It's, I understand why it happens, but it's, it's, it's crazy. But I was having a conversation with one of our friends just last week and we're discussing this and like, wait, pharmaceuticals are a part of the solution. Like, like, let's just, let's just think about obesity and the glib ones and, and all the just from a mortality benefit and what we're spending on them, they are part of the solution. And just that I was looking at the healthcare administration, I forget what the number was, but it was the estimate when you distilled it down, the estimate of just redundancy and inefficiencies in hospital administration is 9% of healthcare spend. So that if we just focused on efficiencies, we could have all of our drugs for free. And so they're not, you know, they're not going to stifle innovation, they're going to figure out the uncertainty, the rest of the world 80% is not fair. I understand how we got there. And there will be some negotiations to get some of the other countries to start picking up some of the R&D dollars. But in the meantime, there, as you mentioned, there are 354, 400 public companies, public biopharma companies, you know, over $100 million, there's way to wait until the, if this market continues to return a rebound, way until you see the rebalances and these, in these benchmarks come next year. And that the folks who think they can, this is when the flywheel starts happening. They think they can ignore and as I showed that slide where the folks are 20 to 50% underweight therapeutics, you have been right for the last three years. That is started to change. It's up in the last six to nine months. I thought it was beating the S&P and bioretext beating all of healthcare. And you know this game with the market cap. There are just so many companies that are still public. And there was so much delusion that was done over the last two or three years that I look at these guys. I've gotten back into investing after I took two months off and Jenna and I went to Scotland and then I could got back here and I started waking up earlier and earlier and putting my PA to work and I've been getting back involved in revisiting companies and like I see some of these companies and I'm like, wait, that $4 stock is a billion dollar market cap and it's because they've had to do these dilutive raises to stay alive. That aggregate market cap and these companies that are either shifting from value to growth, which is just cheap to expensive and the breadth of this lift. The peak weight in the Russell 2000 growth was about 24% during that 2020, 2021 period. This is by weight. I think currently it's in the 10 to 12% level. That is coming back. And then you're going to start this whole cycle of reluctant investors who are going to start with the top of the benchmark and go own, don't own, own, don't own, own, don't own and just, okay, just, oh, I just, I just need to own the, you know, the top 30 names in the benchmark and it's, it's, you cannot solve this space without active management. You cannot solve this space without duration. Next time we have you on, we're going to force you to do some picks. It's shorting a minefield and biotech. I know people that will do it, but it's pretty tough. I mean, the right way to do it is to, it's a short ETFs and the banks will put together baskets for you, but you know, you're already running with a, you know, I run with 40 to 80 names and that if you have two shorts for every long, like these aren't your, your fading themes, your fading and there just aren't enough companies. And then just with the asymmetric outcomes, the shorting is, I've been doing the individual name shorting because I can't, I've never been able to and I'm enjoying it. I'm doing it also just to build up my skill set, you know, a hedge fund is in the realm of likely landing spots for me and there is this, I think, unfounded bias against folks who have not shorted individual stocks versus, you know, when you're managing to a benchmark, you are a long short. If the benchmark owns something and I don't, I am short it. The difference is that I cannot press a short. So the right way to think about this is the game theory. This is when you're, you know, once you're, once you introduce a benchmark, you are no longer investing. You're solving for a game. And this goes back to when I was a TI craft, we had these sector neutral portfolios. And so we would do big pharma. We had our own pool of like $500 million that we would manage it in big pharma. There were five names, maybe six. Pfizer was half of the benchmark. So the first thing you would do, this is just the logical, this is just a decision tree. Your first decision was Pfizer, not Pfizer, like the, like, Silicon Valley hot dog, not hot dog, Pfizer, not Pfizer. And if you thought that Pfizer was the best name out of those five or six, your job was done. What you could get is 50% tracking error. And if it wasn't, then you went short Pfizer and you went to the next one, which was like Bristol or sharing pile back then or wild, and you just went systematically down there and you figured out what your portfolio would be now enter the Russell 2000 growth benchmark. It gets rebalanced May or June every year. We start to get the information in May and then in June of one day, you get this big shuffle. And the rational way to go about it is you are dealt eight, I love my poker analogies. You are dealt a hand of shorts and your decision is, will I cover that short and go long? Or will I accept the exposure to it? The problem is that you can find the best short in the world. But if the bench only owns five bits of it, you can't, and you're running with 70-bit positions or, you know, you can't come up with enough of these and you can't press them that you are just really handcuffed, irrelative to