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Kelly ETF's new gene editing technology ETF has innovation in its DNA.
February 8, 2022– By Simon Erickson
The disruptive potential of gene editing could have huge implications for health care. Suddenly, several chronic diseases — which may have required patients to be treated for decades — have a potential to be fundamentally cured at the genomic level.
This is unlocking publicly-tradable investment opportunities. Companies are utilizing the power of CRISPR gene editing, base editing, and prime editing to directly modify patient DNA. Larger pharmaceutical companies are partnering with these smaller drug developers and are building commercial programs that could be worth billions of dollars. Genetic sequencing companies are reducing costs and unlocking broader market adoption, which is rewarding them with greater volumes and higher profits.
These opportunities are what has led Kelly ETFs to launch its newest investment product, the CRISPR & Gene Editing Technology ETF (Nasdaq: XDNA).
In this exclusive conversation with 7investing CEO Simon Erickson, Kelly ETFs founder Kevin Kelly describes why he brought the ETF to market and how it is less-correlated with other health care funds that are available. He describes his allocation approach and why he isn’t afraid to take large stakes in smaller companies.
The two also dig into several of the ETF’s largest positions, including Beam Therapeutics (Nasdaq: BEAM), Intellia Therapeutics (Nasdaq: NTLA), and Illumina (Nasdaq: ILMN).
Publicly-traded companies mentioned in this interview include Abbott Laboratories, Beam Therapeutics, CRISPR Therapeutics, Editas Medicine, Illumina, Intellia Therapeutics, Regeneron, and Thermo Fisher. 7investing’s advisors or its guests may have positions in the companies mentioned.
Simon Erickson 0:00
Okay, hello everyone and welcome to today’s edition of our 7investing podcast. I’m 7investing founder and CEO Simon Erickson. We’re gonna be talking about healthcare again here today. And I’m very excited to be joined by Kevin Kelly. He’s the founder of Kelly ETFs out in Castle Rock, Colorado. We’re gonna be talking about gene editing and his new ETF that he recently launched. Kevin, welcome to the 7investing podcast.
Kevin Kelly 0:23
Thanks for having me.
Simon Erickson 0:24
Kevin, just a real quick higher level of what we’re talking about. You’ve launched Kelly ETFs to be a new ETF issuer that’s bringing disruptive investment ideas to the market. And you’ve launched the Kelly CRISPR & Gene Editing Technology ETF to specifically play in the healthcare space. With a look at gene editing approaches that are being taken out there. The ticker on that first of all, is XDNA (NASDAQ: XDNA). I’ve got to start higher level Kevin, what is it that brought you to want to start this ETF?
Kevin Kelly 0:52
Well, you know, I’m so glad to be here. Because we’re really at this inflection point in history. Where we’re entering healthcare 2.0. And so I decided that I got to launch this ETF because there was nothing else out there that gave me the targeted exposure to that event, that seminal event that happened last summer.
Kevin Kelly 1:10
So if we go back to what happened, you actually had the first successful systemic delivery of gene editing in humans, and that is a game changer. Because over the past 10 years, we had groundbreaking research and we had tested in trialed it. And what happened was is Intellia (NASDAQ: NTLA) with its partner Regeneron (NASDAQ: REGN) came out with these results. And it changed everything.
Kevin Kelly 1:37
And knowing that we can actually go into the body, it’s called in-vivo is the term, where you can actually go in and have this gene editing technology go through your body and target the DNA that needs to be edited and replaced. And it worked. And so that was really the inflection point and turning point in my eyes.
Kevin Kelly 2:01
It was going back to like, what happened, back in January of 2007, where Steve Jobs came out, and he had his cell phone, right. And it was this iPhone, he was unleashing it on the world. And previously, we had Blackberries and Palm Pilots and things like that. But what really changed it is that he was able to build out this ecosystem of Internet of Things devices, that was really the inflection point where we went from the computing revolution, to the intelligence revolution, where everyone had a desktop and a laptop. And now it was our phones, it was, now it’s our watches or refrigerators. And so that was the seminal event that changed then for computing, where we’re computing with intelligence.
Kevin Kelly 2:42
And this is, that’s the game changing event that happened last summer. And so that’s how I decided I have to come out with this, because I was looking at the options. And there wasn’t a way just to get CRISPR and gene editing names. There are great biotech, there’s great genomic ones that incorporate a few different gene therapies. But I wanted targeted precise exposure to this theme.
