WEBVTT - Lawrence Golub Sees Mixed Picture in Middle Market Earnings 0:00:04.760 --> 0:00:08.080 Welcome to the Bloomberg P and L Podcast. I'm Pim Fox. 0:00:08.119 --> 0:00:11.200 Along with my co host Lisa Abramowitz. Each day we 0:00:11.280 --> 0:00:14.480 bring you the most important, noteworthy, and useful interviews for 0:00:14.520 --> 0:00:16.880 you and your money, whether at the grocery store or 0:00:16.920 --> 0:00:20.680 the trading floor. Find the Bloomberg P L Podcast on iTunes, 0:00:20.840 --> 0:00:29.280 SoundCloud and at Bloomberg dot com. We have Lawrence Gallop. 0:00:29.320 --> 0:00:32.200 He is the chief executive of Gallum Capital ascids under 0:00:32.200 --> 0:00:35.320 management about twenty billion dollars. They're based in Chicago, but 0:00:35.400 --> 0:00:37.800 he joins us here in our New York studio. Lawrence, 0:00:37.800 --> 0:00:40.440 thanks very much for being here. Much appreciated. Tell people 0:00:40.479 --> 0:00:42.960 about your focus, and the reason I want to do 0:00:43.000 --> 0:00:44.640 this quickly is because I want to get to this 0:00:44.680 --> 0:00:48.159 idea of revenue in the mid market. You've done some surveys. 0:00:48.200 --> 0:00:50.879 Revenue in the US middle market group eight and a 0:00:50.920 --> 0:00:53.800 half percent during the first two months of Q one. 0:00:54.920 --> 0:00:57.400 We're a non bank lending business. We lend to medium 0:00:57.440 --> 0:01:00.920 sized companies in the United States, typically with revenue between 0:01:01.040 --> 0:01:04.040 about fifty million dollars and five hundred million dollars. So 0:01:04.080 --> 0:01:07.280 these are businesses that are smaller than typical public companies. 0:01:07.319 --> 0:01:10.000 As a lender. We have loans outstanding to about two 0:01:10.080 --> 0:01:14.560 hundred companies and we're monitoring receiving their financial information on 0:01:14.600 --> 0:01:18.319 a monthly basis. The Gallup Capital Middle Market Report focuses 0:01:18.360 --> 0:01:21.320 on an early look at actual revenue and profit from 0:01:21.360 --> 0:01:24.640 the first two months of each calendar quarter. So the 0:01:24.680 --> 0:01:26.840 growth and revenue of about eight and a half percent 0:01:26.880 --> 0:01:29.360 that you refer to is what we've seen in the 0:01:29.400 --> 0:01:32.880 portfolio for January and February, you know, just to sort 0:01:32.880 --> 0:01:36.000 of give more to flesh that out. Gallob overseas about 0:01:36.000 --> 0:01:38.120 twenty billion dollars in assets and is one of the 0:01:38.160 --> 0:01:41.120 best known names in the middle market area. And I 0:01:41.400 --> 0:01:42.960 have to say I was looking through report and I 0:01:42.959 --> 0:01:45.120 was struck not just by the increase in revenues, but 0:01:45.160 --> 0:01:51.320 by the massive dispersion of avita of earnings UH depending 0:01:51.360 --> 0:01:53.960 on the sector. I mean, you have consumer UH companies 0:01:54.000 --> 0:01:57.000 that are seeing negative earnings a decline in earnings, whereas 0:01:57.000 --> 0:02:01.600 you see technology companies seeing an increase of more than earning. 0:02:01.640 --> 0:02:03.480 So can you explain, I mean, have you ever seen 0:02:03.560 --> 0:02:06.840 such dispersion before in your life? This dispersion is very wide, 0:02:07.040 --> 0:02:09.920 and it's really a story of an ability to control 0:02:10.040 --> 0:02:13.440 costs and an ability to have operating leverage as volume 0:02:13.480 --> 0:02:16.080 goes up or down in the tech sector. In our 0:02:16.160 --> 0:02:19.200 tech sector is primarily business to business software, There's been 0:02:19.240 --> 0:02:23.440 tremendous investment for a long time. The business buyers and 0:02:23.560 --> 0:02:27.560 invest the purchasers of the software are eager to get 0:02:27.639 --> 0:02:30.480 the efficiency gains that come from it, and that sector 0:02:31.080 --> 0:02:33.560 is just really knocking the cover off the ball. Contrast 0:02:33.639 --> 0:02:36.560 that with say healthcare, where for the third quarter in 0:02:36.560 --> 0:02:40.160 a row, we've seen recentably good revenue growth, but the 0:02:40.200 --> 0:02:42.560 typical companies and healthcare have not been able to control 0:02:42.600 --> 0:02:44.680 their costs. So