D.A. Wallach – Investing in Healthcare - [Invest Like the Best, EP.166]

My guest today is D. A. Wallach, one of the more interesting investors I’ve come across. He is the former lead singer of the group Chester French and the former artist-in-residence at Spotify, where he was also an early investor. While he’s also an early investor in companies like SpaceX, his focus the last 5 years has been on early stage health care investing, which is the topic of this conversation. We discuss the entire life sciences and heath care investing ecosystem. This was recorded in the very early days of the Coronavirus outbreak so while we touch on it briefly it isn’t the primary focus, and I intend on returning to more traditional episodes like this one in the coming weeks, meant to be evergreen conversations. Please enjoy my conversation with D. A. Wallach. For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub. Follow Patrick on Twitter at @patrick_oshag Show Notes 1:31 – (First question) – Where is interest in healthcare started 4:04 – How to categorize health services 5:13 – The product of medicine 6:56 – How medicine is changing in 2020 10:17 – What is enabling innovation in medicine 12:41 – Manufacturing of solutions, gene therapy example 17:16 – Using CRISPR 19:47 – Pros and cons, and the morality of gene intervention 23:44 – How progress is being made in medical breakthroughs 26:51 – What is the business and investment world seeing on the longevity side 30:15 – What is next in the wearable medical tracking trend 33:04 – The personalization of medical treatments 34:31 – How he thinks about all of this from an investing standpoint 36:37 – Exiting these companies 39:41 – How he thinks about founders in this space 42:35 – Drug prices 42:46 – The Paradox of Pricing 46:45 – What will lead to a change in the pricing of drugs 49:05 – The delivery side of healthcare 51:09 – Investments that could improve the delivery side of healthcare 53:33 – Thoughts on the anti-interventionist line of thinking in the medical world 57:50 – Lessons from his health portfolio 1:02:33 – Other frontiers that pique his interest, including gut biome 1:06:46 – His career in music 1:08:20 – Lessons he learned during his time in the music industry 1:10:19 – Opportunities in the music industry as an investor 1:12:29 – Kindest thing anyone has done for DA Learn More For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub Follow Patrick on Twitter at @patrick_oshag

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Patrick O'Shaughnessy?

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• 0:36Patrick O'Shaughnessy?

  Hello and welcome, everyone. I'm Patrick O'Neal and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

• 0:57Speaker 02

  Patrick O'Neal is the CEO of O'Neal Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Neal Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Neal Asset Management may maintain positions in the securities discussed in this podcast.

• 1:22Patrick O'Shaughnessy?

  My guest today is DA Wallach, one of the most interesting investors I've come across. He is the former lead singer of the group Chester French and the former artist in residence at Spotify, where he was also an early investor. While he's an early investor in companies like SpaceX, his focus the last five years has been on early-stage healthcare and life sciences investing, which is the topic of this conversation. We discussed the entire health investing ecosystem. This was recorded in the very early days of the coronavirus outbreak, so while we touch on it briefly, it isn't the primary focus and I intend on returning to more traditional episodes like this one in the coming weeks, meant to be evergreen conversations. Please enjoy this conversation with DA Wallach.

• 2:04Patrick O'Shaughnessy?

  So DA, I thought a really fun place to start would be in and around 2015 with a transition from sort of music and some early investing into your keen focus now. Maybe you can describe what got you so interested in the world of healthcare and specifically in the investing in early-stage healthcare businesses?

• 2:23Speaker 04

  So I had been investing, as you allude to, in wide range of early-stage consumer technology companies, and that included most notably Spotify, which was sort of my pivot out of my life as a musician into my life investing. And I think what has always guided me is kind of a dual motive. On the one hand, looking for where you can make a lot of money, but also where you can have a great impact. And I kind of resist the term "impact investing" because I almost think all investing should be impact investing. In other words, it's not a good thing in general to be directing your power as an investor or any other kind of person at things that are bad for the world.

• 3:04Speaker 04

  So I'd been superficially interested in healthcare because obviously it's pretty central to all of our lives and our families' lives. And we all understand healthcare, or most of us do, who are 40 or under, primarily understand the healthcare industry from the perspective of a relatively healthy person. So when I initially got interested in the sector, I was kind of thinking about how terrible my experience as a sort of average, healthy patient was. And that came down to sort of the indignities of going to the doctor's office and having to wait for an hour and be treated like cattle, and then they move you into an exam room and you wait for another hour.

• 3:48Speaker 04

  So it just struck me that as a consumer technology investor, this was one sort of consumer experience that had yet to be significantly modernized. And that was kind of my door in. And the first investment I made in healthcare was a company called Doctor On Demand, which is a telemedicine service. So their product's very simple. You install an app on your phone, you open the app, and you're thrown into a video chat with a physician. And through a video conference, it's actually possible to question you about your symptoms and to diagnose a pretty wide range of conditions. And even subsequent to that, to prescribe medication without you needing to be face

• 4:33Speaker 04

  to face, or at least in person with a physician.

• 4:37Patrick O'Shaughnessy?

  What is the, you think, the major or best way to categorize early-stage healthcare investments? Meaning, is there a taxonomy? Is it biotechnology, pharmaceuticals, care services, kind of similar to how the public markets would operate in healthcare? Is there a useful way that you'd sort of divide and conquer the different types of businesses?

• 4:57Speaker 04

  Yeah, so the highest order taxonomy, I think, would be to distinguish between, call it biopharma and healthcare. So they're all integrated, but the way I think about it is biopharma refers to the products of medicine, and that would encompass drugs, diagnostics, medical devices, and potentially research tools. And then healthcare is sort of the delivery system by which we get those products to patients. And then, of course, it also includes in the delivery side, services that are provided by physicians, like surgery. So the healthcare economy can roughly be broken down in this

• 5:40Speaker 04

  way. The products of medicine, on the one hand, and then you could think of it as the stores, on the other.

• 5:47Patrick O'Shaughnessy?

  Can you walk me through the take on the product side first? Obviously, I want to cover both and go into some detail on each. The story in public markets, again, has been some incredible successes, some huge flameouts, some huge companies that were created. How do you, as a non-doctor, start to get comfortable potentially making investments on that side of the industry?

• 6:07Speaker 04

  To answer that question, you have to explode out the taxonomy even further. So then, as I said, within the first category, biopharma, or the product side, You have a huge number of subsidiary markets. So you've got drugs, as I mentioned, which in many ways is the biggest. You have diagnostics. You have medical devices. You have research tools. And then now you even have an emerging category of sort of software businesses that are increasingly involved in drug discovery and diagnostics. So each of these markets is capable of absorbing a lifetime of investing energy.

• 6:50Speaker 04

  And the deeper you go into any one of them, the finer grained your taxonomy of that market becomes, because you can slice and dice businesses within each of those subsectors quite a bit further. So one of the things I love about investing in healthcare broadly is that it really is an entire economy. You can think of it as the healthcare economy. And within that economy, there are just so many little niches. And you're always learning about more of them that you didn't know existed. So my approach has been to cast a very wide net at the first pass, but then over time to identify the particular subcategories that I'm really drawn to.

• 7:29Patrick O'Shaughnessy?

