Biotech ETFs Vs. The Coronavirus

immune system gets a big workout every day. And like the consultant experts, so I'm going everywhere. I shake hands, I ride trains, I went to the mall last weekend. Bring it on. I'm somewhere between the two and eight depending on the moment. But the point of this episode is to actually like, bring E t F into this conversation.

Who are we gonna talk with? Yeah, so there is no coronavirus et F obviously, but where we got our next guest was I remember back in ten there was a filing for something called the bio shares biothreat e t F with with which is god of the ticker GERM. Remember the time that it is, and I was like, this is a little crazy. Come on, now. We went

back and we looked in the prospectives. We looked at the stocks that would have held, and these stocks were up thirty to a hundred and forty each over the past week after the because their virus fighting biotech firms. You know, I think this e t F might have had its hack moment where you know, like hack launched right before the Sony hack and return maybe triple the S and P over the next couple of months, one

of the big success stories in et launchers. Yeah, if you're a small issuer with a product that's niats, you need that kind of moment. This it didn't happen for this fund. However, the company that that issued it has two other funds called the Vertice Life Side, Biotech Clinical Trials et F, and the Product So they divided biotech into clinical trials and the product side, and biotech is

just interesting. We've never covered it. So I figured this would be a good time to discuss, uh, the virus, what biotech companies do in order to fight it, and a little bit about the E t F side of things. So joining us this time, Paul Yuke and Ryanson only of life side ventures. This time I'm joining the biotech frontier. Paul, Ryan, Welcome to trillions. Thank you. So whose big idea was this company? Slash ets? So this is Paul speaking Hi, thank you for having me. So I came up with

the idea of creating some new biotech ets. You know, at the time when we launched BBC and BBP, this was two thousand and fourteen, there were really only two established biotech ets and they remained the big grilla biotech ets today IBB an XBI, and they had the lion's share of the assets, and really, if you look at them, I called them fairly dirty biotech ets because they were

not pure biotechnology sector funds. You take Ryan Net who's next to me, who's a PhD, twelve years of bench science and then additional five plus years investment banking and investment experience. I've been twenty twenty four years in this space now, and we wanted to create a true biotech ETF created by sector experts. And the first and most important thing we did is we said biotech is really two sectors. You've got emerging let's call it risky companies

and we call those clinical trial companies. They sell zero drugs and they are experimental. They're they're testing their yeah and they and when they have a positive result, the stocks can go up two in one day. On the converse, when they fail a clinical trial, they can drop. The other side of the equation are more established companies. You have many of them now. They're selling today life saving medicines, am Gen, Biogen, Regenera on Gilliad. Some of these are

now household names. What's exciting about them is they don't have the same risk profile, but they're still growing probably twenty plus percent revenue growth per year in an economy that's growing two or three. So that's what's great about those two buckets. We separate them out and that's the biggest change that we made. I'm shocked no one else has done that in the past five or six years. You know, we've spoken to Brad Longkar, he's got that

cancer immunotherapy. There's been some of that. But you're right, and biotech is an area that has a ton of assets, and you know, I think a lot of new ETFs come from these India issuers that see something wrong with the big guys. Ryan, You're a PhD. I'm gonna ask you the same question they ask Eric, how concerned on the skill want to don Are you about the coronavirus? Yeah? So, um, I think that obviously when new viruses present themselves, it

can be a bit scary. But obviously the world has seen coronavirus is before, and my feeling is that it's early days. But what we've seen in China is that sort of rapid containment strategy that they employed has worked pretty well in the sense the cases over time have been coming down and the spread through the country seems

to have been relatively contained. Unfortunately, you can't keep everybody sort of locked up, right, and so what we now have is the emergence of I'm sure you've heard the buzzword sort of community presentation and so that is where, you know, you can't really track an individual case back to travel to China or exposure in in in Korea or elsewhere. So that essentially, I think, you know, has presented initially in the state of Washington, and now we're

seeing you know, a number of cases emerging there. We've seen a pretty rapid response by by our government and by the agency's CDC and others and I imagine that you know, we'll continue to sort of have updates as this sort of experience plays out. So put your investment hat on for a second. What's the opportunity that you see here? I mean, Paul described theres to to sort of buckets. But from a science perspective, what do you

what do you look at? Sure? I mean I think from from the outside, when when you have an outbreak like this, um you think about, you know, what are the needs in order to sort of contain And initially we heard that there was essentially a lack of resources on the diagnostic side, and so the CDC really had one of the only kits that was being used here in the States, and there was a shortage. We were not testing patients as rapid or potential patients as rapidly

as we could. And so over the course of the last week or so, I think we've we've seen a number of press releases from some of these smaller cap biotechnology and diagnostics companies that have said, hey, look we're working on these next generation diagnostics. It turns out that these kits that help diagnose patients are not necessarily sophisticated. It's really just about sort of implementing the manufacturing UM and and getting them out to uh, to the clinics. UM.

