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Investors hear a lot about genomics these days, but what does it all mean, exactly? 7investing Lead Advisors Simon Erickson and Maxx Chatsko team up to discuss what investors should look for in pre-commercial drug developers. To provide practical examples, they discuss how continuous improvements in DNA sequencing have created various technological offshoots now loosely called "genomics," including exciting new opportunities in precision oncology and liquid biopsies. Finally, they provide a high-level overview of DNA editing tools and approaches, including base editing and prime editing.
October 13, 2021
Investors hear a lot about genomics these days, but what does it all mean, exactly? 7investing Lead Advisors Simon Erickson and Maxx Chatsko team up to discuss what investors should look for in pre-commercial drug developers. To provide practical examples, they discuss how continuous improvements in DNA sequencing have created various technological offshoots now loosely called “genomics,” including exciting new opportunities in precision oncology and liquid biopsies. Finally, they provide a high-level overview of DNA editing tools and approaches, including base editing and prime editing.
Samantha Bailey 0:11 Welcome to 7Investing Now, a show that teaches you how to take a long term view on investing by better understanding what’s happening in the market now.
Simon Erickson 0:21 Today is Wednesday, October 13th, and welcome to today’s edition of 7Investing Now. This is our show where we take a long term investing perspective on several of the market’s most relevant and interesting topics. I’m 7Investing founder and CEO Simon Erickson.
I am so excited about the show today because you’ve almost certainly been hearing about DNA sequencing about genomics, about genetics and about things that are in the future of the medicine and we’re going to be digging deeper into those today. I’m really kind of excited to kind of explore this topic at a much deeper level.
And with me on the show is my fellow lead advisor Maxx Chatsko. Also our 7Investing Director of Marketing Sam Bailey. Maxx, me start with you. You’re up there in Buffalo. This is one of the most underappreciated research capitals of our country. How are things up in Pittsburgh? I said Buffalo I think
Maxx Chatsko 1:12 You said Buffalo but the Bills are crushing it this year so you should give them a little bit of credit now that Tom Brady’s out of the AFC East but yeah, things are going well in Pittsburgh, it gets darker now so early. I don’t like it. But you know.
Simon Erickson 1:24 Fantastic. It’s probably uh, probably a problem we’re gonna be having soon here in Houston. But it’s a nice autumn day today, Sam, right? Are things treating you well, I hope?
Samantha Bailey 1:31 Everything is treating me well, see I like that it gets darker earlier, because it’s easier to put my kids to sleep. So I take it
Simon Erickson 1:38 Very true. Well, Maxx, I’m really excited to be looking into healthcare on the show here with you today. We’re going to be digging into genomic sequencing. And we’re going to be digging into gene editing and what’s that’s enabling in terms of future innovations later on the program. But I want to start at the 10,000 foot level. You know, healthcare is a risky industry, that a lot of investors tend to shy away from, right. There’s a lot of risks here. There’s binary outcomes from FDA trials, there’s changing technologies, that could become irrelevant in a couple of years. But this is a field that you embrace. You love to invest in, you do it very, very well. kind of start us out at the top level of how do you think that we should approach as investors the healthcare industry?
Maxx Chatsko 2:20 So it’s interesting, right, because a lot of these companies are typically smaller. And if you’re a pre commercial drug developer, you don’t have traditional financial fundamentals to interrogate. You don’t have revenue, you don’t have earnings, you definitely don’t have cash flow, you have big cash burns, oftentimes, right. But drug developers do have fundamentals, they’re just different fundamentals. So oftentimes, it’s looking at the cash balance, and how many years of operations or quarters of operations that can fund.
Looking at the number of collaborations, it’s always important to bring in, you know, some deep pocketed partners, that de risks the development of your programs, and also provide some cash upfront. And also as those programs mature, and get de-risked, a company’s current milestone payments. So that’s good, keep the cash balance as high as possible at all times.
And then also another fundamental is the number of programs. So there’s, you know, discovery programs, those are things that companies are kind of kicking around, they’ve found their chemical compound they’re interested in, but they need to do more testing. Then there’s preclinical testing, so preclinical programs, they’re starting to maybe get some data to show to the FDA to say, hey, let us test this in humans. So they’re looking at animal studies, and so forth. And then, of course, clinical testing. So clinical programs. So looking at the number of pipeline programs over on, of course, you know, there’s different stages of clinical programs as well phase one, phase two, phase three, sometimes another one, if you’re unlucky. So it’s very risky, in terms of developing a pipeline.
But you want to look at those three categories of fundamentals, cash collaborations, and programs. And I actually have a different approach, or other frameworks, I should say, for how I evaluate some of these companies. So we have a graphic here, I’ve made for one of my showing a high level of my approach here. So what do I look for when I look at a drug developer, pre commercial drug developer, I look for three things in particular.
So first, I want them to be addressing pain points, the business goals are to unlock value or be a good partner, be a good collaborator. If you’re addressing pain points, then you have a tool and a solution that’s not looking for a problem. You found a problem when you’re developing a solution. Something we often see in academia right? We have solutions looking for problems you don’t want to invest in those.
The second thing I look for a technology platforms, these are easier to scale and you have a greater potential recover from failures. If we know the technology platform works then you know if an asset or two or three fail, it doesn’t necessarily bust your entire investing thesis because you know the company can recover or it has other pipeline programs coming.
The third thing I look for comes with durable advantages. So this is things that can attributes that can help a company navigate a competitive landscape, you know, how does it compete, how does the the drug candidate you’re developing compete with those that your competitors are developing, whether that’s using the same exact approach or a different tool, maybe something that’s already on the market. And it makes it easier to also displace incumbents. So existing drug treatment, so maybe your drugs safer, more effective for various reasons, due to the approaches you took.
