Yet Another Value Podcast - Random Ramblings May 2025

Episode Date: May 14, 2025

In this May 2025 edition of Yet Another Value Podcast, host Andrew Walker shares a range of thoughts in his monthly solo ramble. He opens with macro commentary on market resilience post-"Liberation Day" and ongoing CEO uncertainty. He transitions to the role of AI in investing, using analogies from sports to explore how AI may alter investor success profiles. Andrew dives into how management teams' sales skills can mislead investors and shares his growing skepticism from biotech engagements. The episode closes with reflections on how personal preferences influence investing decisions and a detailed breakdown of how sunk costs and overhead can erode biotech value.______________________________________________________________________[0:00:00] Podcast intro and episode preview.[0:02:02] Corporate governance discussion overview.[0:03:22] Host introduction and podcast growth.[0:04:16] Topics: market, AI, management, products.[0:05:09] Market reaction since Liberation Day.[0:07:26] CEO uncertainty and delayed investments.[0:11:44] Complacency, speculative vs. cyclical sectors.[0:12:22] AI as knowledge enhancer for investors.[0:14:01] AI and sports analogies for change.[0:18:46] AI impacting future investor skillsets.[0:22:05] Management interviews and AI impact.[0:25:24] Trusting vs. over-trusting management teams.[0:31:44] Selling skills of management vs. investors[0:34:09] Viral products and parsing endorsements.[0:38:32] Disliking a product but buying stock.[0:42:20] Balancing personal preferences with investing.[0:44:00] Management and sunk costs in biotech.[0:53:44] Overhead expenses distort trial economics.[0:57:27] Wrap-up: biotech, books, and future episodes.Links:Yet Another Value Blog - https://www.yetanothervalueblog.com See our legal disclaimer here: https://www.yetanothervalueblog.com/p/legal-and-disclaimer

You're about to listen to the yet another value podcast. This is my monthly random ramblings for May 2025 in it. I'm going to talk about some thoughts on the overall market. We're going to talk about AI and investing and kind of use a sports analogy. We're going to talk about management teams, relationships with them a little bit more, and how I'm worried that management teams are just so much better at selling. And value investors are kind of the JV team to their varsity team when we're talking to them and listening to them pitch a stock.

We're going to talk about what happens when you don't like a company, a piece of a company or their product, but you think the stock is interesting. And we're going to talk about management teams and some costs with a little bit of an eye to my broken biotech thesis that I've been harping on for months. So really good podcast. I hope you enjoy it.

We're going to hop to it in one second. But first, a word from our sponsors. This podcast is brought to you by AlphaSense. Those of you who've been following the podcast and the blog know that I've been doing a lot of work recently on shareholder engagement, particularly at these busted biotechs. You know, I've done recently a podcast on Sage and KROS. You guys can go and look in the show notes.

I've posted a lot on the blog about busted biotex, why this time is different, all of these companies that are trading at enormous discounts of cash. So given my focus on corporate governance and shareholder engagement, I worked with AlphaSense and they said, hey, let's do a free webinar. We'll get you in touch with the corporate governance experts. Let's do a free webinar and kind of bring some information

and get you a little smart on it. So we did the free webinar. It was really excellent. It was with a professor at the University of Chicago who actually teaches corporate governance, has been on 100 boards, including almost 20 public company boards. We had very different views, but it was really interesting to get his insights. As someone who's been there, his insights and kind of his differentiation from how I'm viewing corporate governance. So you can go check out that webinar.