so, in other words, when you see 0:02:44.720 --> 0:02:48.440 revenue growth but negative negative earnings, that's the reason why, 0:02:48.760 --> 0:02:51.920 because of costs. I think that that's the most frequent 0:02:51.960 --> 0:02:55.119 reason why. And in the case of healthcare, it's typically 0:02:55.240 --> 0:02:58.120 labor costs. Uh. You know, we think about labor costs 0:02:58.120 --> 0:03:01.160 in terms of just manufact during wages, but in fact 0:03:01.320 --> 0:03:04.120 skilled wages for certain sectors are going up, and we're 0:03:04.120 --> 0:03:06.320 still seeing some of the impact of the Affordable Care 0:03:06.360 --> 0:03:09.120 Act increased demand for health care services, which is driving 0:03:09.160 --> 0:03:12.080 class up. Also, many other healthcare service providers you know, 0:03:12.080 --> 0:03:15.000 are are really demonstrating they're not as good as some 0:03:15.120 --> 0:03:19.520 other industries at developing the operating efficiencies so far something 0:03:19.520 --> 0:03:21.560 my hope we'll see change over time. I want to 0:03:21.560 --> 0:03:23.520 just ask you about an issue that we've been talking 0:03:23.520 --> 0:03:27.400 about having to do with wage increases and productivity, because 0:03:27.400 --> 0:03:30.400 when we received the payroll report last week, we saw 0:03:30.440 --> 0:03:32.240 an increase I think it was about two points seven 0:03:32.240 --> 0:03:35.760 percent year over year in wage in wages and that 0:03:35.880 --> 0:03:38.680 ends up being tied to productivity and what the question 0:03:38.720 --> 0:03:42.720 that I ask is companies choosing people over machines. Because 0:03:42.720 --> 0:03:46.360 we hear a lot about robots and artificial intelligence in 0:03:46.400 --> 0:03:48.760 the companies that you deal with, are they looking to 0:03:48.800 --> 0:03:52.640 replace people? Absolutely, When when we talk about business to 0:03:52.720 --> 0:03:56.080 business software, you know that that really is about getting 0:03:56.080 --> 0:03:58.000 more out of the people. You have to delivering more 0:03:58.040 --> 0:04:02.280 services without adding people and increasing your impact. It's one 0:04:02.320 --> 0:04:05.040 of the drivers of that sector. Let's look within the 0:04:05.040 --> 0:04:09.640 consumer products industry at restaurants, a subsector which has been weak, 0:04:09.960 --> 0:04:13.240 had been weak for several quarters. This quarter, restaurants have 0:04:13.320 --> 0:04:16.159 actually come back some and have some margin expansion because 0:04:16.200 --> 0:04:19.720 they've had to deal with labor efficiency. It's not necessarily 0:04:20.360 --> 0:04:24.039 firing people, it's better scheduling or all all aspects of 0:04:24.040 --> 0:04:27.479 getting more productivity out, but with increasing minimum wages, with 0:04:27.560 --> 0:04:31.839 the regulatory cost, healthcare costs, high labor content, businesses have 0:04:31.960 --> 0:04:33.720 to react. That's one of the reasons I think we've 0:04:33.760 --> 0:04:37.800 seen thirty one thousand lost jobs in the retail sector. Well, 0:04:37.920 --> 0:04:39.760 talking about retail, I just want to go back to 0:04:39.800 --> 0:04:43.120 the consumer decline in earnings. Uh This sort of negative 0:04:43.360 --> 0:04:47.080 eight point five percent decline in ABITA among consumer companies 0:04:47.120 --> 0:04:51.200 that you canvassed, I'm wondering, does this signal to you 0:04:51.320 --> 0:04:54.880 broader weakness among the consumer that might not be reflected 0:04:54.880 --> 0:04:58.159 in current economic data. Potentially, it's certainly not good news 0:04:58.720 --> 0:05:03.200 when when you look at projections for SNPPS up nine. 0:05:03.839 --> 0:05:05.640 There's certainly some sectors that are going to be very 0:05:05.680 --> 0:05:09.120 strong this quarter, like energy, metals and mining, but the 0:05:09.160 --> 0:05:13.000 consumer sector this this number is somewhat worrisome. Have you 0:05:13.040 --> 0:05:16.680 reduced your consumer exposure in your portfolio? Uh? No, We 0:05:16.680 --> 0:05:21.279 were very focused in our portfolio on non retail businesses. 