Long-Term Investing Ideas in a Volatile Market
Simon recently spoke with a $35 billion global asset manager about how they're navigating the market volatility. The key takeaways are to think long term, tune out the noise...
When biotech stocks rise on stories alone, and those stories become detached from reality, then you might be subjecting your portfolio to unnecessary risk. 7investing Lead Advisors Manisha Samy and Maxx Chatsko sit down to discuss what FinTwit isn't telling you about a basket of biotech stocks.
February 23, 2021 – By Samantha Bailey
You don’t need 7investing to tell you that investors are experiencing a historic bull market. To put it mildly, investors are increasingly optimistic. About what? Well, that’s a question worth asking.
Investors are increasingly optimistic about the pace of the economic recovery — at the macro level, anyway. It’s not farfetched to expect record amounts of cash and wealth generation, which has been primarily “trapped” within equities and real estate in the last 12 months, to be unleashed in other parts of the economy as the pandemic loosens its grip. That would usher in a swift economic recovery unlike anything in recent memory, perhaps ever.
Investors are also increasingly optimistic about innovation. Although that’s not necessarily misplaced, individual investors must guard against unbounded optimism and remain objective. This is especially true when it comes to biotechnology and genomics.
On the one hand, we’re making significant advances in our understanding of biology that allow us to standardize biological parts. If we can standardize living systems, then we can engineer them with reproducible results. And if we can apply engineering principles to biology, then we can use biology as technology to improve medicine, industrial processes, agriculture, and much more.
On the other hand, biology remains incredibly complex. The optimism surrounding certain trends, such as the “genomics revolution” or CRISPR gene editing, often dumbs down the complexity of biology to make the opportunities easier to understand for non-experts. Unfortunately, that also makes it easier to dismiss or completely overlook important risks facing new technologies. As company valuations become more and more distorted, those risks become amplified.
One of the problems with the level of optimism in the current stock market is simple: It has become easier to buy tickers than to invest in businesses. Many biotech stocks are trading on momentum and stories alone. Today, we’re increasingly seeing several years of revenue growth and clinical trial results or regulatory milestones — which have yet to be achieved — to be priced into biotech stocks. This can lead to disastrous outcomes when the stories fall apart or future events don’t play out quite as investors expect.
7investing Lead Advisors Manisha Samy and Maxx Chatsko sat down to discuss the importance of balancing optimism with objectivity, the dangers of chasing story stocks and momentum stocks, and why your research into biotech stocks and genomics stocks should expand beyond social media or FinTwit. Most important, they remind all investors to seek information, not confirmation and discussed the following companies as examples:
Amyris (NASDAQ: AMRS)
Bionano Genomics (NASDAQ: BNGO)
CRISPR Therapeutics (NASDAQ: CRSP)
DermTech (NASDAQ: DMTK)
Editas Medicine (NASDAQ: EDIT)
Gevo (NASDAQ: GEVO)
01:21 What’s going on in the market right now?
04:45 What is FinTwit missing about Amyris?
09:14 What is FinTwit missing about Bionano Genomics?
15:47 What is FinTwit missing about DermTech?
21:58 What is FinTwit missing about CRISPR Therapeutics?
29:57 What is FinTwit missing about Editas Medicine?
36:45 What is FinTwit missing about Gevo?
43:41 Seek information, not confirmation
Publicly-traded companies mentioned in this podcast include Amyris, Bionano Genomics, bluebird bio, CRISPR Therapeutics, DermTech, Editas Medicine, Gevo, Myriad Genetics, Novartis, and Pacific Biosciences of California.
7investing’s advisors may have positions in the companies that are mentioned.
This interview was originally recorded on February 22nd, 2021 and was first published on February 23rd, 2021.
Maxx Chatsko 00:00
Hello everyone and welcome to another episode of the 7investing Podcast. I’m 7investing lead advisor Maxx Chatsko and I’m joined today by my partner in crime, Manisha Samy. Manisha, how are you doing?
Manisha Samy 00:12
Well, it’s an exciting time for healthcare and biotech.
Maxx Chatsko 00:17
It is! We had a little bit of a sell off today, I think that’s to signal that the freezing cold weather is over in the part of the country where we live. So I think that’s all good.
Maxx Chatsko 00:27
Now, we’re not here to talk about the weather. In fact, this is our first 7investing podcast, it’s going to focus solely and exclusively on biotech, whether that’s genomics or proteomics or any other omics you want to throw out there or synthetic biology. So we want to do these more regularly, maybe once every month, where we’ll discuss different topics that are interesting to us. We want to help you identify solid investing opportunities, and also identify false patterns and trends that aren’t sustainable, to help investors avoid losing money, having pain, tears, sadness — we don’t want you to have any of that.
Maxx Chatsko 01:06
So today, we’re going to talk about story stocks. We want to discuss the risks involved with blindly following a story or certain individuals on social media when they’re talking about stocks and let that be the end of your research. That should not be the end of your research. You know, in this crazy stock market that we’re in, a historic bull market, valuations make no sense by historical standards. But we’ve seen a number of distortions in how companies are valued, especially here in biotech.