I'll include a link in the show notes. Or you can just go to alpha-sense.com slash yvp to get a free trial and kind of show them. Thank you for the support of this podcast. all right hello and welcome to the yet another value podcast i'm your host andrew walker if you like this podcast it always means a lot if you can rate subscribe review wherever you're watching or listening to it you know i i've joked before but i listened to the zacklow podcast and he came out and said hey i'm about to launch my new podcast on my new feed and i checked in his podcast already had more reviews than my podcast did and he hadn't even launched an episode yet

and it really hurt my feeling so if you could rate subscribe to view wherever you're watching or listening to it, that would mean quite a bit and would really help the show grow, which helps create more of them. Before we hop into this month's random rambling, it is May 10th, I'm going to randomly ramble for things for about 30 minutes. I'll just remind everyone, nothing on this podcast is investing advice, consult to financial advisor, all that stuff. There's a further disclaimer at the end and a disclaimer in the show notes as well. Let's see. Today I've got a bunch of stuff to talk about. We're going to start off by talking about market thoughts. Then I've got some more thoughts on AI. I've got some thoughts.

on management teams, what happens when you don't like a particular piece of a company and a little bit on sunk cost. So let's talk into it to start. It is Saturday, May 10th. I'll just provide a little bit of updated market thoughts because the last podcast, the last ramble I did was in the middle of April and I did a little bit of market thoughts then. Look, markets have recovered quite a bit since Liberation Day or a tariff day. You know, as I am speaking, The Liberation Day was right at the start of April. You know, the markets were down like 10% in a hot second on that. They've recovered completely.

It's kind of crazy to me. The Russell is basically flat for the quarter. The S&P is up a little bit on the quarter. I think both of them are up a little bit. You know, that's not to say there hasn't been a little bit of pain on a year-to-date basis. I think I checked right before I did this. The S&P's down three or four percent so far this year. The Russell's down like 10%.

So they're down a little bit, but, you know, that's kind of, par for the course vanilla for markets. Those are typical just like swings. I wouldn't really bad a night at that. And I will be honest, I'm a little surprised and I'm pretty nervous. And I don't know if I'm just being crazy or anything. Look, every bull market climbs a wall of worry. And this bull market has certainly climbed, this start of a bull market since the Liberation Day has certainly climbed a wall of worry. You know, there's all sorts of stuff. Hey, investors are as bearish as they've ever been all this sort of stuff. I get it. And generally, you want to be buying when investors are bearish. And during the start in the middle of April, when things

were just terrible, I was like, oh, I thought it seemed pretty good. I thought it was a good opportunities per investor that said, you know, the thing with the tariffs are the initial way they applied to them. If they had kept them on for a few months, it would have just shut the entire economy down. So look, I get bull markets climbing wall worry. The tariffs have come down. You're seeing some trade deals, whatever. I totally get all that. But I just worry that it feels very complacent for a economy that feels very fragile. You know, when I talk to managers, CEOs, or when I hear them talking, all your hearing is uncertainty. You know, look, for the past two months, what CEO, what company is going to have made, is going to have been able to make any investment decisions?

Like, look, if you have a decision that absolutely has to be made, you're going to make the, you know, hey, there was a fire. Do we, do we clean it up or something? Yeah, of course, you're going to do that. But if you said, hey, we've got this plant, it's probably time to upgrade it. It's replace it. Hey, we're this growing food chain. Should we build a new store or not? Why wouldn't you delay?

Like, all I'm hearing from companies is delay, delay, delay for the past two months. And that sounds silly, but that's how the economy goes into a research session, right? like CEOs who would normally make capital spending decisions, trading decisions, business deals, they decide, hey, I would have done this, but let's just put it off for a little bit because of the uncertainty. Let's pull it off. That really starts impacting things on the margin. That's how you flip from growth to recession pretty quickly on the margin.

And I feel like you've had two months of it. And I don't feel like that's going away anytime soon. You know, I understand it takes one tweet for things to go kind of straight up, you know, just take all the tariffs off. something. But even then, it seems like damage has been done. Again, you've got two months of uncertainty. If I'm a CEO, I say, hey, I, yeah, okay, great, the tariffs are gone, but they could be back in a day. I don't know. And yes, it's one tweet to go up, but it's also one tweet to go down, right? For some reason, the president decides, hey, I don't like the offer that the

