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7investing Lead Advisors Simon Erickson and Maxx Chatsko discuss a handful of big reveals from the first few days of the 2022 JP Morgan Healthcare Conference.
January 13, 2022 – By Samantha Bailey
There aren’t many single events that bring together a Who’s Who list of the leading private and public companies in biotech and synthetic biology. The JP Morgan Healthcare Conference is one of the rare exceptions.
The annual event, held every January, is one of the biggest stages for companies to reveal innovative new products in development, announce acquisitions, and form landscape-shifting collaborations. Investors were left wanting more after the 2021 meeting, which was relatively subdued due to the coronavirus pandemic. The first few days of the 2022 event seemed to live up to historical expectations, with a handful of companies making splashy announcements so far.
In this episode of the podcast, 7investing Lead Advisors Simon Erickson and Maxx Chatsko sit down to provide quick takeaways on some of the biggest reveals from the beginning of the 2022 JP Morgan Healthcare Conference. These include:
The unveiling of a long-read DNA sequencing technology from Illumina (NASDAQ: ILMN) and an enzymatic DNA synthesis technology from Twist Bioscience (NASDAQ: TWST).
Molecular testing leader Exact Sciences (NASDAQ: EXAS) used the stage to reveal that it comfortably beat full-year 2021 guidance and jump into hereditary cancer testing.
Meanwhile, Beam Therapeutics (NASDAQ: BEAM) announced a research collaboration with Pfizer (NYSE: PFE) that had an unusual structure.
Simon and Maxx also share their thoughts on the slow pace of merger and acquisitions (M&A) in drug development in the last two years — and why record cash balances and a constant need for innovation at the largest companies suggest that could change in 2022.
Publicly-traded companies mentioned or alluded to in this podcast include Beam Therapeutics, CRISPR Therapeutics, Eli Lilly, Exact Sciences, Illumina, Intellia Therapeutics, Invitae, Novo Nordisk, Pacific Biosciences, Personalis, Pfizer, and Twist Bioscience. 7investing’s advisors may own positions in the companies that are mentioned.
00:00 – Introduction
01:00 – Announcements from Illumina
06:38 – Simon and Maxx’s long-standing bet regarding Illumina’s market cap
08:51 – Announcements from Twist Bioscience
12:53 – Announcements from Exact Sciences
15:16 – Announcements from Beam Therapeutics
20:19 – Does Maxx predict future acquisitions in biotech after the JPM?
Simon Erickson 0:00
Hello everyone and welcome to today’s edition of the 7Investing Podcast. I’m 7investing founder and CEO Simon Erickson. I’m joined by my colleague 7investing lead advisor Maxx Chatsko. Maxx I heard it’s a balmy day up there in Pittsburgh for you today.
Maxx Chatsko 0:14
Yes 40 degrees Fahrenheit, not Celsius. With Anirban on the team you gotta always differentiate between two. But now you can take your second winter coat off Simon. So pretty nice.
Simon Erickson 0:24
That is a cold day for us down in Texas and not so bad I guess for you up there in Pittsburgh. But everyone, we’re not here to talk about the weather. Today we’re actually gonna be talking about the JP Morgan healthcare conference. Going on right now. Always a big event. Always big announcements that come out of this, certainly of interest for you, Maxx who follows life sciences and healthcare. And you’ve spotted us up with thus far, a couple of the big reveals that you’ve noticed out of JP Morgan this year. I’d like to just kind of walk through those one at a time and let you tell me what you think of all of these were the first thing you mentioned was some announcements from Illumina (NASDAQ: ILMN), a company is really famous for its genetic sequencing machines.
Maxx Chatsko 1:00
Yeah, Illumina had a number of different reveals, and it’s this feels. At a high level, the JP Morgan healthcare conference feels like it’s back, you know, like years ago used to get really big reveals really big things. Right? The $1,000 genome was announced at a JP Morgan healthcare conference years ago. And this one just has a feel like all these companies. We’ve seen valuations rise, and they came out with some really big announcements, maybe to try to justify those or steer investors to like what to look for in the coming years as well.