  What do you think are the most interesting ways in which here in 2020, medicine is changing? I love the opening framing of, you know, this just as a simple consumer experience still hasn't caught up with a lot of the more cutting edge consumer experiences. We're five years from that sort of initial insight. What are the most exciting frontiers for you in the future of healthcare?

• 7:50Speaker 04

  Let me go back to that initial observation because I think the distinction that it invites then is between the experience of healthcare for more or less healthy people, the experience of healthcare for people who are sick or injured. And the maybe mistake that I made when I first started thinking about the space was that it was most likely that innovation was going to happen or needed to happen in the, call it, healthy healthcare system, when in fact, the majority of this healthcare economy, as it should be, or at least as it has to be at a minimum, is devoted to the sick care part.

• 8:35Speaker 04

  And so. What are the most impactful frontiers for innovation for patients who require medical attention? My view is that the simplest of those is that we want to cure diseases. And so broadly speaking, what's happening right now is we're moving from an era of what I would consider medicine 1.0, where largely what we do is try to control symptoms of disease. And we're moving into medicine 2.0, which is all about trying to cure disease, or even better, prevent it.

• 9:12Speaker 04

  And alongside this, the other kind of meta-transformation is from a mass industrial production model, where we have one-size-fits-all products, to what people call personalized medicine, which would be a model where we tailor medical interventions and medical products to every single patient, because every one of us is unique biologically. And maybe just to zoom out even further, my take on this whole thing is that we're entering really the second great historical era of medicine and biology. So I like to point out to investors that medicine is only 200 years old, and biology

• 9:55Speaker 04

  is really only 200 years old. Humans have been around for about 300,000 years. And so to think that everything we know and have learned about life and living systems, we've learned in only the past 200 years. And I'm talking everything from the discovery of cells, to the insight that germs can spread disease, to the identification of DNA as this universal programming language for life. That's all the past 200 years. And with that understanding came this medicine 1.0 that I was referring to. What's now happening is we've had some serious breakthroughs in the past few decades around biology research tools.

• 10:35Speaker 04

  And those tools are now enabling us to learn about how life works at a totally unprecedented pace. And it's that rapid learning that is giving rise to breakthrough products and technologies that can actually be taken to market.

• 10:50Patrick O'Shaughnessy?

  Can we talk about what the principal tools are that are helping us accumulate that data? So like instantly the genome sequencing cost curves pop to mind. Would that be a good example of of kind of what you mean?

• 11:01Speaker 04

  Absolutely. So DNA sequencing has come down in cost at a pace that arguably is greater than Moore's law, which is to say that we have reduced the cost of sequencing a human genome from $3 billion when the first one was done to today as low as a couple hundred dollars. And so what that has allowed us to do is much more affordably obtain the genetic information that exists in the natural world. So not only have we been sequencing human DNA to learn about our own biology, but we've also been sequencing microbial DNA and DNA that's in our environments.

• 11:45Speaker 04

  And this truly is the programming language of life. So this is really the first time that we've been able to go under the hood at scale and see what the heck's going on. Now, DNA, unfortunately for our understanding, DNA is only the bottom layer. And the so-called central dogma of biology, one of the most important theories in biology is what's called the central dogma, which is that DNA gets transcribed into RNA, which is another type of biomolecule. And then RNA gets translated into proteins.

• 12:27Speaker 04

  And proteins are the workhorses of biology. These are the little molecular machines in our bodies and other organisms that are doing all of the stuff. And so alongside DNA sequencing, we've also been developing

• 12:43Speaker 04

  Better and better tools to look at these additional layers of life. RNA, it happens, you can look at using the same tools that you use to look at DNA. But then to look at the proteins that exist in our cells or in other natural systems, we've got tools like mass spectrometry, flow cytometry, and other basic research technologies that in the aggregate, give us this much broader and higher resolution picture of just what's going on in life.

• 13:14Patrick O'Shaughnessy?

  Maybe we could pick like a specific example where there's something that we're trying to improve or cure. We now have this rich set of new data, you know, with more coming online all the time. Who are the people then that are structuring these problems to be solved? Is it identifying patients that have certain kinds of diseases and sequencing them? And, and then trying to come up with ways of intervening and changing the health picture for that, that category of person? Like, what is the, what is like the manufacturing line look like with all this new data in mind?

• 13:46Speaker 04

  Absolutely. So I'll talk about two different examples of it in practice. The first would be the broad category of rare genetic diseases. So there are many people in the world who are born with genetic mutations, sometimes as minimal as a single letter of DNA being different in their genome. And she doesn't mind me mentioning this, so I'll, I'll use my wife as an example. She has a single mutation in a gene that is called MLH1. And this gene produces a protein, again, a protein is like sort of a molecular machine. And what that machine does in every single cell of her body

• 14:30Speaker 04

  is fix mistakes when the DNA is copied as cells divide. So the cells in your body are dividing all the time, particularly tissues like the lining of your GI tract are turning over at a pretty rapid rate. So six months from now, the cells that will line your intestines are different cells that were there six months ago. And so as this cellular replication is constantly occurring, there's a process that basically goes and does spell check. And in my wife, in every cell in her body, this spell check machine is slightly defective. Well, what does this mean? Over a lifetime, it stochastically increases the probability

• 15:14Speaker 04

  that mutations will occur in her DNA. And at some point, it's very likely that one of those mutations will endow the cell in which it occurs with a significant evolutionary competitive advantage, AKA cancer. And cancer is interesting. She's a fascinating case, my wife, because not only does she have this genetic defect in this MLH1 gene, but what that will lead to is a genetic disease, cancer. So we've actually made a lot of progress in the past couple decades using DNA sequencing to deliver benefits to both patients with genetic diseases and cancer patients.

• 15:58Speaker 04

  So in the case of patients with genetic diseases, there are multiple new approaches to remediating those genetic abnormalities. And if, again, you take my wife's example, what we would like to do is have a way of either fixing her DNA so that we could edit that mutation out of it. But if you think about it, she's got trillions of cells in her body. It would be very hard to edit the DNA in every single one of those cells. And so the most promising option for someone like her might in the future be that if she was conceived using IVF,

• 16:39Speaker 04

  perhaps we could edit the DNA when she was only a few cells, because that would be a tractable number of targets for us to go and hit. Downstream of that, once someone is a fully grown person with trillions of cells like she has, then the question is, is there any way to sort of remediate it in a less fundamental way? So, for example, what actually results from her mutation is that she has a smaller number of the machines that she needs. In other words, in a normal person, you'd have 100 of these spell check machines. In her, you only have 50. And so what if we could use a virus

• 17:21Speaker 04

  to go and introduce RNA into some number of her cells that codes for the functional version of this machine? And then her cells would sort of manufacture

• 17:36Speaker 04

  Using the blueprint of that artificially introduced nucleic acid. So that would be an example of a gene therapy. And that's a whole class of treatments that people are now exploring.

• 17:49Patrick O'Shaughnessy?

  It's an unbelievable thing to even try to think about, like how we could be intervening at the cellular level. I'm sure some people listening will think about things like CRISPR technology as another major technological advancement in the world of medicine that I think is still in its very early days. Maybe you could talk about something like that and where that fits in sort of this schema that we're starting to build here.