Chinese made me. I don't like the offer that the EU made me. And he tweets up based on their rudeness, you know, the reciprocal tariffs stay on and they'll go higher or, hey, you know, we pause the reciprocal tariffs for 90 days, but now we're coming back and unpausing them or the 90 days up, the pause is over. So I understand it can go up in a second, but it can go down quickly. And yeah, it's just really, yeah, I'm pretty cautious. I will say the other thing I've been saying it for a year and it just gets worse and worse. Like the most speculative places of the markets or the growth these places of the markets continue to seem to mean to be price for absolute perfection, whereas the more cyclical pieces of the markets, anything with

cyclicality, sensitivities to the economy. A year ago, I would say they're pricing a pretty eminent and big recession. And today, I'd say they're pricing in an eminent and even bigger recession. So it's strange market out there. That's it for market thoughts. Let's go to AI. I have been, I've been posting about AI and its impact on investors for two years. I realize I'm far from alone whenever I talk or, you know, there's some investors who I talk to twice, three times a week. There are some investors who I catch up with once every 18 months or something. And, you know, I caught up with a couple of investors who I catch up once every 18 months. And the thing I keep hearing over and over again from people who I kind of haven't talked to in a year or so is, man, I'm using chat.

half my day is getting spent in chat GPT, just going back and forth. It is such a knowledge enhancement. It's such a value lover. So I understand I'm not the only one alone in thinking about AI. I did the webinar with the loop on AI. I released that as a podcast a couple weeks ago. I've written a few things about AI and investing. Like it's just really interesting.

On some legs, I am really impressed with what it can do. And in some legs, I'm disappointed by what has it done. But one thing I've really been thinking about is, A.I. Let me use a sports analogy. In sports, there are some athletes today who are absolutely elite because of the way both the sports field and medicine have evolved around them. Let me give you an example. I think Steph Curry would actually be the perfect example, right? If you were playing 50 years ago, the NBA didn't even have a three-point line, right? So, Steph Curry's skill set would have been, I guess 60, not 50, but Steph Curry,

skillset would have been completely diminished, right? His crazy threes. The game also hadn't involved. It coaches, you know, Larry Bird was a fantastic three-point shooter in the 80s. He didn't even shoot one a game because they, you know, all people wanted to do was driving, was drive to the rim and jump shots, room shots, all that sort of stuff. So if Steph had come along 60 years earlier, his game was just not ready for the way the game was getting played then, right?

First, the three-point shot wasn't there. And second, coaches were pretty much active. discourage three-point shooting or they wouldn't have you know he needs he's taking 10 plus a game and just instilling fear into the defenses if he's taking one a game it's not the same so the game has evolved towards step curry in a lot of ways but there's also been advances in medical tech you know step curry famously he has really bad ankles coming out of college he hurts them a few times in his first years and he signs a with the warriors his first extension is at a big discount you know if the max was 20 million per year. I think he signs for 11 million. I think the discount is actually

bigger than that. And that has all sorts of follow-on benefits for the warriors as they're building their team. You know, the reason they can sign, for those of you don't know, they sign Kevin Durant to a max contract. And the reason they have enough money to sign Kevin Durant to a max contract is because they've got Steph Curry at a huge discount. But I'm neither here nor there. What I'm saying is Steph Curry, his ankles are weak. And I think one of the reasons he's able to play in today's NBA is, you know, modern technology. The shoes are much better. If Steph Curry's paying 50 years ago, he's playing in flat conversees with no ankle support. We don't know the strength of mobility drills to kind of keep his ankles as pristine. He probably has to retire after six years because

his ankles can't handle it. Today, you know, he's going to play for 20 years. He's in his 15th year and he's still in his prime. So metal tech has really evolved towards him. You can think of LeBron James or you can think of in the 80s. You tore an ACL and it was a two and a half year injury and you never came back the same. Today, you tear an ACL and you could be back, you know, within a year, maybe it takes 15 months for you to really ramp up, but you come back quicker. So the medical tech keeps advancing. There are people who would have injured themselves years ago and never been able to play, but today, because of the medical tech, they can play and they can play at super elite levels.