0:05:21.800 --> 0:05:24.400 UH So if you if you looked at a portfolio 0:05:24.440 --> 0:05:27.160 that included retail, the numbers might even be more significant 0:05:27.160 --> 0:05:31.680 than this. And you also provide financing for deals that 0:05:31.800 --> 0:05:35.680 are perhaps done by private equity firms or other non 0:05:35.720 --> 0:05:39.840 bank financial companies. Yes, the majority of our borrowers are 0:05:39.880 --> 0:05:43.000 controlled by private equity firms, and are you seeing that 0:05:43.040 --> 0:05:46.479 they are getting the exit valuations that they want from 0:05:46.480 --> 0:05:49.200 their deals? The deal environment has slowed down a lot 0:05:49.480 --> 0:05:53.320 in the past several months. The combination of some some 0:05:53.400 --> 0:05:56.800 headwinds on the consumer side, uncertainty about the deductibility of 0:05:56.880 --> 0:06:00.839 interest owners holding off on selling because they're hoping capital 0:06:00.880 --> 0:06:04.760 gains rates will go down, the possible border adjustment tax, 0:06:04.800 --> 0:06:07.800 which very few people think will pass but everyone worries about, 0:06:08.120 --> 0:06:11.080 has all led to really a decline in the pace 0:06:11.120 --> 0:06:16.640 of transactions. The Panera style sales and Panera is a 0:06:16.640 --> 0:06:19.200 great company, the same source sales as past quarter up 0:06:19.279 --> 0:06:22.640 five pc, which is industry leading. But but that sort 0:06:22.680 --> 0:06:25.240 of multiple is pretty unusual right now. Thank you so 0:06:25.320 --> 0:06:28.440 much for joining us. Truly fascinating report. Lawrence Gallub is 0:06:28.480 --> 0:06:32.080 chief executive officer of Gallop Capital, which oversees about twenty 0:06:32.080 --> 0:06:34.880 billion dollars and is based in Chicago, Illinois. He was 0:06:35.000 --> 0:06:39.279 highlighting his latest gallob Capital Middle Market report, talking about 0:06:39.320 --> 0:06:43.240 the broad dispersion in earnings depending on the sector of 0:06:43.400 --> 0:06:59.880 smaller companies. Well, this deal was heralded last year as 0:07:00.040 --> 0:07:03.560 what was going to become the biggest energy infrastructure UH 0:07:03.839 --> 0:07:09.400 system and distribution provider in North America. Enbridge bought Spectra 0:07:09.640 --> 0:07:13.640 Energy for thirty seven billion dollars. And here to talk 0:07:13.720 --> 0:07:17.280 about that deal, which recently was completed, is John wheel In, 0:07:17.400 --> 0:07:20.600 chief financial officer of en Bridge, which is based in 0:07:20.680 --> 0:07:24.720 Calgary in Canada. John, congratulations and completing this deal. And 0:07:24.720 --> 0:07:28.160 can you talk a little bit about what and Bridge 0:07:28.240 --> 0:07:32.520 stands to gain from this acquisition. Well, thank you very much, Lisa. 0:07:32.640 --> 0:07:36.840 Um Really, Enbridge, UH, it really is an opportunity to 0:07:36.920 --> 0:07:40.880 extend and diversify our growth program. At the end of 0:07:40.880 --> 0:07:44.760 the day, UH, we have a value proposition that focuses 0:07:44.880 --> 0:07:50.520 on low risk, reliable income generative from energy infrastructure assets. 0:07:50.920 --> 0:07:55.160 Buying a platform, the premier gas distribution and transmission platform 0:07:55.880 --> 0:07:58.840 UH in the US really gives us a big opportunity 0:07:58.880 --> 0:08:02.360 to extend and diverse offy off of that off of 0:08:02.400 --> 0:08:06.560 that platform. So we're now operating in forty states, UH, 0:08:06.640 --> 0:08:10.000 seven provinces in Canada, so we're truly a continental player. 0:08:10.560 --> 0:08:13.080 And John, if you could speak to the issue of 0:08:13.200 --> 0:08:17.080 environmental responsibility, how would you address the concerns that have 0:08:17.160 --> 0:08:20.120 been brought about not only for end Bridge, but also 0:08:20.160 --> 0:08:24.400 for the industry of transporting oil and natural gas. Right, Well, 0:08:24.440 --> 0:08:26.240 I think that is an issue for the industry as 0:08:26.280 --> 0:08:28.720 a whole, UH, and it's become a bit of a 0:08:28.760 --> 0:08:31.440 focal point. But quite frankly, I think there's never been 0:08:31.480 --> 0:08:37.280 a greater focus on operational reliability operational integrity of our 0:08:37.320 --> 0:08:41.360 systems going forward. UM operations and safety are the number 0:08:41.400 --> 0:08:44.839 one priority of our company, as it is many companies 0:08:44.920 --> 0:08:47.880 in our industry at the end of the day, and 0:08:47.920 --> 0:08:52.320 we work very hard, UH to ensure that all of 0:08:52.360 --> 0:08:55.120 our stakeholders are customers, the communities along our rights of 0:08:55.200 --> 0:08:58.280 way and so on, understand the steps that we take 0:08:58.760 --> 0:09:03.760 UH to make the pipes operate reliably and safely. Can 0:09:03.760 --> 0:09:06.600 you talk a little bit, John about the change in 0:09:06.720 --> 0:09:10.440 the US administration and how that might affect the US 0:09:10.559 --> 0:09:14.360 bring in Canadian oil or vice versa. Frankly, yeah, well, 0:09:14.400 --> 0:09:17.120 I think I think generally the climate for energy would 0:09:17.120 --> 0:09:20.280 appear to be more positive at the moment in the 0:09:20.360 --> 0:09:23.240 US if the US exporting it, not the other way around. 0:09:23.679 --> 0:09:27.040 Not necessarily, although I think you know, there's a tremendous 0:09:27.080 --> 0:09:30.960 benefit that both countries get from an integrated energy market, 0:09:31.760 --> 0:09:36.360 and we find that really huge cross border trade exists 0:09:36.360 --> 0:09:39.440 in energy, not just self bound from Canada into the US, 0:09:39.480 --> 0:09:43.160 but also from the US up in Canada electricity, natural 0:09:43.200 --> 0:09:46.240 gas and so on, and for many, many years, both 0:09:46.320 --> 0:09:50.240 countries quite frankly, have benefited hugely from that. So our 0:09:50.280 --> 0:09:54.200 initial conversations with administration in the US and others would 0:09:54.200 --> 0:09:56.880 tend to make us think that everybody does understand that, 0:09:56.960 --> 0:09:59.600 But of course we do have to see how rules 0:09:59.640 --> 0:10:04.520 around UH across border taxation and so on play out. John, 0:10:04.600 --> 0:10:07.480 many people are familiar with Keystone XL, they might not 0:10:07.559 --> 0:10:11.360 be familiar with g x L. Tell us about end 0:10:11.360 --> 0:10:14.719 bridges g x L, what it plans to do, and 0:10:14.840 --> 0:10:17.439 maybe you can just allude to some of the challenges 0:10:17.480 --> 0:10:20.719 that you've had putting this together. Well, I think you're 0:10:20.720 --> 0:10:24.720 probably referring to a whole series of low cost capacity 0:10:24.800 --> 0:10:28.240 expansions that we have been looking to build on our system, 0:10:28.280 --> 0:10:32.000 and bridges expanded the system very significantly over the last 0:10:32.040 --> 0:10:35.360 number of years. We're continuing to do that. We have 0:10:36.360 --> 0:10:38.360 this is all around the Great Lakes area. It also 0:10:38.440 --> 0:10:42.520 includes expansion to the network in Minnesota, for example. Yeah, right, 0:10:42.559 --> 0:10:45.079 We've got a large project or line through replacement project 0:10:45.160 --> 0:10:48.840 that is currently going through the approval process, so completely 0:10:48.840 --> 0:10:52.720 approved now in Canada and really completely approved in in 0:10:52.880 --> 0:10:55.679 the US, with the exception of Minnesota where we are 0:10:55.720 --> 0:10:58.960 working with the Public Utilities Commission there UH, and that 0:10:59.040 --> 0:11:02.319 process is taking us a little longer than we expected. However, 0:11:02.520 --> 0:11:07.480 our environmental impact statement process is completed, UH, rather not 0:11:07.559 --> 0:11:09.480 completely I shouldn't say that has been fully scoped and 0:11:09.600 --> 0:11:11.600 is in the process of being completed. And so we 0:11:11.640 --> 0:11:14.600 think there's some clarity now with respect to the regulatory 0:11:14.960 --> 0:11:18.199 UH direction and the regulatory process there, and we're moving 0:11:18.200 --> 0:11:21.360 that project along. John uh and Bridge also has a 0:11:21.400 --> 0:11:24.360 big renewable business, including wind farms in Texas and off 0:11:24.360 --> 0:11:28.640 the east coast in North Carolina. Have you projected a 0:11:28.800 --> 0:11:31.719 slower pace of growth in some of those renewable industries 0:11:32.000 --> 0:11:36.440 given the more favorable climate for fossil fuels UM. It 0:11:36.520 --> 0:11:40.200 really depends on jurisdictions. I think different jurisdictions have different 0:11:40.200 --> 0:11:43.800 renewable portfolio standards in terms of what they're trying to achieve. 