• 18:12Speaker 04

  Sure. Since I'm here on Invest with the Best, maybe I'll sell my own book a little bit. I just thankfully was a part of an IPO about two weeks ago in a company I backed a couple of years ago called Beam Therapeutics. And Beam has developed a next generation version of CRISPR. So some of the folks who invented CRISPR are founders of this company Beam. And the difference between CRISPR and what Beam is doing, which they call base editing, is that what CRISPR does is it sends a machine into your cells and it cuts your DNA. So your DNA, as you probably will find familiar, has this double helix structure.

• 18:56Speaker 04

  And the virtue of that double helix is that the same information is on both sides of the ladder. So what you do with CRISPR is you send a machine in that cuts the DNA, cuts both strands, and then your cells actually have a bunch of machines for repairing that break that you artificially introduced. And when they are repairing the break, they can introduce and edit like some new DNA that you'd like to impart there. What this alternative technology Beam does is rather than cut the DNA, it sends a machine into your genome and it latches onto the genome at a specific location where you've

• 19:40Speaker 04

  told it to go. And then it enzymatically transforms a single letter of DNA into another one. So it's sort of a lighter touch way to go and transform a single point mutation. Now, as I mentioned, there are lots of patients like my wife where that's all you need to fix is a single letter. Looking forward over the next 100 years, what we are hopefully going to be chasing is the ability to edit much more complex genetic diseases where multiple different genes are involved. And in order to fix a disease phenotype, you're going to need to go and make multiple edits.

• 20:21Patrick O'Shaughnessy?

  I'd love to talk through the life cycle, literally, of some of these ideas. You mentioned this notion of potentially editing at conception or pre-birth, which sounds both exciting and somewhat scary. And I'd love you to talk through how you've explored sort of the ethics, the morality, the trade-offs of that potential sort of intervention in people. And whether or not you think it's too slippery a slope, meaning everyone's going to decide, you know, they want blue-eyed, beautiful, whatever, children and adjust things early as such. Just walk me through your thoughts there on the pros and cons.

• 20:56Speaker 04

  Well, it's a very complex ethical space. And people have been talking about it long before this technology was even within reach. But of course, to your point, now it's kind of important that we give this serious thought. And I see both sides of it. I think the first point I would make is this technology should, as we develop it, first be put to the use of helping people who are obviously suffering. So there are set of applications for gene editing, for instance, that should just be ethically totally without controversy. I would include my wife's disease in that.

• 21:39Speaker 04

  I mean, neither my wife nor I thinks that it would be exciting for her to get cancer at 40. But yet, without us doing anything to prevent that, she has an 80% plus chance of that outcome. So First off, we should start by thinking about where we can point this stuff, where it's going to really help people in ways that are totally non-controversial. Then you move into more complicated possibilities, and that would include the selection of embryos or the editing of embryos. As a very personal example, I'm a couple of weeks away from being a father for the first time,

• 22:19Speaker 04

  and the daughter that we're going to be having is actually a product of some amazing medicine, because we were able to use IVF to select an embryo that was free of the mutation that my wife bears. Wow. So, in theory, half of my wife's eggs have the DNA in them that includes this mutation. Half of them didn't. And so, as a miracle of IVF, we were able to fertilize a number of eggs outside of her body in a lab and genetically sequence all of the resulting embryos. And then we chose to implant in her an embryo that we knew was free of the mutation.

• 23:04Speaker 04

  And so, I sort of use this as a poignant case study of the past, present, and future of medicine. My mother-in-law was actually the one who led us to know about this mutation in my wife's family when she got two very advanced cancers in her mid-40s. And thankfully, some breakthroughs in the pharmaceutical side of things have, we hope, saved her life, but at a minimum have extended her life for many, many years. And so, in that generation, my mother-in-law, we have benefited from breakthrough medicines. Then in my wife's generation, that led us to know about this mutation. And as a result, we were able to get out in front of it,

• 23:49Speaker 04

  and she gets annual screening, like annual colonoscopies, among other things, to make sure that if she gets cancer, we detect it so early that we can put a lid on it. And then you move down to this third generation. Our future daughter, and that is truly preventative medicine. That is the, the real future of medicine, which is to say, stop people from even getting diseases in the first place. That's the most elegant possible intervention we could achieve.

• 24:17Patrick O'Shaughnessy?

  I mean, it's an absolutely remarkable, remarkable story and, you know, makes me very happy to hear it. It is remarkable, there's no other word for it, that we're able to do that. And it sounds like we're at the cusp of the ability to, for there to be a lot more examples like this and a lot more types of cases. How broadly prevalent is that? Are there major areas that you feel we're closest to making major strides? Like, obviously, cancer is something that everyone will, will have had some experience with. How broad is this kind of progress?

• 24:50Speaker 04

  Sure. Well, it's a good segue into how the technology moves from basic biology research that's happening in universities to ultimately big public companies, be it new biotechs that have gone onto the public markets, or the large pharma companies that ultimately buy those that are appealing. And this can be a very long process historically. There are products that are now coming onto the market, delivering absolute breakthroughs for patients, whose histories go back 20 or 30 years to some esoteric lab somewhere.

• 25:29Speaker 04

  And I guess the argument I would make is that the initial scientific breakthroughs are quite unpredictable. The National Institute of Health in the United States, which finances a lot of basic research in universities around the country, is putting billions of dollars a year into basic research. And brilliant scientists are following their own muses to explore nooks and crannies of biology that they think might yield some breakthroughs. And occasionally, thankfully, these days, more frequently than in the past, they are stumbling upon amazing insights.

• 26:10Speaker 04

  So then the next step is how do you take those basic insights or breakthrough technologies from a lab and actually commercialize them ultimately so that they can reach patients?

• 26:23Speaker 04

  And what we've seen happen in the past 10 years is a total renaissance in cancer biology. And then as a result of it, some, as I mentioned, really remarkable new products coming onto the market like the one that my mother-in-law has been on. So I think the answer to your question is that we all have to follow where the biology leads us. In the past decade, that's led the markets into an obsession with immuno-oncology, which is to say, using the immune system as a tool to fight cancer.

• 27:04Speaker 04

  And that has resulted in, at times, perhaps, an overly single-minded focus on the part of investors and big pharma companies on trying to back or invest in competitive new products in that field. But the biology will not stop there. It's going to lead us into other spaces and you've got to go where it takes us.

• 27:24Patrick O'Shaughnessy?

  We've talked a lot about treatments that might help people that most acutely need it and sort of the non-controversial, as you put it, things that obviously, forms of suffering that we would want to alleviate. Another fascinating category is, I guess I would borrow our friend Peter Attia's term health span, this sort of notion of longevity and the quality of life during the years that you're alive and the breakthroughs on that side of the equation. I'm curious, from a company and investing standpoint, what your thoughts are there? Is there equal attention being paid to ways that, you know, basically normally healthy people take action or buy a product or service to make their health span or lifespan improve?