On the flip side, there are people who get outdated. You know, if you think about just to stay with basketball, a plotting big who can't shoot threes, 20, 30 years ago, there was a space for them, right? Especially before the three-point line, you just put a big go-hout and you put them in the rat as close to the basket as you could. you toss the balls on. Today, there's no space for those guys anymore because of both the way the games evolved, the math's fault. Those guys have been played out of the league. Now, you can be a super athletic big, you can be a big who shoots threes, all that sort of stuff, but plotting

bigs, there really isn't space for. Why do I mention all this? I think about AI and the way investing has evolved. And I'm here, you know, like the investor, the best investors of today or two years from now, are they going to be investors who would have failed, let's say, 20 years ago, but AI in some way has benefited something that they would have been a glary weakness that would have taken them out of the game before. I'm trying to think of a good example of a skill set. It's actually very hard to think of an example, but you could imagine, say, there's one investor who's particularly weak when it comes to comparing 10Ks over time.

not that that's a huge skill set, but you could imagine an investor who 20 years ago would have had a career devastating loss because, you know, at 10K evolved from one year to the next to the next, a risk factor evolved and a fantastic investor would have started, oh, they just added this risk factor, a huge red flag, I'm out, right? And this investor wouldn't have been able to do that, so he'd get tripped up by companies and their evolving risk factors in this. Well, guess what? AI, you can just toss into AI, compare these two 10Ks, and tell me the largest differences, and they'll source and say, hey, they added this risk factor. So maybe that, you know, it's not a perfect analogy, but maybe this one blind spot for this

investor has been aided. Contrary, you know, I think 50 years ago, AI is going to play some investors off the field, right? If you think 50 years ago, if you could just calculate a price to earnings ratio and buy the ones that had to really buy stocks that had really price low rate ratios, you could do pretty damn well there. And those guys have gotten played off the field by quantitative research, but I wonder if AI is going to play some investors off the field today who did really well in the 2010s in the pre-AI world, but AI takes what they were doing and makes it superfluous. So that's one thing I've thought about. You know, here, I'll get one example. I could imagine, one example of an investor who might be elite tomorrow, who might not

have been elite yesterday. I could imagine that investors who are really good at talking to management and kind of talking to them and in real time telling how their business is going or if they can trust this investor or not. I could imagine that investor would have been good 10 years ago, but maybe that investor is weak on business models and weak on quantitative. So 10 years ago, they simply couldn't play because they were weak on those. I could imagine today, AI can do the quantitative and AI can do the business model. So all of that gets neutralized out, right? Every investor is kind of doing the same if AI is the best at that. And the investor is get rewarded tomorrow are the investors who can go and shake management's hands and look them in the eye

and determine really quickly, is this guy really good, really bad? Or, you know, hey, I'm talking to them about the earnings for this year. Are earnings going to be really good or really bad this year? And is it priced in? A 20 years ago, that might not have been enough today. That skill set might be amplified. I don't know. But it's just something I've been thinking about a lot where, you know, the game evolves over time. How is AI going to evolve the game over time? You know, let's sit with the management thing while I'm there because I just mentioned AI. I could imagine where we're in a world where your ability to decipher management is increasingly important because AI takes some of the more quantitative researching things out or kind of levels of the playing field for everyone.

So let's stick with AI. Those of you who've been listening to me or especially reading me know that I'm increasingly skeptical of most management teams over time. I think I mentioned it in my March ramblings, but like one of the things I've really been thinking about is where's the line when you're dealing with the management team between a good working relationship and a friendship? And does one of them start to impact the other? You know, my experience with busted biotex recently has made me really, really jaded. You can only watch so many biotechs with 100 million of cash on their balance sheet, decide, hey, instead of returning the cash to shareholders, let's light this on fire on. one crazy project after another before you get really jaded with management teams. But just speaking to the AI, you know, aside from managing, one thing I really worry about

with talking to any management team is, you know, you as this investor, when you're talking to a CEO, you're getting played by a salesman, you're talking to a salesman who is literally like in the top, top, top NBA professional team. and you are probably like a JV high school team person they're selling too. Let me give an example. Say you're talking, you know, every investor, most investors at some point get attracted to a company that is selling medical products, right? And let's say you're looking at a company that sells medical products to plastic surgeons.