Maxx Chatsko 01:36
In more sensible times, Manisha, if a company didn’t have clinical data, it really would very rarely be worth $5 billion or $10 billion. And that’s not at all what’s happening now. Now, I think you and I would probably agree, in the past, that was maybe not an efficient way to value early-stage drug developers. A lot of things that companies do behind the scenes — they have a technology platform, they have different ways to mitigate risk, maybe they have in-house manufacturing, maybe they’re addressing pain points that are very important that Wall Street analysts are overlooking or don’t really fully understand. So we would probably argue that the way it was done in the past was very inefficient, right?
Manisha Samy 02:18
I absolutely agree. You know, back in the day, I definitely did some research into that where I was thinking, “Okay, well, platform technology companies, they have some value.” And their valuation at the time would not necessarily reflect that, as you said. So I think now we’re definitely in a different era, where we have, even though it’s based on platform technologies, and very interesting and compelling stories and different modalities for therapeutics, for example. Now the valuations, they flip to the other side.
Maxx Chatsko 02:55
Yeah, I think the pendulum swung where before it was inefficient because maybe Wall Street analysts were out of their league, they didn’t really understand what’s going on. And now it’s inefficient, but because companies are getting crazy valuations where they haven’t really earned it, they haven’t really deserved it.
Maxx Chatsko 03:11
The risk here is that there’s a lot of upside potential being priced in. Whether that’s good news investors are expecting to come out or great clinical results that haven’t been delivered yet. It’s already been priced into the stock now. So, if you buy now and then you’re buying into the story, and it doesn’t work out, that story fades. Well, you know, some of these companies could fall quite a bit, we might see some pretty sharp drops and corrections, if these stories fall apart.
Maxx Chatsko 03:37
So, we want to help you avoid some of these and just provide more objective information about some of the companies that we get questions asked about to us individually on Twitter, or on the live show here at 7investing, which is 7investing Now. We want to provide objective information so that you’re not just falling into some of the traps.
Maxx Chatsko 03:58
What we have, we have a handful of companies. We’re gonna introduce each one and talk about why it’s potentially an intriguing story, why people are interested in it. And then we’re going to talk about maybe some things that FinTwit is missing, right? Things that aren’t getting pointed out in the 280 characters you have for a tweet. You ready, Manisha?
Manisha Samy 04:18
Let’s get going.
Maxx Chatsko 04:20
Alright, so first up is a company in my neck of the woods: Amyris. Amyris is an industrial biotech company. That means it’s engineering microbes. It feeds them agricultural sugars as a carbon source. Then, it uses those engineered microbes as tiny factories to produce higher value chemicals. The company today has a market valuation of $4.2 billion, which is, I think, close to an all time high for its market valuation. And it’s gained 440% since October 1, 2020. So it’s definitely a story stock, it’s definitely has some momentum behind it.
Maxx Chatsko 04:59
Now, what makes this an intriguing story? Amyris, does have great technology. It has a good platform technology, can engineer microbes relatively efficiently, test them out at pilot scale, move those up the chain and eventually to commercial scale, hopefully. It has a tremendous amount of chemical diversity of the different chemicals that it can make, through the metabolic engineering pathways that it understands very well. It’s very intriguing. It also has a handful of consumer brands. It’s taken some of the ingredients that it’s made and, you know, some of those are really good moisturizers. Manisha, you might like those.
Manisha Samy 05:38
Still waiting for you to make my anti-aging moisturizer here, Maxx.
Maxx Chatsko 05:43
That’s an inside joke between us about a DIYbio lab I had previously about, it was a cosmetic company. But Amyris actually has cosmetics companies, not just in their spare bedroom, this is legit, on the market, making revenue now. So they have cosmetics, personal care brands, and so on. Those offer high growth, high-margin revenue.
Maxx Chatsko 06:01
So on paper, this looks great, right? It has these opportunities ahead of it and issues press releases and investor presentations that makes it look like this story is amazing and it’s an amazing growth opportunity. Some things that FinTwit is probably missing — a lot, actually.
Maxx Chatsko 06:20
The company is on pace to lose over $150 million from operations in 2020. And this company routinely loses hundreds of millions of dollars from operations each and every year. I think it had a record operating loss in 2019, and it might do that again in 2020. This business is losing more money as it scales. That’s not what you want to see, as an investor.
Maxx Chatsko 06:44
A bigger red flag in my mind and Manisha, I know you care a lot about management teams and the people behind the business, and that is that Amyris has really been mismanaged for a number of years. The CEO has just not really executed very well and he’s continuously over promised and under delivered. You know, if you look back in 2019, April 2019, the business told investors, they were going to have $850 million in annual revenue in 2021, which is this year. And it’s not going to come close to that. It’s not going to have half of that, it might not even have a third of that this year. And the company at that time also said it was going to have $1.3 billion in revenue in 2022. It’s not going to come close to that either. It’s continuously missed its own projections, it’s just set this high bar that’s impossible to meet.