So I think there's been a real push. So you know, we've we certainly have been looking at companies that we think that you know, are on the forefront of putting new diagnostics out there. UM. In addition, you know, we're looking at companies that have means of of sterilizing nursing homes, hospitals, schools, subway cars for example. And there's some interesting technologies out there that we've come across and against small cap companies

where they have hydrogen peroxide based mists or sprays for decontamination. UM. And then finally, obviously there's um, you know, there's therapeutics and vaccines, and that's probably you know, closest to home to what you know, Paul and I do. And so there have been a number of companies that have announced that they're working on either vaccines or they've identified potential therapeutics by looking at the components of of some of the of the blood of infected patients and so UM.

You know, those companies as they continue to sort of move those early stage products through development, I'm sure we're going to hear more and more about them. We'll go into German a minute. But what are in terms of BBC. Are these companies that that do these things? Are they in BBC or BBP that's the clinical trials or the product stage? And which companies are they? So the BBC

and BBP are very specifically biotechnology drug companies. You know, the term biotech is used colloquially UM to cover a wide range of approaches, whether their business orienters sometimes not. Even business cloning. For example, animals is sometimes considered biotech. We don't consider that a biotech investment. We consider a drug that's put into a human to be a biotech stock.

In this case, the last segmented companies Ryan mentioned, which I think is potentially the most lucrative on an ongoing basis financially UM. These are the medicines that will cure affected patients or vaccinate and prevent in action of the broader population. I think that's going to be the big business here for corona virus and other similar types of outbreaks. There are a handful of those stocks which happen to be in BBC and BBP because they're strong scientific players.

Let's take a look at Maderna. It's a leading biotech company about a ten billion dollar market cap with a real leadership position in RNA therapeutic technology. They jumped very quickly to said to say, we can move and and develop a vaccine to prevent coronavirus outbreaks in the future, like within weeks, within weeks, within weeks. So that company, they're not selling any drugs. They're in clinical trust for other compounds, but they are in BBC, the C standing

for clinical. On the other side, Gilead, which has a drug, an anti viral drug that was already in testing for other coronavirus. Let's keep in minding coronavirus has been been around for a while. It's a type of a virus. Common colds are caused by some forms of coronavirus, also stars and merser coronaviruses. So Gilliad had a drug wasn't that wasn't testing for prior forms of coronavirus. This drug looks like it works in one patient tested in the US.

That patient recovered very quickly, so they're studying it very quickly in corona patients and the stock is reacting very well because it looks like this could be a winning

agent in this war. Talk to me more about the science of this and how quickly things have improved, because you've mentioned mers and stars, like when when we're developing treatments at that stage, it was taking months years to get something and here we're seeing it just in like a matter of weeks, where there's potential solution that's even been identified. Right, this all plays too how quickly biotech

is moving. You know, when I first entered the industry, the rule of thumb was it would take thirteen years to move from that pre clinical phase to f D approval. That was just the rule. Thirteen years, maybe twelve if you're very fast. We now have examples of drug hugs that got from lightbulb moment. Aha scientists says, let's try this to f D approval and dosing in a commercial patient, a patient who paid insurance company paid the bill in

four and a half years, and targeted cancer effect. Ryan worked on one of those drugs that was approved targeted cancer and is selling today treating patients. So that if you think about that speed thirteen going to four and a half, that's science that's regulatory abouties. The FDA has now created pathways where you can move, or accelerated approval, breakthrough approval designations, UM, new clinical trial designs that say you don't have to do sometimes things that don't make

sense in a clinical trial. And for all of those reasons, we can react much more quickly today to an outbreak than we could with stars or abola. What you just described make me want to invest in biotech, and I think that's a lot of what people are attracted to. UM, help me explain the relentlessness of this sector because every year we have the leaderboard, know which ETFs are like at the top and the top twenty, it's usually like they come and go right, they have their moment because

you're usually very concentrative. But biotechs on there a lot. And you look at XBI that's the equal weighted biotech. It's up three, D and six over the past ten years. The S and ps up two and even this health care sectors are only up two, so they're up a lot already. Right, UM, how much of this is priced in? I mean, how much are we pricing in the future expectations versus what has already happened. So I think today what you're asking about is UM, you know, we look

at things ultimately as net present values. I mean, we're both of us here sitting here are former bankers, and you've got to boil things down to DCF analysis. And in a typical it's called a widget manufacturing business. UM, when we project out cash flows, we'll see something like sixty of the value in the near term casules that

you project out in the terminal value. In biotech, it's flipped around dramatically, so in most cases it's maybe in the near term casual terminal value, so it's really all terminal value. Having said that, today what we see is real tangible evidence that drug will work. Companies are often acquired after they show in a phase two study that's maybe two years before they're marketed. UM, then they're acquired. That's when a drug company knows it's going to be

a real drug. So Gillyad two days ago announced the acquisition of forty seven fts V ticker f ts V, which is in one of our funds. And the reason they paid five billion dollars for that company is not because they're selling today, because they're not, but it's because the evidence from the early clinical trials are now tantalizing and show with very high probability that this will be a major drug, a major new drug class. And I'm looking at your fun BBC. It's equal weighted, right, and

