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State of Biotech 2022: The View from ARC Invest
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State of Biotech 2022: The View from ARC Invest
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Language: EN.
Segment:1 Introduction to GEN Edge.
KEVIN DAVIES: GEN Edge is the premium content channel of genetic engineering and biotechnology news. The magazine that's been covering the twists and turns of the biotech industry for four decades. GEN Edge offers exclusive in-depth reports from the front lines of biotech delivered right to your inbox focusing on business trends and opportunities and spotlighting the most exciting startups and funding rounds shaping the industry.
KEVIN DAVIES: GEN Edge features the brilliant reporting and journalism of the GEN editorial team led by Alex Philippidis, senior business editor in New York, and Jonathan Grinstein in San Diego.
ALEX PHILIPPIDIS: We deliver a lively, authoritative, curated set of stories each week profiling dynamic new biotech companies. Sitting down with founding CEOs and other key executives, researchers, and analysts from the leading edge of biotech.
KEVIN DAVIES: Subscribers to GEN Edge also enjoy exciting exclusive video content. Close to the Edge features 60 minutes interviews with outstanding biotech CEOs. And our Front Row series offers a deep dive into subjects such as Alzheimer's therapies and AI in drug development.
ALEX PHILIPPIDIS: If you sign up, you'll have instant access to two years of this exclusive material. And GEN Edge will be home to full length versions of the interviews and panels featured here in the State of Biotech forum.
KEVIN DAVIES: GEN Edge offers personal subscriptions and various options for group subscriptions for organizations and companies. Stay on the bleeding edge of biotech with GEN Edge . [MUSIC PLAYING]
Segment:2 The View From ARK Invest.
FAY LIN: Hello, everyone. Welcome to our next session, the review from Ark Invest. My name is Fay Lin, senior editor with GEN Biotechnology, the new peer review journal from GEN publishing outstanding original research in all areas of biotechnology, in addition to an array of front manner ranging from news, features, commentaries, interviews, and more. You can learn more about GEN biotechnology at our website at genbiotechjournal.com And follow us on Twitter @genbiotechjournal.
FAY LIN: My co-host for this session is Alex Philippidis, senior business editor with GEN. How's it going, Alex?
ALEX PHILIPPIDIS: Howdy, Fay. And so good to see you. Yesterday, I co-hosted an outstanding panel with the three hosts of the Clubhouse Biotech podcast to get their impressions of where the biotech industry as a whole has been and might be heading. Right now, we're excited to speak with two talented young analysts at ARK Invest, the high profile investment firm led by Cathie Wood. So a warm welcome to Ali Urman and Simon Barnett.
ALI URMAN: Thank you. Thank you.
SIMON BARNETT: Thanks for having us.
ALEX PHILIPPIDIS: Yeah.
FAY LIN: Great. Welcome to you both, Ali and Simon. Why don't you both just give our viewers a quick introduction of who you are?
SIMON BARNETT: Sure. Maybe I'll start and then hand it over to Ali. So like Alex mentioned, Ali and I are both analysts working on our life science strategy here at ARK Invest. Myself, I've been with the company since summertime of 2018. Back then, we were just taking our first steps into life sciences in general. We were mostly focused on things like sequencing and CRISPR gene editing.
SIMON BARNETT: Of course, that's broadened out quite a bit. And I'm happy to get to that throughout the conversation today. Since then, we've hired some excellent folks-- Ali, as well as our newest associate, Pierce. My core focus at ARK is really on life science tools as well as the diagnostics companies. But I also do cover some of our synthetic biology companies like Ginkgo Bioworks, for example.
ALI URMAN: Perfect. So maybe I can give just by way of background. So my background is in epidemiology and biostatistics. I was working at Sloan Kettering Cancer Center and IBM Watson Health. Sloan, I was doing lung cancer research. And at IBM Watson Health, in AI and cancer research consulting. There, I became really interested in coding. I actually started a Python club there. And I also became really interested in patenting.
ALI URMAN: So a lot of my ideas there were patented. And I would review other people's patents, which has really helped me with reviewing companies, both from learning about AI and AI for drug discovery, which has become a big code word lately, but also, in terms of patents and what that means for the company or their competitors. I incorporated my own consulting firm in 2018. Focused on early growth companies, patenting, innovation strategy, management, operations, et cetera.
ALI URMAN: And the way I got to ARK is probably worth mentioning because it involves Simon. And it's a really good story. I was working on a startup at the time that I co-founded. And I wanted to learn more about getting funding for my startup. So I went to a financial event. I met a guy there who works at Stifel. And he said that I reminded him of Cathie and her energy. And that he wanted to forward my CV along to ARK.
ALI URMAN: And I think it went through several people's hands. But eventually, it landed up in Simon's. And I just think it's quite interesting. So Simon and I ended up going for coffee I think for three hours and just nerding out on genomics and became very fast friends. And so my hesitation of going into finance at the time, Simon alleviated all those concerns. And it's been an amazing really interesting road.
ALI URMAN: And being able to help, from the more business finance side from where I was before in the research side, has been really interesting. So I specialize and then cover all things therapeutics. So I focus on gene editing, gene therapy, immunotherapy, and basically any novel therapeutics.
FAY LIN: Great. Thank you both for those introductions. It's great to learn a bit more about your journeys. And I want to jump a bit more into what ARK Invest is. Now, many viewers have heard of ARK Invest. But for the few who perhaps have not, what is ARK Invest all about? And what sets it apart?
SIMON BARNETT: Sure. I can take that. So first and foremost, ARK is a long-term centered asset manager focused solely on progressive and differentiated technologies. So for people listening to this, some examples might be things like next-generation sequencing, gene editing, but also things like artificial intelligence, as well as collaborative robotics, blockchain, energy storage are a few other prominent examples.
SIMON BARNETT: And I think we're uniquely interested in understanding how these different technology platforms interweave and feed off of one another. Certainly, the molecular diagnostics of today wouldn't be possible without high throughput lab automation and really powerful AI classifiers on the back end. And we can get into that later. In addition, the way that we define these platforms, generally, we look at three different specific criteria.
SIMON BARNETT: So whether or not there is a precipitous cost decline, I'm sure everybody has seen that famous NGS cost decline curve. So that's an example. We look at platforms that are fundamentally cross sector and cross geography, so not limited by that, as well as platforms that themselves act as, again, that platform word enabling other types of technologies to be built on top of them. So sequencing clearly is the backbone behind diagnostics, synthetic biology, the rational design of gene editing, things like that.
SIMON BARNETT: The other thing that I think is really unique to ARK is the way that we've set up our research function. So we are very aggressive when it comes to publishing our research across many different types. So whether it's podcasts, or written articles, or interviews, things like that, we try to ingratiate ourselves with the scientific community. It's a lot easier to get when you're giving at the same time. So soliciting critical feedback on our ideas very early in that research process is really critical, I think.
SIMON BARNETT: As well as the fact that just having humility that there are going to be really smart people out there that know a lot more about these things and being able to get in their good graces and have a collaborative relationship with them. So that we can keep our finger on the pulse in these really hard to cover areas is really critical, I think, to our success as a manager. The last thing I'll say is that most of our assets under management, our AUM, are in a vehicle called an ETF, an exchange traded fund.
SIMON BARNETT: So for those that don't know, it's like a portfolio. But it trades on an exchange so you can buy it and sell it. And to that end, we are a liquidity provider in many ways for companies that are maybe not as big. So a lot of the biotech companies are like small cap, mid-cap. They may not be getting captured in the major indices. And so we try to bring a research spotlight, but also an investment spotlight for those companies.
SIMON BARNETT: And get them the platform that we think they rightfully deserve as architects of the next wave of life science innovation.
FAY LIN: Great. I'll pass it over to Alex to ask a bit more questions from the business side.
ALEX PHILIPPIDIS: Sure. Thanks, Fay. And Ali and Simon, you spoke about ARK Invest approach to research. Now I'm curious what is Ark Invest's approach to investing. And why does the firm focus on public companies?
SIMON BARNETT: It's a great question. So maybe I'll go a little bit deeper into the framework, the valuation framework, the process as it were for us. Generally speaking, we start at the top down. And what that means from a research perspective is we look at long-term secular trends around whether it's a technology getting a lot cheaper, or maybe there's a specific clinical application that's translating from research into the clinical setting, these longer term things.
SIMON BARNETT: And from doing that process, typically, companies rise up to the surface. The ones that are actually in charge of spearheading that transition. And so that's generally where the research starts for us. We have, basically, like a six-point framework that we apply to all of our investments. So we try to quantify a company's track record of execution, its people management and culture, whether there is a technologically disabled unfair advantage that the company has, as well as barriers to entry in the market.
SIMON BARNETT: So trying to quantify the competitive landscape. And last, but not least, is the valuation. The five-year-- I mentioned we're long only. All of our investments are typically underwritten with the expectation that we'll be with them for five years. So that's how we do all of our modeling. And you mentioned the focus on public companies. It's interesting.
SIMON BARNETT: You're absolutely right. That is where our focus is. But this year is actually going to be a special one for us because it's our first foray into the private markets. So I can't go too much in the detail at this point. Of course, this is all in public record now filed with SEC. But later on this year, we're launching our first effectively crossover fund, so private and public at the same time.
SIMON BARNETT: So it'll be certainly an exciting period as we move forward here.
ALEX PHILIPPIDIS: Will that include biotech investment in those public-private mix?
ALI URMAN: Yes.
SIMON BARNETT: Absolutely.
ALEX PHILIPPIDIS: Can you at least offer some reasoning as to why the foray into private as well as public?
SIMON BARNETT: Sure. Maybe I can take a stab at it. And then I know Ali is really active in that area as well. So I'll turn it over to her. But generally speaking, I would say it's a mixture of one, we want to continue to innovate with new types of vehicles that, again, hit on that principle that I mentioned, which is liquidity. Offering investors the opportunity to get in even earlier in some of these technologically disruptive names and potentially folks that are not necessarily associated with a big VC.
SIMON BARNETT: So it's a little bit harder for the average investor to actually get access into those early stage companies. And that's something that we want to try to address with this fund. In addition to that, obviously, in life sciences, the translation from technology that's whether it's recently spun out of academia or is still being built in an early stage context, it's very seamless the translation of that technology into the public sector, whether it's organic, through an IPO, or it's done through M&A.
SIMON BARNETT: And we're obviously really keenly interested in looking at private companies. We've been doing it for years. And it's largely because of we just have to be aware of competitive threats to our public companies. So the research has always been there. It's just that we're now able to actually go that last step and make investments there.
SIMON BARNETT: So we're really excited about it.
ALI URMAN: Yeah. Just a few things to add there. So as Simon mentioned, we've been looking at private companies throughout all the times that we've been analysts. It helps us get a framework for what's going on within the ecosystem. But also what's on the horizon. So what can potentially disrupt some of our public companies? So from a research perspective, and even from a day-to-day, I don't think this changes it so significantly.
ALI URMAN: But one nice thing to private companies as well is that ARK has always been an investor that's really there for their companies. And so in times of troubles, we shall say, ARK really tries to lift the companies up and support them. And so I think this is a way in which a private company can pretty much, we can never say guarantee, but there's pretty much an idea of the fact that ARK could be there during the public as well as the private for this particular company's life cycle.