Maxx Chatsko 07:37
So I would caution investors, everything it says looks great, but it’s always looked great. And the company has rarely met its own expectations or guidance. So again, it has some interesting opportunities. I’ve been arguing for years, even directly with the company, that it should be investing all, it should go all-in on its consumer brands. Those are high-margin, high-growth opportunities, it doesn’t need manufacturing facilities for those necessarily. And it’s only just coming around to those and it’s still not shedding some of the more inefficient parts of its business, which are these big, high volume bulk ingredients that it sells to other companies. It should go all-in on consumer brands.
Maxx Chatsko 08:14
My takeaway here, the actionable insight for investors that are being led astray by FinTwit. Yes, this is a momentum play. It looks cool when you’ve made you know, 440% in four or five months, but look, industrial biotech, it is a real opportunity. In fact, I think industrial biotech generates more revenue today for the US economy than biopharmaceuticals, and that’s not something that many people would would think about. But look, there’s a lot of next-generation industrial biotech companies that are out there, most of them are privately held, but I would say, wait for those. There’s much better businesses, much better-managed businesses, much better growth opportunities, and you’re not missing out on anything by trying to rush into a position here with Amyris.
Maxx Chatsko 08:59
Next up on our list is a company, Manisha, that you know, well. And that would be Bionano Genomics.
Manisha Samy 09:06
Yes. So I think Bionano, it was towards the end of December or around Christmas time. Twitter was going nuts, FinTwit was going nuts talking about this. Well, before that the company that was not known at all really. It was very under-the-radar. Based in San Diego, and they are a laboratory hardware and software tools developer. It is also another SPAC, and this was through Longview Acquisition. Their main technology is called Saphyr and the company has a market valuation of $3.2 billion. And just for full disclosure, I do own shares of this company. I was in there kind of earlier on before the stock gained 2,000% or 2,120% gains and just three months. So I mean, yes, am I a happy investor? Sure, but I also realize that everyone makes mistakes. And I realized that’s not necessarily usually how I invest. So it happens, everyone falls into certain traps, especially when you are really excited about a company that you haven’t heard about.
Maxx Chatsko 10:32
Even then. So this is important to point out like you bought in at a much lower price, we won’t say what it was, but it was way lower than what is that today, right? Yeah, at that valuation, it might have made sense. And you’re also going to hold it for a long period of time, right? You’re a long-term investor, but people that are buying it now, at a valuation of $3.2 billion, it’s at like 440 times sales. Yeah, you’re gonna be waiting a while to see a return, you might never see a return. So there is a difference there between, you know, you saw it as an opportunity before it kind of took off and blew up, and people who are chasing momentum.
Manisha Samy 11:07
Exactly. And that’s something that is very important right now. Is that you should never be chasing stocks. And once it’s completely overvalued, getting in at the wrong time will only give you further losses in the future. So I think timing is very critical. But why did I buy it when it was at much cheaper valuations?
Manisha Samy 11:28
So, it’s a cytogenetics company, which cytogenomics for those of you who don’t know, it’s looking at genomic variations and structural variations in your DNA. It has, compared to current ways of doing genomics, it has a 10,000x resolution versus the current standard karyotyping. And what’s also interesting, and I think this is what really helped the company blow up so quickly, is that there were a ton of press releases and studies that the company released, basically, maybe even unfairly, comparing themselves to a DNA sequencing company, specifically PacBio. And in that press release, they said, “Hey, PacBio only gets 72% of structural variants.” So compared to what PacBio is able to do using long-read sequencing, and not only that, Bionano’s hardware tools and diagnostic system, it only costs less than $500, compared to a couple of thousands of dollars. So that is really interesting.
Manisha Samy 12:45
But there’s also some things missing when it comes to, what is missing in FinTwit? So what is hard for people to understand, especially if you don’t dig in deep enough, is that it’s still not a replacement to DNA sequencing. For example, at current validations, they cannot detect point mutations. So there are different types of point mutations you can have in DNA. And when it comes to genetic testing, or genetic testing of genetic diseases, there are different types and ways that your DNA can morph. Structural variation is just how the DNA forms when cells divide. Very, very unique and very niche area that they are focused on. And actually, in my mind, I think it’s a compliment to DNA sequencing. I know a lot of DNA sequencing companies took a hit when the press release was released from Bionano. So I think that really makes a difference. And I know you have a few points here as well, Maxx.
Maxx Chatsko 13:59
Yeah, I mean, that’s important to point out: It’s more of a supplement to DNA sequencing. I mean, a lot of these DNA sequencing platforms have different ways, usually through chemistry or software or both, to detect structural variants. And you know, to get the finest detail, you do need to use sequencing, you probably can’t use this optical mapping system. So, you know, I’m more focused on the valuation here, but FinTwit is missing. So look, this company is valued at 440 times trailing 12 months sales, that’s ridiculous people.
Maxx Chatsko 14:30
I mean, in the previous market, a hardware company would never be valued anywhere close to that. But let’s just say Bionano eventually has $100 billion in annual revenue. Okay, that’s still trading at 30 times sales. That’s way, way higher than any lab hardware company should ever realistically be valued at. And that’s actually pretty high historically for a software company, if you wanted to argue that that’s where Bionano and its business model is going to go. So definitely be careful here. I think what’s happening here is probably a lot of people playing the momentum, right? It kind of goes up by double digits all the time and I don’t think that’s very sustainable.