• 28:05Speaker 04

  It's a great question because in addition to the healthcare market, what you're alluding to is that there's also a massive, what people now call wellness market. The distinction being that in healthcare, at least in the United States, the patient is not the customer. In other words, when you go to the doctor, almost always, you're not going to be paying the bill, your insurance company is going to be paying the bill. So most of the medical industry that I focus on,

• 28:34Speaker 04

  Is the part where the patient is not actually the direct customer. In the wellness space, by contrast, the patient is spending their own money out of their own wallet on things like gym memberships, or smoothies, or Pilates, or wearable fitness trackers, and those sorts of things. And of course, people are doing that, not just to show off, that's part of it, but they're also doing it because they genuinely believe that these products are going to impact their health and the happiness of their lives. I think the question is, how much potential is there for technology

• 29:16Speaker 04

  to take us beyond what we can achieve by sleeping well, eating healthily, and exercising? And we know that doing those things is really good for you. So if you just do those things, you significantly juice your chances of living a long, healthy, happy life. Now, there are a class of products that are there to potentially help us do those things better. So for example, inspired by Peter, I wear a continuous glucose monitor, and this is literally plugged into my body, I wear it on my upper arm, and it is measuring the amount of glucose in my blood in real time, all day, every day.

• 29:57Speaker 04

  And I do that, not because I'm diabetic, which is the proposed use of this product for most people, it's because I love sweets. I love ice cream, and cookies, and whatever. And so it's actually helpful for me to be measuring this because it's like being supervised by a teacher or something, you know? There's a consequence that I see in the data when I look at it every night that kind of punishes or rewards me for how well I adhere to my goals. So that would be an example of something in this sort of wellness and longevity space that is not paid for by the mainstream medical community for non-diabetic patients,

• 30:41Speaker 04

  but yet, I as an individual have decided, I think is going to help me live a healthy life. You know, I'm spending money on that out of pocket.

• 30:48Patrick O'Shaughnessy?

  It's an interesting place to apply the William Gibson idea that the future's here just not evenly distributed. So you and people that are at the forefront of kind of healthcare, both investing and technology, are aware of and use some of these products. Obviously, the average person is not. I've worn the heart rate tracking like rings and wristbands, but never worn a glucose monitor. But but it seems like the trend is towards more and more constantly measured data that lives in or on our bodies. And I'd just be curious to hear your take on what the next, say, five years looks like for that set of technologies. What will we be measuring? How invasive will it be? A heart rate and blood glucose are two examples.

• 31:30Patrick O'Shaughnessy?

  I'm curious what else is sort of at the forefront of this, we'll call it like measurable trend and revolution in wellness.

• 31:37Speaker 04

  A couple of the things that people are also looking at measuring, in fact, we're already doing it, would be ambulation. So you know, how you walk, what your gait is like. You can imagine facial expression and body movement being very interesting. Facial expression, for instance, might provide early indicators of neurodegeneration. You could see almost imperceptible droopiness in a face, for instance, or biomarkers like that that otherwise we wouldn't detect until much later on. Voice, it turns out, is pretty interesting. You know, our voice contains a lot of information about our emotional state. How much variance there is in the pitch of our voice may be a clue as to whether we're depressed or not at a given moment.

• 32:20Speaker 04

  So the things I just described, you could already measure with the technology that's in your cellphone. I think as a blueprint to where this whole sort of quantified self-movement goes, I would refer to my friend Eric Topol's formulation, I think 15 years ago, which is that the model we should be pursuing is essentially that of a car. A modern car today has all of these sensors in the engine and the tires for pressure and the brakes and everything. And as something starts to go wrong, something lights up and tells you, hey, you should go check this out. Today, we largely have a reactive approach to medicine. You don't typically go into the doctor and the doctor doesn't typically do anything

• 33:04Speaker 04

  for you unless you're already noticeably sick. And biology and disease are so complex that once a condition has gotten to the point where it's obvious that you're sick, it's likely to be much harder to put back in the box than if you had identified it at its earliest onset. So in a lot of ways, I think that's the most exciting potential for this kind of personal monitoring is very early detection of progressive disease.

• 33:38Patrick O'Shaughnessy?

  Is that the most significant way that you think your earlier notion of personalized medicine gets deployed, meaning it's really a series of sensors for early detection of issues? Or is personalized medicine more even further upstream of that, some sort of intervention based on particulars of the individual, whether that's consumables or some other lifestyle changes in order to prevent future diseases?

• 34:04Speaker 04

  Well, it could be both. I think where those two possibilities connect is that in order to usefully identify deviation from "healthy" for each of us, you first need to have a baseline understanding of what we look like when we are healthy as individuals. So Google, among others, has been undertaking a huge research project, theirs is called Project Baseline, where they've taken, I think, as many as 100,000 people and measured all kinds of biomarkers in them, I think every few months now for several years. And the purpose of that study is to get a sense for multiple individuals of what the

• 34:48Speaker 04

  healthy values look like across a range of biomarkers. Because what we all need is essentially this baseline profile and then, as I mentioned, alerts that are able to identify deviations from those baselines.

• 35:04Patrick O'Shaughnessy?

  Once that baseline is established, how you think about this from an investing standpoint? So maybe it's a good time to transition more away from the big themes and towards your specific process. So you're deploying capital, trying to earn a return. Obviously, there's an ancillary benefit in this style of investing of making such a large impact, to your point on impact investing. But talk me through that kind of funnel process of how you think about the pool of capital that you're trying to deploy, what the funnel looks like as you analyze potential investments.

• 35:34Speaker 04

  What we've been talking about so far are these big lofty visions about what the future looks like. And as an early-stage venture investor, I think it's important to do those explorations because you need to have a sort of north star that orients you towards the opportunities you encounter. So when I think about this future, in fact, the distant future in many ways is much easier to predict than the proximate future. So I have no doubt that in 100 years, we're going to be broadly applying genetic editing technologies. I have very little doubt personally that assisted reproduction through technologies like IVF is in fact going to become much, much more pervasive than it is today.

• 36:19Speaker 04

  I'd even go so far as to suggest that I think there's some chance that a majority of babies born 100 years from now will have been born as a result of reproductive technologies. And furthermore, I think it's very likely that we're going to cure some of these very stubborn diseases like cancer. So those are all future things and with it, all of this quantified self and monitoring and everything. Now, in the nearer term, as a in-the-field investor, the question is, how are you going to make money over the next five to 10 years, which is the time horizon that we play in as venture investors, funding private startups? And when you ask that question, I think the starting point has to be

• 37:04Speaker 04

  Asking what the exits for these companies will be. It's much easier to get into venture investments than it is to get out of them.

• 37:11Patrick O'Shaughnessy?

  Never heard it put quite so simply. I love that.

• 37:13Speaker 04

  The returns you generate are a function of how you exit the investments. So when we talk to entrepreneurs, we're very transparent about this. I mean, we're not suggesting that we are engaging in quick flips here. Our goal is to build startups to the biggest version of what they can become as quickly as possible. And if they've got amazing ambitions, let's go for it. But still, ultimately, our returns are going to come from the exits. So in the markets that we play in, a lot of the exits are ultimately driven by big pharma. And so the first question is, over the next five to 10 years, what is big pharma going to need to buy or develop to remain competitive?

