Author Topic: Psilocybin and Covid-19 show how the USA stock markets outperform int'l. peers  (Read 2145 times)

bwall

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First, a short overview of the players:

Compass Pathways (ticker symbol: CMPS) is a biopharma company based in London, GB. They are researching the use of psilocybin, the psychoactive ingredient in magic mushrooms, for the treatment of ‘treatment-resistant depression’. They are now in late stage 2 clinical trials and it appears as if they may have a successful product to bring to market in the next year or two (or so). If they can get approval and the treatment lives up to expectations, it could be the next blockbuster.
https://ir.compasspathways.com/investor-resources/faqs

Curevac (ticker symbol CVAC) is a biopharma company based in Tuebingen, Germany. They are working on a vaccine/treatment for COVID-19, apparently their trials are moving along quite well. No need to speculate about the potential here.
https://www.curevac.com/investor-relations/aktie/

Both of these companies are located in stable (capitalist) democracies where rule of law is quite well established as are their respective stock markets—very liquid and flush with cash and stable currencies. The companies themselves still have small market capitalizations and, as everywhere, all stock price gains will accrue only to those who invest in these companies.

However, the only place you can purchase these stocks is in the USA b/c they went public in the USA only (see above links). Not in their respective home countries with a dual-listing. Just in the USA. So, if you’re investing internationally, you have no exposure to these groundbreaking companies and the concomitant stock price gains. The researchers are located in Europe and the drugs are developed there. Investment gains will flow to those shareholders participating in the USA markets, not their European peers.

Why did the companies chose to do this? I have no idea and at the end of the day it doesn’t really matter. They could have listed anywhere; LSE, Deutsche Boerse, Switzerland, Amsterdam (might be a natural fit for CMPS):) or even Hong Kong. But, they chose the USA.

These aren’t the first companies to do this and they won’t be the last.

My point is two fold:
1) VTSAX is more international than one may believe
2)Investing ex-USA may not expose you to the best investment opportunities that other countries produce.

maizefolk

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I wonder how likely Compass Pathways is to truly be a blockbuster (in terms of profits made not real world impact).

We're starting to see movements towards decriminalizing and legalizing psilocybin mushrooms in the USA. Unlike marijuana where there are potentially many different active compounds and a drug company could isolate one, my understanding has been that psilocybin is the only active compound in the mushrooms (unless you count psilocin as a separate compound).

So if Compass Pathways is successful at demonstrating real world benefits for treatment resistant depression, how much can they change before they'd drive people people to just using legal (or at least decriminalized) magic mushrooms instead?

As for why not dual listing in multiple countries: each exchange a company is listed on means extra paperwork and compliance overhead, challenging when you are still a small company. Surely investors in the EU can purchase shares of stocks listed on only US exchanges through the equivalent of ADRs?

fixie

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Psilocybin without a shaman not recommended.

Fru-Gal

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I love posts like this, thanks for the insight. However, in addition to the overhead, I wonder if it's as simple as the fact that the US is still awash in money. Because honestly both these companies sound like something I'd never invest in, pharma is borderline scammy IMHO.

To be honest the only thing that excites me in investing is green energy (or anything environmentally helpful like rail, green transportation, green tech).

celerystalks

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Biotech startups are notoriously risky.

If you want to invest in biotech, might I suggest a contrarian value approach..

First, Identify net-nets based either on NNWC or NCAV. Graham provides a formula for doing this in Security Analysis. Exclude any company that is foreign domiciled (nothing against foreign cos. But for this micro-/nano- cap strategy to work, one really needs to rely on U.S. corporate governance as a basic minimal standard).

At one point I did this with the help of some online stock filtering software at old school value and found that there were about 20 companies at that given time that satisfied the net-net metrics.

Next, I took about 75k of play virtual money (by setting up a tracking list in Fido), with an equal amount of dollars towards each of these identified net-net companies.

Then wait.  I started my ‘mind bets’ about two years ago. One company was bought out in about six months for a 200+% gain on that position. About half have cratered in value and undergone reverse splits loss of 75+ percent.  About half a dozen have gone through reverse takeovers.. Not entirely sure what is going on when that happens, but I assume I’m being ripped off some how on those deals (good thing they are just mind bets..). My guess is the insiders want to keep playing researcher rather than returning unused capital to shareholders by just winding down the business and selling the assets when the drug or other therapy the startup was working on doesn't pan out. About 3 cos are treading water (down about 15-20%).

Two of the companies have had a 250%-300% gain since purchase. And four others have had gains somewhere between 25-100% since purchase.


Overall, The portfolio down about 6% from where I was when I placed the mind bets two years ago.