XBI is equal weated. We've written about XBI in particular because it's crushing IBB and we feel like the equal waiting gives bigger waitings to the small companies and it's gotten what we call m and a pop um. Talk at the importance of that, is that why you equal weighted, so that you'd give a little more waiting to the potential targets because unless you have inside information, you don't

know who to own. But here you're putting your eggs in an equal basket to get that kind of pop Is that was that the goal in the design of the product. That is probably the biggest reason for the difference between the XBI and the IBB, the IBB being

market weighted. If you think about what are the largest companies in the space, they dominate the market, CAB, gilead am Gen, regen Eran, and these are companies that are unlikely to be acquired anytime soon, and if they are relatively modest premium because they're becoming big pharma like the difference between a MRK and a visor and ultimately an

AM genery Gilead is blurring. But the companies like forty seven, I mean, we're talking about a stock that's gone up fifteen to twenty fold in the last six to twelve months.

Fifteen to twenty x, not percentage points, and that's fairly typical for a small cap biotech company that a shows that a trial goes from being high risk to to oh, this works as cures patients, and then be going to a big farmer company or multiple big farmer companies saying we have to own that in our pipeline and that those are the valuation inflects that happen in really in the whole sector. But unless you equal weight, as you said, Eric, you're not going to capture that alpha. So that's why

we do it. So let's talk about GERM for a second, because great ticker not on the market right now, and so my question is sort of like, in the middle of all of this, do you kind of like hit your forehead and go doll like we had the thing

and it's not out right now. So GERM, just for a little bit of background, GERM is an index that we have created and we created it back in two thousand and sixteen, and the overarching index is called the Bioshares bio Threat Index, and it's designed to invest in companies that can protect and guard against a wide variety of biological threats. Now, first and foremost of course, that is disease outbreaks, Bola and that's existing and new so Bola, sars, coronavirus.

Now also biological warfare, sarin gas war. I mean, you just don't know what's going to happen in the future, and so protecting homeland security in the borders, things like chlorox, I mean, we think about very basic industries. Clorox has been a big component of that index. Clorox went up every day of the Corona outbreak because they are selling every unit that they can make, and so there's a wide variety of aspects that go into the Germ Index.

But the mechanics, no one knows better than Eric of launching an independent et F is it's expensive and it sits out there for a while, sometimes until you have an outbreak. So we're in high gear right now, um with respect to potentially getting something out there that's investible. You know, we all love to invest and the problem with investing in coronavirus doxes are so little. These stocks

are generally small cap. They trade fifty to a hundred million shares a day today whereas they traded fifty thousand six months ago, and the volatility is insane. So you need to invest in a basket, and we're seeking to

create that kind of a basket. And in the Germ index, you know, some of the tickers you send over that would be in here are include something like Cleveland bio Labs via Biotechnology Co Diagnostics, which, by the ways, up three last week when the market fell eleven, I think they had to halt it, right, it was halt on the upside um? Those are small. We look, those are all small microcap. Would you balance that out with a Clorox or a Gilliad or somebody? So, what would what

does this index look like? And how much was it up last week? We've been told not to talk about the index right now just because it's uh, lawyers, come on, but lawyers, clients. No, the the index is fun. Let's think about it as a It does have a lot of a lot of larger companies in there, and some of them did very well. Some of them didn't do as well, but overall, the let's say you're to date, you're talking about double digit out performance over the SMP.

So the way the index works is it is modified market cap weight with a four point nine percent maximum waiting about fifty four stocks currently in the index, and it has several different buckets, not just coronavirus or other virus companies, but also companies that will assist in sterilization. Um think about companies, hospital cleaning companies like Sterocycles actually

done very well. Companies that make disposable gloves or mass like these are companies that everyone knows Kimberly Clark, three M chlorox as we mentioned. And then of course the drug companies like Gilead, which was already a leader in anti virals and very quickly they were able to jump on and help with this outbreak. Okay, Ryan, I want to bring you back in, especially on the investor beware

side of this. Right, like biotech, for all the promise out there, it's also had bus moments and and big ones. You know in the Thoronos question is probably still hangs over the industry to some extent. Where do you come down in terms of like how an investor should approach what could be you know, massive returns but also like a total bust. Yeah, for sure. And I think with the stocks that we were just discussing, you know, a