Simon Erickson 3:05
That’s perfect Kevin, and we’ll talk a little bit about Intellia here in a minute, because I know that’s one of the larger positions in the ETF. But I do want to chat a little bit still higher level about the strategy that you have. You’ve mentioned in this ETF, you’re avoiding correlation with the traditional healthcare indices that are out there. Of course, there’s other options to choose from, you’ve got kind of a three pronged approach in terms of the types of companies that you’re wanting to place in here. But how are you avoiding the correlation with the other indices? What’s your strategy for the ETF at the higher level?
Kevin Kelly 3:34
Yeah, so at a higher level, what the ETF comprises of is three main sub-sectors of this CRISPR and gene editing ecosystem. So the first one is the companies that have the technology to deliver gene editing and CRISPR solutions. And then if you take a step back, in order for them to do that, they really have to have development partners. So you can see that a lot of these CRISPR companies partner with bigger firms, to help them get through the clinical and deep technical and science expertise. And then the third one is actually the next generation of sequencing, right? So you need to actually map out the DNA workflow.
Kevin Kelly 4:13
So it’s got those three sub-sectors that comprise of it. And because these companies are so dedicated and focused on these types of solutions, in gene editing technology, it really has little overlap, because there’s only a small segment of these companies. There’s not many of them out there because it is a newer technology.
Kevin Kelly 4:38
So if you look at broad based biotechnology ETFs, or funds, or you even look at some of the genomic ones that are out there. They’ll have some overlap, just a little bit of CRISPR or gene editing, but it won’t make up most of their funding. If you look at their top holdings they’re probably just really little overlap. So we view this as sort of a publicly traded venture capital fund, where you’re getting into these smaller companies that are in the infancy of their development in the cycle.
Kevin Kelly 5:13
So if you think about an S curve of growth, right? They’re at the beginning of an S curve of growth in their business lifecycle. So we’re talking the next 10, 15, 20 years, because these drugs haven’t even been commercialized. So over the next 18 to 24 months, you’re going to start to see some approvals so they can reach commercialization over the next 3, 5, 10 years. So that’s why I say you don’t get traditional correlation, because it’s really a binary trade, it’s a one or a zero, right? They’re going to make it or they’re not going to make it. That’s why you want a diversified approach to these types of companies.
Kevin Kelly 5:49
It makes sense, Kevin, let’s talk about some of those pre-commercial drug developers. The disruptors in the early phase of the S curve, like you just mentioned. You’ve got a concentrated portfolio. 24 positions, at least in the last prospectus you guys put out there. Your largest position is Beam Therapeutics (NASDAQ: BEAM), that’s about a 10% weighting right now. What is it that you can tell us about this company or why you have it in the index?
Kevin Kelly 5:50
Well, what’s really nice about Beam, it’s actually a diversifier from traditional CRISPR names, because they focus on a different type of gene editing. So gene editing incorporates base editing, prime editing, different types. And so when they focus on prime editing, and base editing is really differentiates the old, kind of foundational CRISPR companies and gene editing companies.
Kevin Kelly 6:35
So what Beam does is, it’s really nice, because these companies, different companies throughout focus on specialties, right? And they’ll focus on their niche. So that’s why it’s great because you’re getting exposure to the different niches within it. But Beam is a great company, because they sort of came out and validated what they’re trying to do, because they just signed a $1.35 billion joint venture with Pfizer (NYSE: PFE), a few weeks back to the JP Morgan health conference.
Kevin Kelly 6:35
And so what this does is shows you that these companies are so valuable on their own, you can’t have a Pfizer come in and buy a Beam, right? And then insert them within Pfizer’s sort of culture. You’ve got these companies that have their own culture, that are blazing trails, and pioneers when it comes to new medical technologies. And it’s better for a company like Pfizer to do a joint venture.
Kevin Kelly 7:32
And what they’re doing is, Beam’s coming in and saying, hey, we’re gonna pick the therapeutics, the IP that you guys have, and try to turn them into gene editing, and deliver them that way. So it’s a really nice validation of where healthcare is going when you have, sort of the older stalwart healthcare companies like Pfizer, that could totally do this on their own, but they need the expertise of a Beam to come in and really develop out their existing IP, Pfizer’s existing IP. And develop them out into a base editing or gene editing solution and technology.
Kevin Kelly 8:14
Yeah, absolutely. It’s certainly great to see the evolution of CRISPR. From CRISPR 1.0 to 2.0. The base editing like you mentioned, as opposed to those double stranded breaks and the safety profile that we’ve been taking a look at.