A few curious things I have noticed.
1. At first, there was a lot of volatility, but now not quite as much as I thought there would be.
2. The experiment started off with lots of companies loosing lots of money really fast. It took time for the winners to emerge.  So the a graph of the progress looks roughly like a moderately steady drop over the first year or so, followed by a climb.  Since I haven’t added more mind bets to losing companies, the losers have less and less effect on the portfolio over time.
3. The majority of value in the portfolio is now concentrated in 6 companies out of an original 20. 
4. There was no way for me to know in advance which companies would turn out to be the winners and which the losers.

Questions?
« Last Edit: October 09, 2020, 07:43:20 AM by celerystalks »

ChpBstrd

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Alternative explanation:

Investors in the US markets are more willing to overpay for earnings than investors in other places? [looks at international differences in market PE ratios]

bwall

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Great feedback all.

BTW: I'm not advocating for these stocks, or for biotech. It's just an example.

Maizefolk; I wondered the same thing; why should it be a blockbuster if you can grow your own? The answer lies in getting exact dosage right, as all living things have different concentrations (in this case psilocybin). A medical extraction process would provide reliable dosage where a grow can't. Add to that the comment by fixie and I see a treatment that is not easily and reliably replicated outside of the medical system by people who are, by definition, extremely depressed. Compass Pathways describes the treatment on the website, if one were interested in learning more.

My understanding is that the only place these two stocks can be purchased in on a US exchange. So, unless your EU based trading platform allows you to trade on US exchanges, then you cannot buy shares of these companies.


maizefolk

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My understanding is that the only place these two stocks can be purchased in on a US exchange. So, unless your EU based trading platform allows you to trade on US exchanges, then you cannot buy shares of these companies.

More generally do you know if european trading platforms incorporate the equivalent of ADRs?*

*American Depository Receipts. Some company (usually a bank) has bought a large block of shares of a foreign company that isn't itself listed on US exchanges. I don't have direct access to to the stock market where the shares are traded but I can buy an interest (an ADR) representing one or more shares in the same company on local US exchanges.

From my old very old stock picking days (2011-2012) I still own ADRs for a few companies like Telefonica SA (not a good investment choice on my part, I was prone to chasing yield in those days).

Buffaloski Boris

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My point is two fold:
1) VTSAX is more international than one may believe
2)Investing ex-USA may not expose you to the best investment opportunities that other countries produce.

My counterpoints:
1.  Did VTSAX even pick these up, and if it did, did it pick up enough of it to make it worthwhile?  Probably not because it's CAP weighted. That one might pick up some insignificant share of some future high flyer doesn't negate that you're stuck with 20% plus of your investment in 5 megacap stocks in the mean time. 

2.  Maybe, maybe not.  These are pharma companies and the US market may be relatively kind to them as compared to other markets. Which is not to say that the US market won't be a great deal at some point in the future. It probably will be.  I just don't think that's the case right now.         

pmac

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I see so many people here push international funds... and then charts like this make me wonder why?!


Buffaloski Boris

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I see so many people here push international funds... and then charts like this make me wonder why?!

Mean reversion, diversification out of the dollar, lower P/E ratios, lower transaction costs than in the past, increased political risk in the US, huge portions of the US market in a handful of stocks, less correlated returns, and demographics (for Emerging Markets).Those are a few reasons that immediately come to mind. 

Radagast

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More to the point, what index are they included in? Just because they are listed on a US exchange doesn’t mean that MSCI or whichever index maker will put them in a US index. It seems like they would be put in a EAFE or ex-US index.

park10

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I see so many people here push international funds... and then charts like this make me wonder why?!

Mean reversion, diversification out of the dollar, lower P/E ratios, lower transaction costs than in the past, increased political risk in the US, huge portions of the US market in a handful of stocks, less correlated returns, and demographics (for Emerging Markets).Those are a few reasons that immediately come to mind.
--How have these factors served you in the past? Answer is they havent. take any time frame, 1 year, 3, 5, 10 etc. Answer why the international (Europe especially) is pushed by money managers is expense ratios are higher, but more importantly to sound intelligent on TV and in brochures. Why would anyone pay them if the advice was invest 90% in $SPY and have 10% cash on hand. So much of that industry is sounding intelligent and not much about actual outperformance.
Your response has the same shades, all your reasons do sound intelligent and logical, but actual performance has been a disaster.

pmac

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Quote
Mean reversion, diversification out of the dollar, lower P/E ratios, lower transaction costs than in the past, increased political risk in the US, huge portions of the US market in a handful of stocks, less correlated returns, and demographics (for Emerging Markets).Those are a few reasons that immediately come to mind.


Performance is the only thing that matters, and international has performed terribly!

Paul der Krake

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Same reason why Chinese tech stocks list here too. The US equity market is just deeper. More volume, more prestige, more services, more adjacent debt markets. This is just another example of network effects.

Do you care where your bank is headquartered? I don't.