NETF approach would certainly be what I would recommend. There's just a ton of volatility in these names, as Paul mentioned, Um, you know, companies like co Diagnostics or Cleveland, or even in the names like in Ovo Um we've seen in just in the past day have gone up to and they'll come down to in in less time, and and certainly Um for for the average retail investor investor out there, it's it's it's quite challenging to be able to time

those traits. So that's why we're so excited about putting together this Jeremy TF because we think, you know, certainly provides an opportunity for folks to get involved in a relatively de risked way. Paul, I see you at conferences at the booth there sometimes, you know, and I consider

you an indie issuer. Um. Besides obviously what you've already proven here, which is that indie issuers are very close to the ground, their local they know their material, very well, in some cases better than the bigger issuers, but they typically also have a lot of other things going on in their business life. So talk about these ETFs are just the small sliver of your whole operation. What else do you do? Yes? So, Life Size Partners is headquartered in New York City. We have about a hundred and

seventy employees globally at this point. We're a leading consultancy to the biotechnology sector as well as the broader healthcare space. We have a number of different business units that can provide executive search, investor relations, consulting, investment banking. As you know, the operations of an e t F that's passively managed

like ours doesn't require a lot of day to day UM. Really, the business once the funds have been up and running in ours have been out there for over five years, is to make sure that the indexes are maintained properly and regular ausly. UM. So we do that and twice here we rebounce. What Ryan and I spend the vast majority of our time doing is seeking out private companies, and so we we run a venture fund called LIFESID.

Venture Partners were out there generally looking to invest maybe one year or two years before these companies become public through an I p O, in which case they would enter most likely the BBC et F And what size of investment are you guys looking on the VC So we're generally participating in this round that's called a crossover round or maybe a Series B or C round. Those are usually fifty to a hundred million dollar rounds. Today

we're writing ten ish million dollar checks. Um, we're just we just had our first clothes on our latest fund, our second fund, which is a two million dollar fund. But we would join as a syndicate member across you know, we'll lead a couple of deals a here, but we'll join you know, three to five other investors in that round.

So if I zoom out a little bit and just think about all the various industries and sectors that have sort of had moments and you know, maybe reached a certain plateau and like we've seen tech just over the last twenty years just boom in a big way. Biotechs had those boom moments, but it hasn't reached maybe the same exponential growth that we've seen from the tech industry.

And if you know about Moore's lawn sort of what's happening in sort of the tech industry, Like maybe there's a thought that we could see a plateau, there is this biotech moment. I don't know that this is biotex moment per se. I think it's been, you know, a more of a gradual curve up, and I think moments like outbreaks like this is the industry's chance to shine and really show everyone else what's going on. One of my first bosses in the industry, um, a senior banker.

Goldman once said, Um, this was back in the early Now, it's probably in the late nine You said, there's really no biotech sector. In my view, biotech companies are really just small pharma companies. And I think that's a view that was long held for a while, and I think people really understanding that that things have changed so dramatically that the DNA of a biotech company is so utterly different than that of a farmer company. Eric, you said

you're from Philly. Philly is one of the original homes of those mainline farmer companies Smith Klein, Beach, um Roan poolong Roarer, and these are companies that all along the main line of near the Philadelphia area, they've now merged and merged and these are in some cases fifty or a hundred year old businesses. These are people who join a company and will stay and retire and have their pensions.

In biotech, it's very different. These are superstar scientists, superstar executives who are free agents and and will solve a problem, sell the company, move on to the next. And it's a it's a dynamic industry and it's growing faster and faster. Besides GERM maybe coming out at some point, do you have any other that are you know, farther down the road that are sort of cutting edge kind of indexes

that could btfs? Yeah, we are. You know, we're constantly looking to see what other indexes that we can innovate on within healthcare. And there are a lot of other spaces that I think that are investable that are not served by the current market. There's nothing I would say earlier than the bio threat index. Um, we're being very selective. We've got a lot on our plate. Last thought, Ryan, you didn't give me a number scale of one to ten. Where are we on the coronavirus? Here's what he wants

you to do. He wants you because you're an expert PhD to overrule sort of embarrass me for my I don't care. Yes, this is what's going on. So the higher the number, the better he'll feel. But don't don't listen, don't do it just for him. Yeah. I think we're somewhere around the five or six. Yeah. Yeah, you just made Joel very happy. I'm still a point to Paul Ryan. Thanks for going, Thank you, thank you, Thanks for listening

to Trillions. Until next time. You can find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcast, Spotify, and where else you'd like to listen. We'd love to hear from you. We're on Twitter, I'm at Joel Webber Show, He's at Rick Faultunos, and you can learn more about Life's Side Partners at Life side Partners dot com. This episode of Trillions was produced by Magnus Hendrickson. Francesca Levy is the head of Bloomberg Podcast. Bye