Simon Erickson 8:27
You have a couple other drug developers and in the top four, if you want to round those out CRISPR Therapeutics (NASDAQ: CRSP), Intellia Therapeutics, and Editas Medicine (NASDAQ: EDIT) are your next three largest positions. Any thoughts on those, Kevin? Or is it kind of similar with the thinking about Beam. Your going with the category, kind of, IP foundational patent leaders that are out there?
Kevin Kelly 8:45
Yeah. So if you think about those companies, I talk about sort of this specializing in their niche. I mean, if you look at a company like Editas and what they’re trying to do, ocularly, right? They’re focusing and dedicated to the eye. And we’re really building out their suite around that. So we get some successes in some of their current technologies, and they’re trying to build out for other types of diseases that they can address with that.
Kevin Kelly 9:11
And then also, what that does is that streamlines the manufacturing process. So if you actually listen to the CEOs of these companies, they tell you exactly, hey, it’s really hard to manufacture these types of drugs and these types of therapeutics. So if we build, around our current expertise, it leads to greater scale for us, right. And what they’re also talking about is their previous iterations of drugs, where they worked in their indications and their testing.
Kevin Kelly 9:43
And now they’re actually trying to figure out the right size of delivery, right? Can they increase the drug and get better effects? I mean, you have people, which is unbelievable, that have ocular disease, and they never saw colors and now they can see shades of colors. Their quality of life quadrupled, because now they can actually understand shapes, and they can get depths. I mean, there was a video of a gentleman and he was out on a dance floor, still in his wheelchair, but he was able to enjoy and saw all the different colors, and just what it did to his quality of life is unbelievable.
Kevin Kelly 10:22
So that’s why it’s so exciting, so these management teams are talking about this, where now they’re going to try to increase the drug dosage. And so when we’re thinking about Editas, that’s great, it gives you the mindset and mentality. Because then they want to perfect how they deliver their mechanisms. But but want to then do partnerships with those that specialize in other types of diseases, and they can partner, sort of like what Beam did.
Kevin Kelly 10:46
And then if we look at Intellia. Intellia is an unbelievable company, because, their first success last summer and then they have upcoming catalysts that are going to happen hopefully this quarter or next quarter when it comes to their applications. Intellia 2001. And so you’ll get more data that you can point to about the application and success.
Kevin Kelly 11:15
And I’d just like to touch base on that because Regeneron is partners with Intellia. And Regeneron just reported earnings. And the second to last question on the earnings call was from an analyst that them and says, Hey, can you talk more about Intellia and Intellia 2001 and what we’re going to be expecting to see the next quarter. And you got sort of a canned answer from someone else on the management team. And the CEO came in and jumped in and said, listen, we are really excited about what’s going to be coming out over the next quarter. We’re really excited about our partnership with Intellia, and he starts talking about CRISPR and gene editing. And it was infectious.
Kevin Kelly 11:57
And just seeing the CEO of Regeneron, which is an established company, they’ve got great drugs already out there in the marketplace, blockbusters. And they’re hinging their next success, their future success, in anticipation to be their third biggest drug coming with Intellia. That speaks volumes to the applications and what they think they can do. So he didn’t give much that wasn’t publicly out there. But just having him come on and talk, and hearing the excitement in his voice just validates what CRISPR gene editing is going to do us as a species, and where we’re going scientifically.
Simon Erickson 12:34
It’s so true, Kevin, it’s very exciting. Especially when you see, mentioning Intellia. I mean, bringing Abbott Laboratories (NYSE: ABT) Chief Science Officer back out of retirement to be CEO of a company like that. When we know that he’s created HUMIRA, the world’s second best selling drug of all time, taking a new approach is certainly very exciting.
Simon Erickson 12:52
I wanted to chat just a little bit, before we wrap up this part about the drug developers. Because we did say, I didn’t mention this before, but your CRISPR and gene editing technology segment is about 70% right now of your ETF. Its the largest component, so it’s the most heavily weighted right now.
Simon Erickson 13:08
How are you thinking about those weightings? You know, why is this so heavily weighted towards those smaller companies? Like you said, a lot of other indexes might be putting a much, much lower valuation, or a much, much lower percentage into these smaller pre-commercial companies. You’re going for the gold on this one, though? How do you think about balancing this index?
Kevin Kelly 13:27
Yeah, so if we think about how you want to, depending on your risk, your reward, how you construct your portfolio, but this is trying to give you the concentrated exposure to those new developing and emerging technologies in CRISPR and gene editing. So what you want to do is you want to get primarily exposure to those outcomes, right. And so if I look at, if I’m an investor, and like I said, I kind of view this as sort of a publicly traded venture capital fund. What you can do is look at your core healthcare holdings, right? And say, I can use this as a satellite to those core health care holdings, right?
