11/20/2018

Biopharma/Investing
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There have been a bunch of questions on generics. The first thing to understand is the generics world has always been an cottage industry compared to branded pharmaceuticals. The largest 3 generic companies, Sun, Mylan and Teva, have market caps (EV maybe more accurate!) that are very modest compared to pharma or even single/few-product biotech companies like Vertex, Celgene and Regeneron. The fact that one drug from Alexion is worth more than the biggest generics player in the world is telling enough.
Moving on, there is a “new normal” margin compression in generics. For a long time, generics companies enjoyed 50% (sometimes higher!) gross margins. I actually think this comes from assuming normative gross margins from specialty chemicals (where pharmaceuticals originally evolved). Why shouldn’t a fine chemical medicine company have higher or at least the same margins as someone making polymers? The world has changed. Chinese and Indian companies care little for convention and Western margin is their opportunity. 30% or less gross margin for generics has become the norm and it will continue to plummet until ROICs approach WACCs. In essence, we’ve had it too good for too long and the party is over. This happens in cottage industries, all the time. Why here? The scale of making generic medicines is modest. We’re usually dealing in kilogram scale and rarely tonnage of API. This means that no matter what the product, it is easily made with cGMP quality at low cost. Assuming you have your own manufacturing facility, what is essentially happening is you are entering into a cost-plus dynamic. With no IP, buying consortiums and a FDA quick to approve new generics, the best you can hope for is cost recoupment with a margin. Obviously the higher the margin you can get, you’ll eagerly take, but equilibrium will quickly align ROIC to WACC for most projects.
Companies like Mylan and Teva are surviving because the rest of the world isn’t the United States. In most other countries, generics are still not that substitutable and health agencies are slow to approve new ones (30+ months). That will change. Healthcare costs have been growing for decades, as demand outstrips supply. Turns out people like living longer and being healthy. Drugs are a small part of healthcare costs and earn disproportionate blame, but generics are a hero and will see continued support from global governments.
Generics are great for entrepreneurs. I would know. It is such a fragmented industry, one can “hit it big” with any ANDA. It’s the pharmaceutical equivalent of a dollar and a dream–a $2 million ANDA could bring you $100 million in wealth if you pick your spots correctly. The problem, of course, is it is very difficult to scale. Like any gambling game, entrepreneurs tend to play too many hands and end up looking like the larger companies they are trying to beat. Occassionally, you get an Apotex or some other company with a hot hand a smart management team selecting great projects. Biogenerics are really high return projects from what I can tell, for instance. Inhalers and topicals appear to be similar. Oral solid dose is dead and likely dead forever (with the caveat that conditions can change).

Steve Cohen says a bear market is coming. Cohen also mentioned that Buffett is no Cohen. Cohen has a much higher investment return than Buffett but Buffett built a company that gets a multiple. I forget how old Cohen is (60?). They are probably neck-and-neck in terms of wealth for inflation and age adjustments. Cohen’s long-term returns are probably still in the 30% range, which is nothing sort of astonishing. Reminds me of the Stephen King book, “The Last Gunslinger”. Nevertheless, many feel he deserves an asterisk next to his name, like Barry Bonds. Cohen built a company of sharks who swarmed the waters for any advantages. Needless to say, many crossed lines that they should not have. Despite that, Cohen’s work ethic and talent speak for itself. He is an innovator in so many respects: the use of trading psychology, the focus on short/medium-term (more than 1 day, less than 1 month) IRR to achieve very high returns, the investment in technology to increase returns, perfecting the hub-and-spoke model, supreme talent acquisition, etc. SAC still deserves special mention in the firmament of great investment houses: Soros/Druckenmiller, Buffett, Cohen, Simons.

Bloomberg gave away $2 billion. I guess that means he is running for President. Good luck, Mike. Michael is one of my business heroes and I was fortunate to briefly meet him in college. Politically and personally, I think he would be a decent president. He is a little too left for me, normally, but he is a very practical guy that would appeal broadly to Americans. Trump’s best challenger for 2020, by far.

I saw DNLI announced “positive clinical results” and when I opened the story, it was Phase 1 healthy volunteers. Poor PR/IR person there.

Papers I’ve Read
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Thermodynamic characterization of the multivalent interactions underlying rapid and selective translocation through the nuclear pore complex. Hayama et al. JBC 2018.
These Einstein and Rockefeller researchers break the reader’s brains with their biophysics. The final frontier of molecular simulations amuses me. If you want to hurt your head, read this. They apparently solve the nuclear pore paradox. I, for one, didn’t know it existed. All jokes aside, this is interesting work on protein complexes that are “fuzzy”. I’m not sure they get it right because they’re probably not sure they get it right. I have to suspend enough disbelief to measure static in silico entropy changes.