ALI URMAN: Another thing that's probably helpful to mention is that ARK is going to have an ARK Innovation Center. So the building should be done by late 2023, hopefully. And so within that Innovation Center, we're going to have an accelerator. And so that accelerator will give us also access to some of these really early stage companies and creating an impact, both through Tampa Bay and Saint Pete area, but also more globally.
ALEX PHILIPPIDIS: And to what extent does that reflect the interest and success that a few other firms have had accelerating as well as just painting money or investing? And I'm thinking of flagship and foresight, capital firms like that.
ALI URMAN: So from the accelerators perspective, we're still working out all the details on how that's exactly going to work. But one thing that we think will differentiate us is first of all, ARK research will be used as a screen for choosing investments in companies. And so with our differentiated research, we think we'll have a very important way in terms of finding companies that are differentiated. And as Simon mentioned, our framework and rubric for things we look at.
ALI URMAN: So those criteria, the precipitous cost decline, et cetera. So I think that's going to differentiate it in terms of the companies that we choose to invest in. And then in terms of how active we are within the companies, we'll have to see how that develops. Because right now, it's in early stages. But we're really thinking about how we can even create more innovative solutions.
ALI URMAN: So one thing could be thinking about a metaverse where we all congregate from the accelerator. So that if we have accelerators elsewhere or people from companies elsewhere, we can all come together and share exchanges of ideas and knowledge. So I think ARK is really putting itself on the map in terms of finding different solutions to incorporate in the investing process.
ALI URMAN: So one will be as a screen. But we'll keep coming up with other innovative ideas as well.
ALEX PHILIPPIDIS: Speaking of the map, why did ARK choose to relocate to Tampa, Florida?
SIMON BARNETT: I think-- maybe I'll start, Ali. Sorry. It's a mixture of factors for sure, I think one of the things that we were thinking about being based in New York. And obviously, scaling as a company, it's been a really interesting last two years for us. When I joined the firm in 2018, I think we were something like 15 people. And now, we're getting past 40. And we have all these new exciting ideas about how to keep fleshing out the team.
SIMON BARNETT: And with that, we just needed to expand our physical footprint. So right now, we're actually nearing the completion of the new permanent St. Pete HQ, which is really exciting. It's right in the last couple of weeks there. And so it's just giving us a lot more of the proverbial ceiling has been raised in terms of what we can do and how we can scale. So it's giving us a little bit more flexibility on that end. I also think that the city itself, as Ali has talked about, whether it's really getting on the ground floor in terms of tapping into the talent, as well as some of the early stage companies that are there, but also I know Ali has an interesting project going on with the Johns Hopkins Hospital.
SIMON BARNETT: They're based in St. Pete and working with them to continue to expand what we call our theme developer network, which is essentially a group of people who are active and come to our weekly meetings and contribute their expertise. And it's not just limited to life sciences, but all the different areas that we cover. So continuing to build that out is also a really important thing for us. And so far, it's been going well.
ALEX PHILIPPIDIS: Great.
ALI URMAN: Maybe just to add on that just for a quick second. I would say, one of the things that is really incredible is the potential impact that we can have on St. Pete and the broader Tampa area. So I think Simon hit on a couple. So there is a ton of untapped talent. And being culturally involved in Florida, the St Pete area has been really remarkable. And there are, as Simon mentioned also, the Johns Hopkins Hospital is right by actually where our Innovation Center will be.
ALI URMAN: And so we can potentially partner with them as experts both within our theme developer network or our network of experts, but also even potentially as things of like, mentors for our accelerator program, et cetera. So there's just a lot of untapped talent and cultural benefits, I think, to being in that area. And we've seen I think pretty remarkable results already. So looking forward to the future there.
ALEX PHILIPPIDIS: Great. Before I turn it over, just one thing, ARK's CEO Cathie Wood is one who enjoys a very high public profile. What's it like working with Cathie?
SIMON BARNETT: I think we all have probably unique answers for that. I think there are a few things that I really appreciate. And I think I've come to appreciate more actually getting deeper into the role. So ARK is a fairly flat organization from a structure point of view. And so given that we're an active management firm, meaning, that we're buying and selling around positions on a daily basis, we're always in lockstep as a research team with Cathie.
SIMON BARNETT: So there are no real degrees of separation every morning when we sync before the markets open on what the strategy is for that day. And so as analysts, it's great to be able to learn by osmosis in that scenario. Cathie brings decades of experience as a portfolio manager across various firms, different strategies. Just the rules of thumb and the market cycles that she has seen are things that you can't really get out of a book.
SIMON BARNETT: And so by being close to her and actually seeing how her brain works and the connections that she makes across seemingly disparate markets or different technologies, there is a lot of serendipity, I think, that's captured in the daily chop of working at ARK that I've really come to appreciate. And to your point on publicity, Cathie is a very humble person. I think you'll find it rare that a portfolio manager-- well, the sole portfolio manager at this point, as well as the co-founder and CIO of the company, gives a lot of free reign to her analysts.
SIMON BARNETT: And lets them go on CNBC and have these conversations or actually receive full credit for publications, is not something that's very common I think in financial services generally. So it's a great opportunity. A lot of hard work but certainly, the opportunity is there.
ALI URMAN: Maybe just to add on that. I think Simon mentioned intellectually and being around Cathie and learning from her from the investing process and the research process, that has been amazing. But I think what's most surprised me about Cathie is actually more on a personality level. So Simon mentioned, she's humble, which I would definitely say. But maybe a story just to illustrate that. Before I got to ARK, they asked me what surprised you most about the firm or anyone at the firm.
ALI URMAN: And I said, it surprised me most that Cathie, and we haven't done this so much because of COVID, but Cathie will go to dinner with every single one of the employees. And that's everyone. It's just not just the investing team, but everyone. She'll take them to dinner, wine, food, whatever, and just talk to them and get to know them as a person. Cathie will remember our parents' names, our family members' names, things about what we're doing.
ALI URMAN: And I think something that impacted me is I remember my first week in New York, I was leaving. It was Friday. It was 5 o'clock. And I was like sneaking out. Not that we're not allowed to leave at 5:00, but my first week. And I remember Cathie came out of this phone booth room that we had right the elevator.
ALI URMAN: And I was like, oh, my God. Am I leaving too early? And Cathie said, it's been really great. And we're so happy to have you on the team. And she said, can I give you a hug? And that to me just really signifies and exemplifies her personality. She's very caring. And she's gotten to the success.
ALI URMAN: And so everything Simon said is true. We sit next to Cathie. And she's in the trenches with us. And that's been amazing to learn from her. But I think her humility and her personality help that get to another level even.
ALEX PHILIPPIDIS: Great. Fay, over to you.
FAY LIN: Thanks, Alex. I want to dive a bit deeper into the science. Now, Ali, I want to turn to you for a moment. Your major area of coverage is genome editing. And I wanted to ask, how would you sum up the field of genome editing today? It's been 10 years after the legendary Doudna-Charpentier paper. And also, two years after their Nobel Prize. What are your thoughts on the field now?
ALI URMAN: One word. Amazing. No, just kidding. I'll delve a little deeper than that. But gene editing is something that I think when I got to ARK, I had learned about it before. But I think delving into it has been just such a privilege. I think it's one of the most interesting fields. I think it's one that also is going to go cross pipelines. People are like, well, gene editing is one thing.
ALI URMAN: But it's not. We can use it in cancer to edit cells before they're put it back in the body. There's so many things that we can do with gene editing that I think people don't even realize. Maybe to put some context or numbers around it, so we believe at ARK that gene editing and gene therapy could reach about, from a market cap potential, $1.1 trillion. And that would ensure that these companies basically scale up 54% at a compound annual growth rate.
ALI URMAN: So that would be going from about $130 billion to $1.1 trillion. And that's by 2026. So just to give that a bit of context in terms of the market applications that we actually see there. Also, at this time, so by 2026, we believe that a total R&D spending devoted to these curative therapies could grow from 3% to 17%.
ALI URMAN: So we believe that you may put your dollars more likely into things that could potentially be curative as opposed to chronic therapies. And I guess the question Fay, like, you mentioned is, why? Why are we so interested in this? Well, I think the potential for curing disease, as opposed to just managing symptoms is really important and really crucial to extending life. So we think that this technology can be transformative.
ALI URMAN: It alters DNA. Either you can remove, you can insert, you can replace genes at the DNA level with gene editing. And then of course, the difference between gene editing and gene therapy is that in gene therapy, we just insert a healthy version of a gene. So that's the alteration that happens there. And obviously, there have been some issues with that. And some diseases may lend better for that.
ALI URMAN: But I think there's some really, really exciting gene editing modalities. So as you mentioned, Emmanuelle Charpentier, Jennifer Doudna. So that's Cas9. And there's been many flavors since then. But obviously, it's a nuclease that's used in which you can cut DNA. So it's been referred to as scissors very often. We also know that base editing is a new technology that's evolved.
ALI URMAN: It's been compared to a pencil and eraser because you can change one base pair to another base pair. And that's going to lead better to certain diseases, of course. And then prime editors are going to be maybe the most versatile, depending on what we see from an efficacy standpoint. But instead of cutting that target DNA, we're changing one letter of that DNA like you might do with base editing.
ALI URMAN: Prime editors can actually replace a segment of DNA. So they're going to be potentially more versatile and potentially able to cure even more diseases. And maybe to put a little real world context into it, we've seen some pretty exciting early data. So CRISPR Therapeutics in collaboration with Vertex Pharmaceuticals, they've treated over 75 patients in sickle cell and beta thalassemia, which are hemoglobinopathies.
ALI URMAN: And we've seen some pretty great data. So they use Cas9. And we've seen virtually no vaso-occlusive crises or pain for these patients. And they'll be going to the FDA to talk about that. We've also seen from Intellia, again, it's a Cas9. So in terms of base and prime editing, they're newer so we don't have as much data on it. But we saw some great TTR polyneuropathy data from Intellia Therapeutics that revolutionized what we thought was even possible for gene editing.
ALI URMAN: And so I think it's still early for gene editing. But the potential is just so large. And I think that's why people are just really excited about it.
FAY LIN: That's great. Thanks for that great overview. Now, I know you've interviewed a host of CRISPR stars on your podcast. And I wanted to ask you, is there anyone who stands out in particular?
ALI URMAN: Yeah. So that's a tough question. Because they're just also amazing. But affiliated with GEN is Kevin Davies. We did a podcast together. And the way I met Kevin was I reached out to him on Twitter. So this has been a long-standing relationship through Twitter. And I was reading Editing Humanity, which is one of his books. And it's an incredible description, in my opinion, of the whole CRISPR discovery and how it happens and who's involved.
ALI URMAN: And we all know the names, Emmanuelle Charpentier and Jennifer Doudna, but there were a lot of unsung heroes in the CRISPR discovery. And so I think Kevin did an incredible job of writing that book. And I have a signed copy now. So I'm very excited about that. So he may have been my favorite guest because of that. So there's been many standouts.
ALI URMAN: But Kevin is certainly top of the list.
FAY LIN: Amazing. And it's a pleasure to work with Kevin as well as in our work with GEN biotechnology. Fantastic. Ali, thanks for that great intro into the gene editing space. I wanted to dive a bit deeper, and ask you, are there any specific trends or company that you find the most noteworthy that you want to highlight and just explain what makes them noteworthy in our conversation today?
ALI URMAN: Sure. One of the things that I think about are edits. And we want to make sure that there are no edits that are unintended edits or no unintended consequences to the genome. And because of that, I would probably highlight Beam Therapeutics, which is working with base editing. And so like I mentioned, there's a chemical reaction. And so you convert one base to another.