The CEOs of companies, they get promoted to the top level of companies or industries or anything, for lots of reasons. They're very, they've got skill sets, they're at the top of their field in a lot. a lot of different levels. But the main thing they're good at is selling. They're good at selling themselves and they're good at selling their products. So let's go back to the plastic surgeon example. If you're talking to the CEO of a company that sells to plastic surgeons, there's core customers, plastic surgeons. For plastic surgeons, time is literally money. Every minute that they're talking to, that they're talking to someone who's not a customer, I mean,

what does a plastic surgeon make? A thousand an hour, two thousand an hour? How much did they get paid for a surgery? Five K, 10K? I don't know. But it's, a lot. Their time is extremely valuable. And when they're doing something that isn't cutting on a patient or talking to a patient who will eventually get cut on, they are giving up a lot of an opportunity cost. So plastic surgeons have high opportunity costs. And guess what? Because plastic surgeons, because the margins and because there are so many different options they have and they have so much leeway choosing between one tool or another, they are getting bombarded by salesmen left and right. So if you're talking to the CEO of a company that is selling to plastic surgeons,

you are talking to a CEO who is like literally at the top of this field in selling to people who are very difficult to sell to, right? So he made it, he's got this core customer that is completely difficult. You know, he's playing on the hardest of hard modes every time he's trying to make a sale and he did it successfully at the top level. Now say that you've got a one-on-one with this guy, right? And you're a value investor who probably spends 95% of their time, reading 10Ks, reading books, thinking about businesses. I'm sure you're very good at that. How many

management meetings are you doing every day? One? Are you talking to one management team on the phone? Maybe. I mean, probably on my schedule, I probably average out to about one a day. Some days it might be three. Some days it might be zero. Probably about one. And that's probably, you know, a general phone call where you're calling a business that you know well and talking to them about things. Say you go to a conference and you get in a one-on-one with this CEO of a plastic surgeon team and you're trying to learn about the business. He's going to going to eat you alive. Again, you are the JV team playing against a professional. He's going to destroy you and you are going to come out and think that that business is the greatest business

of all time. And then hopefully you will go home and, you know, let the sales fish cool off and you'll research the company. But every time you talk to him, you're going to get more excited about the business. And, you know, it's just an unfair, it's literally an unfair competition. And, you know, I just, I think about that a lot when I talk to management teams. I go back and forth, but I wonder, Hey, should I not be talking to these guys? Because every time I talk to them, I'm going to get excited. And I'm not sure if the tradeoff of hearing their spin, you know, they are so much better at this than me, I'm not sure if it's worth the risk of taking myself out of, hey, let's just read these 10Ks, let their actions speak for them. I can read the transcripts.

I can listen to them on the call. But let's just let their action speak for them versus let them paint these colors. I don't know. I go back and forth. I'll give you one more example. one thing I had to get very careful with is parsing management words. And there's a company. I've talked to a friend about it who I think he's got a great thesis on it.

And I'm a little bit hesitant, I think, for all the reasons I just mentioned. But there's a company and they said, hey, we are extremely popular on TikTok. All of the big influencers are TikTok are using our product. And they're mentioning they're using our product and they're telling their fans they're using our products. And guess what? We haven't paid a single one of them for them to mention. a product. And I hear that. I'm like, oh, my God, this is the greatest thing ever, right? This company is completely viral. These influencers who, you know, if I was a brand and I wanted to

work for them, I might have to pay them $50,000 to mention me once in one of their posts. They're mentioning them in multiple posts for free. Like, this is insanity. You know, no free ads is a popular thing among podcast. People like, these things are giving out free endorsements on TikTok. So this is crazy. This is a huge vibe. Sarkin's another person. They're like, yeah, but you need to parse what they say, right? They're not paying the influencers for the product, but the product is a very expensive product.