Simon Erickson 5:19 Okay, well, anyone who was not able to see the video really missed out on the great pictures that Maxx chose for each one of those topics. I personally like the guy doing the squats for the competitive advantages, showing how strong some of these companies can be, obviously, Maxx a lot of scientific research that you require for investing in this space. I think that’s why you’re so good at this actually.
But okay, let’s say that I’m an investor that I want to start dabbling in, in biotech companies, or healthcare companies or Life Sciences companies. And, you know, typically, the rest of the investing world looks at fundamental analysis, right? We’re looking at quantitative things like cash flows, like revenues, like DCF models, that’s not quite the same when you’re looking at a pre revenue biotech company or a drug developer.
And because of that, I think you see a lot of volatility in these types of companies, right? You tend to see when there’s a good event, or a de risking event, like you mentioned earlier, or there’s a collaboration or a partnership or something like that, you’ll see companies pop 30, 50, or 100% on a day’s news. How do you think about valuation in this space, knowing that there’s not a whole lot of really hard quantitative numbers to analyze?
Maxx Chatsko 6:29 So we did a podcast on as a few months ago. So the nitty gritty of it is you do determine valuations based on you’ve create risk adjusted net present value models. I’m still learning all the ins and outs of those because they are quite complicated. But it’s basically a way to assign what’s the probability of success that this asset in the pipeline is going to reach market? And what might the sales look like? And how long would it take to reach peak sales.
Now, in the last decade, from 2011, to 2020, for every drug that entered phase one, clinical trials, only 7.9% actually reached the market. And if you look at oncology, drug candidates, meaning those that are targeting cancers, that number dips to 5.3%. So meaning, you know, 92, to maybe 95% of drugs, depending on the therapeutic area, never actually reached the market. So there’s a lot of risk involved in those probabilities of success are very low.
So when you’re looking at these things, when I’m looking at these things, so I want to look at, you know, well, what companies might have a really good chance of outperforming the, you know, historical probabilities of success. And again, it kind of goes back to you know, do they have a technology platform, that’s maybe been de-risked, it shows they can avoid, you know, design drugs that are safer, more effective, doesn’t guarantee success, sometimes it only bumps up the probability of success to 20% from the day they enter phase one clinical trial.
So that might not seem like a lot. And it’s really not, but it’s four times the industry average, right? That’s how you would do it from a technical perspective. But yeah, evaluations today I’ve been pained to see, you know, and explain that this is kind of unusual what’s going on, there’s a lot of momentum, there’s a lot of excitement. I think the narrative right now, overall investing is, you know, we’re coming out of the pandemic, we developed this new thing with mRNA vaccines never been used before, and look how well they work. So there’s a lot of excitement now for genomics and innovation.
And overall, I think that’s true, we’re seeing it’s gonna get a lot we’re gonna have awesome treatments coming in the next decade, but very important member, it does take time, and we can’t price in too many good things into these valuations. You know, some of them are $10 billion. Some of these companies very exciting, but then they announced results, and sometimes they’re really good results. And you’ll see the stock tumbled like 10%, because there’s just too much good news priced in and they’re priced for perfection.
So you really do have to be, you know, cautious and, and think and be mindful of valuations, the price you buy in and of course, affects your future returns. So you do have to be mindful of these things.
Simon Erickson 8:56 That’s an interesting one too Maxx as we kind of close out this segment of the program. I won’t say any names because we keep our recommendations behind the paywall for our paying subscribers but I have seen that several of your recommendations you have gone on and re recommended in future months, which is of course an option for our advisors every month is to take past recommendations and re recommend them. Are there any factors that go into when you re recommend a company? Are you looking for the things you mentioned earlier about collaborations or updates on the trials? Or what goes into your mind if a company’s going up for it’s too early to see revenue from commercial drugs? It’s not producing cash flows yet? Are you looking at specific events when you re-recommend a company?
Maxx Chatsko 9:37 Yeah, well, just to the left of me off camera, I have a big cauldron. And I throw in all these different things and I stir it up real good. And then I see what comes out and it’s almost Halloween. So this actually is a good analogy. So it’s actually a combination of things right? Sometimes the valuation is really, really attractive relative to some of the drug developer fundamentals. Some of these companies have a lot of cash. You know, they’re funded through 2025 or something, you never see that.
They have a lot of collaborations, they have a lot of programs. So they have a, they’re just kind of crushing it they’re doing really well maybe their therapeutic modality is actually pretty well de risked overall. And even if they’re in earlier stages, you can look ahead and say, Hey, you know, in three years, this is a really good price, right? So that might factor in.
And sometimes Yeah, de risking events occur. So maybe a phase one readout comes up. And we know the technology platform a little bit de risked, right, or maybe that program is at risk, we can assign again, a higher probability of success to that. So a couple different things, sometimes those are de-risked, and by the first of the month, I just can’t get on the scorecard again, at a great price, necessarily. So maybe a pullback or waitt still makes it a pretty good investment so it’s complicated. There’s a lot of math that goes in there.
Simon Erickson 10:45 Fantastic. Well, we want to give you at least a little bit of a sneak peek on the method to the madness of how Maxx Chatsko picks his recommendations every month. So Sam let me segue to you. Before we get into our second segment of the program, I mentioned subscribers just a couple of minutes ago, and we are actually in the middle of doing a large, entire subscriber wide survey right now, what did we found out from some initial results from that?
Samantha Bailey 11:07 We are a customer focused organization. And I know a lot of companies say that, but we really mean it here. We had a survey last year. And from that survey, our subscriber call was born. And that’s one of the highlights, I think our members would agree of the 7Investing subscription. So we were thrilled with the responses we got last year one, we wanted to do this again, you know, how can we grow? As the company evolves, you know, we want to evolve what our subscribers want. And it’s too early to disclose the results. But we’re already seeing more than a 10% improvement in our customer satisfaction scores compared to last year. So I’m so happy that our members are pleased with the service and I can’t wait to continue getting these results.