Buffaloski Boris

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I see so many people here push international funds... and then charts like this make me wonder why?!

Mean reversion, diversification out of the dollar, lower P/E ratios, lower transaction costs than in the past, increased political risk in the US, huge portions of the US market in a handful of stocks, less correlated returns, and demographics (for Emerging Markets).Those are a few reasons that immediately come to mind.
--How have these factors served you in the past? Answer is they havent. take any time frame, 1 year, 3, 5, 10 etc. Answer why the international (Europe especially) is pushed by money managers is expense ratios are higher, but more importantly to sound intelligent on TV and in brochures. Why would anyone pay them if the advice was invest 90% in $SPY and have 10% cash on hand. So much of that industry is sounding intelligent and not much about actual outperformance.
Your response has the same shades, all your reasons do sound intelligent and logical, but actual performance has been a disaster.

What?? Someone challenging my opinion?? Oh the horrors!

:-)

Skepticism is a good thing so lets go take a look at the numbers.  I'm going to use the gold standard for MMMers, portfoliocharts.com maintained by our own @Tyler . Super good stuff.  Backtests about anything you'd want to look at.  Thank you Tyler!  Just remember the inherent danger of looking at investment history: past performance does not necessarily predict the future. But it's the best we've got absent a crystal ball, so let's look at it. 

Let's look at it from the perspective of a 100% Total Stock Market portfolio.  Portfoliocharts has been upgraded again and allows us to look at 5 different total stock market portfolios: US, Europe, Japan, World except US, and Emerging Markets.  Just run a 100% portfolio and lets compare each based on average annual returns, median returns over 10 years, a SWR for both a 30 year and perpetual retirement, and something he calls an ulcer index. Assuming a US based investor. So here goes, and feel free to check my numbers:

100% US TSM
Average annual real return 8.0%
Median return over 10 years 8.0%
SWR 30 year 4.3% 
SWR perpetual 3.5%
Ulcer index 16.5

100% Europe TSM
Average annual real return 7.4%
Median return over 10 years 6.6%
SWR 30 year 4.5% 
SWR perpetual 3.3%
Ulcer index 18.2

100% Japan TSM
Average annual real return 8.6%
Median return over 10 years 2.8% (wow)
SWR 30 year 1.5% 
SWR perpetual not provided (probably 0% because of incredible variance)
Ulcer index 43.3 (wow)

100% World ex US
Average annual real return 6.8%
Median return over 10 years 4.4%
SWR 30 year 3.8% 
SWR perpetual 1.9%
Ulcer index 19.8

100% Emerging Market
Average annual real return 8.5%
Median return over 10 years 5.6%
SWR 30 year 2.9% 
SWR perpetual 1.4%
Ulcer index 28.0

Some interesting things to note in the numbers.  The US does very well in annual and average returns, and has a surprisingly low ulcer index.  EM does very well on annual returns, beating the US, but less well on median returns over a longer time period.  Europe does a little bit better on SWRs than the US. But here is the part that's fun: what does it look like when we combine various portfolios?

Here's a 50/ 50 split between US TSM and EUROPE TSM
Average annual real return 7.7%
Median return over 10 years 7.5%
SWR 30 year 4.5% 
SWR perpetual 3.6%
Ulcer index 15.9

Note that the returns go down, BUT the safe withdrawal rates increase and the ulcer index goes down as compared to the all US portfolio.  Let's look at another one.

50/50 split US TSM and Emerging Market TSM
Average annual real return 8.3%
Median return over 10 years 6.8%
SWR 30 year 3.8% 
SWR perpetual 2.8%
Ulcer index 18.9

Interestingly that raises the average annual real return to 8.3%, but lowers the SWR and increases the ulcer index as compared to US. 

25/25/25/25 split between TSM US, Europe, Japan, and EM
Average annual real return 8.1%
Median return over 10 years 6.2%
SWR 30 year 4.5% 
SWR perpetual 3.3%
Ulcer index 17.2
 
One last one:

40/20/20/20 TSM US, Europe Japan, and EM
Average annual real return 8.1%
Median return over 10 years 6.5%
SWR 30 year 4.5% 
SWR perpetual 3.4%
Ulcer index 17.2

What I got out of this other than it was a fun exercise.  (1) while the US TSM does have the higher returns over 30 years, the difference isn't immense. (2) there is a tradeoff to be made in return versus safe withdrawal rates.  Diversification does provide a little bit of free risk reduction.   (3) a lot of this is going to be based on perspective.  What's more important to you?  A higher SWR or average rate of return?  (4) I keep on coming back to the underlying problem with historical data and it's relevance to the future. The data on Japan was really interesting in this respect. The average annual return was great, but there was that period during 80's and 90's where they were just massacred.   