• 37:58Speaker 04

  That's a great segue into just a quick capsule history of the past 20 years in pharma. You have these huge global multinational pharmaceutical companies who have massive incumbent advantages. And one of their big advantages used to be that they employed each of them thousands or tens of thousands of scientists whose jobs it was to develop new drugs. And the impetus for this was that big pharma companies have portfolios of products, but most of those products have expiration dates that correspond with the patents that they own on those drugs. So a typical pharma company has this portfolio of products and they know a priori the expiration dates of those products

• 38:43Speaker 04

  and they can pretty well estimate how much revenue they're going to lose when they hit those patent cliffs. And so they have an inescapable need to replace expiring products with new products. As I mentioned, they used to do that by trying to develop the next great drug internally. And they would try to invent these products from the very earliest stages. So they might collaborate with academic scientists in universities and then immediately try to translate their discoveries within the company. Or they might even try to discover basic biology de novo internally. What has happened over the past 20 years is that all of the big pharma companies,

• 39:27Speaker 04

  almost 201, have divested from internal research and development, especially at the early stages. And they have all pivoted to a model of buying startups, either from the private market or biotechs from the public market. This is the seismic shift in our industry that has created a structural opportunity for venture capital that didn't exist before, because we now have essentially a forced buyer that every year is purchasing $20 to $30 billion worth of startups. And there's no reason to expect that they're going to stop needing to make those acquisitions. So as investors, what we think a lot about

• 40:08Speaker 04

  is how do we build the things that they're going to need to buy in order to remain competitive?

• 40:14Patrick O'Shaughnessy?

  Talk to me about the founder set in this part of the venture ecosystem. I would expect that as doctors and researchers would dominate the founder ranks, which is very different from your typical technology startup. So what's unique about how you think about founders in this case?

• 40:32Speaker 04

  It's very unique. And you're right, most of the originators of the technologies we look at are either physicians or academic scientists. Now, one of the things that's unique about those inventors is that they've got great jobs already. So many of the academics are tenured faculty members at great universities. And their mindset is they want to invent stuff. Yes, they'd like it ultimately to reach patients and have an impact. But many of them are not trying to leave their jobs and start a company. And so you, in many cases, have a situation where the inventor of a technology is not actually going to

• 41:13Speaker 04

  be the entrepreneur. Maybe they will be at the very early stages, but pretty quickly, it is often the case that someone else is going to take a technology and run with building a company. And that will very often be the person who we first encounter. They may continue to work with the inventor, and that physician or scientist is probably going to remain on the scientific advisory board of the company, or maybe even be a chief scientific officer. But as I said, they're not usually going to be the CEO. What that has led to in the venture capital market in life sciences is that many of the best investors in the space, and almost all of them are in Boston and San Francisco.

• 41:56Speaker 04

  So let's get to that in the future, but I'll start by making this point that they're very geographically concentrated. And what they are largely doing today is, as venture firms, they are trying to build companies around technologies. So these investors will find a really cool piece of intellectual property at MIT, or at Harvard, or somewhere like that, or Stanford. And then they will recruit entrepreneurs from their rolodex of experienced biopharmaceutical business people, an initial founding team, and they'll water it with money and create something from scratch that they, the investor, oftentimes own 80% or 90% of from day one.

• 42:37Speaker 04

  Now, the investing that I primarily do is a different model. I require that when we're going to back someone, there is not only great technology, but also a great entrepreneur, and that that entrepreneur has a lot of skin in the game. And so I, in fact, want them to own a significant amount of the company because I want their future fortune to depend on it. And in some ways, this is an older form of venture capital in biotech, given how popular this venture creation model has become.

• 43:08Patrick O'Shaughnessy?

  You mentioned the kind of changing nature and, obviously, importance for the style of your investing you're doing of the large pharma companies. It brings to mind an essay, I think, that you put up just this year called "The Paradox of Pricing," part one, around drugs. I'd love you to walk the audience through your exploration there and sort of what is going on with drug prices.

• 43:28Speaker 04

  Well, the starting point for that essay is that if you've been watching the Democratic primary debates, for folks in the future, this is the year 2020. And so there's been a very diverse field of Democratic candidates vying for the nomination. And one of the consistently hot topics has been drug pricing. So you've heard over and over again about these big evil pharmaceutical companies charging hundreds of thousands of dollars for treatments. Within that, there are at least two issues. One of them I'll just briefly address, and that is that some of the new breakthrough drugs that are coming out have very, very high cogs.

• 44:09Speaker 04

  So as one example, there are cancer cell therapies today where you actually use a patient's own immune cells as a drug to treat them. These are effectively nano robots. And this is the most advanced human technology in the universe. So making a dose of this product for a patient might even cost up to $200,000 or $300,000 cost. That's before you think about the pharmaceutical company trying to recoup all of their research and development investments that led to the marketing of that product. And so indeed, some of these breakthrough new drugs have been charging price tags that on the surface appear outrageous, like a million dollars a patient.

• 44:51Speaker 04

  But in fact, are much more reasonable, I think, if you put them in their proper context. And also if you consider the fact that 20 years from now or less, they will become generic, their patents will expire. And those products will become very inexpensive for all people in the future. So we are essentially by paying up today, giving a gift to people in the future. But the second issue is that drug prices have been driven up and up on drugs that are not that new or innovative, including drugs like insulin that are taken by type one and type two diabetics. And everyone has been trying to point the finger at the pharma companies or at the insurance companies.

• 45:30Speaker 04

  But what I describe in the essay is that there is a whole mess of incentives that is leading these prices to go up. And in fact, what is going up Is not the price that is truly the market price of the drug. So what I talk about is that for any given drug product that you might go to the pharmacy and buy, there are in fact multiple prices that you have to consider throughout the supply chain. And the most basic of these is that the pharmacy is paying a certain price from a wholesaler to buy that drug. Then they are selling it to you at what is called a list price.

• 46:14Speaker 04

  Rather, they're selling it to your insurance company. So the pharmacy is getting paid an amount called the list price from your insurance company. And then your insurance company is being paid a rebate that they have negotiated with the pharmaceutical company that made that drug. So it may turn out to be that you go to the pharmacy and you buy a drug where the list price is $100. Your insurance company gives $100 to CVS for that drug. And then the pharmaceutical company gives your insurance company an $80 rebate. And so that brings up this second price, which is the net price, which is to say the actual net cost of the drug to your insurance company.

• 46:58Speaker 04

  What has been going on is that the list prices have been charging up and up and up every year, but so too have the amounts of these rebates. So in reality, the net prices of drugs have not been going up very dramatically, but it looks like they are because these list prices keep going up.

• 47:18Patrick O'Shaughnessy?

  The complexity raises, I think, a key question, which is whether or not you believe kind of this entire system where the insurance provider is sort of in between the consumer and in many ways blinds the consumer to the actual cost of what's going on here. Like, I would have no intuition about what any drug I've ever taken, an antibiotic all the way to something more specialized, would cost to manufacture. Like, it just seems so incredibly opaque and that there isn't perhaps the benefits of a true marketplace or price discovery in healthcare. How true is that? How far away are we from what would maybe be an ideal market environment that produced more innovation? I would just be curious more of your thoughts here.