Kevin Kelly 14:09
So if I have 10% to health care, I could do half a percent, 1%, 2.5% percent to this. And just try to figure out how it fits in my portfolio, right? Because I’m not going to be able to get this targeted exposure elsewhere. And this is the diversified effect within CRISPR, and gene editing. So that 70% is really, really, really important, because it’s giving you that target and exposure to add that satellite, right?
Kevin Kelly 14:37
Otherwise, you would have to go out there and follow the space intently. Who’s coming public, like Verve Therapeutics (NASDAQ: VERV) right, came public last quarter. There’s tons of private companies that are going to look to come public. And so you’re going to have to. Is this a CRISPR base editing, gene editing name, or is this not? So understanding who the key players are, it’s time consuming. And you don’t want to have to pick the winners and losers. You don’t want to have to go out there and say, I want to own Beam, CRISPR and Intellia. And I don’t want to own Verve or Editas. Right?
Kevin Kelly 15:10
So that’s tough, right? Because what if you only pick three, and you didn’t pick the best three, or something happens in a trial, and then your portfolio gets hit, right for that quarter of the next six months until it gets figured out, right?
Kevin Kelly 15:23
So I think that’s the important part is that you do want this is meant to give you that targeted exposure, right? This is exactly, it’s like, you want, this is what you want, right? Because you don’t want any dilution to the returns that CRISPR and gene editing.
Simon Erickson 15:39
Makes a lot of sense, Kevin. I’ve got to point out also, that you’re bringing this to the public markets at an interesting time right now, right? It’s been a crazy couple of months for public stock investors. Certainly, gene editing and health care has been a sector that hasn’t been spared from this market sell off right now. What’s the reception though, that you’re getting from institutions? I mean, are they are they starting to want to allocate money into healthcare again? Or is it still, kind of, are we in this kind of risk averse, risk-off scenario that we kind of saw for these last six months or so in the market?
Kevin Kelly 16:12
Yeah, the reception has been great, because, we timed it and wanted it to come around the JP Morgan healthcare conference. Where everybody is talking about the exciting developments that are happening in this space. And so I think a lot of. So we’ve been talking with a lot of investors, including institutional investors. They are really focused on the exciting things in the space, right? And they’re looking at the calendar and the calendar for CRISPR gene editing companies, is very stacked over the next 18 to 24 months.
Kevin Kelly 16:48
So it’s figuring out how to allocate around that calendar. Because like I said, over the past 10 years, groundbreaking research has happened. A lot of ex-vivo, where they take the cells out of the body, edit them in a lab, and then put them back in. What’s taking place now, we’ve really proven that you can do it in-vivo, and we’re having successes.
Kevin Kelly 17:10
And so, if you look at even a sickle cell patient who actually got treated with CRISPR, she’s lived a healthy normal life for the last year. She’s now out of the trial, which is unbelievable and that came out in December. So I think a lot of people are trying to figure out how do we play genomics? How do we play next generation health care? And so this is a solution within that entire realm. Because we know we have an aging demographic.
Kevin Kelly 17:40
So one of the biggest things in the markets and why you’ve seen turbulence is two things. Debt and demographics. Look at our companies, and look at their balance sheets, a lot of cash is on their balance sheets. Tons and tons of cash on their balance sheet so they can go to commercialization and do also partnerships. And then the second thing is demographics. We have an aging population, we also have a population that has a lot of untreated diseases, right? So small penetration into these untreated diseases, whether it’s even only to 2%, 3%, 5% of treating and having successes makes a big difference, not only in people’s lives, but also for these companies.
Simon Erickson 18:21
Fantastic, Kevin. We chatted about the pre-commercial drug developers, we talked about the partners that want to partner up with those companies. Let’s round this out and talk about the third segment of your ETF. Which is really the genomic sequencing and the cost of sequencing the human genome has just fallen so significantly in these last couple of years. Looks like you’ve got a play on this as well. You got some companies like Illumina (NASDAQ: ILMN) and Thermo Fisher (NYSE: TMO) in the top 10 holdings.
Kevin Kelly 18:45
Yeah, yeah. And so these are big stalwarts that have great expertise within mapping the human genome, but they’re also trying to come up with development solutions in mapping that for CRISPR [INAUDIBLE]. You can even go to their websites and order CRISPR kits, which is amazing. We even had high school kids in Minnesota try to send up, they sent up CRISPR kits to the International Space Station.