being able to come up with your own bespoke short basket and then bet against it, you basically would, you know, shorts are, yes, many of them are generating alpha out of their shorts. And if they're doing an biotech with the asymmetric outcomes, God bless them. But really what they're, what a lot of them are doing are creating your own custom benchmarks to then, to then judge their long portfolio against. And it's a source of capital, you know, I don't necessarily need, I don't need that name to go down, I just needed to go up less than, you know, what I've, what I put that money into. What's the recent example here? I don't give you a real time one. This is just a couple weeks ago, it's called Moon Lake, it was a SPAC, they're basically looking at a longer acting safer version of existing immunology drugs. And it was widely owned. It's about a four billion dollar name. And data were coming out in September and to the quarter. And the data came out on a weekend on a Sunday and they were murky judges against the placebo. The absolute rate of resolution or improvement in this disease, first of many diseases that they're studying, absolute level was actually kind of fine. But from a placebo adjusted, you give the, you give the, the placebo to the control arm. How did they do? When you do active minus control, the one was statistically significant, but underwhelming, effect, certainly relative to other, the other drugs that are approved. And the other of the two trials that read out actually was not statistically significant, stock traded immediately to cash, which was down 90 plus percent. And I'm sitting here now is just, you know, armchair, shade tree investor, freedom to operate which I make a love. And I'm seeing this setup, but I know how widely it's owned. And this is going right into the end of the quarter, it's amazing when you think about this long duration money and how much calendar effects comes into play. But if something, you know, a delay shifts from November to February and a trial reading out, that does not impact the MPV of the asset by very much, but to Joe hedge fund manager who needs to make his number, that matters. So this was going right into the end of the quarter. And I see it this setup and I'm like, oh man, this is going to be, you know, all time. And you could bring up the stock chart, it's MLT act, you're going to have to squint your eyes when you see what happened afterwards. But because this was, you know, this is going to be a get it off my books trade because the PM's just don't want to show this in their holdings, that they lost money and even now they're going to have to, you know, if it was meaningful enough, they're going to have to put it in their, you know, they're going to have to report it in their commentaries. But, you know, just the all time, at a minimum, a dead cat bounce is coming. But at a maximum, there's a path forward for this drug and sure enough, you could bought it September 29th and 30th, the six handle on it. And it got above 10 bucks, it now is starting to find its way. But K. Allows folks are just trying to develop medicines and treat their patients said, this is a quote at one of the conferences I was at, it was that folks on Wall Street, the only people who care about placebo adjusted results. And I understand why you should be comparing this to a sugar pill. But we don't care about that. We care about treating patients and this drug is going to get approved. And it's going to be standard of caring these patients. That was her opinion, that is not, you know, fact, but not only should it not, you know, from 60 to six, not only should it not be it, if it's got a path forward, if it gets approved, not only should it be a 60, but something like that should be, obviously they were, it was not pricing an approval away on phase three data. And, you know, this is the, these are the opportunities that we are presented with on the regular in this space. It is just such a fascinating space to invest in. Chris, most memorable investment, good bad in between. Yeah, I'll tell you a good one. There are a lot of bad ones as well. So back 15 years ago, we really started to pivot and go from these risk averse to investing, what I think was optimally and correctly in the biotech market. There was a story called, a company called Pharmacet. And Pharmacet was trying to develop a product for hepatitis C. And hepatitis C for those of you who don't know, it's a baby of a myrrh disease, I called it drug sex and blood transfusions. And it lies more or less dormant in your body for 20 or 25 years and then all of a sudden it starts to affect your liver and you get cirrhosis and you die of liver failure. So you have time. It's a very unique space where you can find out if you got hepatitis C today, you have time. So there were all these patients who were waiting and warehouse waiting for the next best thing. And there was a product that Pharmacet was developing. The Alphanumeric Code was PSI-7977 and it was a nucleoside inhibitor. And I love analogies, I need analogies to think of this high sign stuff, but it's really its goal was to be used in combination with other drugs that were interrupting the replication of the DNA that the virus would gain resistance to those drugs. Well, if you added this Pharmacet drug, it would prevent the resistance. So I thought of it as a full back, a full back that could block for the running back that was really going to do the work and advance the ball. And they did some real smart things, they let they they sign these non exclusive development partnerships where they would lend their drug out to everybody else and let them play around with it. But there's it was non-committal. And the CMO, our name is Michelle Berry, she's a fantastic woman. She would told me we had