• 48:03Speaker 04

  So I think there are multiple issues within that. One of them is this issue of price discovery. And that's where the opaqueness and the complexity of the supply chains really gets in the way. So I think you're correct. There is very limited price discovery in healthcare as a general statement. Beyond that, there are also a lot of monopolies. And some of those monopolies are driven by patents. So when the FDA approves a new drug and there are patents on that drug, not only does the patent provide a competitive moat for the drug developer, but the FDA's approval comes with market exclusivity, which is another

• 48:42Speaker 04

  form of a legalized monopoly. We have established these legal monopolies in the drug market for the purpose of incentivizing people to develop drugs that don't yet exist. And we have indeed succeeded at creating that incentive, although it's not perfect. And we are missing the incentives to develop, for example, much better anti-infectives. So right now, as you know, we're in the midst of this coronavirus pandemic. And one of the things that that reflects is that we have under-invested in infectious disease prevention, monitoring, and pharmaceuticals. And part of that results from the lack of

• 49:23Speaker 04

  incentives for entrepreneurs to develop new types of antibiotics or anti-infectives. The other type of monopoly, though, that exists is among healthcare providers. So maybe this is a nice foray into the world of the sort of delivery side of healthcare. The chief culprits in our cost disease in America, I believe, are hospitals. And you can look at many hospitals as essentially being local monopolies. So the dynamic that drives hospital pricing is very often that there's an insurance company that would like to offer an insurance, a health insurance product in a given geographic market. So

• 50:04Speaker 04

  they go to Madison, Wisconsin, and they say, you know, we would love to launch an insurance product here. In order to offer a product that patients are going to want, or that employers are going to want to choose, they need to build a quote-unquote "network" of service providers, which is to say, if you have this insurance, here are the people you can go see. Here are the hospitals you can go to. Here are the doctors you can go to, that we will cover. What establishing a network requires is for that insurance company to go and do deals with all of those providers. So they go to the hospital and they say, we would like to be able to send patients that we insure to you. Let's negotiate all the prices

• 50:46Speaker 04

  for which we will reimburse your services. And in that negotiating process, the respective leverage of the insurance company and the hospital will drive the level of prices.

• 50:59Patrick O'Shaughnessy?

  Right.

• 51:00Speaker 04

  So in many small towns or cities, there might only be one hospital. And what that means is that any insurance company who wants to offer a product there is going to have to play ball and is basically negotiating with the counterparty who has all the leverage. Because if the insurer doesn't accept the prices that that hospital is offering, get lost, get out of the city. You don't need to offer a product here and you can't. So these are the sorts of things that have led to our sort of cost disease. Legal monopolies, absence of price discovery, and de facto monopolies resulting from geographic control of markets by hospitals.

• 51:41Patrick O'Shaughnessy?

  What do you think the innovation future looks like on the healthcare delivery side? So we've talked mostly about on the sort of product side, I guess I would call it. And I'm curious how different you think the future will look on the delivery side. I loved a podcast that Russ Roberts did with, I'm blanking on the gentleman's name, but who ran basically like a totally transparent surgery center, I think somewhere in the Midwest. And the basic model seems so clean that he was offering incredibly satisfied customers, lower prices with a lot more transparency. And I found myself wishing that that model had been replicated. So far it has not been. But I'm curious how you think about that side of things and whether or not that is also an investing funding opportunity to

• 52:25Patrick O'Shaughnessy?

  improve the experience or the delivery of the care.

• 52:28Speaker 04

  So we're always looking at it and thinking about it because obviously the delivery of care is where all of this medical innovation ultimately touches patients. So it would be a tragedy if we had this renaissance in medicines and yet a total sclerosis in the way that we deliver that medicine. That being said, I'm a little more sober on the healthcare delivery market. Given that your audience here includes all kinds of investors, I would say I think it's a great place for private equity or growth equity. And the reason for that is that by and large, the healthcare delivery system is filled with very stable, profitable businesses.

• 53:11Speaker 04

  And unfortunately, I think it's a safe bet that most of them will be charging higher prices a year from now and five years from now and 10 years from now. This is the problem with our system, which is that almost everyone in it has an incentive to raise prices. And so I think my sort of sober pessimistic take is that if you're just a cold-blooded capitalist, healthcare delivery is a great place to buy operating businesses because they're very stable and they're likely to grow. On the innovation side, where I play in the products of medicine is much more exciting because, as I described, with pharma's need to reinvent itself, you have this constant

• 53:55Speaker 04

  pull that leads entrepreneurs to be able to build very large companies very quickly. And it's really, really difficult to do that on the healthcare delivery side.

• 54:06Patrick O'Shaughnessy?

  What about on the, on back on the product side? This notion of, I think Jacobs Taganga, I think is his name, calls it medical nihilism, which is this idea that there really aren't that many things that actually are super effective when we're trying to intervene, you know, antibiotics being maybe an obvious exception that work incredibly well. Any thoughts there on that line of thinking, sort of the anti-interventionist line of medical thinking?

• 54:29Speaker 04

  By and large, I think it's wrong because there are patients like my mother-in-law today, whose lives are being saved definitively by amazing drugs without which they would die. So to folks with that point of view, I'd say go talk to those patients. That being said, there is such a thing as over-treatment. And it's in fact, one of the problems with our system is that we significantly over-treat people who maybe don't require it. So a great example would be back surgeries. There is a huge over-use of back surgery in America. And many of these studies have demonstrated that a large percentage of patients who get

• 55:09Speaker 04

  back surgery would essentially do as well or better with consistent physical therapy. So that's an example where we're spending a lot of money intervening where we shouldn't be. The same is true also of, for example, prostate cancer. So we test people for prostate cancer, and unfortunately, our testing is not all that helpful. So a large percentage of the prostates that we biopsy come back with a result that is sort of ambiguous as to whether or not we should operate or not on the patient. It's probably the case that a lot of those operations are unnecessary and that they

• 55:49Speaker 04

  actually cause more harm than good because they leave the men who receive them with incontinence or erectile dysfunction or other problems that they didn't have. And the slow-growing cancer that they may have would not have killed them before something else would have. So I do think it's reasonable to ask, where are we over-deploying medicine? And in those instances, obviously, we should do less of it. But again, I believe in this future where we're going to be collecting a lot more information. We're going to be doing all this kind of ongoing monitoring of people. And in that paradigm, hopefully, what you'd end up with is a dynamic where we look at everything, but we treat less.

• 56:34Speaker 04

  And one of the risks of that constant sensor approach is that it may lead us to over-treat. So in diagnostics, there are these confusing concepts of sensitivity and specificity.

• 56:49Speaker 04

  Sensitivity refers to the percentage of patients with a disease who you test and will successfully detect. So if 100 people walk in with a disease and you have a sensitivity of 70%, you will detect 70 of those people and 30 of them, you will give false negatives. Specificity, on the other hand, refers to the true negative rate, which is to say if 100 people come in who don't have the disease and you have a specificity of 70%, 70% of those people you will correctly say do not have it, 30% of them you will incorrectly say have it and be given a false positive to. We're starting to see very well-funded companies roll out what are called liquid biopsies.

• 57:33Speaker 04

  These are blood tests that are aiming to detect cancer very early in the bloodstream. And one of the problems that we're really worried about with these tests is that if the specificity is not high enough, then we could have a very dangerous false positive rate. In other words, imagine next year that 300 million Americans get tested and there is even a 99% specificity. I mean, that sounds great, but it means that one out of every 100 people we test, we're going to be giving a false positive to. And then we're probably going to go and spend a bunch of money doing biopsies on them or putting them through CT scans or even giving them unnecessary surgeries.

• 58:17Speaker 04

  And so that's why it's really important to always pay attention to the potential for overdiagnosis.

• 58:23Patrick O'Shaughnessy?