Maxx Chatsko 15:08
And that’s important, too. We’re having this discussion about FinTwit and what it’s not telling you. So none of these companies are necessarily, we’re not saying they’re gonna fail tomorrow. We’re not saying they’re bad businesses, they don’t have anything going for them. We’re trying to be objective here. But it is possible to overpay for a good business. It’s possible to overpay for growth. So just keep that in mind. You know, if you’re buying this at this price, you might be waiting quite a while to see any return.
Maxx Chatsko 15:32
The next company to talk about is DermTech. This is actually a very– one of the favorite companies here of social media lately. So DermTech is a genetic testing company focused on skin diseases, and its initial product is focused on diagnosing melanoma from suspicious pigmented lesions, otherwise known as moles. I’m covered in moles. Nobody knows, because Simon makes me wear a shirt every time I’m on video here. We’ll have to talk with him about that policy.
Maxx Chatsko 16:03
DermTech has a market valuation of $1.9 billion. And I had a tweet months ago saying, “Wow, this is a $250 million. I don’t know this is crazy.” So that didn’t age very well. Glad I sent that tweet out. But it’s stock has gained 490% in just the last three months. Again, this is a big momentum play.
Maxx Chatsko 16:23
What makes this company intriguing? Well, I’ve had some close calls with melanoma actually, and I can appreciate what the company is trying to do. So it takes a little piece of proprietary tape it has, it can peel off a layer of the mole, and then send that in for genetic analysis. It’s much less invasive than a typical biopsy. I have a couple scars on me for biopsies that were nothing, and those are some of my biggest scars I have. I would appreciate not having scars, so something like this is exactly, I can appreciate it. The company has a pipeline of other things it’s working on outside of melanoma and other skin diseases. So this is an area that’s really underserved right now from genetic testing services.
Maxx Chatsko 17:07
But what is FinTwit missing as part of the objective pieces of information here? You know, look, the path to success in, Manisha, you can weigh in here too. In genetic testing, you’re successful by scale, you need to have a high volume of tests, high-throughput labs, need to have high quality data, and you’d have low costs. Not to get too far into the history of genetic testing, but years ago there was Myriad Genetics. And they patented certain genes, which later the Supreme Court overturned, overruled, so you can’t do that. But they patented genes and they just sold a very small number of tests for a very high price, exorbitant price, some would say. And then other companies came along and said, “No, no, no, no, no, look, this is how you win in genetic testing. You do it by selling as many tests as possible for the lowest price possible, and also keeping quality high.” Myriad Genetics, of course, has been slagging in terms of– lagging, rather, in terms of catching up to that strategy and shifting its tactics there. Certainly have been some acquisitions and things like that, but we’ve seen newer players come along and do it better, and maybe even start to become the leaders in this space.
Maxx Chatsko 18:15
For DermTech, oh, go ahead. I’m sorry.
Manisha Samy 18:18
Oh, no, no, no, I just wanted to agree with you. And not only that, but another very important thing to think about is genetic testing is a very saturated area. There are just a whole host of companies. Like you said, Maxx, I think the the true winners will be kind of companies who have proven scale and are bringing low-cost genetic testing. And you know, there are larger players who are trying to do that and some of these players can basically disintermediate what DermTech is doing. Once their platform gets there, once they realize detecting melanoma early, or doing genetic testing there’s also important. So I think that’s a very important point.
Maxx Chatsko 19:03
Yeah, exactly. So you know, one of the narratives here for DermTech is, well, it has a couple patents in these genes or genetic markers that it looks for. And the reality is, even if you look beyond that Supreme Court decision with Myriad Genetics, there’s been a handful of other legal decisions that have set a precedent in the United States where, the National Institutes of Health has actually said, patents for genes or genetic biomarkers are basically, you can’t defend them. If you come up for litigation, don’t expect any help from us or the legal system, because you’re probably not going to find it. So the fact that DermTech has a patent portfolio to me is almost worthless. It does have a patent for the tape that it uses, the adhesive patch. That’s the soonest-to-expire patent that it owns. And there’s other ways to do that, right? There’s microneedle technology, where you can get other skin samples and things to process in your lab.
Maxx Chatsko 19:55
The company also has yet to really scale its business. In the last, I’m sorry, in the first nine months of 2020, it had a $2.9 million in revenue from its genetic tests. That’s it, $2.9 million. So the company has to sign up a lot more insurance companies to use it’s tools, its products, and it is doing so. It’s had a nice string of success lately. But I think there’s a lot of success already being priced in to the current price. It’s trading at a couple 100 times revenue, 200 times revenue, 100 times revenue, right now at these prices. So look, DermTech can absolutely be successful, maybe other scaled competitors don’t want to get into genetic testing of skin, maybe they don’t have labs that can handle those types of tissue samples.