Altered Mitochondrial Acetylation Profiles in a Kainic Acid Model of Temporal Lobe Epilepsy. Gano et al. Free Rad Bio Med 2018.
Never heard of this journal before but the workers do a good job demonstrating that SIRT3 is clearly a mitochondrial deacetylase and could be related to epileptogenesis. So let’s jump on it and make lysine acetyltransferase inhibitors? Not so fast. There is a lurking causality problem here, as usual. Despite that I think the results are worth further experimentation if you can find a selective enough inhibitor of acetyltransferases or SIRT3 mimetics.

Neuropsychiatric expression and catatonia in 22q11.2 deletion syndrome: An overview and case series. Butcher et al. Am J Med Genet Part A 2018.
Who isn’t fascinated by catatonia? This paper doesn’t add much to the picture but I certainly will follow-up on 22q11.2DS.

The cellular chloride channels CLIC1 and CLIC4 contribute to virus-mediated cell motility. Stakaityte et al. JBC 2018.
This was very interesting–MCPpV causes Merkel cell carcinoma. I don’t know the difference between a polyomavirus and an arenavirus but virus-causing cancers have always interested me. Their takeover of the CLIC4 and CLIC4 ion channels for motility is convincing and lends a clear pharmaceutical intervention. Very nice work.

Sports
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1-1 on Sunday. Titans stunk but the Bengals kept it close. Returning to mean, nothing to see here.

Poker continues to mystify me. “Game theory optimal”? Here’s one hand. I’m short stacked at a 6 player table. UTG raises 3x BB. One caller and then me. I’m holding KJs. I call, BB calls. Four of us are in. BB checks and the UTG raiser bets half the pot. Caller to the right calls. I raise, only doubling the bet (my stack is almost gone). Everyone calls and the original bettor goes all-in with a huge stack. 3 of us call (my stub stack calls for roughly 3x BB). Raiser turns over AKo, caller to the right flips over KQo and I’m stuck in third place. No consolation prize.

I also went all-in post flop in a button pre-frop-raise where the BB called me after seeing 8 2 2 flop. My hand? 3 3. He calls and turns over K K.

Personal
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It was nice to see the big homie speakeasy Sunday. One of my closest friends!

I like this Queens House of Representatives Democrat. Young woman. Hyphenated last name. You know who she is. She needs to go to college but at the same time she’s really independent and anti-establishment. Viva anarchy!

20 thoughts on “11/20/2018”

  1. Anarchy is never practical though. Lol

    And if you’re talking about Alexandria Cortez Ocasio, she’s even way more far left than Bloomberg. She’s got good intentions, but like Bernie, has no clue of actually making a realistic policy.

    Idealisim is a stupid way of policy making, whethet it be left wing or right wing.

    1. “And if you’re talking about Alexandria Cortez Ocasio, she’s even way more far left than Bloomberg. She’s got good intentions, but like Bernie, has no clue of actually making a realistic policy.”

      If you’re assuming she can’t “make a realistic policy” just because she’s left, you’re just as cluelessly biased as anyone else. Way to just lump everyone into two categories, I bet that makes it easy for your simplistic mind to follow.

      1. No I seen what she had to say about economics, job reports, and even healthcare.qq

        And I’m closer to the left myself than Martin, but that doesn’t mean I support these badly thought out policies. She got laughed at and mocked for lying about some things regarding economics.

        And it’s simplistic to thing these populist demoguages can do what they promise.

  2. Enjoyed the overview of the generics market a lot Martin. Do you think some of these generics-only players will turn to R+D at some point to try and develop products with a higher margin? Surely a business model where generics are the cash cow to fund research has potential?

    Additionally, how do you feel about the microbiome space, particularly looking at MCRB, ASMB, Enterome?

    Looking forward to the CELG deepdive!

  3. Good stuff, Martin. Spot on with the generics market analysis. Kind of reminds me of your strategy that you built your companies around in selecting niche generics and re-positioning them where they actually belonged in the market . I am wondering if you were to pick new biogeneric projects as an entrepreneur what would your best bets be?
    still waiting for celgene deep dive

  4. Thank you for keeping in perspective the areas of profitability in the long term such as pills and generics. With all these groundbreaking gene editing and technology driven products still years from really taking hold. Please let us know about Uniqure’s (QURE) recent test results and pipeline.

  5. As a matter of fact I find your posts such as these as a sobering reminder not to expect the skies from these newer innovations in gene editing such as those administered via vectors plus genetic material. Profitability as to make sense. Please provide sobering review of how profitable gene editing can really become based on what patients can tolerate which is pills pretty much for now.

  6. Once again it is clear that this material is published by Martin Shkreli. I base it on the substance per the youtube videos published last year 2017 until around year-end. This content is consistent with the profound meaning and unique perspective of these videos published on youtube last year.

    1. Biotech is so volatile it’s uninvestable. But very interesting to follow. SGMO is interesting. but with SGMO so volatile and now ONCE bouncing back from 36 fast. QURE is no shoe in either and tough to say where these things will trade. but potential is at its peak now so the demand should be coming in as these trials are advancing towards conclusions more than the early stages. Notwithstanding gene editing of this sort flopping completely, this could be on of the last moments of make or break for these equities. Great times.

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