How We Pick Companies to Invest In
June 7, 2021
Every 7investing lead advisor has a different method for evaluating companies. Some use a more technical style while others have a mixed approach that also involves personal experience. We all value different metrics in different ways and on this episode of “7investing Now,” Dan Kline and Maxx Chatsko will share how they pick the companies they invest in personally and how they find their monthly pick for 7investing members.
Biogen (NASDAQ: BIIB)
Beyond Meat Inc (NASDAQ: BYND)
Apple Inc (NASDAQ: AAPL)
Roku Inc (NASDAQ: ROKU)
Mercadolibre (NASDAQ: MELI)
Sea LTD (NYSE: SE)
Target Corporation (NYSE: TGT)
Walmart Inc (NYSE: WMT)
Lululemon Athletica Inc (NASDAQ: LULU)
Walt Disney Co (NYSE: DIS)
Dominio’s Pizza, Inc (NYSE: DPZ)
Twist Bioscience Corp (NASDAQ: TWST)
Catalent Inc (NYSE: CTLT)
Sam Bailey 0:13
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.
Dan Kline 0:23
Good afternoon 7investors and welcome to the Monday edition of 7investing Now. My name of course, is Daniel Brooks Klein. I’m gonna be joined today by Maxx Chatsco and we lucked out, Maxx. You’ve been following this, this is not our lead topic. We’re going to talk about this later in the show. But Biogen (NASDAQ:BIIB) was just approved for the first treatment of Alzheimers ever. We have some things that treat the symptoms of Alzheimer’s. There is a lot to unpack with this one. It is not as simple as like, hey, this drug is approved, now some people are going to be cured of Alzheimer’s. That is absolutely not the story here. But we’re going to get to all of it in a way that you’re not going to see anywhere else in the media. I’ve read this story, it’s been alerted to me like a dozen times. And every time I read it, I’m like, oh, that’s really really wrong based on what Maxx is saying in our Slack and based on frankly, usually the third paragraph of the article you’re reading. A lot of times the the headline just doesn’t get it. This is probably good news, but it’s not necessarily good news. But before we get to that, Maxx, how was your weekend? Are the dartboards in Pittsburgh opening back up? What fun did we have this weekend?
Maxx Chatsko 1:31
Yeah, I went to play darts. I went to play disc golf- actually got my first hole in one a disc golf Dan.
Dan Kline 1:37
Disc golf would be similar to what I used to think of is frisbee golf. Do you use more than one disc? Do you have like a putting disc in a in a long disc? It’s gotten more complicated, right?
Maxx Chatsko 1:47
Yeah, they have different attributes. So you know, you want like a different disc for driving. Sometimes there’s bid ranges you have different putters, I only have two that I use, usually, but some people have like a whole bag, a suitcase with wheels, and there’s like 30 discs. It’s a little overboard. But you know.
Dan Kline 2:02
Perhaps someday I will caddy for Maxx in a game of disc golf. Our lead story today, we’re going to talk about how we pick the companies we invest in. This is not hard and fast. There’s no one set of criteria. Now we know some of our friends out there the Brian Feroldi’s and the Brian Stoffel’s of the world. Our good friend Anand Chokkavelu, they have spreadsheets where they fill things out. And even those people have some leeway, and some wiggle room in what they do. I will say I have more wiggle room than anything else. A lot of what I’m doing is a feel. But we’re going to go through six different topics here that sort of breaks it down, we would like to take your questions and your comments. Feel free to throw in your general investing or market questions as we go. We know it is the summer and a lot more people are watching these shows after the fact than live. So if you’re watching live, we fully appreciate your questions, your comments, your hellos, your thank yous, your compliments, your negatives, whatever it might be. But Maxx, when you are investing a stock, how do you start?
Maxx Chatsko 3:06
So Dan, I take a bottom up approach to investing. So I say you can have a top down or bottom up approach, a top down approach might be, you know, hey, I like CRISPR gene editing, I think that’s going to be big. So I’m going to go and own all of the CRISPR gene editing stocks. So it’s more of a basket approach, a bottom up approach that I do, I’d take a look at an area, let’s say CRISPR gene editing. And I’ll start with scientific literature. So I want to really understand all the ins and outs of the science behind it. What are the challenges? What are the opportunities? What are some of the outstanding questions that haven’t been solved? And then from there, I’ll look at the competitive landscape as well. So even though CRISPR gene editing might be targeting, sharing diseases, I’ll look at, you know, what are some other therapeutic modalities, there’s antibody drugs that are doing something similar. There’s RNAi, there’s other genetic medicines out there.
So I want to get a whole, a big picture view of the entire landscape. From there, I’ll zoom in and try to focus on a few companies. So I think that’s maybe where most people start really, right. So I’ll look at like SEC filings, understand the financials. I’ll try to identify and really narrow down the list to only a few. Sometimes I’ll reach out to the companies themselves, I’m usually reaching out to people in my network, a scientist or other management executives in the field to get a read on it. And then I try to, if I can, narrow down to one company that I can invest in. Now sometimes I do this and there’s no companies to invest in. So you just kind of walk away with your head down. But that’s the bottom up approach to investing.