Maxx Chatsko 20:45
But again, there’s nothing stopping a scaled competitor for moving in here. And quite literally, they could just copy what DermTech is doing. At some level, there’s almost no novelty to genetic testing. I mean, there’s workflows and things for automation and how you handle samples in the lab. Liquid handling or using acoustic handling, you’ve worked in labs as have I, we know all about that. But for the most part, there’s nothing proprietary about processing a sample. So if a scaled competitor moves into DermTech market, that could very much change the storyline here, right? If it actually has competition, and it’s from a much bigger competitor, I don’t think investors are really factoring that in right now. So I would wait until the company proves successful, maybe a few quarters — is it actually scaling revenue? It can grow quite a bit and still be vastly overvalued, which I think is more likely to be the case.
Maxx Chatsko 21:43
So the next company, actually the next two companies, we have are companies again in genomics in your little area: CRISPR Therapeutics and also Editas Medicine. So let’s take CRISPR Therapeutics first, Manisha.
Manisha Samy 21:57
Alright, so CRISPR therapeutics, what is it? It’s a CRISPR gene editing company. I will give them that.
Maxx Chatsko 22:04
They nailed the name.
Manisha Samy 22:08
Yeah, they got it. And they’re focused on, well, initially, they’re focused on ex vivo applications, but they have also started working on in vivo as well, which is great. The company currently, especially to compare it to all of the other CRISPR gene-editing based companies, has really scaled quite quickly in terms of developing their pipeline. But also, their market valuation is $10.5 billion dollars. Last year, the stock gained 161% and it has recently sold off from, I think, from around $13 billion. But if you look at their pipeline, there’s still some questions on valuation.
Manisha Samy 23:02
Again, it’s an intriguing story, because from when they IPO’d, they have quickly scaled and developed their pipeline programs. For example, not only are they working on CAR-T therapy, or kind of areas where you can potentially treat diabetes, which we all know, especially in the US, that is a huge problem, because we love our burgers and fries. But it’s a huge unmet need. So they’ve done really well and I will say it’s also an intriguing story, because I am impressed at how management has been able to enter multiple programs into their pipeline. They very early on securex large pharmaceutical companies. So it makes sense why a lot of people are excited. They’re moving, they are moving very quickly.
Manisha Samy 23:53
But what is FinTwit missing? I think they’re not, we hear about CRISPR everywhere, these days. Now in saying this is a gene editing tool of the future, this is going to bring us into the era of curative medicines — and I know Maxx really hates that term, absolutely despise it. But, you know, especially when you compare it to peers, there are questions on, “Is it overvalued?” Another kind of issue that we should or another thing we should be thinking about is, you know, it’s still a very early technology that we know a lot about, but we haven’t really seen it long enough on the market to understand what are the future safety issues, I think it’s important to get a commercial drug out before we get to these valuations. So, you know, there’s that. And I know Maxx here has some thoughts on genetic medicine and is CRISPR the end all be all for genetic medicines? What do you think?
Maxx Chatsko 25:06
Yeah, I think of all the companies we’re going to talk about here, this one has the most mature data, which I guess isn’t saying much. Was it still Phase 1/2, right?
Manisha Samy 25:17
Maxx Chatsko 25:18
But we’ve seen some good results of durable responses, insofar as how long these trials have been going on. But there are other companies out there trying to use genetic medicines to treat these blood conditions, sickle cell and beta thalassemia. So is it possible that next-generation therapies maybe do this less invasively? I know, there’s– wasn’t the Bill and Melinda Gates Foundation, bad timing on their part, but they just announced with Novartis, the funding of an initiative to find a single-shot, curative gene therapy for sickle cell disease. And they did that the day after Bluebird Bio paused its trials of gene therapy in sickle cell disease. So that was what the bad timing was about. But do you think something like that’s possible? I mean, you’re maybe more tuned into this space.
Manisha Samy 26:10
Yeah, no, I think it’s very possible. I think the beauty of kind of new technology and research, we think, I think CRISPR will definitely accelerate research and kind of wet labs, just understanding biology, and potential potential accelerating our development of new modalities of treating genetic diseases. So I think it’s very much possible. I mean, no one thought that there will be in 2012, that’s when we will discover CRISPR gene editing, and then all of a sudden it’s taking over the world. And now no one else is looking at other gene editing. And I mean, honestly, gene editing, that concept has been around for decades. It’s an old technology, that over time, it’s getting easier, faster and cheaper. But there are also other gene editing modalities that people can use. And I’m sure you know, in the future, maybe not in the next three or five years, but maybe in the next 10 years, there might be a different way of editing the DNA that’s also– or kind of different ways of doing it in a safer, more precise way. I think just over time, it’s going to get better. And then the other part is going up.
Manisha Samy 27:27
So CRISPR Therapeutics’ lead indication, sickle cell disease and beta thalassemia. Again, as Maxx said, amazing data. But then there’s the question of how many other companies are working on that? And are all of these companies going to have great data? So there’s definitely gonna be competition on, well, whose drug will be used? So when you tie that to current valuations, that is an area that should be focused on, and I think FinTwit messes. And then lastly, and I know, Maxx wrote a piece on this: Is the first-mover advantage, really an advantage?