  I've often on the podcast used this, this fun idea from Nassim Taleb of, don't tell me what you think, tell me what's in your portfolio. And I'd love to tweak that question. Obviously, whatever you answer is not medical advice or advice really of any kind, but just to ask for any other examples of changes in your own personal or your family's behavior as a result of everything that you've learned. So the glucose monitor is a great example of something that you're doing that very few people are doing, probably in large part due to your, your research and, and learning in this space. Are there other things in your sort of quote unquote, "health portfolio" that you do that you think are interesting?

• 59:00Speaker 04

  Well, I'm, I'm not a super nut here. I wish I were healthier than I am and I wish I exercised more than I do. I try to exercise every day. I've got a Peloton now and I ride that thing for 20, 30 minutes in the morning when I get up and, you know, having it right near my bed makes it really easy. I don't have any good excuses. The glucose monitor is interesting. I think the one that is very obvious to me, but not widespread, at least among older generations, is I've basically stopped drinking. I mean, there's just no question that alcohol is not good for you. So notwithstanding that there are, you know, various antioxidants and all these kinds of things, there are other ways to get the good parts of wine.

• 59:44Speaker 04

  And, you know, I find that not drinking really helps me with my sleep. And I think there's probably a lot of, it's a known carcinogen, you know, in sufficient quantities. So probably, you know, abstaining from alcohol over time is helpful on the cancer front. And so, you know, I think you can probably have a pretty big impact on your long-term health by not drinking.

• 1:00:07Patrick O'Shaughnessy?

  Yeah, it's an amazing one. That seems to be a rising trend, especially among younger people. You even see startups that are doing sort of alternatives to alcoholic drinks. It's kind of a fascinating thing. And wearing the, uh, the Oura ring, which is what was my way of measuring sleep for a while till the damn ring broke. That was the most interesting finding was even like a glass of wine would spike my heart rate, um, sleeping overnight and the quality would be crap. It's pretty amazing.

• 1:00:31Speaker 04

  Well, we got, and the Oura ring is great, by the way. I'm sorry to hear it broke. So we got to get you a new one. I'm, I'm an investor in Oura.

• 1:00:36Patrick O'Shaughnessy?

  Okay, good. So I got an, I got an inside track.

• 1:00:40Speaker 04

  We'll make sure you're handled on that front. And I invested in that. Actually, it turns out with a, a fund that I am an advisor to, Will Smith's Venture Fund, which is called the Dreamers Fund. We love that product because it sort of straddles these worlds of consumer wellness and healthcare.

• 1:00:57Patrick O'Shaughnessy?

  Totally.

• 1:00:57Speaker 04

  It's, it's great data, but you know, folks like you are buying that with your own hard-earned money. And I, I think it's a great product.

• 1:01:05Patrick O'Shaughnessy?

  Yeah, it, it, as I was using it, it was phenomenal. Um, I've certainly seen them start to pop up. I, I would imagine that other, you know, hardware companies, maybe Apple most, most obviously, would, would get into ever smaller measurable, uh, wearable devices. And that's very exciting because obviously it gives you a, a wealth of data about things that you can do better. A tighter feedback loop for health is, I think, what's missing for a lot of people.

• 1:01:27Speaker 04

  I think that's right. And, and, you know, one of the points I'd make that I think is, is boding well for healthcare. And it's part of why I jumped into it with my weird background as a artist and all of that. 10 years ago, or let's say it's 15 years ago to be safe, I don't know if any public market analysts would have predicted that the biggest entertainment companies in the year 2020 would be Apple, Amazon, Netflix, and Google. And yet, that's the world we live in. And I think in our space as well, in healthcare, you see the same things on the horizon. If you look at where Google is investing, they have a venture capital fund called Google Ventures.

• 1:02:11Speaker 04

  As I understand, 60% of their investments last year were in healthcare and life sciences. If you look at what Apple is doing, both with the AirPods and the watch, they're trying to get closer and closer to your physical body such that they can measure things that are going on, including, for example, your voice with the AirPods. And the Apple Watch even explicitly now has an FDA-approved heart application. Google bought Fitbit. So what you can see is that these large public technology companies are internally looking out at the future and they're saying, what are the big next markets we can go after? And healthcare is the first answer for all of them. Same goes for Microsoft, by the way.

• 1:02:55Speaker 04

  So there is basically, in my view, a consensus among the smartest minds in technology that the next major waves of innovation are going to be in healthcare and biotech. And that's why they're placing their bets there.

• 1:03:06Patrick O'Shaughnessy?

  What major categories have we missed? So like, one idea that just as an example that pops to mind would be like the gut biome and the exploration of, maybe along with your friend Eric's work, I know that was kind of a part of some of the things he had investigated. That seems like an entirely new medical frontier that no one even knew what that meant five years ago for most people, but now seems to be a popular category. Is that of interest? And if not that example, have we missed anything else major that you spend a lot of your time on?

• 1:03:34Speaker 04

  Well, that's a fascinating one. So we can talk about it for a second. I mean, The short answer to your question is there are dozens of these frontiers. And I can go on and on about all of them. But the microbiome is a really interesting one because I think for investors, it sort of begs this question of timing. As you put it, you know, this is really a frontier. It's as if we've discovered a whole new universe of biology. And the short of it is that we've now learned that within our bodies and on the surface of our bodies is a enormous ecology of non-human microbes that we have cooperated with in evolutionary history. They live on us and in exchange, they do stuff for us.

• 1:04:19Speaker 04

  And that stuff probably includes aiding in our digestion and even manufacturing essentially drugs in our gut that get absorbed into our bloodstream and do all kinds of essential things in places as far from there as our brains. Go figure. So this is like this whole new universe. We're throwing the kitchen sink of research tools at it to try and quickly figure out what the heck's going on. And that's where the DNA sequencing comes into play, among other tools. And you've also, in the past five years, seen a number of very well-funded startups arise that are promising to leverage this new universe to create novel types of drugs.

• 1:05:02Speaker 04

  So one approach to this would be to use bugs as drugs. So could patients swallow a pill that includes bugs that they're missing in their gut, without which they may be deficient in certain functions? And so there are companies working on that. Now, my perspective is that it's probably a little bit early in the science. People might be jumping the gun a little bit on the technology. I learned a lesson about this the hard way. My mom was in the investment industry. She built 401K businesses for large insurance and mutual fund companies. And when I was 12 years old, my first lesson in investing...

• 1:05:44Speaker 04

  Was she gave me a thousand dollars in a Schwab brokerage account and she said I could buy whatever I wanted. I bought two stocks and they were both far ahead of their time, I think, but nonetheless huge mistakes. The first was Iridium, which at the time was trying to put satellites all around the world so that we could have global cellphone and ultimately internet coverage from space. Turns out 30 years later, I'm an investor in SpaceX and Elon's trying to do this. And now it may actually be the right time because the technology's gotten there. The other funny connection to Elon's entrepreneurship is that my other investment

• 1:06:23Speaker 04

  was a company called Zap and they were a San Francisco company that made electric scooters. And these were basically just like the Limes or the Birds. I mean, basically the same form factor, but 25 years ago and they were like a thousand dollars apiece. But as a 12 year old, I thought, man, this is the coolest thing. Like, who isn't going to want one of these? And also, cities are getting congested. Like, why are we all going around in cars that are five, you know, 15 times the size of our bodies? Our vehicles should be, you know, not much bigger than us. And I was totally wrong. Both of those companies totally ate it and don't exist anymore, I think. So, timing's everything. And I think in the case of this microbiome work, I sure

• 1:07:08Speaker 04

  hope that some of these companies succeed because they're working on cures for things like irritable bowel disease that are really in need of solutions. But my guess is that it's probably a little early.