Dan Kline 4:36
So I take more of a, let’s call it an experiential approach. Almost all of the stocks that I’ve recommended at 7investing and most of the ones in my portfolio that were not Maxx Chatsko picks are stocks that I’ve been hands on with. So let’s pick a stock, a company that’s IPO’ing that I’ll tell you, I’ll not be buying – Krispy Kreme. If I decided, hey, Americans are pretty overweight, and they like coffee a lot. Like Krispy kremes are delicious. Like, I bet this is a good business. I would go to a Krispy Kreme and not only what I order and see how that goes, and I’d probably do it more than once. But I would watch how other people are handled, I’d watch to see if the staff is well trained. If it isn’t, maybe I would dig into CGH are the stores franchised are company owned? I’d get a little bit of a sense of it. And I would find out right away. When I walk into a Krispy Kreme, I go, wait a minute, there’s only donuts here? There’s no breakfast sandwiches, there’s no bagels? That to me would be, if not a red flag, a pretty digging yellow flag. And then I would move into step two.
So you can’t always do this. There’s one pick in my portfolio that I almost had to skip step one. And I took sort of the approach hey, this is an industry I’d like to be in how do I do it? But most of the time, my ideas come from, oh, hey, like I’m using this product every day, like, you know, or go back many years, and I don’t own Roku (NASDAQ:ROKU), I should but I don’t, I should have gone wow, I use this product. It’s awesome. And the reason I didn’t buy it is because I also used an Amazon product, I went oh, Amazon will crush them. And now we know that’s not true. But I start very hands on. Part two is, what do you read and watch to learn about the company? I’ll go first here, Maxx, because you shared some of the things you watch and read. I start with the last couple of quarters of earnings calls. And I sort of look at what is the company talking about as their problems? What are the trials and tribulations? I might look at earnings reports. But that doesn’t tell you that much.
I’ll also watch to see if there’s any company presentations, a lot of tech companies and telecoms and other spaces I follow do a lot of big public events. So you know everything from watching, say like an Apple (NASDAQ:APPL) investor day type event, which is pure hype and not meant to be all that informative beyond a public relations point of view, to places where sometimes people are getting grilled at industry conferences and events. If possible. When we’re in a normal world and we’re traveling, I’ll try to talk to somebody from the company or at least watch somebody from the company, go give a speech, you can learn a lot. Like I’m not an investor in Beyond Meat (NASDAQ:BYND), I just don’t see how you could possibly differentiate enough in that space to be worth my investment. I also think lab grown meat is going to be a pretty big challenger at some point. That being said, I saw the founder give a speech. And one, I then dug into why he’s not the CEO and that – so as much as I don’t own it, I came way closer to wanting to own it because I saw the person and believe the vision much more than I did. Maxx, where do you read? Where do you go?
Maxx Chatsko 7:34
So like I said, for drug developers to I should color that in? Right? That’s what my perspective here for this is this topic here for the show. So I started with scientific literature. And then I you know, I’m very heavy into SEC filings as well. I try to read quarterly and annual reports for all the companies I own and recommend. So I already talked about that. But I would say too, investors have to be careful about the sources of information they’re reading, right? I mean, Dan, you and I worked in media, we know like it’s some of those maybe aren’t the best sources of research, maybe it’s not from people that are well informed. Sometimes the incentives aren’t necessarily there to do the best research. So, you know, you also have to think about you like industry conferences, or if you read like investor presentations, for instance, right? That’s the company telling you what they want you to see in here, no company issues a presentation that says, hey, here’s all the things you’re doing wrong. Here’s our biggest weakness is right, you don’t see that. So you have to seek out objective information, and not just information that confirms what you want to be true. So you guard against biases in the things you’re reading as well,
Dan Kline 8:38
I would say you have to learn enough on your own. So you can see if a person writing you know, let’s call it an analysis piece actually has any analysis. It would drive me insane back when – I don’t cover the cable industry as much as I used to – but I would see cord cutting articles that fundamentally got the numbers wrong. Those are not hard numbers to get there. They’re widely reported. The other thing is, you know, when you’re following individual writers, it’s really important to get to know the writer. So there’s a lot of great analysts out there. A lot of our friends on Twitter are great analysts, and they may disagree with us, but they may work at places where somebody else is writing the opposite opinion. So you need to know the foundation of the person, what they believe in. I like it a lot to movie and television reviews. If you understand, hey, this television reviewer tends to value the same things I do. You know, then you might take their advice more often than not, for example, if you like my recommendations, I’ll tell you right now, go watch MODOK on Hulu, it is the best superhero cartoon I have seen in ages. It totally rips apart what you would think. That is unrelated to this show though.
Let’s go to number three here. We would love your questions and comments. Tristin we’ll take yours a little bit later but I appreciate it. We have a we have a few more to get through here. Is there an obvious deal breaker to you because there is one for me, Maxx.
Maxx Chatsko 10:04
I don’t know about an obvious one. There’s so much nuance, I think when it comes to like drug developers, right, to different diseases, different parts of the market, all that, I will say the three things I do look for in companies are that they’re addressing pain points, that means they’re actually adding value, they’re solving some type of problem. It’s not uncommon to see companies that have a solution looking for a problem. You don’t want to own those companies. So addressing pain points, I also want companies that have technology platforms, that makes it easier to scale makes it easier to recover from failures, so long as the underlying technology platform works. And I also want companies that have durable advantages. Sometimes that’s intellectual property. Sometimes that’s just having good, you know, science behind it. Because that makes it easier to navigate the competitive landscape. So ideally, I really only invest in companies that have all three of those boxes checked. Sometimes I’ll make exceptions, but I almost never do.