0:11:43.840 --> 0:11:46.160 So there are some places where I know UH. We 0:11:46.240 --> 0:11:50.800 continue to plot forward UM on a number of different projects, 0:11:50.800 --> 0:11:53.959 both here in the US and in Canada and also 0:11:54.000 --> 0:11:56.600 in Europe right now, whether it's a significant focus on 0:11:56.640 --> 0:11:59.560 the development of renewable and renewable energy, So it really 0:11:59.640 --> 0:12:03.600 is more of a local consideration primarily for US in 0:12:03.679 --> 0:12:06.520 terms of where the activity is. Can you speak to 0:12:06.559 --> 0:12:09.080 the issue once again, just a pipeline safety, because as 0:12:09.120 --> 0:12:11.160 you build out this network, there's been a lot of 0:12:11.200 --> 0:12:15.360 criticism about spills and potential harm to the environment from 0:12:15.400 --> 0:12:18.760 this pipeline extension. What are you doing differently now than 0:12:18.800 --> 0:12:21.720 you did, let's say ten or fifteen years ago. Well, 0:12:21.760 --> 0:12:25.480 we have put a tremendous amount of UH, both time, 0:12:25.520 --> 0:12:30.920 effort and money into improving and enhancing the integrity of 0:12:30.960 --> 0:12:34.200 our overall systems. Old pipe is being replaced by a 0:12:34.200 --> 0:12:37.640 new pipe. That's what that major project going through Minnesota 0:12:37.720 --> 0:12:41.920 is really all about. And we've been working to um 0:12:42.000 --> 0:12:47.120 if you will enhance the operational uh the operational integrity 0:12:47.200 --> 0:12:50.400 of the overall system. Safety has always been, but never 0:12:50.480 --> 0:12:54.439 more than now, the number one priority for our our 0:12:54.480 --> 0:12:56.760 operating leaders. All Right, I want to thank you very 0:12:56.840 --> 0:13:00.000 much for joining us. John Wheeland is the Chief Financial Office, 0:13:00.040 --> 0:13:15.319 Sir of en Bridge. The promise and the potential products 0:13:15.320 --> 0:13:18.960 from biotechnology investments here to tell us more as Eli 0:13:19.080 --> 0:13:21.800 has than he's a managing partner of kasid In Capital. 0:13:21.840 --> 0:13:24.160 He joins us in the studio, Eli, thanks for coming 0:13:24.200 --> 0:13:26.400 in today. Maybe you could just give people a little 0:13:26.480 --> 0:13:30.200 quick background of kasid In Capital, how you came to 0:13:30.280 --> 0:13:33.240 the business, and then the focus that you're taking. Sure, 0:13:33.320 --> 0:13:36.600 thanks for having me. It's great to be here. UM 0:13:36.640 --> 0:13:40.000 so I launched the kasid In Capital in where life 0:13:40.000 --> 0:13:44.400 science technology investment firm. UM We invest primarily and publicly 0:13:44.440 --> 0:13:46.640 traded companies, but when we can't find what we want 0:13:46.640 --> 0:13:50.160 in the public markets, will invest in privates. That said, 0:13:50.520 --> 0:13:53.000 not a venture capitalist by training or disposition, and so 0:13:53.040 --> 0:13:55.000 we hope never to do it. We've done it now 0:13:55.040 --> 0:13:58.640 twenty one times and the fund is organized all around 0:13:58.840 --> 0:14:01.959 this broad identity that the cost curves for analyzing and 0:14:02.040 --> 0:14:06.960 manipulating molecular biology DNA specifically have come down dramatically over 0:14:06.960 --> 0:14:10.559 the last decade, particularly fast in the last five years. 0:14:10.600 --> 0:14:14.080 For a reference, the Human Genome Project, which cost about 0:14:14.440 --> 0:14:17.760 three billion dollars and took thirteen years to do UM 0:14:18.000 --> 0:14:21.160 can now be done in a day for a thousand dollars. Well, 0:14:21.240 --> 0:14:25.440 so just from the thirty views. Still, I'm curious how 0:14:25.640 --> 0:14:28.560 your firm deals with smoth of volatility that we've seen 0:14:28.840 --> 0:14:34.120 in biopharmaceutical company shares just based on i mean, tweets 0:14:34.200 --> 0:14:37.800 and and off the cuff commentary by politicians. I mean, 0:14:37.840 --> 0:14:41.080 how do you capture value at a time when kind 0:14:41.080 --> 0:14:43.400 of research could be thrown out the window by by 0:14:43.520 --> 