ALI URMAN: But with Cas9, you're literally cutting that's why we think of it as scissors. And the challenge with that is that our body uses its own natural repair mechanisms to repair the broken strand. And we can have a lot of undesired outcomes there. But the worst part about that is we just can't predict it. And we did a pretty interesting blog I wrote for ARK on CRISPResso, which is just, well, the best name for a tool, but also a tool that looks at different outcomes that happen.
ALI URMAN: So we get a little plot generated from data that we can input. And the data is just archived in papers or in their supplemental information. And so I took that data. They're called fast Q files, put them into this CRISPResso tool. And it actually analyzes. And so I showed what a Cas9 base edit and a prime edit would look like.
ALI URMAN: And again, base editing and prime editing, we don't have a ton of data just because they're really new. But from what I can see now, it looks like a base edit and a prime edit may have less unintended consequences. And they're being be more precise. So base editing, Beam has that IP. And then Prime Medicine has the IP for prime editing. And so I think those two companies are really interesting.
ALI URMAN: And their technologies are really interesting.
FAY LIN: Great. Alex, I'm going to pass it back to you.
ALEX PHILIPPIDIS: Sure. Thanks, Fay. And Simon, I say, tongue in cheek, that there's not much happening in NGS these days. Would you agree?
SIMON BARNETT: I would. Completely boring.
ALEX PHILIPPIDIS: Seriously, what are the highlights as you see it of the new platforms in chemistries introduced by three new entrants that have gotten a lot of attention in recent months? Singular, Element Bio, most recently, Ultima Genomics and its claim of the $100 genome.
SIMON BARNETT: We can talk about all of those. I think back to ADBT, which concluded just a couple of months ago. And the atmosphere was just electric when it came to NGS. The last couple of years has been mostly about spatial biology, which is certainly extremely interesting and important and something to really focus on. But it's been more than a decade, since we've had this level of real bona fide competition in the sequencing space.
SIMON BARNETT: I think this is actually probably the most competitive and interesting time ever when it's come to sequencing. And so before getting into company specifics, I think there are a handful of things that make the next decade of sequencing really exciting for us. And the first one is we are in the post telomere-to-telomere era where we can finally say with certainty that we've sequenced every base in the human genome.
SIMON BARNETT: It's actually one of my favorite Gotcha questions we give on seminars is when we finish the human genome. The answer is always 2003. And it's actually about eight months ago. So I think that is an interesting thing. We hear this phrase a lot. Certain technologies are good enough. And I think good enough is a product of being able to hide behind incomplete reference.
SIMON BARNETT: And we're still working on making that reference even better. So instead of having it be a haploid reference actually phasing across that entire genome and making the benchmark not a 3 gigabase human genome but a 6 gigabase human genome looking at the variation between mom's side and dad's side and how those interact together to create variants and look at things that way.
SIMON BARNETT: So it's been an interesting, I think, tone setter having the T2T genome come out just recently. I would also say, there's a ton of exciting stuff going on in RNA sequencing. So sequencing transcripts as well as potentially protein sequencing, which we can talk about maybe in a little bit. But by and large, I think the entrance of competition is unequivocally a good thing for the field.
SIMON BARNETT: It's good for patients. It lowers a key input cost for the diagnostics companies at a time that their supply chains are seeing a lot of inflation. So it's a really important thing to have happened right now. It's also putting us in this really unique position to go back and question our priors around what's possible with NGS. How deeply can we sequence?
SIMON BARNETT: How many early stage cancers can we pick up with potentially with some of these new approaches? It's really exciting, I think, to see these new sequencers and companies begin to proliferate and really place their first instruments in the field.
ALEX PHILIPPIDIS: Why are we seeing this much ferment in a competitive sense regard to Illumina?
SIMON BARNETT: I think it's a combination of factors. I think the easy thing to point to is patent expiry. Certainly that's something that Illumina has used to block competition from companies like MGI, BGI, for example, which I believe actually today, I just saw notification that they're selling the DNB400 I think here in the United States. So we're seeing patents lifted. And that's enabling competition. I also think there's been real legitimate new innovation in sequencing.
SIMON BARNETT: So if you look at companies like Element and Omniome, which was bought by PacBio, the sequencing chemistry is not sequencing by synthesis. It's still short read technology. But it's a fundamentally new way of actually getting at that base level resolution that isn't what Illumina use. So you are seeing some folks taking a different route to getting there.
SIMON BARNETT: And each company has reworked different stages of the process. So you're seeing a little bit of that. I also think from a customer standpoint, whether it's research customers or the large production scale clinical folks, they have been clamoring for the ability to have more control over their input costs. And you've seen this with early partnerships being struck. For example, you saw Exact Sciences make an early investment in partnership with Ultima Genomics to lower the price of its multi-cancer screening tests, as well as a few others.
SIMON BARNETT: So I think the market itself too is primed for more competition. And I think ultimately, lower costs, more capabilities are going to be the output, whether that's new companies delivering on their promises that they're talking about, or if it's just a little bit more pressure being applied to Illumina. And potentially, they've got a lot of things in the fire that they've been working on for quite some time. But you might see that come out potentially a little more aggressively than otherwise would be the case, if there wasn't as much competition.
SIMON BARNETT: So there's a multitude of factors I think at work here.
ALEX PHILIPPIDIS: Now, Simon and Ali, what will be the major determinants of the success and failure for these up and comers like Element and Ultima, and Singular as they try to take business away from Illumina and some of the more established names like a PacBio or Oxford Nanopore even?
SIMON BARNETT: Well, it's a good distinction you're making here. Because when we talk about new entrants, basically, I think of companies like Illumina, MGI, BGI, Nanopore, and PacBio as the folks who've been doing this for a while that have global commercial footprints, supply side relationships that are either vertically integrated or very robust. They've got field application support, the software tooling, everything you need to do to be a company.
SIMON BARNETT: Because I think it's very easy to get a little technocentric and just focus on the cool new capabilities of an instrument. And let me reiterate, that's extremely important. It will certainly carry the day for some companies. But the way I think about it is these folks have to prove that they're stable and that they have secure supply chains and support functionality. Because ultimately, there is absolutely resistance to change.
SIMON BARNETT: There's switching friction as it were. And one of the ways that I think these companies are going to have to prove themselves is on the support and supply side as well as having instruments that actually do replicate the same performance in the hands of a user that they do behind the four walls of a company. So I think right now is a good time to underpromise and overdeliver and be very metered about the go to market and the strategy.
SIMON BARNETT: I think each of the companies, Ultima, Singular, Omniome with PacBio and what they're doing on both the long and the short read side, I don't necessarily think that you're going to have a situation where Illumina is usurped. And a huge portion of its market share is taken away. I think they're the 800-pound gorilla for a reason. And they'll continue to do that. But at the same time, I think the market share potentially has peaked.
SIMON BARNETT: And that you'll see a little bit more of a situation where folks are leaving potentially to other suppliers, depending on the application that they're doing. I also think that the production scale folks, the folks that are doing hundreds of thousands to millions of samples per year, are becoming sufficiently broad that they may actually incorporate technologies from multiple different companies, depending on what assay that they're running it through.
SIMON BARNETT: So I could see some assays running best through Ultima. I can see other ones going best through a native long-read instrument. It really depends on what the customer is doing. And so I think you'll see a broadening out, as it were, in terms of who goes for what. But generally speaking, I would say that the new companies will have to replicate the performance that they've teased already in these early beta access programs, as well as demonstrate that they have the chops to compete on a service level at the same time.
ALEX PHILIPPIDIS: Now, how will or should Illumina respond to this growing competition? I know they've touted something called Chemistry X. What will it be and how much of a game changer that really be?
SIMON BARNETT: So I don't necessarily think that Illumina has been resting on its laurels with innovation over the past few years. To your point, both Chemistry X and I believe the infinity synthetic long-read assay, we'll get more details later this year at their genomics forum. So we're excited about that. I'm still a little bit mixed frankly, on whether or not Chemistry X will be backwards compatible with instruments that are already in the field.
SIMON BARNETT: Based on the commentary from the last earnings call, I think it depends on how new that instrument is and whether or not it's gone through its full amortization cycle. So we'll see as far as Chemistry X is concerned, there's just not a lot of details out there right now. From what has been shared, my understanding is that it is another sequencing by synthesis technology that likely works in tandem.
SIMON BARNETT: We some of the innovation that they've done on the material science and the optics. So a couple of years ago, they talked about super resolution, which essentially allows you to differentiate floor for molecules that are closer together physically than the diffraction limit of light. So that's really important for packing more information per flow cell, which, of course, lowers prices per run.
SIMON BARNETT: So I think you'll see continued innovation in that direction. That being said, on a read length, speed and accuracy standpoint, these early numbers, which, again, could prove to be out of date once they have their genomics forum, still seem like they're lower on an accuracy level than both Elements and Omniome or PacBio's short-read technology, which, again, are both based on binding, not synthesis.
SIMON BARNETT: So there is a real fundamental difference in how those technologies work. But generally speaking, I think it will be a powerful new asset. Certainly, I think it's going to be a requirement to get to the fabled $100 genome on the NovaSeq or some other kind of high throughput class instrument. So I see it as an iteration on what they have been doing. It looks like the same playbook for the most part.
SIMON BARNETT: And I think it will be definitely something that will help buttress against potential losses and share from some of these new competitive entrants. I don't necessarily think it's going to be a redefinition of sequencing by any means, though.
ALEX PHILIPPIDIS: And where does this competition leave PacBio and Oxford Nanopore?
SIMON BARNETT: So the first thing that I'll mention is we don't necessarily see a hard divide between the long and short read world necessarily. Ultimately, we think that there are tons of different applications for sequencing. Some that might be better served by long reads especially native long reads. So maybe I can take a moment to look at both of these companies, Nanopore and PacBio. Because the interesting thing about them is both of them have both long and short read capabilities.
SIMON BARNETT: You see Nanopore doing a lot with leveraging the fact that its technology can read epigenetic modifications natively, for example, which is very important in things like cancer screening. PacBio's accuracy on the short-read side seems like truly game changing. I think it's going to take-- again, they're under the same strictures that everybody else is in terms of proving that in customers' hands.
SIMON BARNETT: So we'll see. But some of the early data has been really, really exciting on that front. I think both companies will be extremely successful. I think they're both undervalued relative to what their native long-read technologies will do in the future for a handful of applications. So let me maybe actually highlight a couple of those. The first one to mention is certainly whole genome sequencing.
SIMON BARNETT: I think by now, it's not really an argument that you need tens of KBs to hundreds of KBs to fully assemble and phase a human genome, especially across the really hard to read stretches like tandem, repeat, pseudogenes, or other areas of low complexity that are many of them extremely important from a medical standpoint. I think there's always been this thought that the hard to do is we'll forget about them because they're not that important.
SIMON BARNETT: It's like, well, you have a catch 22. Just because you can't read them, it doesn't mean they're not important. So I think that's one of the things that we're excited about is whole genome sequencing. Of course, PacBio and Nanopore, you get the epigenome for free. So because both technologies can read based modifications like 5-methyl-C and others, you get that information for free. And you can phase it.
SIMON BARNETT: So we're seeing this take off in some disorders, like imprinting disorders, which happen to show patterns of allele-specific methylation. So rare disease diagnostics, I think, are another really important component. I mentioned transcriptomics earlier, the sequencing of RNA. So both PacBio and Nanopore have really interesting capabilities to actually sequence the entirety of transcripts. So we talk about gene expression.