Kevin Kelly 19:12
So it’s amazing what’s happened in this space with just sequencing. But we’re just scratching the surface. Especially when we’re trying to do targeted approaches directly to the liver, right? Where you can put the technology in, it goes to the liver, it not only cuts out the bad but replaces it with good.
Kevin Kelly 19:35
So we still have a long way to go. And the great part about the sequencing companies is that they’ve got the clinical expertise and basically the intellectual property on how you map the genome. And so that is one of the most critically important parts because targeting the genome and the bad DNA is is step one, right? Is getting it there and especially for efficacy. So that’s why they are a critical component of CRISPR and gene technologies.
Kevin Kelly 20:15
And they are investing, if you listen to management’s calls, in this technology for sequencing going out. Because it’s not only going to help CRISPR in gene editing, it’s also going to help gene therapy companies. Because not everything is going to be solved by CRISPR gene editing. A lot of great things are going to come from it. Even including in our food sources for crops, right. But the important thing is, is that there’s also going to be therapies, gene therapies, that are out there for this. And that’s where the sequencing companies come in, because they can do all therapeutics going forward and increasing the efficacy of those therapeutics.
Kevin Kelly 20:51
Absolutely, that’s one of those two beer conversations we like to have here with our 7investing team, is where is sequencing going? You know, is it the next generation short reads, versus long reads, versus nanopores, there’s certainly a lot going on?
Kevin Kelly 21:02
Yeah, yeah, fun. And a lot of it has become commoditized, right? But in order, but you want those companies that have been there to create the next generation, and that’s what these companies are doing?
Simon Erickson 21:14
Absolutely. Kevin, any final thoughts, any things that investors should be watching in this space that are interested in investing, either in gene sequencing or CRISPR? Anything to wrap this all together, you’d like to say for investors?
Kevin Kelly 21:24
Yeah, I think it’s an exciting time period. And so I think investors should stay tuned to the IPO calendar and see where the money is going. We’re seeing a lot of money being invested in this space. And so that’s why we wanted to give a public solution because there’s a private company called Mammoth Biosciences that was founded by Jennifer Doudna, who actually led the groundbreaking research 10 years ago, and you saw out of the healthcare conference, they are even invested in them and did a partnership with them. So that’s another one of those old software companies, that is investing in these, these next pioneers in the CRISPR gene editing space.
Kevin Kelly 21:58
So I think for investors, it’s follow the money. Where is the money going in research and development? It’s going to this space. So there’s going to be a lot of exciting companies coming out of this. And like I said, we’re at the beginning of an S curve of growth over the next 10, 20, 30 years. And we’re at the beginning of that. So it’s figuring out as an investor where you’re comfortable getting in. But just following the space, because I think, whether you use any of the names, they’re going to come out with drugs that are going to impact us personally, our families, people we know. So I think that’s the most exciting aspect is just follow the news.
Kevin Kelly 22:33
It really is, it’s gonna be an exciting time, these are cures not just, this is going further upstream, right?
Kevin Kelly 22:38
Yeah. And one last thing, and I’m glad you brought that up, because this is going to be more expensive than traditional therapeutics, and what have you. So the insurance companies are going to want to do, they’re going to want to do pools, cost pools, right? Where they’ll all go in together to help do treatments, and pay for those treatments together. So there will be cost pools for this, because these are going to be very expensive products, because they’re going to cure disease, right? And it’s going to be a one time and that one time is going to be very expensive, but it’s not going to be, repetitive. So, that’s the interesting aspect, too, is that the insurance companies are figuring out a way how to get these therapeutics to the people that need it the most.
Simon Erickson 23:20
I agree they’re getting the coverage determinations for a lot of those. There are CPT codes now for genomic sequencing. I mean, we are getting where the payers are on board and they’re recognizing the opportunity here as well.
Kevin Kelly 23:29
Simon Erickson 23:30
Thanks very much, Kevin, I really appreciate you being a part of our 7investing podcast today.
Kevin Kelly 23:34
Thank you for having me. I really appreciate it. If anybody has any questions, please don’t hesitate. You can always get ahold of me at invest@kellyETFs.com.
Simon Erickson 23:42
Absolutely. And the Kelly CRISPR & Gene Editechnology ETF. The ticker on that is XDNA, go check that one out. Some great innovative research being done by Kevin and his team. We appreciate you tuning in to this edition of our 7investing podcasts. We’re here to empower you to invest in your future. We are 7investing.
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