Dan Kline 10:55
For me, the biggest deal breaker is I will not invest in companies that don’t value their customers and treat them well. And I think it’s why like, I don’t care how much money AT&T (NYSE:T) makes, I’m not going to invest in it, I’m never going to invest in Comcast(NASDAQ:CMCSA). And when I look at any public facing company, I don’t expect perfection, things are going to go wrong. There are a million reasons I don’t invest in, say food delivery. But the biggest one is they don’t value you as a customer, they look at you as numbers. And I think how you handle problems, problems are inevitable. You know, if you have an internet connection, or you know, whatever, whatever it might be, things are going to go wrong. When I call that company, do they make it easy to get a person? Does that person actually have the latitude to talk to me and not have to read a script? Oh, I know, I feel bad about your problem. Do you know you could go to our website and get it fixed? I know that – my internet’s out, please fix it. Right? I have little tolerance for that. And I have a pretty high standard for it. It’s why like, I look at, say, an Apple, you know, and I go, oh, wow, like this is really expensive. But if something’s wrong, it’s super easy to get it dealt with. You know, it is really easy to get your – it’s expensive if you’re not under Apple care, but it’s really easy to get your stuff fixed.
Number four, how do you view management? I’ll be quick here. management’s really important to me. But that doesn’t always mean management is perfect. So I’m not against a Steve Jobs style flawed genius CEO, as long as the overall company culture doesn’t necessarily reflect that. Now, that could be badin the C suite and the upper tiers of the company, you might see a lot of volatility, but I can put up with a difficult, I’m not a giant fan of the evil genius. You know, and I won’t throw out the one we’ve had thrown out to us the most, though there’s two you could really think of, but I do think sometimes with being incredibly brilliant means you’re not necessarily gonna be the best people person. And then I look a little deeper. Is there a good COO? Are there layers? Are people happy at the company? I’ve been places I’ve worked adjacent to places that didn’t necessarily have a nice guy at the top of the chain. But the rest of the culture was actually pretty good. Maxx, I’m gonna guess management is incredibly important in early stage biotech investing
Maxx Chatsko 13:16
Yeah but first, I mean, let’s just name names, right? The evil genius are talking about Simon Erickson.
Dan Kline 13:22
Simon does have a hairless cat. So no, no, he does.
Maxx Chatsko 13:27
So actually, I don’t actually value. I should say, I don’t weight management very heavily in drug development. It’s a box that, you know, if they have an amazing management team, that’s good. I check that box. I try not to overweight it because at the end of the day, it comes down to the science and the data, right? You can have the best manager team in the world that do everything, right. But if the therapeutic compound you’re studying for the first time ever doesn’t work, then it doesn’t really matter what people are in charge. You can have the right people who have tried to avoid missteps and make development go smoother. It’s way more important. Once you get to commercial stage operations, and you have a drug on the market, you need to really navigate a lot of complex situations there. But if a company I’m looking at has terrible management, then I absolutely weight that against them. And that’s that’s almost one of my deal breakers. So that’s how I look at it.
Dan Kline 14:17
Let me ask a follow up here. Do you dig into the sales team? And the reason I ask is because, you know, my brother is a sales lead. My brother’s the, I don’t know what his title is, he’s in charge of all of sales for Tottenham Hotspur in the Premier League. And I’ve watched him sell and he’s really, really good. And I have a buddy who is an amazing sales trainer and has a book coming out which we’ll probably have him on the show. I would think in the biotech world, if I have two drugs that are roughly similar, whoever has the better sales leadership is probably going to win. Is that fair to say?
Maxx Chatsko 14:49
Yeah, and it’s funny. Increasingly, you’re seeing companies talk about their sales teams sometimes even have individuals on the sales team and their investor presentations and what territories are covering across the United States. So it kind of puts this front and center for investors. This only comes into play if you have commercial stage operations. So that can take years to get to not all the companies I invest in have any drugs on the market yet. But when they do, it is very important to do that. And also, you know, that comes in, that’s a whole nother thing, you need to evaluate their commercial strategy, because it’s already on the market is approved. But you still have to sell it, you still have to get insurance coverage to explain to doctors and patients why this drug is adding value. So very much important.
Dan Kline 15:28
Sam Bailey and happy birthday, Sam Bailey, by the way, we are going to take the second that comment from from Tristan Wakeley before we get to the next one. Do you eliminate stocks from certain regions due to disclosure, a rule of law, government, Eg China, EU, etc. So I don’t rule it out. Obviously, I own some companies that have some exposure in the entire world. But I don’t generally seek out companies that their prime operations are in places that I don’t operate. So I’ll give you a great example of a really good company that I should own. I should own MercadoLibre (NASDAQ:MELI), I don’t. And it’s because I just don’t feel comfortable innot understanding how that part of the world works. Now, do enough of my friends who’s investing accumen I trust love that stock that I should probably buy it? Yes. I don’t own Sea Limited (NASDAQ:SE). And part of that is global exposure. Part of it is I’m not sure about their reliance on a game to provide a lot of their revenue to fund their growth and other businesses. Maxx, do you have anything that you just flat out rule out?