So Illumina had another big JP Morgan healthcare conference. Made a number of announcements. The first was for Grail. The first we’re going to talk about anyway. So this is the liquid biopsy company originally started this as a subsidiary within Illumina and spun it out. It just required it, I’m not so sure, you know, regulators are going to allow that to proceed, it might get unwound eventually. But nonetheless, right now, it is a part of Illumina. So Grail isn’t launching, and that has launched actually the first multi cancer early detection product, first of its kind that’s in the market. So if you look at the specs that they released for this, and we kind of already knew from a large perspective study earlier, the specs are not really great in terms of like high specificity or high sensitivity. But early cancers are very difficult to detect. The signal that’s in your bloodstream are not very high. So it’s very difficult to tease this out, the signal versus the noise. Nonetheless, this will help to detect earlier cancers, cancers that might have gone undetected otherwise, so this could still save lives. It’s important to point out you know, this is still like, batting practice in a nine inning ballgame, right where we’re at with this technology right now for early detection stuff.
But nonetheless, out there right now in the market, it’s going to be offered as a laboratory developed tests. This isn’t FDA cleared or FDA approved. That would require pre market approval. Future products will probably need that, in order to be used in the largest segments of the market. And this is specifically suggested for use and individuals that are maybe already receiving other types of screening or at higher risk of cancer. So like older individuals. So look for this tech to significantly improve over the years. I actually took a screenshot of the spec list because I was I was sitting there thinking like, you know, in five years or 10 years, we’re gonna look back at this and just, it’s going to be amazing how much better all this tech has gotten. Not just for Grail, but for some of these competitors as well.
Company also announced new chemistry. So you know, DNA sequencing, we talked about machines all the time Simon, right? Sequencing machines are the the size of the refrigerator, maybe they’re on a desktop, really expensive. They got all the glory, but really, you know, the business model and lab hardware is to sell the machines, you sell that once and then you get recurring revenue by selling the consumables revenue again and again and again. So the customers can run those machines. So Illumina is kind of like a chemical business really, right. Like most of its revenue, I think 70% In the first nine months of 2021 came from consumables, much less came from machines. That’s kind of interesting.
But they’ve unveiled some new chemistry improvements at this point is maybe like incremental improvements. But that’s really good for Illumina, because it has an installed base, very large, lots of customers, and the longer and keep them on those machines or make those machines work better, get better data, faster, cheaper, all those things. So this new chemistry will be unveiled or rolled out rather, in the coming year or two. So that’s important to development for shareholders as well.
The biggest news, of course, from Illumina, is that unveiled a long read tech that’s been working on called Infinity. So this can read up to 10,000 bases of DNA, and we only got like one slide, there’s not a whole lot of details, and there’s no specs, so we can’t really get too carried away. Although the market kind of did right. Illumina shares were up like 15% or something. This is not a small startup. This is a pretty big large global company. Pretty big day for Illumina, shareholders and rivals like PacBio (NASDAQ: PACB) and Oxford Nanopore (OTCMKTS: ONTTF). Wow got tripped up on one of my favorite companies. Both saw their shares decline yesterday on the news as well.
Now, it’s important point out, so we have no specs. And this is up to 10,000 pieces of genetic material that this can possibly read. So that’s not as long as PacBio definitely not as long as Oxford Nanopore, which can read hundreds of 1000s of base pairs at a time. Nonetheless, the important takeaway here is that it can be used on existing Illumina platforms. So there’s a huge installed base out there. And if you can run short read and long read on the same machine, that’s pretty catchy, right? I think a lot of customers are going to be interested in this and give it a try. So that could be a pretty big headwind for PacBio which is still emerging, it’s still trying to scale and need to sell a lot more machines to reach that critical mass of installed base out in the wild. So this could be a pretty fierce headwind for PacBio.