0:14:46.360 you know, a press release. Yeah, we certainly don't try 0:14:46.400 --> 0:14:50.720 to manage volatility. UM. You can't write, you know, if 0:14:50.760 --> 0:14:55.400 if Hillary can tweet and crush the market, Um, there's 0:14:55.400 --> 0:14:58.800 no way to sort of manage through that except to 0:14:58.960 --> 0:15:01.520 know what you own, buy more when it's when it's 0:15:01.560 --> 0:15:06.120 lower UM, and sort of hold on UM and Uh. 0:15:06.400 --> 0:15:09.960 The fundamental reality though, is that these companies, those that 0:15:10.000 --> 0:15:14.720 are successful, build products that change people's lives UM and 0:15:14.760 --> 0:15:19.120 that has value. And so you just needed time frame 0:15:19.400 --> 0:15:23.120 to ride out through that volatility. Eli. Uh. One of 0:15:23.160 --> 0:15:25.680 the things I note about your process is that you 0:15:25.760 --> 0:15:30.400 hold information sessions lunches basically in which you invite your 0:15:30.440 --> 0:15:33.480 investors to come in and meet with the actual chief 0:15:33.480 --> 0:15:35.720 executives at some of the companies that you're invested in. 0:15:36.080 --> 0:15:38.640 One example is Sage Therapeutics, and I'm wondering if you 0:15:38.680 --> 0:15:41.280 could use that example to tell us what does SAGE do, 0:15:41.400 --> 0:15:43.920 How did you come to find them? And why you 0:15:44.000 --> 0:15:47.080 do that? Why do you bring the investors literally into 0:15:47.160 --> 0:15:51.320 the business and say here, meet directly with the company. Yeah, no, 0:15:51.520 --> 0:15:54.440 it's UM. I think the reason we do it, and 0:15:54.760 --> 0:15:59.160 I'll start there is that UM largely our investor based 0:15:59.200 --> 0:16:03.200 are successful UH investors in their own right, running large 0:16:03.520 --> 0:16:07.200 private equity funds, hedge funds, not typically in the healthcare space. 0:16:07.240 --> 0:16:09.480 And and what we find is they think that the 0:16:09.520 --> 0:16:12.240 life sciences is sort of pixie ust. You know, that 0:16:12.320 --> 0:16:14.400 you sort of get lucky, you find some kind of 0:16:14.720 --> 0:16:17.640 insight in the lab, and and if you're lucky uh, 0:16:17.640 --> 0:16:19.440 ten percent of the time it turns into something and 0:16:19.480 --> 0:16:23.560 that's worth it. Um Our belief is that actually, UM, 0:16:23.600 --> 0:16:26.960 it's all the execution between the lab and commercial product 0:16:27.000 --> 0:16:32.160 done by human beings, real people that determine success. And 0:16:32.680 --> 0:16:35.600 so what we try to do is of our effort 0:16:35.680 --> 0:16:39.120 is find good science and then confirmed that the people 0:16:39.160 --> 0:16:43.160 are really good that can actually deliver UM. So and 0:16:43.200 --> 0:16:45.360 so in that example, we like to bring in these 0:16:45.360 --> 0:16:47.640 c e o s who we think are very impressive 0:16:47.640 --> 0:16:50.880 and built impressive firms and let our investors have at 0:16:50.920 --> 0:16:53.400 them and sort of see, wow, these are really uh, 0:16:53.440 --> 0:16:56.040 these are real businessmen, um. And I would just note 0:16:56.080 --> 0:17:00.200 that the you know, if you take Gilead, Gen's time, 0:17:00.360 --> 0:17:05.280 gene Tech by Geni Deck uh and cell Gene Uh, 0:17:06.400 --> 0:17:09.960 their revenue comes from assets they went out and acquired 0:17:09.960 --> 0:17:12.000 and brought in, which means their internal R and D 0:17:12.640 --> 0:17:16.000 didn't deliver, but their business acumen UH did. And so 0:17:16.040 --> 0:17:18.679 that's what we're trying to find businessmen like that for people. 