They're giving the product to the influencers for free in exchange for the endorsement. And yeah, the customers are probably taking a little discount. You know, they're probably getting $15,000 worth of product in exchange for a testimonial that they would normally get paid $50,000 for or something. But they want this product. So it's not that the product isn't good. They want the product. They're using the product, but they're getting the product for free and giving the endorsement

exchange for that. And that's like a real cost. It's not like their Coke and giving away a free Coke in exchange for an endorsement that, you know, the Coke costs a buck. Like, this is a multi-thousand-dollar product. So they're getting it for free. And it was just another example. Like, it doesn't mean bad or good, right?

Like, I actually still think it's good. Again, the customers really like it and they're willing to take a huge discount for the product. But it's one of those examples where I was dealing with a master salesman. And when he said that, I was like, oh, this is great. And if you didn't really think about imparses words, you could have come to the very wrong conclusion. And it speaks to my earlier thing of, hey, when you're dealing with these companies, they're going to paint everything in such a favorable light.

And as an investor, I don't know if you're going to be able to handle it. Let's, I'm going to come back to management teams in a second. Just one other thing, completely separate from that. You often hear that there's the old Peter Lynch thing. If you love the product, you should think about the stock or something, right? And I think he actually mentioned when he'd go to the mall and ask his daughter what she was really interested in and kind of look at those stocks and buy some of those stocks. But you will frequently hear people make a fortune because they bought a Tesla in 2016. They love the car, so they bought the stock, right?

They love the products, so they bought the stock. Now, I think outside of the past five to ten years, history says that's actually a bad idea because products that people that love can either be like huge fans, you know, I think Beanie Babies or something. Or the stocks are super rich because guess what? Everybody loves the product. So they pile into the stock. It's a retail frenzy. And then the moment the kind of fad fades or the retail fades, the multiple comes down.

Their price for more than perfection, right? I've been thinking about something different. What if you don't like the product? And I will give you an example. I did a podcast recently on Seaport. I am Long Seaport. So there's my disclosure there. And they recently signed a,

long-term lease with Meow Wolf for Seaport. And I think the long-term lease is great, right? It's everything they needed. Now, I was really excited for Meow Wolf. Mia Wolf, for those who don't know, is an interactive experience. I think there's about five across the country. I think there's going to be a sixth opening up in L.A. and then New York will be the seventh one when it opens in 2007 or something. Meow Wolf is in Vegas. So I went to Mail Wolf in Vegas, and I was so excited to, I was so excited for it. You know, not just because they're going to Seaport, but because I've heard so many people talk about I saw so many reviews from people who have interest similar to mine who are really into it. I went to Meow Wolf and I went with three other friends and I will tell you,

at the moment I walked in, I was super disappointed. I just flat out did not like it and I feel like I should have been their target market. So, you know, now I'm kind of looking at, and I don't think it changes anything for Seaport, right? They've got a long-term lease and kind of the results speak for themselves. I was like Meow Wolf was packed when I went there and the things doing fantastic. I'm sure I'll do fantastic in New York, but I was pretty disappointed by it. And I've kind of had the thing like, what happens when you don't like a product for a company? And I don't know the answer to that, right?

I don't think it, now, Meow Wolf is only one piece of seaport, but I'm disappointed. I was kind of hoping I'd love it and I had gained a little conviction, I guess. You can't reject a company just because you don't like the product, right? Like I've seen it time and time again. Celsius, the stock has come down quite a bit from ties, but it's still a multi-bagger over the past few years. Monster is one of the best performing stocks of the past 25 years. I've seen people who dismissed both out of hands because they're like, I don't like the product,

and guess what, the stock went straight up. If you, a lot of people today give up sugar or alcohol, well, if you're dismissing all sugar and alcohol products simply because you personally don't like the product, I mean, that's fine, but you're dismissing a whole lot of companies out of there. Yeah, I just, but it's difficult, right? Because when you want to like a company's product, you want to invest in things you have conviction in generally, and it's just weird when you've got a company

and they've got a product you don't like, like, can you do it? I don't know. For Seaport, I think the answer is yes, but I can also understand why you say, hey, I only want to invest in companies that I completely believe in and I love the product. Though, again, look, somebody's got to invest in Boeing airplanes, right? there are people who love airplanes, but I don't know anyone who's like, oh, the 737,