I don’t really see it being a major deal for Oxford Nanopore. It’s a little bit of a headwind, perhaps maybe it slows down some of their customer acquisition, so forth. But with Nanopore, so sufficiently different, the machines are much smaller, they’re much lower cost to begin with. And you can already run short and long and ultra long read on nanopore. So not I don’t see really affecting that company nearly as much. This early access program doesn’t open up until the second half of 2022. So this is still a long time away, right from maybe having any we can’t gauge how it’s gonna do in the market, or how might impact the competitive landscape. But the commercial advantage Illumina has – I would not sleep on this. I would be a little a little shaky if I’m PacBio right now. So we’ll see how that plays out in the next, you know, 12 to 18 months.
Simon Erickson 6:38
Now, Maxx This is an interesting one, because you and I have a long standing bet regarding the market cap of Illumina in the future, the market share that Illumina is going to have in the sequencing market in the future. Of course, it seemed like always the knock against Illumina was long read sequencing, right? We always got used to Illumina is next generation sequencing. Of course, that’s short read, always the PacBio, the Oxford Nanopore were always the Hey, Simon, don’t you see where the future is going here? And it seems like Illumina has tried and failed due to regulators to make acquisitions to try to make up for that incompetency that it had. That it wasn’t addressing long read sequencing. You think that this is a defensive play that now they’re trying to develop it in house so they can kind of keep competitors at bay? I know that Illumina for many years, was the economical option had higher throughput and had the larger machines and depreciated over time, but it does seem like the market wants longer read sequencing. Is Illumina doing this to try to keep its competitors from stealing share, and Maxx Chatsko ultimately winning this bet?
Maxx Chatsko 7:38
Yeah, they’re trying to keep me from winning our bet I think. The way I read it, if you have like longitudinal analysis of the competitive landscape, and you’ve been following this for years, as you and I have, I don’t think Illumina strategy has really changed. You can see you know, years ago, they were really fiercely contending with Oxford Nanopore in court, trying to slow them down a little bit, right. And Oxford Nanopore is kind of the reason that the Illumina PacBio acquisition didn’t play out, right? UK regulators came down pretty hard. Made it easy for Illumina to walk away there. So then again, you know, Illumina was trying to acquire PacBio, again, needing to combine short run and long run to position itself for where the field was headed. Now it couldn’t do that so it said, hey, you know what, we’re just gonna develop this in house. So again, we don’t have too many specs. We don’t know how good it is, or but I consider it long enough read, right? It’s not really like longer than PacBio. It’s not longer than Oxford Nanopore, but good enough, long enough. So yeah, this is exactly the company positioning itself strategically, for the next decade here in DNA sequencing.
Simon Erickson 8:41
Definitely want to keep an eye on their Illumina ticker. And that is ILMN. Let’s get another company Maxx, another one that had a big announcement was Twist Bioscience (NASDAQ: TWST) doing DNA synthesis. What’s the news on this one?
Maxx Chatsko 8:51
Here, we just talked about DNA sequencing. So that’s reading DNA. And Twist Bioscience is DNA synthesis, that’s writing DNA. And you know, for since their inception, they really kind of played down this, you know, next generation technology called enzymatic DNA synthesis. So they use different chemistries right now with their silicon chips. And they said, Ah, you know, enzymatic synthesis, still not economical, we don’t really see that being the future. We’re well positioned anyway, if it does emerge, like we can use it within our existing infrastructure, existing synthesizers, right?
And then at JPMorgan, they said, “Hey, guess what guys? We’ve been working on enzymatic synthesis for the last 18 months.” So I was like, “hey, oh, no kidding?” So there’s a lot of companies in the competitive landscape that are kind of trying to develop this technology. So it’s just closer to what nature does when it’s trying to make genetic material. It has a higher ceiling, in terms of the throughput it can get, how much DNA you can synthesize, how low the cost can go, than what we do today. So it’s obviously the future even though it’s still not ready for primetime or commercialization, but it’s good to see Twist Bioscience take a step here, develop this in house. It can maybe launch it to its own customers eventually.