Maxx Chatsko 28:11
Yeah, I think a couple of things. So that was a great discussion. You know, I don’t doubt that maybe we rushed CRISPR tools into the clinic. I still think some of these first-generation CRISPR tools, we don’t really know a lot about how they’re going to work. What are the long-term ramifications? Are we going to see things four or five years after clinical trials have completed that are worrisome safety signals?
Maxx Chatsko 28:39
If I try to use the power of future hindsight, right, I think we might look back and say, “Wow, making double-stranded breaks in the genome — which is what first-generation CRISPR does, by and large — Hey, that was a really bad idea. Man, that was stupid. We should have never done that.” I could see us totally coming to that conclusion. So some of the hype right now in the market, and these frothy valuations, it’s based on the stock market we’re in at the macro level, then there’s different narratives about CRISPR gene editing.
Maxx Chatsko 29:07
And you brought up a good point, too, which is that I think a lot of the potential of CRISPR is maybe even outside of therapeutics, right? We can have much better diagnostics, we could have much better R&D tools, editing cell lines, and things like that. Just understanding what genes are expressed, when. Various things that no one really talks about, that aren’t really investing opportunities. That’s like a lot of the power of what CRISPR does, because it’s so cheap, it’s so easy to use, so that’s kind of outside of the horizon of many investors at least. So I would agree with that.
Maxx Chatsko 29:42
All right, the next company is Editas Medicine. We’ll just keep with CRISPR. So you want to talk about this one as well? What is FinTwit missing about Editas? What does Editas do?
Manisha Samy 29:53
All right. All right, drumroll. It’s another CRISPR company. So, again, I will say, I’ve written a lot about CRISPR and CRISPR white papers and whatnot. I love the technology. I think it’s something that we needed. But that’s the other thing. There are peers, and there’s gonna be first generation, there’s going to be second-generation CRISPR tools. Editas initially focused on ex vivo applications as well. Their first lead indication is for LCA 10, which is basically pediatric, childhood blindness. And over time, unfortunately, these children do go blind. And, of course, that’s terrible. And another reason why people– people would pay for something like this, if their their child can see again.
Manisha Samy 30:54
So they are in clinical trials, we don’t have too much data. But then again, that this is not the only company that’s working on LCA 10, there are other companies using different modalities. So they’re not the only ones in this market. And it’s also not too common, and especially when you compare it to a market valuation of $3.3 billion, and that the stock has gained 112% in the last year. You have to question kind of the pipeline. So definitely an intriguing story.
Manisha Samy 31:28
But what is FinTwit missing here? I would say is, well, a number of things. My biggest concern, and the area that really drives me to invest in a company is having a solid and great management team. I don’t know if I am comfortable that I can say that for Editas, the management churn has been just insane.
Maxx Chatsko 31:59
Yeah, it was founded in November 2013 and it’s already on its third CEO. They lost their Chief Scientific Officer inJanuary of this year. I would say that’s a little concerning for sure.
Manisha Samy 32:13
Oh, and their chief financial officer actually left when it’s first, basically within two months– Well, it was first the chief financial officer. And then within two months, the first CEO had left. I think she might have even been ousted, there’s some speculation there. But when you have management churn, that is so much management churnin a development-stage therapeutics company, there’s not much stability. And if you’re transitioning new executives, or new C suite people, and to help develop and grow the pipeline and bring it forward. I’m sure there’s plenty of delays. But then it also begs the question, you know, what’s under the hood? Why is there so much turnover? What’s happening? So, I think that that’s something that kind of rubbed me the wrong way. Obviously, everyone has a different opinion on management teams, and maybe their current management team is going to be even better than when they first IPO’d. That remains to be seen. But I think, again, what we’ve said about other therapeutics companies and whatnot. Relative to the data that’s been presented, at a $3.3 billion market capitalization, does that make sense? I personally think it might be overvalued. Maxx, do you have anything to say here?
Maxx Chatsko 33:44
Yeah, I think certainly, I think the CRISPR space in general might be a little frothy, right? Some of those companies might deserve it more than others. They have better data or different delivery tech or something. But we saw Editas Medicine stock jump on some of the ASH data. And it has an in vivo sickle cell approach. But it was preclinical data. It looked pretty good as far as preclinical data goes, but an important thing for investors to remember, everything that moves into the clinic has very good preclinical data. And that’s why it moves into the clinic in the first place. So just, you know, it’s still super early for this.
Maxx Chatsko 34:22
Another thing, and this applies to CRISPR Therapeutics as well, most of the humans on planet earth that have these traits, for sickle cell disease or beta thalassemia, don’t live in the United States. They live in Spain or Portugal, or Mediterranean countries, or in Africa, there’s actually a population in India. Those are places that aren’t going to be paying $2 million a year for a cure, or a “cure”, I should say in quotes, because I don’t like that word. But for these durable treatments, when you’re pricing these companies based on potentially having this very great treatment for some of these diseases, well, how– I think it’s 70% or 80% of the patient population is outside of the United States. They’re not gonna pay these prices. I think you have to factor that in as well to some of the valuations here.
Manisha Samy 35:17
Yeah, I think actually brought up a great point in terms of where these patients, because then the next thing you have to think about is these are all, you know, these are CRISPR companies developing first generation kind of treatments for sickle cell and beta thalassemia. But is there going to come a company that is able to figure out a more scalable way of making edits that will actually be cheaper?