this metric that once we get it in 400 patients, we know it works. In infectious disease, really interesting that if you know you're interrupting something from an infectious disease standpoint, and you're going to know early on, it's all about whether it's safe or not, if you can get it into humans in enough of a concentration that will work without doing something else. So she gave us this metric of 400 patients. If once we got to 400 patients, things were happy. So that's all we were really monitoring. We knew it was going to work. We were just monitoring it. When were they going to enroll 400 patients and we kind of get the all clear? So this advanced through phase one into phase two. We got our 400 patients an hour, so we knew it was safe. And it turned out, this is, you remember these moments in your career, this is back when you used to go to things in person, but the AASLD, the American Association for the Study of Liberty Diseases, was here in San Francisco, right down in the Moscone Center. And we're in the room and they were revealing the results. If you've seen the fugitive, it's just like the end of the fugitive where you're all in a conference room and they're releasing a result. And they released the results and this drug on its own had 100% cure rates over all the variations of the disease. So not only was it not the fullback that was, I thought of it as like Tom Rathman, that it was a fullback that could also run the ball itself. And throughout the auditorium, there were ooze in aas. And these are generally an introvert of people who shout out when they see data on the screens at a conference like this. And the socket already moved quite a bit running into it. For some reason, the socket did not move, and despite these perfect data, and two weeks later, Gilead bought the company for $11 billion. And going back to where we got in, it was a 20-bagger by market cap. I don't know if it was a, obviously there's a lot of delusional in the way, but I was proud of the fact that we participated in every secondary along the way, that I feel that I'm helping the company out if I invest directly with them. And I'm solving their needs and I'm also solving my needs because I'm helping the company get further to the right on that cash runway curve that we looked at earlier. And then when I go out and talk my book and go to ideas and earths, if people want to get, if people want to invest, they got to go buy the shares on the open market from somebody else and drive the share price up. And now for me. So amazingly, Gilead, this is the most expensive phase to acquisition of all time, Gilead's stock traded down on the news of the acquisition. It was a little out of their wheelhouse, not in their HIV primarily. So it was kind of 10 gentle. Then somebody, a friend of mine had a bet that they were going to pay for that acquisition in the first full year on the market. And sure enough, when that drug was approved because it was so good and so safe and all these patients had been warehoused and were all of a sudden in need of it that they did. I believe $14 billion in revenue, the first full year on the market, Gilead ended up not beyond the cash, $100 billion of market cap gain really attributed to this acquisition. We're a billion here, a hundred billion there, you're talking real money. I know. Yeah, nothing in the trillion dollar world now. And I still am wondering. So Michelle, I consider her friend, she met her husband, who is IR for the firm. And I'm still waiting for the Disney movie about her life that she cured a global pandemic and found love in the process. People want to keep up today with Chris. What's the best place to find you, is it linked in? Yeah, I'm not a big social media guy, however, I've started to, you know, I know that I'm free of the compliance restrictions. I've started to write a few things on LinkedIn, some of my thoughts. These are some of the things I would tell companies through testing the water's meanings over the years. I'm just kind of giving out this free advice, which is probably worth what you're paying on LinkedIn. I've been doing some, I left a lesson victory in May. I've been doing some consulting here and there for some of these smaller companies that need help thinking about a path forward, some of the things that I spoke about on the pod today. And then, you know, I've been thinking about where I can get back involved in the biotech ecosystem at a point in my career where I want to a facts meaningful change. I do see this as a generational opportunity that's not just for investors, that's for operators as well. So I would bet, I am betting, man, I would bet that I resurface in one of two capacities. One is in an operating role, helping one of these exciting biotechs navigate the waters and dealing with folks like me and my brethren on the other side. And the other is managing a pool of capital that is excited and interested in investing in these types of companies and is not a, you know, not a reluctant investor investor, but a real active long duration biotech investor that wants to solve that wide golf between the private money that we spoke about in the generalist money, you know, that has really withdrawn from the from the market. You got an email address, people can find yet. Yeah. CW Clark bio at gmail.com. Perfect Chris, it's been a world one tour, thank you so much for joining us today. Thanks, Matt, years into making and I really appreciate you having me up. Podcast listeners, we'll post show notes to today's conversation at mebfavor.com/podcast. If you love the show, if you hate it, shoot us feedback at the mebfavor.com. We love to read the reviews, please review us on iTunes and subscribe to the show. Anywhere good podcasts are found. Thanks for listening, friends, and good investing.