Maxx Chatsko 16:31
So I’m like tinfoil hat level, you know, conspiracy theory, when it comes to China – no. I just think this decade is gonna be rough for U.S./China relations. So I do actually consider that a yellow flag or a red flag for companies that I’m looking at, if they’re a little too close to or too reliant on, you know, suppliers in China, manufacturing in China, something to do with China, that tends to come into play more for energy companies I’m looking at. But ironically, one of the drug developers I’ve recommended here is very close to certain partners in China. I’m like, oh, man, and they announced that after I recommend to them so ironic that that would happen to me. But yeah, I just think it’s going to be tougher to operate there. And I actually look at the opposite of that means that there’s opportunities, the US is going to start onshoring certain critical supply chains and investing in certain industries, AI, synthetic biology, we’re going to do more of that here. So you want companies that are taking advantage of that, and maybe seen as like national strategic importance of these companies and businesses, that will I think, come out a little bit more in this decade. But maybe that’s yeah, so there you go.
Dan Kline 17:33
We appreciate the question and would love to hear from more of you, as the show goes on. Number five on our list here is how important is valuation? And how do you assess risk? So Maxx, valuation matters more to you than it does to me, I tend to be recommending most of my picks are fairly mature companies, and I’m looking at where is the growth going to come from. And if I see a path to growth, risk for me is one where I mostly avoid risk. I would say, if you’re an older investor, looking for a safer portfolio, that’s going to throw off some dividends. And I say this because we got an email today asking us, you know, this question, I’m someone who’s, you know, 15 years from retirement, you know, is your service right for us? And I would argue that you can pick and choose and have some investments that have a lot of upside, but don’t necessarily have that downside risk. Like, you know, I’ll pick one that I’m not invested in, you know, Target (NYSE:TGT), a company I really, really love, just don’t know why I don’t own any stock, but I don’t, what’s the worst case scenario for Target? it’s gonna languish, like, it’s gonna die over 30 years, like, you know, there’s no scenario like you have with some of these high flying tech companies, where someone invents a better wheel. And all of a sudden, you know, these big traditional companies now, have we seen big traditional companies die? Sure, we’re in the prolonged death rattle of Sears and JC Penney, it can absolutely happen. But I tend to look for companies that are also innovating and evolving in a way you’re not going to see quickly. Because you know what, adding a couple billion dollars in sales at Walmart (NYSE:WMT) doesn’t mean that much, but Maxx in your space, valuation and risk are much different.
Maxx Chatsko 19:14
So there’s different types of risks. And I outlined these in my recommendation report. So there’s like technical risk, commercial risks, market risk from the competitive landscape, and then there’s valuation risk. So, you know, I was kind of, I don’t know, sounding the alarms at the end of last year and beginning of this year, because in biotech, it really is different. If you’re a tech company, and you’re growing revenue very rapidly, even if you’re not profitable, we can at least squint our eyes and turn our heads and look at it just right and kind of justify valuations and maybe we’re just looking three years out, so two years out or such on. In biotech, when a company’s valuation gets too high. That’s a lot different because you’re assuming that certain derisking events that haven’t happened yet, like a clinical trial data readout, you know, is going to be favorable, and that hasn’t happened yet. If you’re pricing in way too much valuation, and then that derisking event fails or is unfavorable, you have a lot steeper decline ago. So it’s a lot different for companies that are, you know, development stage drug developers, and they don’t have a drug on the market, valuation risk does matter quite a bit.
Dan Kline 20:18
And Maxx you actually invest in companies sometimes knowing that or always knowing that a percentage of them may literally fail, may never come up with a commercial product, like, is that just a numbers game where you have to identify, you know, a basket of those companies?
Maxx Chatsko 20:34
You know, I mean, any company can fail in the drug development space, especially like early stage drug developers. You know, I think of all the companies I’ve recommended, they’re all I think they’re all going to be successful, it’s more of a matter of time. So that’s where that bottom up framework comes into play and having other frameworks that I look at companies with that comes into play. But sure, I mean, you got to accept that, you know, if your thesis breaks, it’s tough to recover from like, hey, this technology doesn’t work, right? There’s no, it’s not like a pivot at Target, like you’re saying, right? They just, it’s way different. So yeah.
Dan Kline 21:09
You can’t be like, hey, this cancer curing pill doesn’t work, let’s use them as Connect4 pieces! Like it’s just, there’s very little you can do. When that happens, we’re going to go to the last one, here. It is, how do you actually buy, and I am not disciplined on this. So when I decide to buy a stock, I look at how much money is in my account at any given time. And I buy some, it’s usually just a small amount, you know, maybe it’s a couple hundred dollars, maybe it’s even less if it’s something you know, that I’m buying, because because you picked it, it’s not a company, I really know. And then as money is added in my account, I kind of unscientifically look at my positions and look at what’s up or down in any given day, and maybe I’ll see a real opportunity, the markets been so volatile, maybe you’ll see something you really like that went down 20% for stupid reasons. You know, or, or maybe there’s just something that’s really been lagging performance. And you go, okay, this stocks been really flat because and I actually wrote a public facing article, I think you edited on how a lot of retailers, it’s going to be really hard to judge performance next year, because, you know, you’re seeing things like Lululemon (NASDAQ:LULU) be up 88% in revenue, well, if next year, they’re only up 2%. in revenue. Is that because there was pent up demand? Or is their audience slowing? I don’t know, it’s gonna take years to figure this out. So I look for signs that there’s value there. But there’s no major science to it for me, Maxx, how do you do it.