SIMON BARNETT: Genes aren't the things being expressed, though. It's the isotherms that they create. And there are processes like alternative splicing, for example, that are highly dysregulated in cancer genomes, for example, that govern what actually happens. And so the ability to not just with a short read the beginning of a transcript and try to reference assign it to a gene, you can actually sequence entire isoforms end-to-end without any computational assembly because you're seeing the whole thing.
SIMON BARNETT: So that's another really exciting area that I think will be important for transcriptomics, but also the folks that are even further downstream doing proteogenomics, so looking at the transcriptome and the proteome in tandem. One cool thing, if you have isoforms in hand and that their sample-specific, is you no longer have to rely on databases that are lower resolution.
SIMON BARNETT: You get sample-specific isoform databases. So that's going to be, I think, a cool thing. Areas like metagenomics, even for gene editing and gene therapy design, we've seen some cool stuff happen with using long reads to actually surface off target effects that were unintended that would evade short-read technologies, structural variation, larger changes, or even edits and regions that would be invisible like homopolymers.
SIMON BARNETT: We're seeing that too. So that's really exciting. Bottom line here is that I think long reads are around to stay. And that native long reads have a lot of benefits over synthetics, which have been tried quite a bit in the past. And so we're excited to see where companies bring that technology to bear and for us. And the closing thing I want to say is for both Nanopore and for PacBio, we really feel like a major order of magnitude improvements when it comes to throughput, to cost, to user interface, user experience.
SIMON BARNETT: None of these things require miracles. And many of them we think are happening within the next 12 to 18 months or so. So we couldn't be more excited to see what types of new biology and clinical applications that brings about.
ALEX PHILIPPIDIS: Great. Fay, over to you.
FAY LIN: Thanks, Alex. I want to shift a bit and talk about the market. Now, most people watching this will know that it's been a tough year for the biotech market. What do you think led to this sharp downturn? And was it obvious in retrospect that this would happen?
SIMON BARNETT: Maybe I'll start. And then Ali, feel free to cut in or jump in here. So the first thing I would say, I totally agree with you. Anyone who's been a student of the biotech space over the past 18 months or so would certainly agree with you. But it's really far reaching beyond that. so biotech, absolutely. But virtually, all sectors and across asset classes out to things like cryptocurrency, really everything, there's been not a lot of spaces to hide and avoid this market drawdown that we're seeing, which is severe and also broad base at the same time.
SIMON BARNETT: I think there were many factors culminating during the pandemic. And because of the pandemic, I think that was really the precipitating event that made a lot of things, to your point, maybe a little bit more obvious in retrospect. So things like a relatively lax monetary policy, historically low interest rates over the past decade, a lot of the stimulus that came along with some of the programming that happened and the policymaking that happened during the pandemic, which is really I think led to a state of inflation, which is affecting a lot of companies.
SIMON BARNETT: They're seeing their supply side become a lot more difficult to manage. And key inputs-- we think about things like semiconductors, for example, or even things as benign seemingly as pipette tips, which were really difficult to come about during the pandemic. It really created a lot of challenges for the biotech industry in particular. I would say more recently, I think it's probably the consensus take that the Fed is course correcting very quickly to try to get us out of the inflation that is something that we're all experiencing here.
SIMON BARNETT: And so their mechanism to do that is to increase interest rates. And I think for us, one of my monitors every day is just having all of our names up. And what I can tell you is there's very little discrimination on a day-to-day basis between, oh, this basket of companies had some good news, these other ones had some bad news. It doesn't look like Christmas lights.
SIMON BARNETT: It's either all red or all green, depending on what the Fed is doing that day. So I think unfortunately, my opinion is things will be fairly rangebound for some time. And it's going to have to take either signs that inflation is actually coming back down. And with that, I think you'll see interest rates come down in tandem alongside that. So from a company's perspective, especially in biotech, which you could think of a lot of these companies as folks that R&D is extremely important to their longevity and to what they're doing, I do want to be careful not to make biotech sound like a monolith.
SIMON BARNETT: I think the dynamics that are affecting liquid biopsy companies and gene editing companies are clearly very different. And so I want to just acknowledge that. But generally speaking, the cost of capital right now is quite high. So it's more difficult to take out and do debt financing, for example. The way that stocks have been trending, it's making it more difficult to do equity financing that's not highly dilutive.
SIMON BARNETT: And I think the markets have responded by shortening their time horizon that they're interested in underwriting investments. The future values of some of these cash flows are just not as appealing with the way that rates are right now. But as dour as I maybe was leading everyone to believe there, I want to take a step back and just acknowledge that the first thing is health care, classically, is a defensive sector insofar as you can only delay procedures and not prescribe medication up to an extent.
SIMON BARNETT: So cancer doesn't care about what interest rates are. The shock waves that we've had over the past couple of months when it comes to things like Omicron and Delta making it very hard to get into the doctor or very easy, has injected a ton of volatility in terms of what the quarterly growth metrics look like. So it's very difficult to I think extrapolate from that. But generally speaking, I would say writ large, a lot of the companies are, especially in diagnostics, I would say it's a little harder in tools right now.
SIMON BARNETT: Because there's such a focus on our precious capital expenditures, where are we going to put them? So it's causing sales cycles to become protracted. And so we're seeing a little more turbulence, I think, globally from a life science tool side. But the diagnostics companies, I tell you, we have been really surprising. Many of them have either reiterated or even raised their annual guidance for this year.
SIMON BARNETT: They're moving away from those really hard like, year-on-year comparisons that people like to do so. The health of the diagnostics world seems excellent, I would say. I can't speak for gene editing or therapeutics generally. So maybe Ali, if you have anything there.
ALI URMAN: Yeah. I think one of the things that we talk a lot about at ARK is you're looking at your screen like Simon mentioned and looking at the Christmas lights. And you wonder to yourself company fundamentals, I think, are increasing or are staying relatively consistent. But also, the science is probably getting better or if nothing else staying consistent. And so it's disappointing to see this volatile period. But I guess it goes back to what we were talking about at the beginning, which is that we have a long-term outlook.
ALI URMAN: And so this is likely short-term. And a lot of the factors that Simon mentioned in terms of the Fed and others are probably what's at stake here and what's causing it. But I'll also mention for health care, there has been some turbulence in terms of leadership changes. So Anthony Fauci obviously announced, I guess it was last week, that he would be stepping down. There's also some volatility with the FDA Director for a long time.
ALI URMAN: Janet Woodcock was interim. And we didn't know what would happen there. But obviously, now, we have Robert Califf. And hopefully, with him at the helm of the FDA, we'll see a lot of innovation flourish under his reign. Francis Collins, who is a longtime director of the NIH, stepped down as well. And so I think that did cause some turbulence. Certainly not the extent that the market has we've seen.
ALI URMAN: But I think that did potentially contribute somewhat. Also, health care reimbursement is still also in flux. Simon also touched on the pandemic, which obviously had a great impact on the market. But I think for therapeutics, one of the challenges was that people weren't necessarily coming in for their clinical trial visits. And that slowed down data timelines. And so I think that was quite a big deal for these companies.
ALI URMAN: A challenge that I've also seen, and I think Simon's mentioned this in the tool side as well, is that staffing for hospitals has been a challenge. We had a patient, unfortunately, that couldn't get their therapy, just because there was no staff to administer it. And so this is certainly a challenge that hospitals are dealing with right now. I don't think that's affecting necessarily the broader market.
ALI URMAN: But it is affecting data timelines and catalysts for different companies. And if you don't have a catalyst within six months to a year, maybe ARK can wait since we're a long term, but I think some of the short-term sellers and buyers maybe disheartened by no catalysts or no upcoming catalysts.
SIMON BARNETT: Maybe one last thing to add there too is just the point Ali was making on the time horizon, I think we're definitely aware of the fact that one way that management teams writ large have responded to the macro environment is placed accelerated emphasis on the unit economics of their business, and the underlying profitability of what they can really achieve once that scale. And so I think we'll probably see potentially a culling of business models or companies that haven't quite figured out how to extract cash flow from the revenues that they're generating.
SIMON BARNETT: But I would say at the same time, many companies in the health care space took advantage of pre-pandemic, and perhaps through the pandemic, the lower relative interest rates to raise new capital. And so generally speaking across the board, the balance sheets of many of these companies are not existentially low. So many of these companies are actually operating at cash flow neutral.
SIMON BARNETT: So basically, their balance sheets are leveled off. And they're recycling their gross profit into growth. But others, even the ones that are still burning through cash, have-- and this is, I don't want to overgeneralize, but I would say for median for many of our companies is something like 2 and 1/2 to three years without having to really resort to any other type of external financing. So I think it was probably wise in retrospect to raise capital during those times to get through this period.
SIMON BARNETT: And we really truly don't know how long the markets will be unfavorable to companies needing to raise either debt or equity to fund. But generally speaking, I would just add on top that in all but very few circumstances is there really a near-term financing issue that would cause us to, even within the context of our five-year picture, be concerned about the solvency status of these businesses. And I think we can all take a step back to maybe even acknowledge that in some ways, the pandemic actually made near-term successes perhaps more likely than otherwise would be the case.
SIMON BARNETT: I think an excellent example would be something like liquid biopsy, which for those that don't know, is principally a diagnostic application in oncology. To you as a patient, it looks like a regular blood draw. What's happening in the background is that we're applying very deep extensive sequencing to a blood sample to understand the unique signature of a patient's cancer inside the body.
SIMON BARNETT: And we can do this for screening. We can do it for prognostication. We can do it to diagnose. We can do it to monitor the response that a patient is having to treatment. And the pandemic was a forcing function for a bunch of different cottage industries, whether it's mobile blood drawing, mobile phlebotomy, or digital ordering, or other ways of reaching patients in an environment that was very, very hostile to in-person doctor's visits, as well as the fact that in order to maintain continuity of care, and Ali mentioned it within oncology clinical trials, many oncologists, which historically are somewhat conservative and reticent to or hesitant rather to adopt new technologies, again, it was a forcing function to get people to accept this new modality and try it out.
SIMON BARNETT: And we've seen a bunch of concordance data sets. So studies that match tissue with liquid and look across to see, hey, this is actually a great way to do oncology. And in many ways, it's potentially superior to nuclear medicine. Just blasting people with radiation in hopes of catching a relapse down the road. So just suffice to say that in terms of the fundamentals and the background and the market context, I think we're very positive as to the state of these businesses moving forward.
ALEX PHILIPPIDIS: And just like that, our time is drawing to a close. But we've learned so much about Ark Invest and about biotech and some trends. Speaking of, one of the areas we spend a lot of time talking about was Next-Gen Sequencing. And I invite you, if you're watching the State of Biotech, that that is our next panel. What's next for NGS? And my colleague, Julianna LeMieux, will be moderating that.
ALEX PHILIPPIDIS: And I invite you to tune in and watch that as well as some of the other chats and interviews on this second day of the State of Biotech. David Mittelman of Othram talks about real-life CSI. And I'll be interviewing Peter Hotez for lessons learned on the COVID crisis. So in the meantime, I want to thank you Ali and you Simon for spending the past several minutes with us here.
ALI URMAN: Thank you.
SIMON BARNETT: Thanks for having us.