Simon Erickson 11:46 I love that. Sam how can we sign up for 7investing if we want to be a subscriber and see Maxx’s picks? How do we actually sign up for the service?
Samantha Bailey 11:52 You can go to 7Investing.com/subscribe, and I put the link at the bottom and I will share it in the chat as well.
Simon Erickson 12:00 Fantastic. Thanks very much, Sam. Really appreciate the update on that. Thank you to Doris and Renee Karell chiming in here saying that they did sign up and they’re very happy. I really appreciate the comments there. We’re very happy to have you on board too. We have seven top recommendations each and every month some are healthcare related, some are very not healthcare related. But it’s always exciting to see what Maxx has up to sleeve every month from a healthcare pick.
So let’s move into segment two of today’s discussion on 7Investing Now, we’re going to be talking about DNA sequencing in this one Maxx. And Sam, tell you what, before I let you completely get off the hook here. I have a question for you. It’s about the Human Genome Project, which is the very first time that the complete genome of a human being was sequenced. It was completed in the year 2003. It took a quite a long time several decades and almost $3 billion to complete. My question for you is where was the volunteer from which US city was the volunteer from that gave blood that then contributed to the Human Genome Project?
Samantha Bailey 13:01 I have to go you have a lot of work that you give me for my job so I’m going to go because I’ll see you guys later. I don’t know.
Simon Erickson 13:11 Any guesses Sam? Or Maxx You can also guess as well if you’d like to on this one.
Maxx Chatsko 13:15 Anchorage, Alaska.
Simon Erickson 13:16 Oh, good guess Anchorage. Is he too far north? Or do you think it’s even farther north than that Sam
Samantha Bailey 13:21 I’m going to go with Houston, Texas and playing home field advantage here.
Simon Erickson 13:24 Okay, before I really answer, let’s actually put up the graphic of the actual newspaper ad for volunteers for the Human Genome Project. There it is. They’re looking for 20 volunteers for this new international scientific research effort. This is pretty neat. You can see the phone number and the date down there at the bottom. 1997 is when this was posted in a print paper newspaper that then unlocked so much information about the genome.
The actual answer, Sam and Maxx is Buffalo, New York. And anyone who is listening to the program, I totally botched it by giving away the name of the city earlier when I asked Maxx how buffalo was doing. But that is where the the original anonymous you know, the person is still anonymous, but it was posted up in Buffalo. Really amazing, amazing what we’ve learned in the scientific community from that project.
And so Maxx let me use this to introduce the second part of the program, which is to show how far we’ve come in the two decades. Basically, since the completion of that Human Genome Project. Sam, we always promised graphics for anyone watching on video, let’s put up yet another graphic, which shows the declining costs that it costs to sequence a whole human genome. And if you see over there, you know, the early 2000s where this is a log scale, by the way, this is not a linear graph is a log graph 100 million dollars over there at the turn of the millennium. And you see that declining so so quickly. And you know, Moore’s law, which is kind of the decline across the semiconductor chips, would predict that it would be declined not as quickly as it is, but kind of in the early 2000s.
We’ve got the shotgun assembly method, right? This is where you kind of fragmenting and putting, you know, 20 to 50 base pairs together trying to, you know, one step at a time, assemble a genome, Maxx, you know, in the kind of early 2000s. There we move on to the Sanger method. This is where you’re doing reactions, you’re trying to clone fragments, and then use fluorescence to detect the fragments of DNA and then put them all together, we then kind of move in, you see that that real rapid decline in the cost there in the middle, this is next generation sequencing.
This is where we harness parallel computing, which is the same thing that Nvidia did with GPUs, for graphics processors, and even for data centers later down the road. But this was able to do sequencing in parallel, this sped up the entire process and drove down costs. And here we are now in the 2020 decade, we’re we’re now below $1,000, to sequence an entire human genome. Thanks very much, Sam, for that graphic.
You’ve seen the incredible improvements. Of course, now it’s economical to learn a lot more about a human beings DNA. Maxx, we are seeing a lot more innovation. Even in next generation sequencing, though, I know that you and I kind of had drinks a decade ago, and we’re talking about how excited we were about Illumina (NASDAQ: ILMN), but there’s even more innovative approaches to sequencing that are taking place right now. Can you tell us about those?
Maxx Chatsko 15:52 Yeah, so you know, like I said, for things I look for in companies are, they’re addressing pain points. And sometimes those pain points are that, you know, the first generation or just existing generations of technologies, you know, maybe they don’t give us all a complete picture, they don’t have all the data, maybe there’s safety and efficacy risks, and so forth. But for DNA sequencing, you know, that first approach, the short read approach, is actually blind to about 8 to 10% of the human genome, there’s entire sections of the genome, it can’t read.
So when we completed the Human Genome Project in 2003, we actually didn’t complete the entire genome of a human, there was only about maybe, you know, 90 to 93% of it that we read. So that means, you know, in order to read those other regions of DNA, we needed new tools, things that had longer read capability. So we have tools developed for that, like from Pacific bio sciences, commonly called Pac bio. So they can look at much larger fragments of DNA, and do so accurately to get more coverage of those genomes.
Also important to point out, you know, we’re focused on human genomes, obviously, right for therapeutics, and we’re all humans here. But you know, plant genomes or yeast genomes or or, you know, bacterium genomes, they’re actually constructed a little bit differently, right? So you actually need long read sequencing to get the most accurate and complete picture of some other organism genomes. But this is very helpful as well, if we can put together you know, data from Illumina.