ETA:  I forgot one important point.  If the name of the game here is to pick the maximum returns and SWRs, we're wasting time looking at Total Stock Market returns in the first place.  There are market sectors that at least historically have done really well as compare to the overall markets.  One specific sector is small cap value.  Here is a simple portfolio of 50% US Small Cap Value and 50% World except US small cap value:

Average annual real return 10.4%
Median return over 10 years 9.6%
SWR 30 year 6.5% 
SWR perpetual 6.0%
Ulcer index 11.6

But again, these are historical numbers.  I would not expect the future to match this. 


« Last Edit: October 10, 2020, 02:44:32 PM by Buffaloski Boris »

bwall

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My point is two fold:
1) VTSAX is more international than one may believe
2)Investing ex-USA may not expose you to the best investment opportunities that other countries produce.

My counterpoints:
1.  Did VTSAX even pick these up, and if it did, did it pick up enough of it to make it worthwhile?  Probably not because it's CAP weighted. That one might pick up some insignificant share of some future high flyer doesn't negate that you're stuck with 20% plus of your investment in 5 megacap stocks in the mean time. 

2.  Maybe, maybe not.  These are pharma companies and the US market may be relatively kind to them as compared to other markets. Which is not to say that the US market won't be a great deal at some point in the future. It probably will be.  I just don't think that's the case right now.         

Good points, Boris.
These are recent IPO's and if they're not in VTSAX yet, then I anticipate they will be at some point in the future I any case, they're only available to investors in NASDAQ/NYSE, not to investors in the country where the company's employees are working and researching.


bwall

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More to the point, what index are they included in? Just because they are listed on a US exchange doesn’t mean that MSCI or whichever index maker will put them in a US index. It seems like they would be put in a EAFE or ex-US index.

A stock must earn it's way into an index, of course. These are recent IPO's and most likely not in an index now. I expect that they would be included at some point in the future.

Why would it be in an ex-US index since the stocks are only traded in the USA?

seattlecyclone

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Quote
Mean reversion, diversification out of the dollar, lower P/E ratios, lower transaction costs than in the past, increased political risk in the US, huge portions of the US market in a handful of stocks, less correlated returns, and demographics (for Emerging Markets).Those are a few reasons that immediately come to mind.


Performance is the only thing that matters, and international has performed terribly!

In the past ten years, yes. These things are cyclical. International indexes outperformed the US for most years of the first decade of this century. The opposite has been true for the most recent decade. I have no way of knowing whether the 2020s will be more similar to the 2000s or the 2010s, so I own both.




Why would it be in an ex-US index since the stocks are only traded in the USA?

Because the company is based elsewhere? The index is trying to be representative of something. Do they want to represent the performance of a particular stock exchange, or a particular country's business climate? They could easily go either way. Using the stock exchange isn't as much of an obvious correct choice as you seem to think it is.

Radagast

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More to the point, what index are they included in? Just because they are listed on a US exchange doesn’t mean that MSCI or whichever index maker will put them in a US index. It seems like they would be put in a EAFE or ex-US index.

A stock must earn it's way into an index, of course. These are recent IPO's and most likely not in an index now. I expect that they would be included at some point in the future.

Why would it be in an ex-US index since the stocks are only traded in the USA?
I recall many Chinese stocks being listed in the US but which became part of emerging markets indices.  QQQ seems unbiased in containing NASDAQ companies regardless of country, Pinduoduo is one example, in QQQ but also VWO.
 https://www.etf.com/stock/PDD Look up a stock on etf.com to see which ETFs it is in.

I thought I remembered MercadoLibre being in mostly emerging markets funds but now I see it in US funds. I don’t have enough knowledge of specifics to say for sure, it had just been my general impression that indices were made to track certain segments of the world economy regardless of where the stocks were listed.

bwall

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Why would it be in an ex-US index since the stocks are only traded in the USA?

Because the company is based elsewhere? The index is trying to be representative of something. Do they want to represent the performance of a particular stock exchange, or a particular country's business climate? They could easily go either way. Using the stock exchange isn't as much of an obvious correct choice as you seem to think it is.

Hmmm..... Good point... does an index represent a country's stock exchange, or their economic performance?

With the former, the index would take all an exchanges' main listings and represent them.

With the latter, they would sort by geographic location and include those. This could result in a hodgepodge of stocks listed on multiple exchanges and multiple currencies. i.e. not all stocks traded world-wide have ADR's, thus an index would have to go to that home country's main stock exchange to have a representative index of that country, plus the stocks from that country that are not listed on those exchanges (see: the original two examples provided).

Theoretically either could be done and be considered an index based on country or geographic area, I think.

Does anyone know exactly how indexes are compiled?




Paul der Krake

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Does anyone know exactly how indexes are compiled?
It depends on the index provider, their stated goals, and methodology. If you ask nicely, they'll tell you.

markbike528CBX

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looks like a good discussion when skimmed through.