ALEX PHILIPPIDIS: And for Fay and for me, it's been our pleasure and privilege to be with you here at the State of Biotech. [MUSIC PLAYING]
Segment:1 Introduction to GEN Edge.
KEVIN DAVIES: GEN Edge is the premium content channel of genetic engineering and biotechnology news. The magazine that's been covering the twists and turns of the biotech industry for four decades. GEN Edge offers exclusive in-depth reports from the front lines of biotech delivered right to your inbox focusing on business trends and opportunities and spotlighting the most exciting startups and funding rounds shaping the industry.
KEVIN DAVIES: GEN Edge features the brilliant reporting and journalism of the GEN editorial team led by Alex Philippidis, senior business editor in New York, and Jonathan Grinstein in San Diego.
ALEX PHILIPPIDIS: We deliver a lively, authoritative, curated set of stories each week profiling dynamic new biotech companies. Sitting down with founding CEOs and other key executives, researchers, and analysts from the leading edge of biotech.
KEVIN DAVIES: Subscribers to GEN Edge also enjoy exciting exclusive video content. Close to the Edge features 60 minutes interviews with outstanding biotech CEOs. And our Front Row series offers a deep dive into subjects such as Alzheimer's therapies and AI in drug development.
ALEX PHILIPPIDIS: If you sign up, you'll have instant access to two years of this exclusive material. And GEN Edge will be home to full length versions of the interviews and panels featured here in the State of Biotech forum.
KEVIN DAVIES: GEN Edge offers personal subscriptions and various options for group subscriptions for organizations and companies. Stay on the bleeding edge of biotech with GEN Edge . [MUSIC PLAYING]
Segment:2 The View From ARK Invest.
FAY LIN: Hello, everyone. Welcome to our next session, the review from Ark Invest. My name is Fay Lin, senior editor with GEN Biotechnology, the new peer review journal from GEN publishing outstanding original research in all areas of biotechnology, in addition to an array of front manner ranging from news, features, commentaries, interviews, and more. You can learn more about GEN biotechnology at our website at genbiotechjournal.com And follow us on Twitter @genbiotechjournal.
FAY LIN: My co-host for this session is Alex Philippidis, senior business editor with GEN. How's it going, Alex?
ALEX PHILIPPIDIS: Howdy, Fay. And so good to see you. Yesterday, I co-hosted an outstanding panel with the three hosts of the Clubhouse Biotech podcast to get their impressions of where the biotech industry as a whole has been and might be heading. Right now, we're excited to speak with two talented young analysts at ARK Invest, the high profile investment firm led by Cathie Wood. So a warm welcome to Ali Urman and Simon Barnett.
ALI URMAN: Thank you. Thank you.
SIMON BARNETT: Thanks for having us.
ALEX PHILIPPIDIS: Yeah.
FAY LIN: Great. Welcome to you both, Ali and Simon. Why don't you both just give our viewers a quick introduction of who you are?
SIMON BARNETT: Sure. Maybe I'll start and then hand it over to Ali. So like Alex mentioned, Ali and I are both analysts working on our life science strategy here at ARK Invest. Myself, I've been with the company since summertime of 2018. Back then, we were just taking our first steps into life sciences in general. We were mostly focused on things like sequencing and CRISPR gene editing.
SIMON BARNETT: Of course, that's broadened out quite a bit. And I'm happy to get to that throughout the conversation today. Since then, we've hired some excellent folks-- Ali, as well as our newest associate, Pierce. My core focus at ARK is really on life science tools as well as the diagnostics companies. But I also do cover some of our synthetic biology companies like Ginkgo Bioworks, for example.
ALI URMAN: Perfect. So maybe I can give just by way of background. So my background is in epidemiology and biostatistics. I was working at Sloan Kettering Cancer Center and IBM Watson Health. Sloan, I was doing lung cancer research. And at IBM Watson Health, in AI and cancer research consulting. There, I became really interested in coding. I actually started a Python club there. And I also became really interested in patenting.
ALI URMAN: So a lot of my ideas there were patented. And I would review other people's patents, which has really helped me with reviewing companies, both from learning about AI and AI for drug discovery, which has become a big code word lately, but also, in terms of patents and what that means for the company or their competitors. I incorporated my own consulting firm in 2018. Focused on early growth companies, patenting, innovation strategy, management, operations, et cetera.
ALI URMAN: And the way I got to ARK is probably worth mentioning because it involves Simon. And it's a really good story. I was working on a startup at the time that I co-founded. And I wanted to learn more about getting funding for my startup. So I went to a financial event. I met a guy there who works at Stifel. And he said that I reminded him of Cathie and her energy. And that he wanted to forward my CV along to ARK.
ALI URMAN: And I think it went through several people's hands. But eventually, it landed up in Simon's. And I just think it's quite interesting. So Simon and I ended up going for coffee I think for three hours and just nerding out on genomics and became very fast friends. And so my hesitation of going into finance at the time, Simon alleviated all those concerns. And it's been an amazing really interesting road.
ALI URMAN: And being able to help, from the more business finance side from where I was before in the research side, has been really interesting. So I specialize and then cover all things therapeutics. So I focus on gene editing, gene therapy, immunotherapy, and basically any novel therapeutics.
FAY LIN: Great. Thank you both for those introductions. It's great to learn a bit more about your journeys. And I want to jump a bit more into what ARK Invest is. Now, many viewers have heard of ARK Invest. But for the few who perhaps have not, what is ARK Invest all about? And what sets it apart?
SIMON BARNETT: Sure. I can take that. So first and foremost, ARK is a long-term centered asset manager focused solely on progressive and differentiated technologies. So for people listening to this, some examples might be things like next-generation sequencing, gene editing, but also things like artificial intelligence, as well as collaborative robotics, blockchain, energy storage are a few other prominent examples.
SIMON BARNETT: And I think we're uniquely interested in understanding how these different technology platforms interweave and feed off of one another. Certainly, the molecular diagnostics of today wouldn't be possible without high throughput lab automation and really powerful AI classifiers on the back end. And we can get into that later. In addition, the way that we define these platforms, generally, we look at three different specific criteria.
SIMON BARNETT: So whether or not there is a precipitous cost decline, I'm sure everybody has seen that famous NGS cost decline curve. So that's an example. We look at platforms that are fundamentally cross sector and cross geography, so not limited by that, as well as platforms that themselves act as, again, that platform word enabling other types of technologies to be built on top of them. So sequencing clearly is the backbone behind diagnostics, synthetic biology, the rational design of gene editing, things like that.
SIMON BARNETT: The other thing that I think is really unique to ARK is the way that we've set up our research function. So we are very aggressive when it comes to publishing our research across many different types. So whether it's podcasts, or written articles, or interviews, things like that, we try to ingratiate ourselves with the scientific community. It's a lot easier to get when you're giving at the same time. So soliciting critical feedback on our ideas very early in that research process is really critical, I think.
SIMON BARNETT: As well as the fact that just having humility that there are going to be really smart people out there that know a lot more about these things and being able to get in their good graces and have a collaborative relationship with them. So that we can keep our finger on the pulse in these really hard to cover areas is really critical, I think, to our success as a manager. The last thing I'll say is that most of our assets under management, our AUM, are in a vehicle called an ETF, an exchange traded fund.
SIMON BARNETT: So for those that don't know, it's like a portfolio. But it trades on an exchange so you can buy it and sell it. And to that end, we are a liquidity provider in many ways for companies that are maybe not as big. So a lot of the biotech companies are like small cap, mid-cap. They may not be getting captured in the major indices. And so we try to bring a research spotlight, but also an investment spotlight for those companies.
SIMON BARNETT: And get them the platform that we think they rightfully deserve as architects of the next wave of life science innovation.
FAY LIN: Great. I'll pass it over to Alex to ask a bit more questions from the business side.
ALEX PHILIPPIDIS: Sure. Thanks, Fay. And Ali and Simon, you spoke about ARK Invest approach to research. Now I'm curious what is Ark Invest's approach to investing. And why does the firm focus on public companies?
SIMON BARNETT: It's a great question. So maybe I'll go a little bit deeper into the framework, the valuation framework, the process as it were for us. Generally speaking, we start at the top down. And what that means from a research perspective is we look at long-term secular trends around whether it's a technology getting a lot cheaper, or maybe there's a specific clinical application that's translating from research into the clinical setting, these longer term things.
SIMON BARNETT: And from doing that process, typically, companies rise up to the surface. The ones that are actually in charge of spearheading that transition. And so that's generally where the research starts for us. We have, basically, like a six-point framework that we apply to all of our investments. So we try to quantify a company's track record of execution, its people management and culture, whether there is a technologically disabled unfair advantage that the company has, as well as barriers to entry in the market.
SIMON BARNETT: So trying to quantify the competitive landscape. And last, but not least, is the valuation. The five-year-- I mentioned we're long only. All of our investments are typically underwritten with the expectation that we'll be with them for five years. So that's how we do all of our modeling. And you mentioned the focus on public companies. It's interesting.
SIMON BARNETT: You're absolutely right. That is where our focus is. But this year is actually going to be a special one for us because it's our first foray into the private markets. So I can't go too much in the detail at this point. Of course, this is all in public record now filed with SEC. But later on this year, we're launching our first effectively crossover fund, so private and public at the same time.
SIMON BARNETT: So it'll be certainly an exciting period as we move forward here.
ALEX PHILIPPIDIS: Will that include biotech investment in those public-private mix?
ALI URMAN: Yes.
SIMON BARNETT: Absolutely.
ALEX PHILIPPIDIS: Can you at least offer some reasoning as to why the foray into private as well as public?
SIMON BARNETT: Sure. Maybe I can take a stab at it. And then I know Ali is really active in that area as well. So I'll turn it over to her. But generally speaking, I would say it's a mixture of one, we want to continue to innovate with new types of vehicles that, again, hit on that principle that I mentioned, which is liquidity. Offering investors the opportunity to get in even earlier in some of these technologically disruptive names and potentially folks that are not necessarily associated with a big VC.
SIMON BARNETT: So it's a little bit harder for the average investor to actually get access into those early stage companies. And that's something that we want to try to address with this fund. In addition to that, obviously, in life sciences, the translation from technology that's whether it's recently spun out of academia or is still being built in an early stage context, it's very seamless the translation of that technology into the public sector, whether it's organic, through an IPO, or it's done through M&A.
SIMON BARNETT: And we're obviously really keenly interested in looking at private companies. We've been doing it for years. And it's largely because of we just have to be aware of competitive threats to our public companies. So the research has always been there. It's just that we're now able to actually go that last step and make investments there.
SIMON BARNETT: So we're really excited about it.
ALI URMAN: Yeah. Just a few things to add there. So as Simon mentioned, we've been looking at private companies throughout all the times that we've been analysts. It helps us get a framework for what's going on within the ecosystem. But also what's on the horizon. So what can potentially disrupt some of our public companies? So from a research perspective, and even from a day-to-day, I don't think this changes it so significantly.
ALI URMAN: But one nice thing to private companies as well is that ARK has always been an investor that's really there for their companies. And so in times of troubles, we shall say, ARK really tries to lift the companies up and support them. And so I think this is a way in which a private company can pretty much, we can never say guarantee, but there's pretty much an idea of the fact that ARK could be there during the public as well as the private for this particular company's life cycle.
ALI URMAN: Another thing that's probably helpful to mention is that ARK is going to have an ARK Innovation Center. So the building should be done by late 2023, hopefully. And so within that Innovation Center, we're going to have an accelerator. And so that accelerator will give us also access to some of these really early stage companies and creating an impact, both through Tampa Bay and Saint Pete area, but also more globally.