That gives us a pretty good, quick, accurate read of a genome, but maybe we want a longer coverage. So you know, so we might combine it with a Pac Bio read. And there’s actually some next generation approaches like nanopore, which is also technically a long read, but it’s like longer longer read maybe a couple times longer than what Pac Bio can do. And the advantage there is because of the tools and the reagents and you know, processing power that they use, you can actually get better with nanopore as you scale the machines down.
So Oxford Nanopore actually just went public, we looked this up this morning, I lost track of that one, it went public in London, it did not come to the NASDAQ. Unfortunately, hopefully they have some ADR shares available soon. Popped maybe 45% on the day of its IPO. Lots of excitement for Oxford Nanopore, and nanopore sequencing, but they have a device you can plug in the USB port and actually sequence different things. It’s not very accurate, necessarily can’t do everything. But you know, that’s in quite a big contrast to like Illumina or Pac Bio, where you know, their machines are the size of a refrigerator, right? So you know, Oxford nanopore has been to the International Space Station, I think, is what I’ll say, to to end that, and nobody else can do that.
Simon Erickson 18:55 That’s pretty awesome that you’re going up to the space station and doing sequencing up there already. Something else is pretty awesome is that we’re kind of seeing more of a consumer facing healthcare industry, right? This isn’t just oncology or just being used by doctors and hospitals. We’re now kind of seeing a new consumer diagnostic market that’s developing from this right. And a lot of that is that whole genome sequences, right? We’ve probably are familiar with ancestry.com. And we’re familiar with 23andme. That’s more of genome typing, not a full genome sequence.
But we’re also starting to see those large sequencing companies an interest in kind of earlier stage diagnostics. Illumina is one example of this Maxx You know, we’ve seen Illumina like you said, short read sequencing and kind of one of the pioneers in this space. Now go back and trying to bring Grail back in house within its corporate umbrella. This is something that is spun out a couple of years ago, it said no, we want to bring back in Grail but the Grail this would be a much lower cost way of sequencing.
How important is the IP of sequencing technology because you mentioned Pac Bio, a moment ago, Illumina tried to acquire Pac bio a few years ago and that was blocked by regulators in the United Kingdom, probably prompted in some part by Oxford nanopore, but as you see these different approaches, I know that you’re somebody who really likes to look at the foundational technologies, how important is the IP for sequencing?
Maxx Chatsko 20:13 The IP is very important for DNA sequencing. And that’s how Illumina really built, you know, its entire portfolio really, right became a Titan of DNA sequencing through a number of acquisitions over the years, to build out different you know, beachheads in, you know, next generation sequencing, or just very nerdy details of processes that are then incorporate into its machines later.
So IP is very important because, well, again, that was why they wanted to acquire Pac Bio, right, it needed to maybe stake out a position in some long read sequencing to address some of the shortcomings. And it’s a short read approach. You know, and there’s also there’s a ton of lawsuits all the time, always ongoing to like Oxford Nanopore has been very quick to, you know, protect its IP in different international markets pretty successfully as well. So it’s usually you know, sparring with alumina or Pac Bio, as you mentioned, Yes, it did. It was the one that raise a raised a stink with regulators and eventually nuke the takeover Pac Bio from Illumina. Yeah, IP is very, very important.
Simon Erickson 21:18 Yeah, it’s very interesting. And as we wrap this up, you know, we’ve got a couple of comments over here on the right, we you know, Mike Fee is saying 10x genomics is a company that we should be keeping an eye on for single cell expression. We’ve got several other players in the space that we’ve we’ve talked about in various ways of sequencing.
I think my my final question for you, though, is Maxx is that we are learning more about the genome every year, it’s not just reading DNA, it’s the insight that researchers are obtaining from that. We believe today that there’s only about 1.5% of the genome that is responsible for the code that goes on for the creation of the proteins that we actually see manifest in the human being we are a little more cloudy on the other 98 and a half percent of the 20,000 genes that are out there, and what the DNA the complete genome of a human being means. This is research that’s being sponsored heavily by alphabet. We know that MIT and a lot of academic research institutes are looking at the genome, but are you seeing anything that really catches your attention? And kind of the academic research taking place? As we’re learning more and more about the genome? What do you think this is going to mean for investors?
Maxx Chatsko 22:27 It’s a great question, because we’d even talk about this. And just last week, there was a paper that came out about those non coding regions of the genome. I don’t know the exact numbers there, and you said 98 and a half percent. So we used to think, oh, that’s junk DNA that doesn’t code for proteins, it must not matter. But more and more we’re finding it does matter quite a bit. So some of those regions might not code for proteins, but they might code for things like micro RNAs, or they might affect the expression of the genes that they become before or after, in the genome.
So we’re linking actually, some of this to the differences between what separates us from things like you know, chimpanzees, for example, we’re finding that non coding regions are unique to humans in a lot of cases. And that actually separates us from, you know, chimpanzees and early brain development, when we’re still in the womb, this might actually be what makes us human. So that’s kind of an interesting takeaway. And it might actually, you know, be predictive of certain neurological disorders that appear to be somewhat unique to humans, things like autism, maybe Alzheimer’s, right, and we can, you know, create non human primates, they also have some of these phenotypes but so if we want to understand things like autism and Alzheimer’s, we might probably need to look at these non coding regions of the genome.
So this is an important discussion as well, because you know, Illumina’s machines or Pac Bio’smachines or Oxford Nanopore’s machines, we see there either reading DNA DNA sequencing, and they do that, and they do that well. But they can also use to read RNA, if you design the right tools for that, you know, and there’s different ways to use this for like, maybe protein expression as well, or like Mike Fee brought up 10x Genomics single cell expression.
So this is getting into a very important point for investors is that it’s not just about genomics, you know, you need to take a multi omics approach when you’re looking at investing in this space, or what’s very interesting. And I actually recently had a pretty good analogy, I thought, so we’ll bring that up to end this segment. But there’s the old indian parable about the three blind men and the elephant, right? So one touches the trunk, you know, the other one’s touching the tail, the other one’s touching the ear, and they all walk away thinking that’s exactly what the elephant must be right? They felt the elephant, they know what it is.