As I recall from my misspent youthful reading, many psychedelics have previously (1960's) had substantial evidence of help to:
alcoholics *
psychosis
depression
criminal behavior generally.
etc.

To be referenced better by edits in the future.

*"In the 1950s, English psychiatrist Humphry Osmond began experiments in Canada with mescaline, a psychedelic naturally occurring in a group of cactus plants."
and https://newrepublic.com/article/157144/turn-on-tune-in-cash
https://www.thecanadianencyclopedia.ca/en/article/psychedelic-research-in-1950s-saskatchewan

Question: How will any one non-monopolistic company and investors (see patent-crushing prior work above) benefit ?

Nice click-bait title   :-)

bwall

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I love posts like this, thanks for the insight. However, in addition to the overhead, I wonder if it's as simple as the fact that the US is still awash in money. Because honestly both these companies sound like something I'd never invest in, pharma is borderline scammy IMHO.

To be honest the only thing that excites me in investing is green energy (or anything environmentally helpful like rail, green transportation, green tech).

Have you looked at TWST?
They synthesize DNA, which allows for the simplified production of many dirty products. Fertilizer, for example, can be synthesized via DNA without all the energy intensive manufacturing now needed.
Or rubber; can be directly made with DNA, so no need to manufacture, etc.
While it doesn't have a 'green' flag outside it's front door, the DNA they produce allow for manufacture products in a greener way than anything the world has ever seen.

maizefolk

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Have you looked at TWST?
They synthesize DNA, which allows for the simplified production of many dirty products. Fertilizer, for example, can be synthesized via DNA without all the energy intensive manufacturing now needed.
Or rubber; can be directly made with DNA, so no need to manufacture, etc.
While it doesn't have a 'green' flag outside it's front door, the DNA they produce allow for manufacture products in a greener way than anything the world has ever seen.

This is incorrect.

You can certainly use synthesized DNA to insert genes into microbes that allow those microbes to produce different biochemical products (including perhaps rubber or nitrogen fertilizer). But you still need to provide the system with large amounts of energy (biotechnology isn't a perpetual motion machine), raw materials, and once you've inserted a given gene or suite of genes into a microbe once, the DNA of those gene(s) replicate with the rest of the microbe each time it divides, so you don't need to continue synthesizing the DNA to continue the same process.

bwall

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Does anyone know exactly how indexes are compiled?
It depends on the index provider, their stated goals, and methodology. If you ask nicely, they'll tell you.

Thanks for the link! According to S&P, both of the above overseas companies would be eligible for inclusion in their indexes, even though they are not headquartered here. So, my original premise holds; they would be included in a US Index, while not in an EU index, even though they are headquartered in the EU and their talent lives and works there. Shareholder value accrues to the US shareholder, not the EU shareholder. All they need to do is have a plurality of sales in the USA.

Here the criteria:

1. Files 10-K annual reports.

2. The U.S. portion of fixed assets and revenues constitutes a plurality of the total, but need not exceed 50%. When these factors are in conflict, fixed assets determine plurality. Revenue determines plurality when there is incomplete asset information. Geographic information for revenue and fixed asset allocations are determined by the company as reported in its annual filings.

3. The primary listing must be on an eligible U.S. exchange as described under Exchange Listing below.

bwall

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Have you looked at TWST?
They synthesize DNA, which allows for the simplified production of many dirty products. Fertilizer, for example, can be synthesized via DNA without all the energy intensive manufacturing now needed.
Or rubber; can be directly made with DNA, so no need to manufacture, etc.
While it doesn't have a 'green' flag outside it's front door, the DNA they produce allow for manufacture products in a greener way than anything the world has ever seen.

This is incorrect.

You can certainly use synthesized DNA to insert genes into microbes that allow those microbes to produce different biochemical products (including perhaps rubber or nitrogen fertilizer). But you still need to provide the system with large amounts of energy (biotechnology isn't a perpetual motion machine), raw materials, and once you've inserted a given gene or suite of genes into a microbe once, the DNA of those gene(s) replicate with the rest of the microbe each time it divides, so you don't need to continue synthesizing the DNA to continue the same process.

Thanks for the feedback and correction. I'm not a scientist (and I don't play one on TV, either), so it's quite likely that someone else can provide a better description. Thank you for being that person! :)

My impression, however, was that nitrogen fertilizer could be produced via DNA synthesis in a much, much greener way than the current energy intensive method.

Fru-Gal

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That sounds really interesting! There’s also lab-grown meat. But I still probably wouldn’t invest in individual bio tech stocks as it’s just not my area of competence or interest. On the other hand, it’s cool to think how “green tech” Might affect all kinds of different industries… Without being greenwashing of course.

seattlecyclone

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Does anyone know exactly how indexes are compiled?
It depends on the index provider, their stated goals, and methodology. If you ask nicely, they'll tell you.