ALEX PHILIPPIDIS: And to what extent does that reflect the interest and success that a few other firms have had accelerating as well as just painting money or investing? And I'm thinking of flagship and foresight, capital firms like that.
ALI URMAN: So from the accelerators perspective, we're still working out all the details on how that's exactly going to work. But one thing that we think will differentiate us is first of all, ARK research will be used as a screen for choosing investments in companies. And so with our differentiated research, we think we'll have a very important way in terms of finding companies that are differentiated. And as Simon mentioned, our framework and rubric for things we look at.
ALI URMAN: So those criteria, the precipitous cost decline, et cetera. So I think that's going to differentiate it in terms of the companies that we choose to invest in. And then in terms of how active we are within the companies, we'll have to see how that develops. Because right now, it's in early stages. But we're really thinking about how we can even create more innovative solutions.
ALI URMAN: So one thing could be thinking about a metaverse where we all congregate from the accelerator. So that if we have accelerators elsewhere or people from companies elsewhere, we can all come together and share exchanges of ideas and knowledge. So I think ARK is really putting itself on the map in terms of finding different solutions to incorporate in the investing process.
ALI URMAN: So one will be as a screen. But we'll keep coming up with other innovative ideas as well.
ALEX PHILIPPIDIS: Speaking of the map, why did ARK choose to relocate to Tampa, Florida?
SIMON BARNETT: I think-- maybe I'll start, Ali. Sorry. It's a mixture of factors for sure, I think one of the things that we were thinking about being based in New York. And obviously, scaling as a company, it's been a really interesting last two years for us. When I joined the firm in 2018, I think we were something like 15 people. And now, we're getting past 40. And we have all these new exciting ideas about how to keep fleshing out the team.
SIMON BARNETT: And with that, we just needed to expand our physical footprint. So right now, we're actually nearing the completion of the new permanent St. Pete HQ, which is really exciting. It's right in the last couple of weeks there. And so it's just giving us a lot more of the proverbial ceiling has been raised in terms of what we can do and how we can scale. So it's giving us a little bit more flexibility on that end. I also think that the city itself, as Ali has talked about, whether it's really getting on the ground floor in terms of tapping into the talent, as well as some of the early stage companies that are there, but also I know Ali has an interesting project going on with the Johns Hopkins Hospital.
SIMON BARNETT: They're based in St. Pete and working with them to continue to expand what we call our theme developer network, which is essentially a group of people who are active and come to our weekly meetings and contribute their expertise. And it's not just limited to life sciences, but all the different areas that we cover. So continuing to build that out is also a really important thing for us. And so far, it's been going well.
ALEX PHILIPPIDIS: Great.
ALI URMAN: Maybe just to add on that just for a quick second. I would say, one of the things that is really incredible is the potential impact that we can have on St. Pete and the broader Tampa area. So I think Simon hit on a couple. So there is a ton of untapped talent. And being culturally involved in Florida, the St Pete area has been really remarkable. And there are, as Simon mentioned also, the Johns Hopkins Hospital is right by actually where our Innovation Center will be.
ALI URMAN: And so we can potentially partner with them as experts both within our theme developer network or our network of experts, but also even potentially as things of like, mentors for our accelerator program, et cetera. So there's just a lot of untapped talent and cultural benefits, I think, to being in that area. And we've seen I think pretty remarkable results already. So looking forward to the future there.
ALEX PHILIPPIDIS: Great. Before I turn it over, just one thing, ARK's CEO Cathie Wood is one who enjoys a very high public profile. What's it like working with Cathie?
SIMON BARNETT: I think we all have probably unique answers for that. I think there are a few things that I really appreciate. And I think I've come to appreciate more actually getting deeper into the role. So ARK is a fairly flat organization from a structure point of view. And so given that we're an active management firm, meaning, that we're buying and selling around positions on a daily basis, we're always in lockstep as a research team with Cathie.
SIMON BARNETT: So there are no real degrees of separation every morning when we sync before the markets open on what the strategy is for that day. And so as analysts, it's great to be able to learn by osmosis in that scenario. Cathie brings decades of experience as a portfolio manager across various firms, different strategies. Just the rules of thumb and the market cycles that she has seen are things that you can't really get out of a book.
SIMON BARNETT: And so by being close to her and actually seeing how her brain works and the connections that she makes across seemingly disparate markets or different technologies, there is a lot of serendipity, I think, that's captured in the daily chop of working at ARK that I've really come to appreciate. And to your point on publicity, Cathie is a very humble person. I think you'll find it rare that a portfolio manager-- well, the sole portfolio manager at this point, as well as the co-founder and CIO of the company, gives a lot of free reign to her analysts.
SIMON BARNETT: And lets them go on CNBC and have these conversations or actually receive full credit for publications, is not something that's very common I think in financial services generally. So it's a great opportunity. A lot of hard work but certainly, the opportunity is there.
ALI URMAN: Maybe just to add on that. I think Simon mentioned intellectually and being around Cathie and learning from her from the investing process and the research process, that has been amazing. But I think what's most surprised me about Cathie is actually more on a personality level. So Simon mentioned, she's humble, which I would definitely say. But maybe a story just to illustrate that. Before I got to ARK, they asked me what surprised you most about the firm or anyone at the firm.
ALI URMAN: And I said, it surprised me most that Cathie, and we haven't done this so much because of COVID, but Cathie will go to dinner with every single one of the employees. And that's everyone. It's just not just the investing team, but everyone. She'll take them to dinner, wine, food, whatever, and just talk to them and get to know them as a person. Cathie will remember our parents' names, our family members' names, things about what we're doing.
ALI URMAN: And I think something that impacted me is I remember my first week in New York, I was leaving. It was Friday. It was 5 o'clock. And I was like sneaking out. Not that we're not allowed to leave at 5:00, but my first week. And I remember Cathie came out of this phone booth room that we had right the elevator.
ALI URMAN: And I was like, oh, my God. Am I leaving too early? And Cathie said, it's been really great. And we're so happy to have you on the team. And she said, can I give you a hug? And that to me just really signifies and exemplifies her personality. She's very caring. And she's gotten to the success.
ALI URMAN: And so everything Simon said is true. We sit next to Cathie. And she's in the trenches with us. And that's been amazing to learn from her. But I think her humility and her personality help that get to another level even.
ALEX PHILIPPIDIS: Great. Fay, over to you.
FAY LIN: Thanks, Alex. I want to dive a bit deeper into the science. Now, Ali, I want to turn to you for a moment. Your major area of coverage is genome editing. And I wanted to ask, how would you sum up the field of genome editing today? It's been 10 years after the legendary Doudna-Charpentier paper. And also, two years after their Nobel Prize. What are your thoughts on the field now?
ALI URMAN: One word. Amazing. No, just kidding. I'll delve a little deeper than that. But gene editing is something that I think when I got to ARK, I had learned about it before. But I think delving into it has been just such a privilege. I think it's one of the most interesting fields. I think it's one that also is going to go cross pipelines. People are like, well, gene editing is one thing.
ALI URMAN: But it's not. We can use it in cancer to edit cells before they're put it back in the body. There's so many things that we can do with gene editing that I think people don't even realize. Maybe to put some context or numbers around it, so we believe at ARK that gene editing and gene therapy could reach about, from a market cap potential, $1.1 trillion. And that would ensure that these companies basically scale up 54% at a compound annual growth rate.
ALI URMAN: So that would be going from about $130 billion to $1.1 trillion. And that's by 2026. So just to give that a bit of context in terms of the market applications that we actually see there. Also, at this time, so by 2026, we believe that a total R&D spending devoted to these curative therapies could grow from 3% to 17%.
ALI URMAN: So we believe that you may put your dollars more likely into things that could potentially be curative as opposed to chronic therapies. And I guess the question Fay, like, you mentioned is, why? Why are we so interested in this? Well, I think the potential for curing disease, as opposed to just managing symptoms is really important and really crucial to extending life. So we think that this technology can be transformative.
ALI URMAN: It alters DNA. Either you can remove, you can insert, you can replace genes at the DNA level with gene editing. And then of course, the difference between gene editing and gene therapy is that in gene therapy, we just insert a healthy version of a gene. So that's the alteration that happens there. And obviously, there have been some issues with that. And some diseases may lend better for that.
ALI URMAN: But I think there's some really, really exciting gene editing modalities. So as you mentioned, Emmanuelle Charpentier, Jennifer Doudna. So that's Cas9. And there's been many flavors since then. But obviously, it's a nuclease that's used in which you can cut DNA. So it's been referred to as scissors very often. We also know that base editing is a new technology that's evolved.
ALI URMAN: It's been compared to a pencil and eraser because you can change one base pair to another base pair. And that's going to lead better to certain diseases, of course. And then prime editors are going to be maybe the most versatile, depending on what we see from an efficacy standpoint. But instead of cutting that target DNA, we're changing one letter of that DNA like you might do with base editing.
ALI URMAN: Prime editors can actually replace a segment of DNA. So they're going to be potentially more versatile and potentially able to cure even more diseases. And maybe to put a little real world context into it, we've seen some pretty exciting early data. So CRISPR Therapeutics in collaboration with Vertex Pharmaceuticals, they've treated over 75 patients in sickle cell and beta thalassemia, which are hemoglobinopathies.
ALI URMAN: And we've seen some pretty great data. So they use Cas9. And we've seen virtually no vaso-occlusive crises or pain for these patients. And they'll be going to the FDA to talk about that. We've also seen from Intellia, again, it's a Cas9. So in terms of base and prime editing, they're newer so we don't have as much data on it. But we saw some great TTR polyneuropathy data from Intellia Therapeutics that revolutionized what we thought was even possible for gene editing.
ALI URMAN: And so I think it's still early for gene editing. But the potential is just so large. And I think that's why people are just really excited about it.
FAY LIN: That's great. Thanks for that great overview. Now, I know you've interviewed a host of CRISPR stars on your podcast. And I wanted to ask you, is there anyone who stands out in particular?
ALI URMAN: Yeah. So that's a tough question. Because they're just also amazing. But affiliated with GEN is Kevin Davies. We did a podcast together. And the way I met Kevin was I reached out to him on Twitter. So this has been a long-standing relationship through Twitter. And I was reading Editing Humanity, which is one of his books. And it's an incredible description, in my opinion, of the whole CRISPR discovery and how it happens and who's involved.
ALI URMAN: And we all know the names, Emmanuelle Charpentier and Jennifer Doudna, but there were a lot of unsung heroes in the CRISPR discovery. And so I think Kevin did an incredible job of writing that book. And I have a signed copy now. So I'm very excited about that. So he may have been my favorite guest because of that. So there's been many standouts.
ALI URMAN: But Kevin is certainly top of the list.
FAY LIN: Amazing. And it's a pleasure to work with Kevin as well as in our work with GEN biotechnology. Fantastic. Ali, thanks for that great intro into the gene editing space. I wanted to dive a bit deeper, and ask you, are there any specific trends or company that you find the most noteworthy that you want to highlight and just explain what makes them noteworthy in our conversation today?
ALI URMAN: Sure. One of the things that I think about are edits. And we want to make sure that there are no edits that are unintended edits or no unintended consequences to the genome. And because of that, I would probably highlight Beam Therapeutics, which is working with base editing. And so like I mentioned, there's a chemical reaction. And so you convert one base to another.