Manisha Samy 35:44
I mean, right now, they’re pricing in kind of a one-and-done treatment paradigm. So that gives it a premium, but also the R&D that goes into it. But now there’s a potential that, even if it’s not using CRISPR, maybe it’s just using a different gene editing or genetic medicine kind of approach. That could be cheaper, which would disintermediate their commercialized drug, if they get commercialized.
Maxx Chatsko 36:08
Exactly. I mean, obviously, we’re here the United States, we price all of our companies based on our crazy market for pricing drugs, but that’s certainly an outlier for the rest of the world. So you have to keep that in mind as well, especially for genetic diseases where the populations of people that have these mutations are not all in the United States. It’s dispersed all across the globe.
Maxx Chatsko 36:30
All right, the next company, it looks like our last company here, is another one from my neck of the woods, Gevo. Gevo, just like Bionano Genomics, was a penny stock not very long ago at a very low market valuation. It was actually trading below $1 per share not that long ago. Gevo is an industrial biotech company. It’s working on what it calls a renewable hydrocarbon platform. Similar to Amyris, it’s taking engineered microbes, feeding them agricultural sugars and other low cost carbon sources, it uses those microbes as tiny little factories to produce higher value chemicals. Right now, Gevo has a market valuation of $1.8 billion and it’s gained 760% in the last three months. Quite obviously, a pretty good momentum play and certainly good for day traders. Of course, that’s not what we do here at 7investing, we’re about long-term investing.
Maxx Chatsko 37:26
So what makes this company an intriguing story? I’ve covered this for almost a decade now. And on paper, the company’s platform could be used to retrofit ethanol facilities to produce higher value chemicals, namely isobutanol. So the nation, the United States has, I think it’s over 16 billion gallons of ethanol manufacturing capacity. But ethanol is a very low-margin product, it’s actually been trading at some of the lowest prices in the last 18 months that it’s ever traded at. Now, isobutanol, on the other hand, is a higher value carbon chemical than ethanol. So in chemistry class, Manisha, maybe you remember this, but uh, this little acronym of “Monkeys Eat Purple Bananas”. So that stands for– Do you remember that? You ever hear that in chemistry class?
Manisha Samy 38:12
I don’t remember it, sadly. What it stands for, so please tell me.
Maxx Chatsko 38:18
Alright, maybe they didn’t teach that Stanford, but in my state school in New York they taught it to us. So “Monkeys Eat Purple Bananas”, and that stands for “Methanol, Ethanol, Propanol, and then Butanol”, and each one has another carbon atom, right? Methanol is one, ethanol is two carbon atoms, propanol has three carbon atoms, and butanol has four carbon atoms. So in general, the more carbon atoms it has, the higher value it is, the more difficult it is to make. But it has better chemical properties usually.
Maxx Chatsko 38:49
Gevo is looking to upgrade its isobutanol production platform into renewable gasoline and renewable jet fuel. It’s going to use agricultural sugars to make isobutanol. And there’s another processing step to turn it into these into renewable hydrocarbons. So these are drop-in replacements to existing infrastructure. So that’s a bonus in terms of what the company is trying to do.
Maxx Chatsko 39:11
A lot of talk recently — and I think this has a lot to do with its recent run up — and a lot of people are talking about the new Biden Administration and how it’s going to be a huge tailwind for companies like Gevo. In fact, one of the company’s scientific founders, Frances Arnold, is on Biden’s Science Team. So Frances Arnold won the Nobel Prize for her discovery of directed evolution of enzymes back in, I don’t know, I don’t remember what year that was and didn’t write it down, but it’s within the last 20 years and that’s been an important advance for synthetic biology. And she also grew up in Pittsburgh, so I’m a big fan of hers.
Maxx Chatsko 39:46
Now what is FinTwit missing? So that’s on paper and all looks great. In reality, renewable fuels require a crazy amount of scale to be economically viable. And sometimes they still aren’t economically viable even at massive scale. I mean, look at ethanol, for instance. So this was actually one of the first lessons that next-generation industrial biotech learned and it learned it the hard way.
Maxx Chatsko 40:08
In the late 2000s, oil prices were through the roof, they hit record prices per barrel. And that was really this coming out moment for industrial biotech. There were companies trying to make giant concrete runways in the desert and turn algae into oil and all kinds of crazy stuff going on. A lot of those companies don’t exist anymore, because they looked at these giant markets, and they were measured in trillions of dollars. What they failed to look at was the margins on those products, which were close to zero, you’re also competing with petroleum and petrochemical infrastructure that have a 100 year headstart on industrial biotech. So it’s very difficult to compete with those scales and those economics.