Maxx Chatsko 22:36
So I do have allocation targets that I try to build to, but we use the term buy and hold, I’ve actually updated that recently to accumulate and wait. I think those are the two more accurate verbs. So you know, if I’m going to start a position at a company, I buy a little bit, then I build over time over many months into the allocation that I want. So my largest holding, for instance, I bought shares in each of the last 18 months. So sometimes it just takes a lot of time. But that smooths out your entry points. Sometimes you’re buying “high”, sometimes you’re buying “low”, and over the long run, that doesn’t really matter. But you don’t want to buy your entire position all at once. That’s not how I would do it anyway, I think that’s a little too, that’s unwise.
Dan Kline 23:19
So I do do that if it’s something where my position is only going to be 2%. If it’s something that I’m going to have – and I have a few stocks in my portfolio, and they’re probably all stocks you recommended. I looked at the upside and went okay, 2% will probably be enough if on the chance that this happens. And some of those, there are some stocks where I do own in that 2% range that are cheap enough that if I end up with like a rounding error in my account and have like a few bucks left, I might buy like a share or two and add because I don’t like seeing money sit in my account. And I like sort of zeroing out that balance. So that is our approach. That is how we pick and buy stocks. We of course, would love your questions and comments, we actually see a bunch of watching out there. So feel free to chime in or just enjoy the show.
Maxx, we are getting to the point of the month where we start to think about our picks for next month. But it’s still early. We just released our picks for June. And it is a diverse, amazing selection. But if you’re thinking about becoming a member of 7investing, it’s important to do that right now. Why is that? Because as of July 8, as of the end of the day on July 7, our prices are going to go up. So right now if you join, you can pay $17 a month or $170 a year for life. If you wait, you are going to have to pay $49 a month or $399 a year. Why would you do that? Like you have $17. I’m teasing a little bit. But we are such a tremendous value and we would love to have you be a member and if you join now before the end of the month, you get access to our new member call on the third Friday. That’s not this Friday, that’d be a week from Friday. After that you get access to our members call where a shocking percentage of our membership shows up and asks us questions about our past picks. Really things we cannot talk about here on 7investing Now. Our current picks our past picks, what are we thinking about? What are our top picks, which later does become members content? There is so much stuff So Sam Bailey, if you could share, it is 7investing.com/subscribe, you have until July 8th. But why would you wait, get there now.
So Maxx, we start putting the show together usually the night before. And we agreed on the main topic. And then I think at some point today, maybe like 9 o’clock, 10 o’clock, you put in, you know, hey, the FDA might rule on Biogen Alzheimer’s drug. And then I don’t know, maybe like 11, like pretty close to showtime. They actually made a ruling. So let’s look at the top line. The top line is that the FDA has approved Biogen’s Alzheimer drug, but that’s not really the full story, right?
Maxx Chatsko 26:08
Yeah, so maybe a little background. Biogen was developing a monoclonal antibody that went in and cleared out beta amyloid plaques around brain cells, right. So there’s the beta amyloid hypothesis that suggests the build up of certain plaques in the brain is actually the the main driver of Alzheimers disease, these build up, it leads to cognitive decline and starts to interfere with brain function. And as plaques build up and get worse, that means you have more severe Alzheimer’s or dementia. So this drug was developed to clear those plaques. And they ran two clinical trials years ago, the first one failed, and they were like, oh, man, this sucks. And the second one also initially failed. So they said, okay, we’re gonna halt development, it just didn’t work. It was just another one, the long list of Alzheimers treatments that we tried and failed. Then later, they came in and said, hey, actually, we have data that wasn’t available the first time around. And in one of these studies, we can actually see it provided a benefit, meaning it’s slowed the progression of disease in patients who had early onset Alzheimer’s. So early stage Alzheimer’s. And the data weren’t actually very conclusive. There’s some controversy here. The FDA has also been criticized for maybe working a little too closely with Biogen, there was an ad com.
So an advisory committee meeting, where an independent panel weighs in for the FDA, it’s not actually the regulator decision. And they weigh in and they make a recommendation to the FDA, and they voted 10 out of 11 of these people on the addcom said that they would not favor approval. So then today, the FDA came out and actually approved the drug in early stage Alzheimer’s patients. So it’s not approved for all Alzheimer’s patients, there’s about 6 million individuals United States affected by Alzheimer’s, this country, potentially, maybe 2 million of those. Additionally, it’s a conditional approval. So Biogen still has to run a much larger clinical trial to actually collect the data that shows that the efficacy is legitimate. If it’s not, then this might actually get yanked from the market years from now.
Dan Kline 28:20
So Maxx, this may surprise you. But I’m not a scientist. And what this drug has proven to be effective at is clearing plaque from the brain that is connected, they think, to Alzheimer’s. But is it possible that clearing plaque does not actually impact the progression of Alzheimer’s? Like, like, could this be a drug that’s effective at doing something that seems like it would help but doesn’t actually help?
Maxx Chatsko 28:44
Yeah, so in clinical trials, even the one that failed, patients saw, on average, a 30% reduction in the amyloid plaques in their brain, according to PET scans. So that is good. The issue is that, you know, the beta amyloid hypothesis might be a little too simplistic, right? So yes, the build up of plaques in the brain can lead to – it plays a role in Alzheimer’s and dementia. But it’s it’s almost like only part of the process, right? For instance, in recent years, we have a lot of evidence suggesting that sleep quality is actually the more important driver of Alzheimers progression. And that’s because it actually is before, it’s what causes plaques to build up in the brain. So when you sleep and you go through certain cycles in your sleep, assuming those are deep enough, yeah, that’s when your brains actually clearing cellular wastes from cells in the brain, including these plaques. So if that process breaks down, that’s when plaques can accumulate, and then that leads to Alzheimer’s.