ALI URMAN: But with Cas9, you're literally cutting that's why we think of it as scissors. And the challenge with that is that our body uses its own natural repair mechanisms to repair the broken strand. And we can have a lot of undesired outcomes there. But the worst part about that is we just can't predict it. And we did a pretty interesting blog I wrote for ARK on CRISPResso, which is just, well, the best name for a tool, but also a tool that looks at different outcomes that happen.
ALI URMAN: So we get a little plot generated from data that we can input. And the data is just archived in papers or in their supplemental information. And so I took that data. They're called fast Q files, put them into this CRISPResso tool. And it actually analyzes. And so I showed what a Cas9 base edit and a prime edit would look like.
ALI URMAN: And again, base editing and prime editing, we don't have a ton of data just because they're really new. But from what I can see now, it looks like a base edit and a prime edit may have less unintended consequences. And they're being be more precise. So base editing, Beam has that IP. And then Prime Medicine has the IP for prime editing. And so I think those two companies are really interesting.
ALI URMAN: And their technologies are really interesting.
FAY LIN: Great. Alex, I'm going to pass it back to you.
ALEX PHILIPPIDIS: Sure. Thanks, Fay. And Simon, I say, tongue in cheek, that there's not much happening in NGS these days. Would you agree?
SIMON BARNETT: I would. Completely boring.
ALEX PHILIPPIDIS: Seriously, what are the highlights as you see it of the new platforms in chemistries introduced by three new entrants that have gotten a lot of attention in recent months? Singular, Element Bio, most recently, Ultima Genomics and its claim of the $100 genome.
SIMON BARNETT: We can talk about all of those. I think back to ADBT, which concluded just a couple of months ago. And the atmosphere was just electric when it came to NGS. The last couple of years has been mostly about spatial biology, which is certainly extremely interesting and important and something to really focus on. But it's been more than a decade, since we've had this level of real bona fide competition in the sequencing space.
SIMON BARNETT: I think this is actually probably the most competitive and interesting time ever when it's come to sequencing. And so before getting into company specifics, I think there are a handful of things that make the next decade of sequencing really exciting for us. And the first one is we are in the post telomere-to-telomere era where we can finally say with certainty that we've sequenced every base in the human genome.
SIMON BARNETT: It's actually one of my favorite Gotcha questions we give on seminars is when we finish the human genome. The answer is always 2003. And it's actually about eight months ago. So I think that is an interesting thing. We hear this phrase a lot. Certain technologies are good enough. And I think good enough is a product of being able to hide behind incomplete reference.
SIMON BARNETT: And we're still working on making that reference even better. So instead of having it be a haploid reference actually phasing across that entire genome and making the benchmark not a 3 gigabase human genome but a 6 gigabase human genome looking at the variation between mom's side and dad's side and how those interact together to create variants and look at things that way.
SIMON BARNETT: So it's been an interesting, I think, tone setter having the T2T genome come out just recently. I would also say, there's a ton of exciting stuff going on in RNA sequencing. So sequencing transcripts as well as potentially protein sequencing, which we can talk about maybe in a little bit. But by and large, I think the entrance of competition is unequivocally a good thing for the field.
SIMON BARNETT: It's good for patients. It lowers a key input cost for the diagnostics companies at a time that their supply chains are seeing a lot of inflation. So it's a really important thing to have happened right now. It's also putting us in this really unique position to go back and question our priors around what's possible with NGS. How deeply can we sequence?
SIMON BARNETT: How many early stage cancers can we pick up with potentially with some of these new approaches? It's really exciting, I think, to see these new sequencers and companies begin to proliferate and really place their first instruments in the field.
ALEX PHILIPPIDIS: Why are we seeing this much ferment in a competitive sense regard to Illumina?
SIMON BARNETT: I think it's a combination of factors. I think the easy thing to point to is patent expiry. Certainly that's something that Illumina has used to block competition from companies like MGI, BGI, for example, which I believe actually today, I just saw notification that they're selling the DNB400 I think here in the United States. So we're seeing patents lifted. And that's enabling competition. I also think there's been real legitimate new innovation in sequencing.
SIMON BARNETT: So if you look at companies like Element and Omniome, which was bought by PacBio, the sequencing chemistry is not sequencing by synthesis. It's still short read technology. But it's a fundamentally new way of actually getting at that base level resolution that isn't what Illumina use. So you are seeing some folks taking a different route to getting there.
SIMON BARNETT: And each company has reworked different stages of the process. So you're seeing a little bit of that. I also think from a customer standpoint, whether it's research customers or the large production scale clinical folks, they have been clamoring for the ability to have more control over their input costs. And you've seen this with early partnerships being struck. For example, you saw Exact Sciences make an early investment in partnership with Ultima Genomics to lower the price of its multi-cancer screening tests, as well as a few others.
SIMON BARNETT: So I think the market itself too is primed for more competition. And I think ultimately, lower costs, more capabilities are going to be the output, whether that's new companies delivering on their promises that they're talking about, or if it's just a little bit more pressure being applied to Illumina. And potentially, they've got a lot of things in the fire that they've been working on for quite some time. But you might see that come out potentially a little more aggressively than otherwise would be the case, if there wasn't as much competition.
SIMON BARNETT: So there's a multitude of factors I think at work here.
ALEX PHILIPPIDIS: Now, Simon and Ali, what will be the major determinants of the success and failure for these up and comers like Element and Ultima, and Singular as they try to take business away from Illumina and some of the more established names like a PacBio or Oxford Nanopore even?
SIMON BARNETT: Well, it's a good distinction you're making here. Because when we talk about new entrants, basically, I think of companies like Illumina, MGI, BGI, Nanopore, and PacBio as the folks who've been doing this for a while that have global commercial footprints, supply side relationships that are either vertically integrated or very robust. They've got field application support, the software tooling, everything you need to do to be a company.
SIMON BARNETT: Because I think it's very easy to get a little technocentric and just focus on the cool new capabilities of an instrument. And let me reiterate, that's extremely important. It will certainly carry the day for some companies. But the way I think about it is these folks have to prove that they're stable and that they have secure supply chains and support functionality. Because ultimately, there is absolutely resistance to change.
SIMON BARNETT: There's switching friction as it were. And one of the ways that I think these companies are going to have to prove themselves is on the support and supply side as well as having instruments that actually do replicate the same performance in the hands of a user that they do behind the four walls of a company. So I think right now is a good time to underpromise and overdeliver and be very metered about the go to market and the strategy.
SIMON BARNETT: I think each of the companies, Ultima, Singular, Omniome with PacBio and what they're doing on both the long and the short read side, I don't necessarily think that you're going to have a situation where Illumina is usurped. And a huge portion of its market share is taken away. I think they're the 800-pound gorilla for a reason. And they'll continue to do that. But at the same time, I think the market share potentially has peaked.
SIMON BARNETT: And that you'll see a little bit more of a situation where folks are leaving potentially to other suppliers, depending on the application that they're doing. I also think that the production scale folks, the folks that are doing hundreds of thousands to millions of samples per year, are becoming sufficiently broad that they may actually incorporate technologies from multiple different companies, depending on what assay that they're running it through.
SIMON BARNETT: So I could see some assays running best through Ultima. I can see other ones going best through a native long-read instrument. It really depends on what the customer is doing. And so I think you'll see a broadening out, as it were, in terms of who goes for what. But generally speaking, I would say that the new companies will have to replicate the performance that they've teased already in these early beta access programs, as well as demonstrate that they have the chops to compete on a service level at the same time.
ALEX PHILIPPIDIS: Now, how will or should Illumina respond to this growing competition? I know they've touted something called Chemistry X. What will it be and how much of a game changer that really be?
SIMON BARNETT: So I don't necessarily think that Illumina has been resting on its laurels with innovation over the past few years. To your point, both Chemistry X and I believe the infinity synthetic long-read assay, we'll get more details later this year at their genomics forum. So we're excited about that. I'm still a little bit mixed frankly, on whether or not Chemistry X will be backwards compatible with instruments that are already in the field.
SIMON BARNETT: Based on the commentary from the last earnings call, I think it depends on how new that instrument is and whether or not it's gone through its full amortization cycle. So we'll see as far as Chemistry X is concerned, there's just not a lot of details out there right now. From what has been shared, my understanding is that it is another sequencing by synthesis technology that likely works in tandem.
SIMON BARNETT: We some of the innovation that they've done on the material science and the optics. So a couple of years ago, they talked about super resolution, which essentially allows you to differentiate floor for molecules that are closer together physically than the diffraction limit of light. So that's really important for packing more information per flow cell, which, of course, lowers prices per run.
SIMON BARNETT: So I think you'll see continued innovation in that direction. That being said, on a read length, speed and accuracy standpoint, these early numbers, which, again, could prove to be out of date once they have their genomics forum, still seem like they're lower on an accuracy level than both Elements and Omniome or PacBio's short-read technology, which, again, are both based on binding, not synthesis.
SIMON BARNETT: So there is a real fundamental difference in how those technologies work. But generally speaking, I think it will be a powerful new asset. Certainly, I think it's going to be a requirement to get to the fabled $100 genome on the NovaSeq or some other kind of high throughput class instrument. So I see it as an iteration on what they have been doing. It looks like the same playbook for the most part.
SIMON BARNETT: And I think it will be definitely something that will help buttress against potential losses and share from some of these new competitive entrants. I don't necessarily think it's going to be a redefinition of sequencing by any means, though.
ALEX PHILIPPIDIS: And where does this competition leave PacBio and Oxford Nanopore?
SIMON BARNETT: So the first thing that I'll mention is we don't necessarily see a hard divide between the long and short read world necessarily. Ultimately, we think that there are tons of different applications for sequencing. Some that might be better served by long reads especially native long reads. So maybe I can take a moment to look at both of these companies, Nanopore and PacBio. Because the interesting thing about them is both of them have both long and short read capabilities.
SIMON BARNETT: You see Nanopore doing a lot with leveraging the fact that its technology can read epigenetic modifications natively, for example, which is very important in things like cancer screening. PacBio's accuracy on the short-read side seems like truly game changing. I think it's going to take-- again, they're under the same strictures that everybody else is in terms of proving that in customers' hands.
SIMON BARNETT: So we'll see. But some of the early data has been really, really exciting on that front. I think both companies will be extremely successful. I think they're both undervalued relative to what their native long-read technologies will do in the future for a handful of applications. So let me maybe actually highlight a couple of those. The first one to mention is certainly whole genome sequencing.
SIMON BARNETT: I think by now, it's not really an argument that you need tens of KBs to hundreds of KBs to fully assemble and phase a human genome, especially across the really hard to read stretches like tandem, repeat, pseudogenes, or other areas of low complexity that are many of them extremely important from a medical standpoint. I think there's always been this thought that the hard to do is we'll forget about them because they're not that important.
SIMON BARNETT: It's like, well, you have a catch 22. Just because you can't read them, it doesn't mean they're not important. So I think that's one of the things that we're excited about is whole genome sequencing. Of course, PacBio and Nanopore, you get the epigenome for free. So because both technologies can read based modifications like 5-methyl-C and others, you get that information for free. And you can phase it.
SIMON BARNETT: So we're seeing this take off in some disorders, like imprinting disorders, which happen to show patterns of allele-specific methylation. So rare disease diagnostics, I think, are another really important component. I mentioned transcriptomics earlier, the sequencing of RNA. So both PacBio and Nanopore have really interesting capabilities to actually sequence the entirety of transcripts. So we talk about gene expression.