But each of these only has one part of the data, right? They need you need to combine all of these things, all of these omics. In order to get the most accurate picture, what the heck does this elephant look like? So if we’re going to solve some of these really perplexing challenges in health and disease, we’re going to need to combine genomics and transcriptomics which is reading the RNA or proteomics which is reading proteins or other things meta below mix, there’s lipidomics, there’s fragment tomix. There’s all kinds of crazy omics out there, some of which I think are made up. So maybe Dan has a point about that. But so it’s not just about genomics, you need to take a multi omics approach.
Simon Erickson 25:16 Fantastic question from Doris and Renee in the chat is what how does Ancestry.com tie in with all of this? Maxx what part of the elephant are they looking at?
Maxx Chatsko 25:26 They took one hair out of the tail, and they’re looking at that. Yeah, so ancestry.com and 23andme. And Simon kind of mentioned this a little bit ago, that’s not full genome sequencing right there looking at certain parts of your genome. It’s called genotyping. And, you know, I don’t know if it’s true anymore. I did 23andme years ago, when they got away with a lot more, you know, they’ll be like, Oh, you, I don’t know, you have just genes for being a sprinter instead of a marathon runner, and like fun things like that, they could probably predict your eye color and different things, and so forth. I don’t know what they can get away with now. But there’s not a full genome sequencing because I would cost a lot more than $99 or whatever cost now so.
Simon Erickson 26:09 Absolutely. Not to be confused with the whole genome sequence. That’s a great point. Also, a question from Martha Barry West, can you put that one up there, Sam, saying that she is a subscriber, but not noticing that she’s getting the emails regarding when these subscriber calls occur. And Martha, we apologize, you shouldn’t be getting access to that, we will double check to make sure that you are getting invited to our subscriber calls on the third Friday of every month, we do send an email out to our subscribers. Sam, can I use that as a segue to talk about our subscriber call? What is this? And what are we going to be talking about this Friday?
Samantha Bailey 26:39 This is my favorite part of our service besides our recommendations, so on the third Friday of the month, all of our lead advisors get together and you can ask all the advisors any questions that you have about the recommendations, and it’s really interactive, it’s really fun. And I learned a lot. And it actually is my favorite part. That’s not just the marketing person in me talking.
Simon Erickson 27:01 And it’s one of my favorite parts, too. And Sam, I think we also even have 7Investing mugs available now right? We always see those 7Investing mugs everyone’s carrying, how can I get a hold of one of those?
Samantha Bailey 27:12 Let me pull it up!
Simon Erickson 27:14 I apologize for putting you on the spot Sam.
Samantha Bailey 27:16 But you asked if the shop was ready, not if I had it. There we go!
Simon Erickson 27:20 Do we have the shop ready?
Samantha Bailey 27:22 And there it goes. So it’s 7Investing.myshopify.com, you can now get your hands on one of these 7Investing mugs in black or white or a notebook, t-shirts, you name it. So I’ve gotten a lot of orders. And it’s fun. Everyone seems pretty excited about it.
Simon Erickson 27:38 And one last point, I believe that I heard that if you are currently a 7Investing subscriber, and you take our survey, giving feedback about your experience with our service apart, we are actually going to give you a credit that can be used to purchase a 7Investing coffee mug, is that also correct?
Samantha Bailey 27:53 That’s correct. So you get a $7 credit and the mugs are $7. So you get a mug for free.
Simon Erickson 27:58 Fantastic. Those are a big hit around here we’re excited to share those with all of our subscribers and anybody else who’s not ready to join 7Investing yet, please use the link that Sam just used if you also would like a 7Investing shirt or coffee mug. Let’s go into the third part of the program here, Maxx because now we’ve talked about kind of generally investing in healthcare. And we talked about DNA sequencing, which is kind of the foundation of this mansion, that we want to build the technology that’s enabling so much of this.
But as you mentioned earlier, there are a lot of difficult challenges to solve in the medical community. We’re understanding more about the non-coding regions of the DNA of the human being, how they influence, you know, the decoding parts of the DNA strand, and how that impacts things like gene expression, and of course, anomalies and diseases that come from that.
But now we’ve progressed from just reading the genome to actually doing something about it. If we used Illumina previously as the reader of the DNA, so say that Illumina is the Amazon Kindle, that allows us to read a digital book, say that we noticed that there’s a spelling error somewhere in that digital book. And we want to go back and we actually want to edit that and correct the spelling mistake that we found.
Now there are a collection of tools and approaches that we have to actually editing the genome and the DNA of human beings themselves. This is fascinating Maxx, and I’ve heard a lot about CRISPR. Lately, it seems like that is really in the spotlight. Can we start by talking about CRISPR and gene editing, and then maybe we’ll progress into some other approaches that you’re interested in as well?
Maxx Chatsko 29:33 Yeah, so now that we have what are called genetic medicines, which means we can actually impact the DNA or the RNA. So in biology, there’s something called the central dogma of biology. biologists are a little full of themselves, as you can tell, but it goes that DNA makes RNA and RNA makes proteins. Proteins are what drive human health and diseases.
But DNA and RNA are the root causes of health and diseases. So up until now, we haven’t had genetic medicines really with, you know, any great deal of success. So we’ve been pretty much stuck with impacting proteins or the molecular messes they create downstream. So we’ve been stuck with like protein inhibitors or monoclonal antibodies, things that impact and maybe reduce or increase the amount of proteins.