Thanks for the link! According to S&P, both of the above overseas companies would be eligible for inclusion in their indexes, even though they are not headquartered here. So, my original premise holds; they would be included in a US Index, while not in an EU index, even though they are headquartered in the EU and their talent lives and works there. Shareholder value accrues to the US shareholder, not the EU shareholder. All they need to do is have a plurality of sales in the USA.

Here the criteria:

1. Files 10-K annual reports.

2. The U.S. portion of fixed assets and revenues constitutes a plurality of the total, but need not exceed 50%. When these factors are in conflict, fixed assets determine plurality. Revenue determines plurality when there is incomplete asset information. Geographic information for revenue and fixed asset allocations are determined by the company as reported in its annual filings.

3. The primary listing must be on an eligible U.S. exchange as described under Exchange Listing below.

Your bolded interpretation seems inaccurate. Criterion #2 requires a plurality of revenues and fixed assets (land, buildings, equipment) to be located in the US. If it's only one or the other, the location of the fixed assets is used. It's not clear from this description whether they consider the EU to be one area or multiple for this purpose. For example if a company's assets/revenue was 40% American, 30% German, 30% French, it would be considered plurality-US if Germany and France are considered to be separate economies from each other, but majority-European if EU countries are lumped together for this purpose.

maizefolk

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Thanks for the feedback and correction. I'm not a scientist (and I don't play one on TV, either), so it's quite likely that someone else can provide a better description. Thank you for being that person! :)

My impression, however, was that nitrogen fertilizer could be produced via DNA synthesis in a much, much greener way than the current energy intensive method.

Not knowing the news story/approach I could guess this being one of two things:

1) Making biologically available forms of nitrogen in a bioreactor.
2) Creating new synthetic bacterial taxa to fix nitrogen for plants in the field.

1) Probably does save energy vs the conventional haber-bosch process, but the logistics of producing economically viable amounts of fertilizer are challenging and I don't think they've been overcome (although they may in the future). Instead of feeding in electricity, atmospheric nitrogen, and hydrogen gas (obtained from natural gas), you feed in a carbon source (simple sugars, maybe more complex carbohydrates), atmospheric nitrogen, and enough heat to keep the microbes growing and biosynthesizing. Both processes release significant amounts of CO2.

2) Is what soybeans, peanuts and other legumes already do with naturally. The problems are A) the plant has to use a lot of the sugars it produces to feed microbes, so yields are lower than in plants that rely on external nitrogen fertilizer and B) releasing a genetically engineered microbe into the wild would be a regulatory nightmare. That's why you see companies like Pivot Bio screening through big libraries of naturally occurring microbes rather than building their own from scratch.

Anyway, biological nitrogen fixation may well become economically competitive with Haber-Bosch production at some point, but the bigger point I'd caution you about in reading about companies like TWST is that a breakthrough like that can be accomplished with a onetime spending on DNA synthesis of $1,000s to $10,000s of dollars, it's not an ongoing revenue source for a DNA synthesis company like TWST.

bwall

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Thanks for the feedback and correction. I'm not a scientist (and I don't play one on TV, either), so it's quite likely that someone else can provide a better description. Thank you for being that person! :)

My impression, however, was that nitrogen fertilizer could be produced via DNA synthesis in a much, much greener way than the current energy intensive method.

Not knowing the news story/approach I could guess this being one of two things:

1) Making biologically available forms of nitrogen in a bioreactor.
2) Creating new synthetic bacterial taxa to fix nitrogen for plants in the field.
.....

Anyway, biological nitrogen fixation may well become economically competitive with Haber-Bosch production at some point, but the bigger point I'd caution you about in reading about companies like TWST is that a breakthrough like that can be accomplished with a onetime spending on DNA synthesis of $1,000s to $10,000s of dollars, it's not an ongoing revenue source for a DNA synthesis company like TWST.

Thanks for the input.

I think that the fertilizer production via DNA process is able to replace the Haber-Bosch process. But, I'm not sure. Clearly, it's not yet commercially viable or else we'd all hear about it already.

I do know that TWST has a recurring customer, Gingko Bioworks, who has ordered millions of dollars of DNA from them annually for the past three or four years. I don't know what they use it for, though.

I'm a bit foggy on all the science that is behind the company, but I see huge potential for increased productivity in a very green manner as a byproduct.

maizefolk

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I think that the fertilizer production via DNA process is able to replace the Haber-Bosch process. But, I'm not sure. Clearly, it's not yet commercially viable or else we'd all hear about it already.

I do know that TWST has a recurring customer, Gingko Bioworks, who has ordered millions of dollars of DNA from them annually for the past three or four years. I don't know what they use it for, though.