It even kind of teased that, “hey, you know what we might make different products for this. We can see enzymatic synthesis being really well suited for decentralized DNA synthesis.” So rather than you order from Twist, and they make it in their large facility that centralized, maybe eventually of kit products or something for customers, where they can do it on their own, or who knows, maybe, you know, one day Twist Bioscience has synthesizer machines itself as a desktop model. Not – it’s very tricky business models, I wouldn’t be I don’t think they’re going to do anytime soon. But maybe years from now, they could do that. Enzymatic synthesis kind of opens that door. So for now, Twist Bioscience customers are going to be using the standard chemistry they have right now, which is still the best thing in the industry by a mile. But you know, over the coming years, enzymatic synthesis could be an option for customers. So it’s pretty interesting to see them make this move from a technological standpoint.
Simon Erickson 10:53
And are we starting to see markets adopting DNA synthesis now Maxx? I know that you’ve been kind of an expert on on synthetic biology for several years now. I know that we just republished your podcast with Andrew Hessel very recently, here. Are markets catching on to the the power of this and where would you consider Twist to be versus its competitors? Are they the leader in this? Are they one of many options to choose from? How does the company actually choose you to work with?
Maxx Chatsko 11:17
I mean, there’s there’s other options than Twist Bioscience in the market, right. So it’s still a pretty fragmented space. But if you read through SEC filings, Twist is actually the OEM for many of its competitors. So I think that’s a pretty strong signal where they are in the competitive landscape. In terms of like where we’re at, I mean, it’s still very early, right? You synthesize DNA, maybe for like high throughput genetic engineering, but there’s not really that many companies doing that, or many labs that need that. So synthetic DNA is still catching on.
A lot of times, it’s still much easier if you have an army of grad students to be able to, like clone things yourself in your own lab. That’s kind of slowly giving way though. I mean, it really is great if you can get the turnaround times down, and it’s very highly accurate, which Twist Bioscience can accomplish. So that does give it an advantage in terms of changing behaviors, right? The status quo is kind of their biggest competitor right now, in terms of terms of how biology is done. So it’s going to be maybe a long haul here for the company, but they’ve done very well moving into markets that are ready now. So for example, you know, Twist Bioscience’s DNA is really quietly the driving force behind a lot of next generation sequencing tools and panels, liquid biopsies, genetic testing. Very big market for them, they’re still just kind of scratching the surface there. And those markets are still in their infancy. So very smart management here at the company, doing what they can now and eventually, you know, delivering on that grand vision of, “hey, we can synthesize DNA maybe anywhere for different uses, we’re not doing today.” So great company, very well led.
Simon Erickson 12:53
Well, let’s double click on that genetic testing and the liquid biopsies to talk about diagnostics a little bit. The next update that you have is on Exact Sciences (NASDAQ: EXAS). That’s a diagnostics company. But they talked about JP Morgan this year.
Maxx Chatsko 13:04
They also had a flurry of announcements here, Simon, so they announced preliminary fourth quarter 2021 operating results. Beat guidance for revenue on all three of its segments. So screening, precision oncology, and COVID testing. COVID testing is not so important, right. We all know, that’s going to be a temporary business for the company. But nonetheless, I mean, you know, we saw maybe there was some signs that with the Omicron wave or the Delta wave last year, maybe slowing some of the screening revenue, and then the COVID testing revenue would pick up to maybe offset some of that volatility. So it was a nice thing to have. They had some spare capacity, so it made sense for them to do that.
They announced a license of the Xerna tumor microenvironment panel. TME panel, Simon, that’s a mouthful from a company, a company called OncXerna. So this is gonna help the company expand into biopharma drug development. Offer better services here for some of those companies. We’ve seen, of course, companies like Personalis (NASDAQ: PSNL) , or Invitae (NASDAQ: NVTA), tried to develop services here as well. So good to see, you know, Exact Sciences, making some moves, trying to be well positioned in the competitive landscape. And of course, it has the largest scale of a lot of these companies. So that certainly helps to throw that around.
It also announced an acquisition of a company called Prevention Genetics, and this moves Exact Sciences into hereditary cancer testing. So this is what Invitae does, really, for it’s bread and butter right now. Now, Prevention Genetics is a pretty small company, it’s only 1/10 or less than 1/10 of the revenue of Invitae. So it’s still very small. But you know, Exact Sciences again, has that scale, it can leverage a lot of its commercial infrastructure. Probably going to quickly scale this business and I wouldn’t be surprised if we see additional like bolt on acquisitions, genetic testing, molecular testing, still highly fragmented spaces. So lots of little companies out there that maybe a company like Exact Sciences can go and gobble up.