So you know, there’s a protein that’s giving you high blood pressure, maybe we can design a, you know, a drug that goes and kind of silences that, right inhibits it, maybe that can have a good effect for you, right? Help you manage your lipid levels or something. But now that we can impact DNA and RNA, well, that kind of changes the game, because now we can maybe silence the RNA or the DNA, or maybe a precise correction of a mutation. So that that mutated DNA, or proteins that are causing and driving the disease never get created in the first place.
So CRISPR gene editing is, you know, obviously very exciting to investors here. And, you know, so we have some of these first generation approaches that are coming out, right? where companies are designing tools that go and impact gene expression in some way. Right now, with first generation tools, we can’t actually make a precise correction yet. But we can maybe disable the function of a gene that’s causing a disease. And we can also maybe use it to insert genetic material as well. But we haven’t tried to do that in humans just yet.
Simon Erickson 31:23 So much of this is so progressive, this is innovative science, right. And I don’t think it’s fully understood by many in the scientific community. And one thing that you’ve been tracking that I’ve seen you write quite a bit on at 7Investing.com is about the safety profile about several of these approaches. Maxx I know that you’ve been critical of the double strand break. Is it for anyone else who’s had more coffee than I have to say, but this is something that we need to better understand that it’s something you’ve been critical of. Why is that interesting? And what can you tell us about kind of the current era of gene editing that we’re in right now?
Maxx Chatsko 31:55 Yeah, so the first generation tools, whether that’s CRISPR gene editing, or TALENs based editing, or ARCUS based editing, all of those require making what’s called a double stranded break in the DNA. So double stranded break, great name for a trivia team, really bad news, potentially, if you’re trying to design human therapeutics. So a double stranded breaks one of the most traumatic events in all of biology. And because of that, we’ve evolved ways to quickly make a repair.
So what does that mean? let’s back up a second. You know, we’re all familiar with a double helix, right? It’s the windy Whoo, right? DNA, double stranded break is exactly what sounds like we cut the DNA in half. And then we just rely on those natural DNA repair mechanisms in the cell to stitch it back together, kind of like Humpty Dumpty.
However, because it’s one of the most traumatic events in biology, there’s some problems, maybe some safety risks there, right? We make a double stranded break. Sometimes with DNA repair mechanisms aren’t really there, they want to quickly make the repair. But sometimes they introduce errors. So sometimes they can randomly delete or insert genetic material where they stitch the genes the genome back up. So that can cause what’s called INDEL mutations for insertion deletion, INDEL, that can maybe affect gene expression or create proteins that we shouldn’t be creating, that can be bad potentially.
Additionally, there’s some challenges when you make a double stranded break, sometimes chromosome so big chunks of the genome can get rearranged. And that can affect gene expression as well. Additionally, all it takes sometimes we found this recently is that one double stranded break can potentially lead to something called chromosome shattering. Where you get 1000s of these chromosomal rearrangements. So each of these different types of genetic alterations INDEL mutations, chromosomal rearrangements, or chromosome shattering, are each events that are found and lead to and are hallmarks of cancerous cells.
So right there, you know, if the foundation of your technology platform first generation gene editing requires a double stranded break, while there’s some long term safety risks, potentially you might be, you know, helping patients to have a durable and safe, potentially treatment, but maybe years later, they develop cancer. So there’s this interesting risk reward equation that we had to figure out, you know, do you have a disease that’s going to be fatal, and there’s no other options, maybe that’s an acceptable risk.
But there are often increasingly are other treatments available, even though we call these rare diseases, and some of them are very convenient, you know, with, like Alnylam (NASDAQ: ALNY), has developed a couple of RNAi treatments. And sometimes they only need to be dosed once every three months. And they want to eventually expand that to once every six months, and they have a new tool they just released last month or just unveiled publicly, and maybe they can dose RNAi once every 12 months and get durable treatment. It’s very safe. It’s also reversible.
It doesn’t act on the DNA so we don’t have any double stranded breaks. So potentially, you know, and also RNA or Alnylam is shown with its RNAi platform that patients who’ve been treated with that actually do have, you know healing of scarring in certain tissues so they can actually reverse disease progression. So you know, if you can check all those boxes with something that doesn’t have this really big looming risk of the double stranded breaks, yeah, that might potentially be very attractive to doctors or regulators.
It’s pretty interesting to note that the FDA has not currently approved or cleared any phase one clinical trial for in vivo gene editing in the liver, all of those two trials that have been approved, but they’ve been approved in international markets, one in New Zealand and one in the UK. So that’s kind of an interesting signal, I think, to investors that they need to take seriously that, even if it works, in the end, I think there’s gonna be some significant regulatory roadblocks for some of these first gen tools. And you know, for good reason, we want to make sure we’re not causing long term problems, because you can’t undo it, right, we can’t stop giving you treatment if you’re treated 10 years ago, once. So these are very serious things to consider.
Now, as you kind of set me up there before I got long winded, there’s other approaches there, right, there’s there’s scientists have developed other tools that maybe address some of those safety and efficacy concerns, and maybe you can be a little more precise, maybe they can avoid double stranded breaks. So Sam, we have a graphic, it’s actually we’re going to skip the third graphic and move right to the fourth, I forgot to bring up the other one.
So the one that talks about this one, there are different kinds of DNA editing approaches. And I just kind of gave a quick overview of each. So first generation gene editing requires a double stranded break to work, I just blabbered for a while about why that might not be such a great idea that led scientists to invent and discovers second generation approach, which is called base editing. So this does not make a double stranded break, but it changes a single base pair at a time, right, now we can make A to G edits or C to T edits. So if you ever watched the movie Gattaca, those are all the letters of the DNA alphabet.
So we can maybe change if there’s a mutation that is caused by a single base pair mutation, it’s called a point mutation, maybe we can change that back. So we can maybe have a precise correction of that mutation and potentially, for the first time, cure a disease, that’s something that’s not really possible with the first generation approach.