0:17:19.119 --> 0:17:22.359 I know that you can't wager around policy. It's a 0:17:22.480 --> 0:17:26.720 very tricky and uh potentially unsatisfying area to go at. 0:17:27.240 --> 0:17:30.440 And yet there are some pretty significant changes that could 0:17:30.440 --> 0:17:34.520 be made, whether it's uh forcing US pharmaceutical companies to 0:17:34.560 --> 0:17:37.520 sell biosimilar as in the US, you know, other efforts 0:17:37.520 --> 0:17:40.480 to reduce drug prices. How are you sort of positioned 0:17:40.520 --> 0:17:42.240 around that, and how do you factor in some of 0:17:42.240 --> 0:17:46.560 the drug pricing issues? Yeah, and listen, I think, UM, 0:17:46.760 --> 0:17:51.760 drug pricing is a really uh challenging issue. You know, Historically, 0:17:51.960 --> 0:17:54.240 the mechanism of going from a branded product to a 0:17:54.280 --> 0:17:57.960 generic product, patent lives and the expiration of those those 0:17:57.960 --> 0:18:00.560 patents has been a really effective way to keep drug 0:18:00.600 --> 0:18:03.679 prices in check in the last couple of years UM 0:18:03.760 --> 0:18:06.440 due to due to several factors, some of them actually 0:18:06.520 --> 0:18:11.360 regulatory UM. That transmission mechanism has broken down, fewer generic 0:18:12.359 --> 0:18:17.040 applications being approved UH, fewer manufacturers, and so there's been 0:18:17.119 --> 0:18:19.520 a lack of competition in the generics market, which has 0:18:19.560 --> 0:18:22.280 allowed generic pricing to go up and sort of broken 0:18:22.280 --> 0:18:24.440 that transmission mechanism. So one thing is you've got to 0:18:24.480 --> 0:18:27.919 fix that. The second thing is we invest in companies 0:18:28.000 --> 0:18:32.280 that are developing drugs where the alternative is usually death. 0:18:33.200 --> 0:18:35.200 And so our belief is that if you can develop 0:18:35.240 --> 0:18:39.480 a novel therapy that UH has a huge impact on 0:18:39.640 --> 0:18:43.480 a group of patients, that's worth something UM. And so 0:18:43.520 --> 0:18:46.880 we don't try to look to invest in marginal products 0:18:47.160 --> 0:18:49.760 or me to sort of follow ones. We're really looking 0:18:49.920 --> 0:18:53.520 to invest in true innovation and avoid UH what we 0:18:53.560 --> 0:18:58.119 call manipulators, people taking advantage of inefficiencies to make margin. 0:18:58.640 --> 0:19:00.760 I want to just the tie get back to Sage 0:19:00.800 --> 0:19:04.400 Therapeutic just as an example, because Jeff Jonas, the chief 0:19:04.440 --> 0:19:07.800 executive of the company, had many other roles previous to 0:19:07.880 --> 0:19:10.520 being the chief executive of Sage. This is a company 0:19:10.560 --> 0:19:14.439 that's working on central nervous system UH drugs. How did 0:19:14.520 --> 0:19:19.360 you come to connect with Jeff Jonas and Sage? Um. 0:19:19.400 --> 0:19:23.040 You know, we're looking for great companies, As I said, 0:19:23.080 --> 0:19:27.199 great managers, pursuing novel biology and then developing it in 0:19:27.280 --> 0:19:31.879 a process that yields very early results of whether a 0:19:31.960 --> 0:19:35.359 go no god decision. The challenge for developing drugs is 0:19:35.400 --> 0:19:41.080 that historically the the outcome has been all focused on 0:19:41.119 --> 0:19:43.919 the phase three where it's the most expensive component and 0:19:43.960 --> 0:19:47.520 you're sort of playing roulette until you get there. Um. 0:19:47.960 --> 0:19:50.720 Jeff is has stepped into Sage, has had some amazing 0:19:50.760 --> 0:19:55.760 science around the CNS particular sort of UH receptor thesis, 0:19:55.920 --> 0:19:59.959 and then has developed very UH specific UH small molecule 0:20:00.040 --> 0:20:02.480 US to target it, and then has a very novel 0:20:02.560 --> 0:20:05.240 way to get early proof of principle so that when 0:20:05.240 --> 0:20:08.840 you go into a phase one to phase phase two three, 0:20:08.960 --> 0:20:11.479 you you have a lot of confidence and you get 0:20:11.520 --> 0:20:14.800 a very definitive result. What are the top picks that 0:20:14.840 --> 0:20:18.840 you would say are undervalued right now? Oh? Gosh, UM, 0:20:18.960 --> 0:20:21.240 I don't know every You know everything in our portfolio, 0:20:21.240 --> 0:20:27.520 and um, everything everything, and I think everyone should know. Um. Listen, 0:20:27.560 --> 0:20:30.840 we think about the unit of the healthcare continuum moving 0:20:30.880 --> 0:20:35.200 from life science tools to applications of those tools and diagnostics, 0:20:35.520 --> 0:20:39.440 to application of those diagnostics into drug development, ultimately leading 0:20:39.440 --> 0:20:43.120 into industrial biotech. Are are feeling on the diagnostic spaces. 0:20:43.200 --> 0:20:47.080 This is a relatively when we when we start investing 0:20:47.080 --> 0:20:51.480 in the diagnostic space, reimbursement was terrible. It's now become horrendous. 