I love this specific plane or something so much. You can buy products that you have no view on that you don't like, all that sort of stuff. All right. Last thing I want to talk about, management teams and sunk costs. You know, I've been on this busted biotech theme quite a bit recently, and I had a call this week that really illuminated it, but I think it's applicable to a lot of companies and management teams and how management teams that don't have a lot of skin in the game or stock ownership look at projects and spending and all that sort of stuff. So let me give an example and I'll

do. Let's just use a simple example. Say you want to flip a coin. If it comes up hedge, you get a dollar. If it comes up tails, you get nothing. The MPB of that is 50 cents, right? One dollar times 50% payoff, 50 cents. If you pay 50 cents for that point flip, you're NPV neutral. a lot of investing is like that, right? You build something and there's odds. Like, for some things, it might be 95% odds of success. For some things, it might be 5% chance of success. But you kind of need to look at, hey, here's how much I'm laying out,

and here's the expected returns, right? Clinical trials in particular are like that. Obviously, the payoffs can be very, very different, and the odds can vary slightly. But the base rate for most trials is actually, if you look at history, it's almost regardless of what type of disease you're studying, what type of trial, the base rate is about a 50% chance of success. So from phase one to phase two, 50% chance, from phase two to phase three, 50% chance.

Now, obviously, that scale. So, you know, if you're talking about going from phase one to phase three, 50% of phase two, 50% of phase three, that's about 25%. You get point. Every child is about a dollar point. Let's use that for simplicity. So when I talk to these busted biotechs about, hey, you have one, one product left in your pipeline, right?

It's a phase one product. Tell me how you're thinking about it. And they'll be like, look, this is really simple. We've got a phase one product. If we spend $10 million so on it over the next two years, we think it will be worth $100 million if we have to trial success. So that's a $100 million chance. Let's say it's $15 million to make the example a little bit easier.

So it costs us $15 million to get there, $100 million in value when it's success. $100 million less $15 million equals $85 million in value. And look, obviously, that's wrong, right? Like, now we can debate the ways it's wrong, but I think there are three particular things that they're missing. First, you know, and again, I've talked to multiple of them, and it's crazy to me how they haven't even said, hey, the trial is a coin flip, right? They'll always say, oh, the science behind this is so good. This is so much better than a coin flip. Like, this is a sure thing.

The science has been great. And preclinical, it was awesome. In phase one, it was awesome. Like, yes, the base rate for phase two is 50%, but are, our, are. science is unbelievable, right? Like, we're way better than that. We're 95. We're 99. Get out of here. Come on. You're 50%. Right. So they're 100 million in value. Right off the bat, I'd say, okay, before expensive, before sign value, 50, 50, it's 50 million. Maybe you can go and like adjust the base rate up a little bit if your science is incredible. But I think a lot,

especially these small companies, believe themselves. So instead of 100 million, you've got 50 million. So 50 million of risk adjusted value, less 50 million. There's 35 million. value there. So we've gone from 85 to 35 already. But then you have to time value adjusted, right? If you get this 50 million and expect the value, it's two years down the line. So it's actually maybe worth 40 million. Now the 15 million you spend will be over two years, but let's just say it's up front. So your 50 million time discounts. The 40 million, you take 15 million out and boom, now you've got 25 million of value, right? So 100 million if it's successful, 50% chance gets you to 50, less $10 million in time value cost.

gets you to 40, less than $15 million, and expense gets you to $25 million. Now, that's still a great return, right? $25 million of expected value on this, $40 million of value on $15 million of expenses. So, you know, you're kind of creating almost three times your money on a risk-adjusted MPP basis when you do that. Except for one thing. The companies I talk to are only talking about the direct trial expenses. There are a lot of overhead costs that a company needs when,

when they're designing a run of these products, you know. You need scientists, you need doctors. You have a chief medical officer who's kind of looking at all these things and everything. A lot of direct over, a lot of overhead causes. And go read the 10Q or 10K of one of these companies. Most of them will break out, hey, you know, we spent $5 million on this drug, $7 million into this drug, and then $25 million on overhead in our research and development. So the overhead is real.