So it’s kind of like a chicken or the egg, I guess, you know, do you want to focus on sleep quality? Or do you want to focus on mopping up some of these plaques? Does that actually address the bigger part of the process? It’s broken down. So we do have like very small studies. electrical stimulation of the brain is actually very effective at treating or slowing or halting Alzheimers disease progression. But we have this like drug first mentality, you know, in healthcare in the United States. So we’re always looking for drugs that we can give people. And, you know, I think at some point this decade will actually come to conclude sleep quality is the way more important metric to focus on and maybe the interventions not drugs, or maybe it’s not drugs only. Maybe it also be you know, some type of electrical stimulation, a cap you wear at night that you know, juices your brain and with fun electrical signals, so you get improved sleep quality.
Dan Kline 30:36
Yeah, I feel like the sleep quality ship has sailed for me. So I’m hoping the electrical stimulation or the mop up idea will work. I am not a great sleeper, and I don’t feel like that’s something that’s going to change. You know, so if there’s some method of making my sleep better by zapping my brain, zap away, I am totally good at that. Next, I want to talk about what this means for investors, I think it’s really important, because you are going to see, I’m going to guess, wild stock price movements in any company that has anything in its Alzheimers pipeline. And that might not track to reality. Is that is that a reasonable take on it?
Maxx Chatsko 31:14
Yeah. So last I look Biogen stock was halted, it might not be it right now, we’ve been on the air for a while, but Eli Lilly stock was not halted. And it is also developing an antibody drug, it’s in the same class as the Biogen drug candidate. And they had actually, it seemed like, you know, encouraging results. So that stock was up 10%. And this is Eli Lilly, this is one of the largest pharmaceutical companies in the world. You know, it was, like $200 billion at market open today. So it immediately shot up 10%. That’s a $20 billion gain in valuation on a drug that’s in development, you know, that’s a pretty big move for a company of that size. So yeah, we’re gonna, it’s probably going to be even worse, if there’s any small caps out there that maybe are working on something similar. So I would say, you know, you need to be cautious. And remember, this is a, you know, this is a conditional approval, so Biogen stills from a larger clinical trial that might not be successful, and then we’re right back to where we started.
Dan Kline 32:15
There are other hurdles here. We talked about it earlier, this drug is supposed to cost about $8,000 a year, I think I’m getting that correct. There needs to be insurance approval, insurances willingness to pay for it might be tied to, well what other expenses does it stop the insurance company? Maybe it stops you from needing a more expensive symptom related drug, you know, so there’s a whole ecosystem that has to be worked out here. And I would always be really careful about buying or selling anything. Based on front page news, the people playing this news, probably made their bets a long time ago. And this, this is not a guarantee, if this works, it could help about 1.5 million people. And that’s really exciting. But it’s not necessarily going to work. But Max, why was this a big decision for the FDA?
Maxx Chatsko 33:03
Yeah, so you’re right. So actually, there was a it’s called the Institute for Clinical and Economic Review, ICER. And they are very influential, they kind of look at the cost benefit analysis for new drug candidates. And they suggest what would be a fair economic value for drugs, they said, based on the data, we have, this drug would be worth $2500 to $8,000 per year, that would be a fair value. So that’s pretty low. For something that’s an Alzheimer’s treatment, right? The company is expected to price it between $10,000 per year to $25,000 per year, but they need to get insurance coverage. Insurance companies might base what they’re willing to accept on that ICER review, which is closer to like 8000 or lower. So that’s a hurdle. Also, you know, to qualify for treatment, if they get a very expensive PET scan, you also have to – the drug is administered once a month through IV, intravenous administration, so that’s not very convenient. So there’s other hurdles here. It’s not, I think, the way to summarize it, investors often look at clinical development, phase three clinical development as like the end the last book end, and and if you have a successful phase three clinical trial, that’s it. That’s not really true. That’s the end of clinical development. But that’s the beginning of commercial development. So that’s now where Biogen is facing hurdles and obstacles. So we’ll see. We’ll see how that goes. Well, you asked a question there before.
Dan Kline 34:24
Well, let me let me ask another question. So this is obviously helpful. If you have Alzheimers, early stage Alzheimer’s, you’re aware of what you have, and it is a bleak road you’re going down so something like this is encouraging. Do you see and let’s say the next 20 years, do you see further development? Do we have the the data the tools that we should be able to maybe not cure but slow progression or give people like we’ve seen it with, with all sorts of different things that were previously untreatable Multiple Sclerosis would be a good example, where there are a lot of treatments that they don’t necessarily stop the disease, but they can stop flare ups, they can lessen severity, they could give you a longer runway, you know of health. Are we going to see that with Alzheimer’s, where it’s, you know, one of those things where you don’t want to hear your doctor say it, but you also know, okay, or Parkinson’s, another good one, you know, when Michael J. Fox got Parkinson’s, it seemed like, you know, a death sentence. And we’ve seen massive changes in how that disease is treated, it’s not cured, it’s still something that dramatically impacts his life and many other lives. But it has moved forward, are we going to go that same direction with Alzheimer’s?