And then there’s another approach this is even earlier development, it’s called This is the third generation, it’s prime editing. So this actually makes a single stranded break. Oops, looks like I forgot to wrap that up there at the end, but it supplies the DNA repair mechanism. So it provides an enzyme and actually exactly tells the cell how to stitch the genome back together. Now, so all of those overcome that double stranded break limitation, but they do have other challenges themselves. We’re going to keep this at a high level today.
So just because maybe third generation prime editing eventually moves into clinical trials, doesn’t mean that second generation is necessarily obsolete. And vice versa. Some of those, you know, second gen can do things better than third Gen, third Gen can do some things better than second and first gen, I do the consider the double stranded break to be potentially a foundational technical risk. This is actually the topic of my advisor update this month, which is a premium article we published for our members. I’m talking about the categories of risks. When we’re looking at pre commercial drug developers, we often say, you know, it’s so risky drug developments risky, it’s binary. Yeah, but I always try to be a little more precise.
So there’s actually four different categories of risks. First is technical foundational risks. So those are things that can blow up your entire approach. All of your pipeline, you have to retool, pivot move on to something else. That’s what a double stranded break is, that’s a foundational technical risk, then there’s drug development risk. So you know, you move through phase one, phase two, phase three, maybe your drugs actually safe, maybe it’s not actually effective. Those are the typically what we talk about when we say, Oh, it’s risky, we’re talking about development risks.
There’s also regulatory risks, you know, a drug developer and regulators might not always see eye to eye on things. Regulators might want more data, they might want you to expand a trial they might make you re conduct a trial, all things that can delay your timeline for getting to market, if they let you get to market at all. And then there’s commercial risk. So now you have a drug approved, it’s on the market, while you still to navigate a lot of other complicated factors. You have to get insurance coverage, right, we’ve seen how that can maybe sometimes go off the rails if you can’t sign up enough insurance payers quickly enough. You also have to navigate competitive landscapes, there’s other drugs on the market for all of these diseases. Is yours gonna be more effective or not?
So all of those things can be overcome, but I kind of view these risks as like a game of Jenga. You played Jenga before right?
Simon Erickson 39:40 Absolutely.
Maxx Chatsko 39:41 Yeah, so every once in a while, you know, you remove one block at a time right and if you pull the one block out, that makes the whole tower fall you lose the game. Now in the game, you know one of the two of the easiest blocks to pull out are the two on the very bottom, and you can leave that one in the middle on the very bottom level intact, but obviously you can’t pull that out because the whole tower fall right?
So foundational technical risk, or that middle block and the very bottom level. So that’s how I think about that, you know, so I try to avoid companies that have those foundational technical risks that I can identify. And so far, none of the companies I’ve recommended have that but i do consider double stranded breaks to potentially be foundational technical risk for investors to keep in mind.
Simon Erickson 40:22 Okay, Maxx. So that’s pretty deep analysis. By the way, I forgive me as I’m going to go back and drink three cups of coffee and rewatch that three or four more times to make sure I understood everything you’re saying. But let’s let’s give this a concrete example for investors. Right now that we kind of understand everything that Maxx talked about everything, we talked about the foundational science and the risks that are involved, let’s make this real and what this actually could mean for you as an investor.
I think a great example of this is Intelia (NASDAQ: NTLA) it’s a company that you and I are both familiar with Maxx ticker on that is $NTLA. And this is what I think we can consider one of those first generation gene editing companies, right? It’s got an approach that showed a lot of promise for treating a condition called transthyretin. amyloidosis.
This is a buildup of proteins you do not want to have in the liver. And it kills people, it’s very serious within a couple of years of of spotting this. And Intellia has found a way to do gene editing using the CRISPR cas9 as the mechanism to actually go in and address this, to stop that protein from building up. And it’s an incredible initial results, right, definitely reduction of the TTR protein that was building up liver.
But Maxx that’s not the whole story, right? We saw a lot of enthusiasm and a lot of optimism on these initial results. But to your point, we can’t look at that in a vacuum. We can’t have our blinders on where we only look at the optimistic part of this, because we need to understand some of those downstream risks that may be present with something like this.
I know that you’ve spoken up in the past about Intellia – are there some risks with this with this company? We don’t need to go to too into the trenches of it. But are there things that you don’t love about what we previously were so optimistic about? And then also more generally, when you see something like this, where it is a red flag that might be out there? How do you think about that, as an investor, is it easy for a company to change course, after it’s already committed to a certain mechanism and approach?
Maxx Chatsko 42:13 Yeah as we saw that those initial results came out over the weekend in late June at a medical conference. So the first six patients were treated couple different dosing levels looked really good, pretty good safety results, from the treatment at 28 days, pretty good protein reduction levels for the middle dose. So that look good, investors are excited because Intellia therapeutics had designed its entire technology platform to be pretty modular.
So given how well it performed, even though it’s only six patients, investors in Wall Street, kind of I think correctly, as well read through like, well, if it works, here, we just swap a couple different things out. And we can try it for any other gene in the liver, and maybe have the same results or similar results. So I think it is correct to read through, even though it’s very early into some of those other programs, and maybe start thinking, wow, you know, this could be a pretty big pipeline, maybe there’s a lot of commercial potential here.
But yeah, those double stranded breaks are a risk. So and this is a great example, to bring up. So for this specific disease, the TTR gene is really only expressed in the liver. So where gene expression takes place is very important to consider. If the liver is only responsible for half of this gene expression, and we knocked it out in the liver, which is the only place that gene editing can get to right now, then we actually only reduce a patient’s expression of this gene by 50%, that might not be enough to actually, you know, reduce the aggregation of this mutated protein enough to have a therapeutic benefit. But because it’s all in the liver, and we can knock it out pretty precisely. That kind of makes sense. So that’s why we saw some of these good results.