It's often in excess of these trials. And when I talk to these companies, they're not impacted. accounting for the overhead that goes with this. Now, if you're Pfizer and you're running, you know, dozens and dozens of trials at the same time, the overhead actually is getting spread over dozens and dozens of trials. So, you know, maybe you can add one more trial without really factoring in the overhead cost.

But if you were a small company with one drug, that overhead cost to support the research department is a real cost. And not only that, if you are one of these small companies with one drug, not only is this one drug propping up the end's higher research and development in the department, guess what? The company as a whole has overhead, right? The CEO, the public company costs, the board, the accounting department, all this sort of stuff. So, you know, for many of these small companies, the overhead of their R&D is $20 million per year, and the overhead of kind of the company overall is $20 million per year. So let's just round it up, $50 million per year

in R&D plus corporate overhead overall, right? I just said that this trial, which is going to create $25 million in value over and above its cost, that didn't account for any of the overhead costs, right? I just said the overhead costs of these companies are running $50 million per year. This is a two-year trial. Guess what? If you're a one company product and you exist for just this one company, cool. You're going to spend $100 million in overhead over the next two years.

So all of the sudden, this drug, you know that on an mpb basis mpb risk adjusted basis 40 million of value less 15 million in cost all of a sudden there's a hundred and 15 million of cost there right so it's actually destroying huge amounts of value once you account for the overhead and everything and it's just funny i talk to multiple of these companies and they're not really thinking about the overhead they're not really thinking about this like yes the more sophisticated ones they're definitely risk adjusting, though I think they're saying, hey, all of our trials are 80 or 90% versus the base rate of 50.

A lot of them are accounting for the expenses of the trial, though I do think some of them ignore the expenses, and I think a lot of them assume that the, you know, if the trial is successful, every product we have will be a $5 billion product, and I just push back on that, but they're pretending that all this overhead doesn't exist. And, you know, again, I'm a broken record with these broken biotechs, but it's just crazy. You'll have these companies $500 million in cash, one product that I think if the product gets approved, it'll be, you know, it's a phase one product. If it gets approved, it'll be eight years down the line and it'll be worth $500 million. But you risk adjust that. You account for the

expenses of just the product and the time value. And the product on its own is very popular, barely profitable. And then you say, hey, we're going to have eight years of supporting this company as a standalone. That's a disaster for shareholders. It destroys tons of shareholder value. But I think it speaks to these smaller management teams, they're not thinking of the overhead and the expenses. They're not thinking of those when they're making these decisions. And maybe it's because they're not incentivized to, right? Who's Brett I, his song and I sing, these guys are, they are the overhead, right? So they're just kind of assuming it as a fixed cost. They don't own any stock. If that overhead goes away, they go away. Their salaries go away. Their livelihoods go away.

So I understand the incentives, but it's just, it's crazy to me because you lay the math out on the paper and you write down kind of like the full company income statement. You're like, hey, you need to have 100% probability of this product being a success for this to even be borderline. It makes sense for you to invest in this thing once you factor in the overhead costs and everything. And look, I understand these managers, they're salary and bonuses and they don't want to admit that reality. but once you start breaking it down, it gets really, really obvious to me. So, all right, I've rambled for a while there. We've talked about a bunch. Look, as always, I'm really looking forward to,

got a lot of interesting podcasts in the near future. We've got our book club with Bern Hobart. We're going to be doing the snowball this month, which I've already got lots of thoughts on Warren Buffett to talk about. We've got some other interesting podcasts. I'm always happy to chat, shoot me an email, should be a DM, whether you want to talk about this stuff, other stuff, whatever.

We're always happy to chat. Appreciate you listening to me to me, Ramble for 30 minutes. I'm going to go on a run and then go good on baby duty, and we will chat soon. A quick disclaimer, nothing on this podcast should be considered an investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.