Maxx Chatsko 35:34
Yes, if you have a long enough timeline, you know, I think every decade we’re getting better at understanding biology, it’s still very complex, we still have a long way to go. But yeah, 10 years from now will be an even better place. 20 years from now, 30 years from now, one of the problems has been, you know, the technical hurdles has been targeting things in the brain, it’s been tough to cross the blood brain barrier, and get drugs there and understand targets there. And again, like I was just talking about, we often don’t understand the whole mechanism, you know, like sleep quality is an important component. There are no drug developers that are looking at sleep quality as a metric in their clinical trials. If they did, I bet we’d get much different data results, or we’d be able to see, maybe you’ll be able to bin patients differently, based on their sleep quality and who’s actually responding to your drug or not. But yeah, 10-20 years from now, I think we’ll make a lot of progress.
Dan Kline 36:24
Our ability to measure sleep on a mass level is at an all time high. Every person who owns a Fitbit can track their sleep. And I have to assume that at some point, the Apple Watch will get better battery and be able to do that. And so our ability to take aggregate data on sleep, and then back it out into percentage of people that have Alzheimers. And that data is not there yet, but it certainly will be in the next few years, we’ve talked about that a lot on this show, sort of all this data that Apple and Google and Amazon and others are collecting, and how we can use it to figure things out. And that is a really good example. Sam, I am not going to share David’s Strauss’s comment because it is not great advice for everybody. But David, I do appreciate the advice. And yes, that might be impacting my sleep in both a positive and negative way.
Maxx Chatsko 37:13
I would add, I would add to that, even though we’re not going to read it. That’s not good for sleep quality, actually. So there’s a good book called why we sleep. Definitely read that David, it talks about the difference between you know, basically incapacitating yourself and then actually sleep quality. So there’s two different things.
Dan Kline 37:30
I say find the healthy balance between incapacitation and sleep quality. But you know, do as is right for you. We appreciate you watching along. We have one more section here. We’re gonna enter the homestretch. Maxx, before we do this, is there anything else you want to say on Biogen and this latest development here?
Maxx Chatsko 37:49
No, I mean, just be careful. You know, there’s still a lot of hurdles here. So depending on what goes on in the stock price today, I mean, doesn’t necessarily mean screaming buy or anything like that. It’s a conditional approval. And I think more often than or more likely, opens a pretty slippery slope for the FDA, in terms of do all the other drugs that have questionable, inconclusive data now get approved? I think this is going to be potentially a tough Genie to put back in the bottle here. So it could it could lead to worse things.
Dan Kline 38:17
Maxx, could this change regulation? I mean, we have some drugs that you can use under compassionate use cases where, you know, there is no hope for you. So this drug that may or may not work? I know that’s the case with certain cancer treatments and studies. It’s not like they just give it to you. They’re in as parts of studies or trials. Could this be a case where if you have something where the end result is terrible, that there’s just, I hate to say this word, because it sounds like a horror movie, but there’s just more human experimentation, where the end is going to be bad? So why not? Why not try something?
Maxx Chatsko 38:53
Yeah, I mean, so the risk here is that we allow ineffective drugs, and then they’re more expensive than the benefit they’re providing. So you don’t want you don’t want a healthcare system that’s based on that. So if this is priced at, you know, $5,000 a year, and maybe it helps a small amount of the patients that are eligible, then that might be a net benefit. But if they price it at, you know, $30,000 a year and it doesn’t help hardly anyone, then that’s a net cost to the healthcare system. So we don’t want to have a regulatory agency that’s allowing that to happen, I think more likely it’s as a one-off case, I think there was a lot of pressure to get the drug approved, because there are currently really no treatment options for Alzheimer’s. So you know, maybe hopefully, this is just a one off example.
Dan Kline 39:38
Yeah, I mean, there’s a slippery slope here and we appreciate the comment there. It is one of those cases where we’ve seen Americans traveling overseas, traveling to South America to get treatments that either aren’t allowed here or might not work. We’ve seen our athletes go get their blood spun and other things that that does appear to work we’ve seen you know something like plastic surgery tourism, where you’re going to go to Thailand to get your calf implants, because it’s cheaper, but then something goes wrong and they don’t have the same medical infrastructure that we do. I just picked the most ridiculous place and thing I could think of I have no idea if people go to Thailand to get calf implants, or even if Thai calf implants are particularly popular anymore, but let’s hit the homestretch here, Maxx, is there a stock you won’t own even though it has strong business prospects? I asked this on Twitter, and a shocking amount of people 1000s of people have taken a look at it. A lot of people have commented an answer. I threw out there that for me, it’s Domino’s Pizza (NYSE:DPZ). This is a company that executes unbelievably well, but their core product I would only eat if it’s 1:30 in the morning, and I’m traveling, and no other food source open. That is the only scenario now I’m not saying if you invite me over and there’s there’s Domino’s I’m gonna be like hey jerk and throw it at you. But I am never seeking Domino’s out because there’s almost always a better food choice. So I don’t care how well they execute. And I get the argument for our colleague, Matt Cochran, who has a family of six, it is a really inexpensive option. I still feel like there’s almost as cheap pizza that’s dramatically better. Maxx, what’s one for you that you understand the case, but you just don’t want to own it.
Maxx Chatsko 41:18
Dan, I would say that’s almost un-American to not like Domino’s Pizza, I think Sam kick kick this bum off, we can finish the show.