Maxx Chatsko 40:46
Another thing to point out here, Gevo has been wisely taking advantage of its recent run up and it’s been promoting its Net Zero 1 project, which is, it’s kind of taking a page of Tesla’s book, right? Tesla has the Gigafactories and it names them accordingly. So Gevo now has Net Zero facilities that it wants to build, and Net Zero 1 is going to produce about 45 million gallons per year of jet fuel and diesel fuel, it’s going to make 158 metric tons of animal feed, which is not a lot, it’s gonna have net-zero carbon emissions. So for this 45 million gallon per year facility, it’s gonna cost about $750 million. That is an insane cost for this facility. And yes, it’s first of its kind. I’m not even sure it’d be economically viable, but I think they’re using it more as a blueprint for saying, “Hey, look, we can do this. Now let’s go build a giant, world-class scale facility, hundreds of millions of gallons per year. They’ll try to use it for that reason.
Maxx Chatsko 41:42
But, again, this technology currently is not economically viable. I’m not sure this is really the the time to be pursuing renewable liquid fuels. The future of transportation fuels is not liquid, it’s probably electric. And I think the trajectory of electric vehicles, they’re going to take off way faster than even the most optimistic projections currently call for. That’s my inkling, you know, we’re constantly underestimating renewable energy. And I think we’re gonna do the same for electric vehicles. So that’s going to take over trucking, heavy duty trucking, it’s going to take over passenger vehicles, pickup trucks. I think, 10 years from now, the market is going to look quite a bit different. So I think that obviously saps some of the market for what Gevo is trying to do.
Maxx Chatsko 42:32
So my takeaway here and the insight, or the actionable insight I would have for investors. Yes, you’re right. Industrial biotech is great. I mean, I majored in it, right? Because I’m really smart. Unfortunately, you have to wait a little bit longer. There’s a lot of really cool, next-generation companies out there, but most of them are privately held. So I would just say wait for those. There’s, there’s great companies with great products, great management teams, they can actually have profitable products and tons of growth. And they’re making really cool things. They’re making new new ways to make materials for apparel or building materials. There’s a company that’s making coatings that helps deflect radar for stealth fighter jets — we’re doing that with industrial biotech. So there’s a lot of really cool opportunities that are much more interesting than making low-margin fuels. So don’t have fear of missing out. You’re definitely not missing out on any of that.
Maxx Chatsko 43:26
All right. So Manisha, I think that wraps up our short little discussion here of what FinTwit isn’t telling you about certain stocks. And again, we want to be objective, we’re not trying to say any of these companies are going to fail tomorrow, or that they don’t have ways that they can succeed. I think we laid out a case for each one where they can succeed. But important to keep in mind a couple different things.
Maxx Chatsko 44:50
Unlike companies in other industries you have, in living technology and biotech these early-stage drug developers or early-stage industrial biotech companies, a lot of times they don’t have revenue or earnings to insulate them from risk. So if one company is a SaaS company has a bad day, or they miss an earnings report or something, you know, yeah, they might fall 10% here and there, might have a little volatility. But when a company like the ones we’ve talked about that really gain on stories, when that story falls apart, there’s nothing there to insulate it from extreme volatility. So I wouldn’t be surprised if some of these companies we talked about and many more that have kind of become story stocks here in early 2021, fall by 40% or 50% or even more before the end of 2021.
Maxx Chatsko 44:38
And the second thing I would point out to everyone is that it’s important to seek out information, not confirmation. Manisha, I’m sure your DMs look way worse than mine. But you know, we get– people reach out to us and even through info@seveninvesting, or we get questions on 7investing Now, our live show. People want us to, they ask about a certain stock, “Hey, what do you think of this?” And it’s our job to provide objective information and we do that. And every once in a while somebody will fire back or you know, reply, and it’s almost as if they want to argue with some of the points we’ve brought up. And it’s kind of frustrating. Every company has strengths and weaknesses, and faces challenges and opportunities. So don’t just, when you’re doing your research, don’t look at opportunities for investing in your portfolio with rose-colored glasses, right? Every company has things that are unflattering. You’ve got to take the good with the bad, right? And you’re trying to navigate those risks. That’s what investing is, it’s not about, casting aside all the bad information and thinking everything’s going to go to the moon, because usually those things are not very sustainable.
Manisha Samy 45:47
Right. And then also, we’re not saying, “Don’t look at stocks, don’t look at the conversations on FinTwit. There’s always great discussions there. And you know, sometimes there might be a great company that is someone is talking about on FinTwit, but it’s just a matter of, don’t buy it just because someone is talking about on social media. I think, it’s a great place for a starting point for research. You know, take that company and do your own due diligence, look at where the current valuations are, and then ask yourself, “Does this make sense?” I think that’s kind of my takeaway.
Maxx Chatsko 46:24
Yeah, exactly. And there’s a lot of great companies that are out there and sometimes they’re just at the wrong price. So maybe you can just wait, there’s better opportunities at any point in the market. So make sure you’re aware of that.
Maxx Chatsko 46:35
All right, so that wraps up this edition of the 7investing Podcast. And you know, we’re gonna do this more regularly. Once a month maybe, Manisha, we’ll focus exclusively on some biotech topic and nerd out.
Manisha Samy 46:47
Oh, I’m always down for nerding out in biotech, you know that.
Maxx Chatsko 46:53
All right, I like it. Like I said at the top, my partner in crime Manisha Samy. Alright, so we will see you guys next week. Take care!
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