I'm a bit foggy on all the science that is behind the company, but I see huge potential for increased productivity in a very green manner as a byproduct.

Yeah ammonia or nitrate from biological sources is chemically identical to the stuff you get from Haber-Bosch, so I agree it should be able to replace regular nitrogen fertilizer, it's just when/if the cost structure makes it viable to do so or not.

Ginkgo does a lot of synthetic biology, so it would make sense they'd be a big customer. But I would imagine the vast majority of that is R&D spending on different projects. Once Ginkgo has a product for a customer, all the impact of that particular new product will happen without the need for additional DNA synthesis.

I wanted to highlight your last sentence (I bolded it) though. What I see Twist and a few other silicon valley startups doing is get a bunch of people really really excited about synthetic biology as a whole (which I agree has huge potential we're just starting to see), and then sort of handwave the "and then our company will make billions of dollars from this cool stuff happening" part.

Twist could easily be a company with a few hundred million dollars in revenue someday, and a hundred million or so in profits from displacing current DNA synthesis companies like Integrated DNA Technologies. But to justify its existing multibillion dollar valuation and continue to provide further return for new investors, I fear they they are going to have to figure out big new sources of revenue above and beyond competing in the existing DNA synthesis market* (I need a better word for this, because the total oligosynthesis market is bigger ($2B) but a lot of that is microarrays, which is a very different thing from what Twist does).

*I think the actual business case for Twist is custom pharmaceuticals based on direct applications of synthetic DNA to patients. Unlike a lot of synthetic biology applications, these would require new DNA to be synthesized for each dose, producing recurring revenue. But while the growth of synthetic biology seems pretty much a sure thing going forward, synthetic DNA drug applications are still very much a thing that may happen or may not (at least on any large scale).

bwall

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wow! Great feedback, maizefolk. How do you know all this stuff? It seems that you have a more-than-casual familiarity with this field.

I've listed to a few of Twist's conference calls and listened to a few of the CEO's talks, so that is about the extent of my knowledge. My wife does a good job of explaining it me as well, but IDK.

Twist is also looking into DNA as a secure way to store information for .... thousands of years. They say that all the existing information the world has created, if stored on DNA, can fit into the size of a shoebox. All those server farms all over the world, condensed into a single shoebox. The cost per gigabyte is still too expensive, but they are working/researching with Microsoft to bring the cost down. Does this mean in the future we could see computers with DNA storage chips instead of silicon chips? I don't understand enough about either to even begin to speculate.

I also think that they are just getting started on the pharma/theraputics market. Once the therapies are developed, the potential is huge. (I think).

As for valuation....a year and a half ago their market cap was $750m (and again just as recently as March of this year as well). So, their current valuation is a bit new and may be a bit pricey as well. Dunno.


maizefolk

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Twist is also looking into DNA as a secure way to store information for .... thousands of years. They say that all the existing information the world has created, if stored on DNA, can fit into the size of a shoebox. All those server farms all over the world, condensed into a single shoebox. The cost per gigabyte is still too expensive, but they are working/researching with Microsoft to bring the cost down. Does this mean in the future we could see computers with DNA storage chips instead of silicon chips? I don't understand enough about either to even begin to speculate.

DNA as data storage is potentially interesting in the super long term. But the barrier to that coming to be isn't just the cost of DNA synthesis. The other two barriers are 1) the cost of retrieving information from DNA (what we today call DNA sequencing) and 2) that all of our technologies for both synthesis and sequencing are lossy and only make up for it with very high redundancy.

So a hypothetical future DNA-for-data-storage technology would need to incorporate super-low-cost DNA synthesis and super-low-cost DNA sequencing that is much much more accurate than what we have today. There is a lot more money and R&D going into the DNA sequencing side of things (reading, what Illumina, PacBio, and OxfordNanpore do) than DNA synthesis (writing, what companies like Integrated DNA technologies and Twist do), yet none of the existing approaches that have been discovered have the potential to scale to the low cost or the high accuracy or the rapid read times needed to use DNA in data storage applications.

There may well be breakthroughs in DNA sequencing in the future,* but TWST cannot control when or if that will happen. If it does happen, whoever has this hypothetical future DNA sequencing tech will have a strong negotiating position in terms of capturing revenue from DNA storage devices which could be generated by combining the two sets of technology (if TWST has gotten the size/cost/speed of their own DNA synthesis technology down by enough orders of magnitude by then, and no one else has come up with new synthesis technology that outcompetes theirs).

My guess is that we'll never see true DNA based data storage. If the overall approach ultimately has merit, synthetic analogs of DNA that are easier to work with (easier to synthesize, easier to unambiguously read**) seem likely to replace DNA itself. There's already some research going on in this area which is really cool (but probably decades away from commercial applications).

*In fact I'd be surprised if there were not unexpected and surprising breakthroughs in the future.