Dan Kline 41:25
I am Team noid.
Maxx Chatsko 41:28
One company that I won’t own. So I actually did own this company up until the beginning of this year is called Catalent (NYSE:CTLT). Everyone knows Catalent. Right, Dan?
Dan Kline 41:36
I assume they sell cat tours?
Maxx Chatsko 41:37
Yes, no. So Catalent is a contract development, manufacturing organization, CDMO. Which means all it does is manufacture drugs for drug developers. Right? So drug developers focus on clinical trials. Once a drug is approved, they say hey, Catalent, you have all the infrastructure for this, you go make this, make it work and make it cheap and all that. So that’s what Catalentdoes, right? It’s a contract manufacturer organization. And, you know, they’ve made a lot of great decisions. Obviously, they played a big role during the pandemic in the last year, they made some great investments in gene therapy, capacity and capabilities, also cell therapy in recent years. However, when they made the deal, the financing deal to own or to to buy the company and cell therapy, manufacturing, they didn’t get debt, they didn’t issue stock, they made this arrangement with a private equity fund, and made a new class of shares, preferred shares.
So the way it works is, you know, all the profits trickled down the income statement. But before they get to you and me, Dan, they actually get siphoned off onto the preferred class of shares. And then we get whatever’s left over. So we’re benefiting from all the revenue growth that that acquisition enabled, but we’re not actually getting the profit growth. Because some of that’s going to the, you know, the fat cat investor with a monocle and top hat. So I imagine anyway, so the share price got a little ahead of itself. I think in the beginning of this year, I was already on the fence about it. I didn’t like that class structure. So I sold that position exited entirely and redistributed that into companies I feel better about so kind of a not like a hard -I like the business but just for that reason I thought I’d rather invest in some of these other companies.
Dan Kline 43:21
If you’d like to answer that question. I will retweet it from my Twitter account that is @worstideas7. I’m only sharing this because it got such a tremendous response. Kristen wakeley says a shout out from four corners Davenport, Florida so if you happen to live in the Orlando in the Davenport area. I am speaking Saturday at money show which is at the Omni hotel you can still register. You can see me speak live in person Monday on the future of retail and really how everyone is getting retail wrong. And if you happen to be in that area, there’s a reasonable chance I will Friday morning, be at the Orlando Cat Cafe having coffee, the coffee part of it is actually called Minch coffee. It is a lovely place. I will be writing the Friday show from there almost certainly, with that being said we are running out of time, Maxx, let’s hit our finisher. Sam Bailey, if you can share the graphic that would be great. Which sector has the most upside over the next 20 years? Overwhelmingly about half of you a little more than half of you said biotech. 21.3% said cryptocurrency. 11% said Entertainment. 14.9% said space. It’s worth noting that in the comments, a lot of people said it would be space if the horizon was longer. I actually think it’s entertainment. I think we’re in this massive land grab and entertainment and shift and consolidation, moving to sort of either really good niches like say your Discovery (NASADAQ:DISCA) channel’s, or really big blockbusters like you’re seeing with Disney (NYSE:DIS), I think we’re gonna evolve and figure stuff out. I’m not saying all of these aren’t great sectors. But if I had to be confident that one is really, really going to work, that’s where I would go and I know I’m wrong. Maxx, where would you go?
Maxx Chatsko 45:02
So I think biotechs correct, but I would clarify it and say synthetic biology. So as a little teaser, that’s our podcast episode tomorrow,
Dan Kline 45:10
So to build like Vision? Are you not an Avengers guy? I was gonna say to build Vision, who is a synthetic humanoid, that comes to life in The Avengers movies? Is that not where synthetic biology is going?
Maxx Chatsko 45:22
No, no. So it’s more about like reproducibility of biology and building things with biology. So that’s our podcast episode tomorrow, I interviewed Drew Endy. So we talked all about synthetic biology and different companies in the space like Ginkgo Bioworks and Twist Bioscience (NASDAQ:TWST). But I’d say it’s biology because that is going to eat the rest of the economy, right? Everything in space. Well, you need biology to get there. You know, we talk about a bio economy today, but really, everything in the economy will be biotech one day, right? We’re gonna grow metals and concrete and all kinds of crazy things. Batteries, computers, one day, we’ll be biologic. So biology has the most upside. 20 years might be a little early for that. But definitely, in our lifetimes.
Dan Kline 46:05
The entertainment world can profit from that with of course, the release of Biodome 2 No, don’t do that. Biodome 1 was not a good movie. We appreciate so many of you watching a handful of you playing along. We will be back on Wednesday. If you’d like to get in touch with us. That’s really easy. You could send a self addressed stamped envelope, no you don’t have to do that anymore. I remember when you had to do that. But you don’t have to do that. You can email us at email@example.com that has questions about your membership questions about pricing questions about how the service works when something happens. We’re happy to take your questions there. If you want to interact with us, that is @7investing on Twitter. We are very, very active. It is it is could be any one of us behind the Twitter chair. Don’t know what we’re doing on Wednesday show. I know that on Friday, we will we will have Anirban Mahanti on and we’re going to be talking about a whole bunch of companies that I know nothing about. So it’s gonna be a really exciting Anirban driven show. Until then, I am Dan Klein. He is Maxx Chatsco for Sam Bailey behind the glass. We’ll see you on Wednesday.
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