Simon Erickson 14:57
Sounds like a good one. The ticker on Exact sciences is EXAS. By the way for Twist Bioscience going to follow that one. That’s TWST. One more update here Maxx was on Beam Therapeutics (NASDAQ: BEAM). Let’s get back into the chemistry again. This is another company that’s doing some really fun foundational science. What’s the update we got from JP Morgan?
Maxx Chatsko 15:16
Yeah, Beam Therapeutics is one of the most richly valued drug developers, that’s not even in clinical trials yet. But you know, it does deserve a premium, not sure if it deserves a $5 billion valuation, but nonetheless, it is the leader right now in CRISPR base editing. Really the leaned in base editing period, no matter what system is being used. It announced a huge four year research collaboration with Pfizer. So it earned a $300 million upfront payment – that’s a lot of money for an upfront payment. Supposed to be for you know, therapeutic modality, it’s still not even clinically validated yet. So lots of excitement, obviously, for base editing and CRISPR base editing, specifically. Beam Therapeutics also earn milestone payments and royalties, if any programs reached the market. Of course, that’s many years away, because this is still a research collaboration. We’re still figuring out how to exactly deliver these things, where they need to go in the body.
Something that stood out to me that maybe isn’t obvious to a lot of others is this is a pretty unusual structure for the collaboration. So they’re initially going to pursue three different genetic targets in three different tissue types; liver, muscle, and central nervous system (CNS). That’s unusual, because what usually happens is a company will come in and partner with emerging therapeutic modality and they’ll focus on a single tissue type, right, a single area. “We’re just going to start in the liver with the first four programs. And we’ll, we’ll go from there.” So this is interesting. I mean, it’s, it’s almost to me, it’s like Pfizer’s may be giving Beam Therapeutics a try out. Maybe years from now if they have successes, they’ll say, “Alright, we’ll take four more programs in the liver, two more in the muscle, and one more in the central nervous system.” Maybe even, you know, setting the stage for a future acquisition. Again, Beam Therapeutics I think is richly valued but, you know, there are a handful of companies that really do deserve big premiums. I’m not sure it deserves to be this big yet, but could be a nice acquisition target. Of course, Pfizer has record levels of cash after its success from the COVID vaccines, it has some oral pills rolling out this year as well, they could maybe add to its cash balance. So this one might actually make sense for acquisition target years from now. So, interesting structure to the deal that stood out to me.
Simon Erickson 17:23
And it’s interesting, right, because, like, you’ve mentioned many times for 7Investing here that we kind of had the first wave of gene editing. But then you kind of got the second and third waves that you’re really interested in the base editing, and then the prime editing. Seems like beam is a nice contender for those with some really cool chemistries that they’re working on. Of course, David Liu, you know, the founder, kind of a technical adviser to this company. Maybe a big part to play in Pfizer paying so much money up front to give them a try. An audition to this, what do you think about the management, or the chemistry that’s going on here Maxx?
Maxx Chatsko 17:53
I mean, Beam Therapeutics has done a great job executing so far, even though they’re not in the clinic, right? Licensing out their technology to different companies to kind of spread and diversify both challenges and risks for shareholders. So that’s great. It’s been able to earn premium upfront payments, like we just see here $300 million is is no joke. It’s larger than a lot of other companies playing around this space. Right? Yeah, and, you know, look, the value potential value of base editing, whether it’s CRISPR, or some other enzymatic system, or maybe an oligo, in the future, is that it doesn’t make double stranded breaks in the genome.