• 1:07:19Patrick O'Shaughnessy?

  So I'd be remiss if we didn't at least spend a little bit of time here at the end, talking about your career before investing, which was in music. I think the origin story here is fascinating. I think you were discovered at Harvard by Kanye West. So maybe you could describe your music career and how it started in that colorful way.

• 1:07:35Speaker 04

  You just described it very well. I had started a rock band freshman year of college with four of my classmates. And three months before we graduated, we'd been sending out literally thousands of copies of the CD we'd made. And we had slaved over this for months and months and actually, I mean, years at that time, in the basement of one of the dorms at Harvard where there was a recording studio. And we just got super lucky. We got a demo to Kanye West and he really liked it. And he tried to sign us to a record deal. And that was really my big break. And it led to a bidding war then between Kanye and Pharrell and Jermaine Dupri, all of whom were my heroes.

• 1:08:18Patrick O'Shaughnessy?

  Yep.

• 1:08:19Speaker 04

  And we ended up signing a record deal. I mean, it was surreal because we were living in dorms and you know, then on the weekends, flying out to LA and hanging out at Kanye's house and you know, in the studio with all these big artists. And we did a record deal ultimately with Pharrell and a guy named Jimmy Iovine, who then built and sold beats to Apple. And at the time, he ran Interscope Records, which was our label. And I spent three years making music and touring the world with Lady Gaga and Pharrell and Weezer and Blink 182. And it was just an amazing experience.

• 1:08:53Patrick O'Shaughnessy?

  What is the most interesting thing, looking back on that time that people may not understand about how that industry works, whether that's touring or music in general? You know, what were some key lessons from your couple of years spent in that industry?

• 1:09:06Speaker 04

  My experience in those years is what launched me into my investing life because the music industry that I came into was really a shadow of its former self. And what had happened in the 15, 20 years prior to our record deal was that the recorded music business was eviscerated by the internet, starting with Napster. And you had ended up with a market where none of the music fans paid for music. They were all either downloading stuff illegally or they were going on YouTube, which had become the world's biggest music service. And so what I discovered as an artist was that on the commercial side, we had entered an industry where the only way to make a living as an artist was to

• 1:09:50Speaker 04

  basically be on tour all the time. So I think musicians in the past, you know, might've made, you know, half or more of their money from selling their music. And then the rest of the touring part was certainly profitable, but it was also seen as largely promotional. You'd go tour in order to build your fanbase so that they would buy your records. And when I came into it, it was the exact opposite. It was that you would put out a record and people would basically steal it. And then you'd go tour to make money. And hopefully those people who had stolen it would buy a ticket. So what this led me to was my involvement and investment in Spotify, which was really my big break as a businessperson.

• 1:10:32Speaker 04

  And I recognized that opportunity because what Spotify had the potential to do was get all of these free music listeners back into a paid behavior model. And that's exactly what they've done. And now streaming music represents a significant majority of the recorded music business.

• 1:10:51Patrick O'Shaughnessy?

  Do you think that there remain investment opportunities in and around that sphere, whether it's music or entertainment, that you keep your eye on as a result of your history there? Both with music, the industry, but also with Spotify?

• 1:11:03Speaker 04

  The history has not been long enough in the media industries to make sweeping arguments about any kind of laws. But one pattern that people have pointed to repeatedly is that there's this kind of pendulum that swings between content being king and distribution being king. And what you saw happen in the past decade was Spotify, Apple Music, Netflix, Amazon Prime. Those were new distribution platforms that were the great successes of the past decade. So 10 years ago, the way to make money in media would have been to back the right platforms.

• 1:11:47Speaker 04

  Now that that distribution ecosystem has reached a sort of new equilibrium that corresponds with streaming. It seems that the pendulum has sort of shifted back to the content because now you've got all of these platforms that have to compete with each other for consumer affection. And the way they do that is to try to offer unique differentiated content. So now the powerful position is to actually be a content creator. And I love that, obviously, as an artist at heart. But it's been great for Hollywood because the actors and the production companies, anyone who knows how to make TV shows or knows how to make movies is back in the driver's seat

• 1:12:31Speaker 04

  because they've got this diversity of competitive buyers who are all fighting to get the best content.

• 1:12:37Patrick O'Shaughnessy?

  I love that concept. You could probably say that that pendulum of product and distribution sort of swings in every industry. And you know, the fragmentation or lack thereof of distribution and suppliers, et cetera, is like one of those most interesting things. And what a cool, what a cool industry to use that idea on.

• 1:12:55Speaker 04

  Yeah, I think you're probably right. And in media, you know, as I said, it's I'm excited when the artists have the power again.

• 1:13:01Patrick O'Shaughnessy?

  Of course, of course. So my closing question for everybody is to ask for the kindest thing that anyone's ever done for you.

• 1:13:07Speaker 04

  Wow, you know, there are just so many. And I feel like my career, at least so far in my life, has sort of been this like falling up phenomenon. Where, you know, it's like I'm in college and we're on the verge of needing to go and wait tables. And I hadn't bothered to go do an internship at McKinsey or anything. And then Kanye shows up like Deus ex machina and saves us. You know, I'm in the music business and I'm an artist and I hate touring. And I don't know what I'm going to do next in life. And I learned about Spotify. And one really wonderful person in my life was a guy named Shaquille Khan, who was one of the early investors in Spotify. And he really believed in me.

• 1:13:52Speaker 04

  As having the potential to not just be an artist. You know, I mean, he vouched for me with Daniel Ack and Martin, who had founded the company and said, you know, I know this is weird, but we got to get this guy involved because trust me, he's going to help us bring Spotify to the US. And that was like a huge break. Obviously, my parents, you know, it's the greatest gift is life. So that's probably the kindest thing anyone's done for me, although I don't know that it was totally altruistic. So, man, I wish I had a really nice, pithy answer for you, but I feel like it's a constant influx of generosity and friendship that I'm on the receiving end of.

• 1:14:29Patrick O'Shaughnessy?

  Well, it's very cool to tie a bow on the conversation with the Spotify story, you know, having had Daniel on the podcast recently and learned so much from him and how he built that business. It's very cool how the constellation widens and starts to connect. So a great answer and an awesome conversation in which I learned a ton. So thank you so much for your time.

• 1:14:47Speaker 04

  Well, thanks for having me on. Anytime you want to dig into biology, I'm at your disposal.

• 1:14:53Patrick O'Shaughnessy?

  Hey, everyone. Patrick here again. To find more episodes of Invest Like the Best, go to investorfieldguide.com/podcast. If you're a book lover, you can also sign up for my book club at investorfieldguide.com/bookclub. After you sign up, you'll receive a full investor curriculum right away and then three to four suggestions of new books every month. You can also follow me on Twitter, @Patrick_OShag, O-S-H-A-G. If you enjoy the show, please leave a quick review for us on iTunes, which will help more people discover Invest Like the Best. Thanks so much for listening.