SIMON BARNETT: Genes aren't the things being expressed, though. It's the isotherms that they create. And there are processes like alternative splicing, for example, that are highly dysregulated in cancer genomes, for example, that govern what actually happens. And so the ability to not just with a short read the beginning of a transcript and try to reference assign it to a gene, you can actually sequence entire isoforms end-to-end without any computational assembly because you're seeing the whole thing.
SIMON BARNETT: So that's another really exciting area that I think will be important for transcriptomics, but also the folks that are even further downstream doing proteogenomics, so looking at the transcriptome and the proteome in tandem. One cool thing, if you have isoforms in hand and that their sample-specific, is you no longer have to rely on databases that are lower resolution.
SIMON BARNETT: You get sample-specific isoform databases. So that's going to be, I think, a cool thing. Areas like metagenomics, even for gene editing and gene therapy design, we've seen some cool stuff happen with using long reads to actually surface off target effects that were unintended that would evade short-read technologies, structural variation, larger changes, or even edits and regions that would be invisible like homopolymers.
SIMON BARNETT: We're seeing that too. So that's really exciting. Bottom line here is that I think long reads are around to stay. And that native long reads have a lot of benefits over synthetics, which have been tried quite a bit in the past. And so we're excited to see where companies bring that technology to bear and for us. And the closing thing I want to say is for both Nanopore and for PacBio, we really feel like a major order of magnitude improvements when it comes to throughput, to cost, to user interface, user experience.
SIMON BARNETT: None of these things require miracles. And many of them we think are happening within the next 12 to 18 months or so. So we couldn't be more excited to see what types of new biology and clinical applications that brings about.
ALEX PHILIPPIDIS: Great. Fay, over to you.
FAY LIN: Thanks, Alex. I want to shift a bit and talk about the market. Now, most people watching this will know that it's been a tough year for the biotech market. What do you think led to this sharp downturn? And was it obvious in retrospect that this would happen?
SIMON BARNETT: Maybe I'll start. And then Ali, feel free to cut in or jump in here. So the first thing I would say, I totally agree with you. Anyone who's been a student of the biotech space over the past 18 months or so would certainly agree with you. But it's really far reaching beyond that. so biotech, absolutely. But virtually, all sectors and across asset classes out to things like cryptocurrency, really everything, there's been not a lot of spaces to hide and avoid this market drawdown that we're seeing, which is severe and also broad base at the same time.
SIMON BARNETT: I think there were many factors culminating during the pandemic. And because of the pandemic, I think that was really the precipitating event that made a lot of things, to your point, maybe a little bit more obvious in retrospect. So things like a relatively lax monetary policy, historically low interest rates over the past decade, a lot of the stimulus that came along with some of the programming that happened and the policymaking that happened during the pandemic, which is really I think led to a state of inflation, which is affecting a lot of companies.
SIMON BARNETT: They're seeing their supply side become a lot more difficult to manage. And key inputs-- we think about things like semiconductors, for example, or even things as benign seemingly as pipette tips, which were really difficult to come about during the pandemic. It really created a lot of challenges for the biotech industry in particular. I would say more recently, I think it's probably the consensus take that the Fed is course correcting very quickly to try to get us out of the inflation that is something that we're all experiencing here.
SIMON BARNETT: And so their mechanism to do that is to increase interest rates. And I think for us, one of my monitors every day is just having all of our names up. And what I can tell you is there's very little discrimination on a day-to-day basis between, oh, this basket of companies had some good news, these other ones had some bad news. It doesn't look like Christmas lights.
SIMON BARNETT: It's either all red or all green, depending on what the Fed is doing that day. So I think unfortunately, my opinion is things will be fairly rangebound for some time. And it's going to have to take either signs that inflation is actually coming back down. And with that, I think you'll see interest rates come down in tandem alongside that. So from a company's perspective, especially in biotech, which you could think of a lot of these companies as folks that R&D is extremely important to their longevity and to what they're doing, I do want to be careful not to make biotech sound like a monolith.
SIMON BARNETT: I think the dynamics that are affecting liquid biopsy companies and gene editing companies are clearly very different. And so I want to just acknowledge that. But generally speaking, the cost of capital right now is quite high. So it's more difficult to take out and do debt financing, for example. The way that stocks have been trending, it's making it more difficult to do equity financing that's not highly dilutive.
SIMON BARNETT: And I think the markets have responded by shortening their time horizon that they're interested in underwriting investments. The future values of some of these cash flows are just not as appealing with the way that rates are right now. But as dour as I maybe was leading everyone to believe there, I want to take a step back and just acknowledge that the first thing is health care, classically, is a defensive sector insofar as you can only delay procedures and not prescribe medication up to an extent.
SIMON BARNETT: So cancer doesn't care about what interest rates are. The shock waves that we've had over the past couple of months when it comes to things like Omicron and Delta making it very hard to get into the doctor or very easy, has injected a ton of volatility in terms of what the quarterly growth metrics look like. So it's very difficult to I think extrapolate from that. But generally speaking, I would say writ large, a lot of the companies are, especially in diagnostics, I would say it's a little harder in tools right now.
SIMON BARNETT: Because there's such a focus on our precious capital expenditures, where are we going to put them? So it's causing sales cycles to become protracted. And so we're seeing a little more turbulence, I think, globally from a life science tool side. But the diagnostics companies, I tell you, we have been really surprising. Many of them have either reiterated or even raised their annual guidance for this year.
SIMON BARNETT: They're moving away from those really hard like, year-on-year comparisons that people like to do so. The health of the diagnostics world seems excellent, I would say. I can't speak for gene editing or therapeutics generally. So maybe Ali, if you have anything there.
ALI URMAN: Yeah. I think one of the things that we talk a lot about at ARK is you're looking at your screen like Simon mentioned and looking at the Christmas lights. And you wonder to yourself company fundamentals, I think, are increasing or are staying relatively consistent. But also, the science is probably getting better or if nothing else staying consistent. And so it's disappointing to see this volatile period. But I guess it goes back to what we were talking about at the beginning, which is that we have a long-term outlook.
ALI URMAN: And so this is likely short-term. And a lot of the factors that Simon mentioned in terms of the Fed and others are probably what's at stake here and what's causing it. But I'll also mention for health care, there has been some turbulence in terms of leadership changes. So Anthony Fauci obviously announced, I guess it was last week, that he would be stepping down. There's also some volatility with the FDA Director for a long time.
ALI URMAN: Janet Woodcock was interim. And we didn't know what would happen there. But obviously, now, we have Robert Califf. And hopefully, with him at the helm of the FDA, we'll see a lot of innovation flourish under his reign. Francis Collins, who is a longtime director of the NIH, stepped down as well. And so I think that did cause some turbulence. Certainly not the extent that the market has we've seen.
ALI URMAN: But I think that did potentially contribute somewhat. Also, health care reimbursement is still also in flux. Simon also touched on the pandemic, which obviously had a great impact on the market. But I think for therapeutics, one of the challenges was that people weren't necessarily coming in for their clinical trial visits. And that slowed down data timelines. And so I think that was quite a big deal for these companies.
ALI URMAN: A challenge that I've also seen, and I think Simon's mentioned this in the tool side as well, is that staffing for hospitals has been a challenge. We had a patient, unfortunately, that couldn't get their therapy, just because there was no staff to administer it. And so this is certainly a challenge that hospitals are dealing with right now. I don't think that's affecting necessarily the broader market.
ALI URMAN: But it is affecting data timelines and catalysts for different companies. And if you don't have a catalyst within six months to a year, maybe ARK can wait since we're a long term, but I think some of the short-term sellers and buyers maybe disheartened by no catalysts or no upcoming catalysts.
SIMON BARNETT: Maybe one last thing to add there too is just the point Ali was making on the time horizon, I think we're definitely aware of the fact that one way that management teams writ large have responded to the macro environment is placed accelerated emphasis on the unit economics of their business, and the underlying profitability of what they can really achieve once that scale. And so I think we'll probably see potentially a culling of business models or companies that haven't quite figured out how to extract cash flow from the revenues that they're generating.
SIMON BARNETT: But I would say at the same time, many companies in the health care space took advantage of pre-pandemic, and perhaps through the pandemic, the lower relative interest rates to raise new capital. And so generally speaking across the board, the balance sheets of many of these companies are not existentially low. So many of these companies are actually operating at cash flow neutral.
SIMON BARNETT: So basically, their balance sheets are leveled off. And they're recycling their gross profit into growth. But others, even the ones that are still burning through cash, have-- and this is, I don't want to overgeneralize, but I would say for median for many of our companies is something like 2 and 1/2 to three years without having to really resort to any other type of external financing. So I think it was probably wise in retrospect to raise capital during those times to get through this period.
SIMON BARNETT: And we really truly don't know how long the markets will be unfavorable to companies needing to raise either debt or equity to fund. But generally speaking, I would just add on top that in all but very few circumstances is there really a near-term financing issue that would cause us to, even within the context of our five-year picture, be concerned about the solvency status of these businesses. And I think we can all take a step back to maybe even acknowledge that in some ways, the pandemic actually made near-term successes perhaps more likely than otherwise would be the case.
SIMON BARNETT: I think an excellent example would be something like liquid biopsy, which for those that don't know, is principally a diagnostic application in oncology. To you as a patient, it looks like a regular blood draw. What's happening in the background is that we're applying very deep extensive sequencing to a blood sample to understand the unique signature of a patient's cancer inside the body.
SIMON BARNETT: And we can do this for screening. We can do it for prognostication. We can do it to diagnose. We can do it to monitor the response that a patient is having to treatment. And the pandemic was a forcing function for a bunch of different cottage industries, whether it's mobile blood drawing, mobile phlebotomy, or digital ordering, or other ways of reaching patients in an environment that was very, very hostile to in-person doctor's visits, as well as the fact that in order to maintain continuity of care, and Ali mentioned it within oncology clinical trials, many oncologists, which historically are somewhat conservative and reticent to or hesitant rather to adopt new technologies, again, it was a forcing function to get people to accept this new modality and try it out.
SIMON BARNETT: And we've seen a bunch of concordance data sets. So studies that match tissue with liquid and look across to see, hey, this is actually a great way to do oncology. And in many ways, it's potentially superior to nuclear medicine. Just blasting people with radiation in hopes of catching a relapse down the road. So just suffice to say that in terms of the fundamentals and the background and the market context, I think we're very positive as to the state of these businesses moving forward.
ALEX PHILIPPIDIS: And just like that, our time is drawing to a close. But we've learned so much about Ark Invest and about biotech and some trends. Speaking of, one of the areas we spend a lot of time talking about was Next-Gen Sequencing. And I invite you, if you're watching the State of Biotech, that that is our next panel. What's next for NGS? And my colleague, Julianna LeMieux, will be moderating that.
ALEX PHILIPPIDIS: And I invite you to tune in and watch that as well as some of the other chats and interviews on this second day of the State of Biotech. David Mittelman of Othram talks about real-life CSI. And I'll be interviewing Peter Hotez for lessons learned on the COVID crisis. So in the meantime, I want to thank you Ali and you Simon for spending the past several minutes with us here.
ALI URMAN: Thank you.
SIMON BARNETT: Thanks for having us.
ALEX PHILIPPIDIS: And for Fay and for me, it's been our pleasure and privilege to be with you here at the State of Biotech. [MUSIC PLAYING]
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