0:20:52.119 --> 0:20:56.199 But one company is surviving Foundation Medicine because they have 0:20:56.240 --> 0:20:58.680 the support of roche Um, and so we think that 0:20:58.680 --> 0:21:01.879 that company and it's with their diagnostics, has a lot 0:21:01.920 --> 0:21:07.240 of potential Foundation Medicine found Eli Hasten, thank you so 0:21:07.320 --> 0:21:10.440 much for joining us. Eli Hastens, managing partner of Kasdanic Capital, 0:21:10.480 --> 0:21:15.119 focusing on the biotech sector, drug pricing, everything under the 0:21:15.320 --> 0:21:32.120 biopharmaceutical son Now let's turn our attention to some business 0:21:32.160 --> 0:21:36.080 news and bonds and bringing Brian to Patta because Brian 0:21:36.080 --> 0:21:39.160 has written a story that I think is worth everybody 0:21:39.160 --> 0:21:43.280 paying attention to. This has to do with foreign investors 0:21:43.720 --> 0:21:47.960 not necessarily loving US treasuries as much as they have 0:21:48.080 --> 0:21:51.040 in the past, and that could be a potential problem. 0:21:51.200 --> 0:21:53.280 Let's find out more. Brian, thanks very much for coming 0:21:53.280 --> 0:21:56.440 in and your patients tell us about this idea that 0:21:56.680 --> 0:22:00.320 you've got negative or you had negative yielding sovereign debt 0:22:00.400 --> 0:22:05.440 places like Germany, for example, But that's now positive yielding debt, 0:22:05.880 --> 0:22:09.840 and as a result, the lure of US treasuries might 0:22:09.840 --> 0:22:13.399 not be so intense, right exactly. Um, there are still 0:22:13.440 --> 0:22:16.200 negative yielding bonds out there, but the stack has gone 0:22:16.200 --> 0:22:19.479 down by about three trillion dollars worth. UM. So all 0:22:19.520 --> 0:22:21.560 of a sudden, you know, you have these investors that 0:22:21.600 --> 0:22:24.040 we're looking at negative yielding bonds, which you know, even 0:22:24.080 --> 0:22:27.320 just a few years ago was borderline absurd. I mean, 0:22:27.320 --> 0:22:31.320 why would you pay for the privilege of owning a security, um, 0:22:31.359 --> 0:22:33.080 all of a sudden because the government told you to 0:22:33.240 --> 0:22:35.280 in one way or another. You gotta hold something very 0:22:35.320 --> 0:22:38.280 secure if you're a bank, right because of the central banks. 0:22:38.280 --> 0:22:40.920 But um, essentially, now what's happening is more of those 0:22:40.960 --> 0:22:43.160 are turning into positive yields. And so all that money 0:22:43.160 --> 0:22:46.439 that was flooding into US treasuries because it was basically 0:22:46.520 --> 0:22:49.879 the only positive yielding option available, all of a sudden, 0:22:49.880 --> 0:22:51.960 you know, maybe those baskets are full and they say, 0:22:51.960 --> 0:22:53.960 you know, maybe now is the time to to buy 0:22:54.040 --> 0:22:57.359 some buns or buy some French debt. For example, Brian, 0:22:57.760 --> 0:23:00.880 really fascinating story. You highlight have four owners currently owned 0:23:02.200 --> 0:23:05.280 of the nearly fourteen trillion dollars of US treasuries outstanding. 0:23:05.320 --> 0:23:08.960 So this is why, uh, this dynamic is so important. 0:23:09.080 --> 0:23:12.560 Have we already seen signs of foreigners backing away from 0:23:12.600 --> 0:23:17.560 the US market to go into boon's or yet denominated bonds. Yeah, 0:23:17.640 --> 0:23:22.120 we've definitely seen some of that, especially the latest Japan 0:23:22.200 --> 0:23:25.440 data showed that there was another month of NETS selling 0:23:25.920 --> 0:23:29.800 UH in February, So that's now four straight months basically 0:23:30.160 --> 0:23:32.480 ever since November, when you know, the losses were really 0:23:32.520 --> 0:23:35.280 severe on on treasuries with the Trump win and the 0:23:35.320 --> 0:23:39.199 reflation bets UM, So there has been some selling. And 0:23:39.240 --> 0:23:41.399 the question going forward is going to be is that 0:23:41.480 --> 0:23:43.320 going to flip eventually? You know, what's going to be 0:23:43.320 --> 0:23:46.720 that trigger? Or is the prospect of you know, higher 0:23:46.800 --> 0:23:49.640 rates everywhere gonna you know, scare them off still well? 0:23:49.680 --> 0:23:52.159