So that’s what we saw with first generation gene editors, right. You know, your Intellia’s, your CRISPR Therapeutics, Precision Biosciences, Cellectis, companies like that. And you know, there’s still this question why double stranded breaks could maybe lead to some not so great unintended consequences and side effects, like long term risks of cancer. So that it might be better to avoid that with something a little more precise, something that doesn’t make double stranded breaks. So something like a base editor makes a lot of sense. And you mentioned alluded to anyway, prime medicine, prime editing. There’s obviously still on the clinic. And there’s a third generation tools. Pretty interesting, though, right? I mean, CRISPR kind of came out and now we’re just making these improvements to it without every generation that comes out. Now, there’s other systems that aren’t even based on CRISPR to, you know, showing this. It kind of paved the way for all this to be possible. But yeah, absolutely. David Liu, being attached to any company is going to help to earn it a premium valuation.
Simon Erickson 19:27
Always certainly nice to see $300 million dollar capital infusion for a partnership. That’s really great news. But let’s close this out Maxx. Let’s talk about this from an investing perspective. Let’s talk about M&A. Let’s talk about the mergers and acquisitions. Just as a kind of a side note before we go into what JP Morgan has to do with this, we actually saw one of your recommendations on 7Investing, Dicerna Pharmaceuticals, a three time recommendation of Maxx Chatsko just got acquired here by Novo Nordisk. The only reason we are able to announce that we never reveal our publicly our recommendations because we did, we did remove it from the scorecard. The acquisition has closed, zero for the gains. There’s a cash offer for investors. Really great work on first of all, picking that one up, Maxx. But let me ask you, are there more acquisitions on the forefront here? I mean, what’s going on at JPMorgan? It’s been kind of a slow year for M&A and biotech right?
Maxx Chatsko 20:19
Yeah, maybe a couple years. I don’t know, since the pandemic maybe in a little bit before that. But M&A activity in drug developments been pretty slow. It was sitting around like, well, is this is this the year picks up? It wasn’t last year, it wasn’t, you know, so maybe it’s this year? It kind of makes sense. If you look at it one way, right? A lot of these large companies are sitting on record amounts of cash. You know, there are a plethora of smaller companies out there even privately held companies doing some really interesting work. Things are developing faster and faster and we kind of do you know, there’s still a lot of biology, we certainly have no idea how it works. And it’s very complex, but we are starting to answer more questions with each passing year.
So a lot of analysts, a lot of reporters, were asking pretty much every one of the big pharma companies, hey, what do you guys need to start acquiring things again? So it was kind of funny to see what the CEOs said. They all kind of I don’t know if they have the same PR specialist. Some collusion, maybe I don’t know. But they all said, hey, you know what, we’re good, where we’re at, you know, they have some share repurchases going on, they said, maybe we want to do some smaller bolt on acquisitions. They all said that term bolt on acquisitions. So what we’ve seen is haven’t been like big splashy deals, right? 10s of billions of dollar valuations at the time of an acquisition, and a lot of large companies have said in the past in the recent past, hey, look, valuations are kind of crazy right now. We might have a lot of cash, but we still have to be good stewards for our own shareholders. So we’re not just gonna be slinging around money for acquisitions, like it’s candy.
So they’ve been disciplined is what I’ll say. But I do think we’ll see some of these, you know, M&A deals start to pick up this year. Again, record levels of cash. Valuations are starting to make more sense a little bit. So in last two years, we’ve seen, we have seen acquisitions, but they’ve just been very small, like $100 million, less than $400 million, lots of those little tiny deals, again, bolt on acquisitions. So I think investors can expect more of those types of deals, but maybe we’ll see the definition of small acquisition kind of creep up closer to like the $1 billion mark. Again, there’s just so much cash out there. Lots of interesting companies wouldn’t be surprised to start to see some more M&A activity this year. Simon,
Simon Erickson 22:31
Will be looking forward to it Maxx. Thanks very much for joining the podcast today.
Maxx Chatsko 22:35
Thanks for having me. This is great.
Simon Erickson 22:37
For anyone who want to follow along again Illumina, Twist Biosciences, Exact sciences and Beam Therapeutics and M&A were the topics and Maxx discussed on today’s podcast as the big reveals thus far from the 2022 JP Morgan healthcare conference. I’m 7investing founder and CEO Simon Erickson. Thanks for tuning in to this episode. Well here we’ll talk to you again soon with another innovative topic. Until then, we’re here to empower you to invest in your future. We are 7investing.
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