But the TTR gene is one of the only transporters in the human body of vitamin A. And we need that for vision. So even though we knocked down and disable that gene from being expressed, patients who have had this treatment will need daily vitamin A supplementation for the rest of their life, they might have trouble with night blindness, they might not be able to drive a car at night or in low light levels. So it’s not a it’s very different from a precise correction. So it’s important to point that out.
And additionally, patients in with this disease tend to be older, they’re in their fifth or sixth or later decades of life. And the older you get, the less efficient your DNA repair mechanisms are. So again, that’s not a great mix, when you’re making a double stranded break. These patients might already be at a higher risk for cancer, and they might not be able to make that repair from the drug candidate as efficiently. So you know, these are things that we might only find out years later, this drug could get approved on the market and then maybe this worrisome cancer signal shows up so those are some of the risks of keep in mind.
You mentioned how easy might be to pivot. And we have seen Intellia wisely started to invest in bass editing tools. So all of their platform today both ex vivo and in vivo programs are using that first generation gene editing approach, they need to make double stranded breaks. But they are developing some of those second generation based editing tools as well. We’ve only seen published data on that for an ex vivo approach.
So meaning they’re using base editors to design cell therapies, I imagine they would eventually want to work those into in vivo tools as well. But you know, if double stranded breaks become a really big deal, a big regulatory hurdle, or the FDA just says, No way, Jose, you can’t do this, everyone’s gonna have to pivot to those second and third generation approaches or something else. That is not involved with like, how we consider DNA editing today. So you know, that would be a very bad day to be an investor, I think, you know, even like, if that happened today, you know, I don’t know what Intellia is worth it was like $12 billion recently.
But if that happened, like tomorrow, the company had to retool and pivot, even though it has a lot of cash, even though can move to base editing, that’s gonna take a lot of time and a lot of money. I mean, what would the company might not be worth one or $2 billion at that point. So again, these are those big, hairy, technical foundational risks. Just to keep in mind, it might not mean anything, maybe we just say, you know, what, we’re not seeing this risk of cancer, or in some diseases, at least, there’s no other treatments, that makes sense.
But here, at least for this lead drug candidate, this is the drug candidate, that’s maybe going to go up head to head without Alnylam and RNAi. And it has already gotten, you know, patients that have reversal of disease, pretty convenient dosing schedules, it’s going to get more convenient over time. So even if Intellia’s drug reaches the market, I mean, Alnylam already has a pretty, pretty great option available for patients.
So that could also affect the regulatory decisions as well, right? If there’s this looming risk of maybe double stranded breaks are too great of a risk. You know, there’s no pressure from regulators to approve these things to get patients treatments, because treatments already exist. So you do have to kind of keep that in mind, too. That’s a maybe in the category of a regulatory or commercial risk. But yeah, so I mean, Intellia has a very great approach in terms of its how it is very methodical, and how it’s developing its pipeline, very modular approach that could scale very well. But it’s still very early, and we’re going to need some long term safety data to really, really be able to put this this technical risk to bed.
Simon Erickson 47:18 Well, this has been a fantastic show, as I expected that it would have the beginning of the program, kind of going full circle and talking about everything that we discussed and tying it back to how Maxx described at the beginning of the program, and how he likes to think about investing. There’s a lot of promise in the future of gene editing, and gene editing, excuse me, a lot of promise in the future of base editing, and Prime editing and all the other things that Maxx described.
But of course, there’s optimistic opportunities that we see out there, the in vivo announcement from Intellia was met very positively by the stock market when they announced those. Then again, just a week ago, we didn’t even talk about this on the show, but Allogene Therapeutics (NASDAQ: ALLO) ticker on that $ALLO, if you followed that story, fell 44% in a single day, as a lot of its approach for cellular therapy gene, I’m sorry, genetic therapy for CAR-T therapies was not as promising as the market was expecting it to be it’s got a lot of things on hold.
There’s a lot of volatility in this space, we need to make sure that we’re optimistic about the opportunities, but also always mindful that things could not go as well as initially look. Back to Maxx’s point at the beginning of the program, less than 10% commercialization rate for early stage drugs, you have to keep that in mind. It’s okay to place a lot of bets in this field. But definitely don’t go all in on one company that’s early stage trials because the numbers are working against you when taking too large of a bet on an early stage company.
But then kind of altogether, like Maxx said, it’s okay to look at things over time. You don’t have to just look at one to one point in time as an investor. He likes to look at the therapies he likes to look at the approaches. He likes to look at the de risking events, the collaborative partnerships, the cash on hand and the different programs. As companies evolve over time. As they learn more and more about the human genome Maxx I had a lot of fun. That’s one of my favorite topics ever to talk about. Thanks very much for being part of 7Investing Now.
Maxx Chatsko 49:05 Alright, thanks for having me. Hopefully, I explained things kind of Alright, try to throw in enough analogies there with Jenga and elephants and cauldron. So hopefully that worked.
Simon Erickson 49:12 There were fantastic I will be rewatching the show three more times highly caffeinated, to make sense of all of it. Thanks to Sam Bailey, our Director of Marketing also for producing today’s show. We hope you enjoyed this livestream edition of 7Investing Now and we look forward to you tuning in to future episodes. Looking forward to welcoming all of our 7Investing subscribers. On this Friday to our subscriber call. We can ask us about any of our previous recommendations. Once again, I’m Simon Erickson. Thanks for tuning into this show. We’re here to empower you to invest in your future. We are 7Investing.
7investing Operations 49:42
Illumina (NASDAQ: ILMN) Alnylam Pharmaceuticals (NASDAQ: ALNY)
Intellia Therapeutics (NASDAQ: NTLA)
Allogene Therapeutics (NASDAQ: ALLO)
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