**The accuracy of Oxford nanopore sequencing would be SO MUCH BETTER if the size and shape of DNA bases were more different from each other than the real four bases (A, T, C, G) used in DNA.

How do you know all this stuff? It seems that you have a more-than-casual familiarity with this field.

In my job I have to collaborate with researchers in a lot of fields, one of which is molecular biology. So I need to know enough about their fields to be able to understand what is easy and what is hard* and how to ask the right questions.

*Side note, figuring out what is easy and what is hard for people in another domain of science makes collaboration So. Much. Easier.

bwall

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Fascinating. Thanks for the great reply. I had to read it a couple of times to let it all sink in.

I think I heard on a conference call that Twist has started sequencing DNA, but I couldn't quite figure out what the purpose was? To compete with Illumina??? Illumina owns 4% (or so) of Twist I believe, so your information below helps explain what is going on there and what gains would flow to a company that can cheaply and accurately sequence DNA-for-storage.

Twist claims to be able to produce and sell DNA faster and cheaper (at 12 cents a base pair?) than other companies can make it in house and at a higher degree of accuracy. Since I've never been in the market for any variety of DNA, it's hard for me to know how good of a price this is.   

maizefolk

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Twist claims to be able to produce and sell DNA faster and cheaper (at 12 cents a base pair?) than other companies can make it in house and at a higher degree of accuracy. Since I've never been in the market for any variety of DNA, it's hard for me to know how good of a price this is.   

It depends greatly on the length of the piece of DNA you need synthesized. Short pieces of DNA are much cheaper per base pair than long pieces of DNA.

$0.12 a base pair is good but not ridiculously so for short sequences. $0.20/base is about market rate for short sequences (under 100 bp in length) before any discounts for ordering in bulk, or negotiated rates between the university/company and the DNA synthesis provider, and in my experience molecular biology companies usually have a LOT of profit built in to their published prices to allow them to negotiate discounted rates and still turn a profit.

However, I think part of TWSTs competitive advantage is being able to cheaply synthesize longer chunks of DNA. A 4-5 kilo base (4,000-5,000 base pair) chunk of DNA synthesized from scratch might cost an end user closer to $0.60/base (although again that might come down significantly with bulk order discounts, so I suspect the cost of production is much lower than that).*

So how good a price $0.12/base is depends on 1) how long the pieces of DNA they are making are and 2) whether $0.12/base is  what they charge their customers or what it costs them internally to do the work.

*At a certain point is becomes cheaper to order smaller pieces of DNA and put them together yourself in the lab. Where the break even point is between order small pieces and put together vs just pay someone to synthesize it in one chunk depends on how much the labor of the person putting pieces together costs or is valued at. So a professor who is having the word done by a grad student making $24,000/year will tend to be more likely order small pieces, and a industry scientist where the tech would would be assembling the DNA pieces into one big whole makes $60-70k/year will be more likely to just pay more money so their DNA comes in one big piece.

bwall

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Great feedback, maizefolk. Thank you very much for all the information.

I think I remember hearing on a conference call that the price of 12 cents was for long strands. But, that meant absolutely nothing to me. Are long strands common? Desirable over short strands? etc. It was hard for me to know how to process that information and apply a context. Now the next time I listen to an earnings report I'll know more about how to process that info.

Same also for analyst questions about 'recurring revenue' i.e. repeat customers. I didn't quite know what the concern was other than the obvious "are they being poached? Taking production in house?", etc. But, you mentioned upthread about how there may be a whole other concern i.e. one the wheel has been invented, no need to buy it again (my paraphrase).

maizefolk

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Long and short strands of DNA are used for different things, so I wouldn't say one is more desirable than the other. However, I do think right now there is a much bigger market for short pieces of DNA, because they are used as the primers when people do PCR (probably the single most common molecular biology technique across the world).

Long DNA synthesis used to be so expensive, but the cost has come down a lot, even from regular commercial vendors (not only TWIST), so demand is probably picking up a fair bit and the markets growing. Like I said in my last post, long DNA synthesis can substitute for trained molecular biology labor, so as the cost comes down, there will more situations where paying to have the whole gene cassette synthesized saves money vs paying a technician to clone together the same gene cassette from smaller building blocks.*

I think your paraphrase does a reasonable job of capturing my concern, which may be the same one the analysts have.

*For example, someone in the field might select a bunch of presynthesized https://en.wikipedia.org/wiki/BioBricks and put them together using PCR, or Gibson assembly, or old fashion digestion with restriction enzymes and ligating the sticky ends together.

bwall

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Great info. I've learned quite a bit from reading your posts. Thank you very much for sharing what you know. As anyone who has read this far may have surmised, I'm long TWST.

maizefolk

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Happy to hear it was of interest/of use. And good luck!