Dear Reader,
Happy New Year and welcome to our weekly mailbag edition of The Bleeding Edge. All week, you submitted your questions about the biggest trends in tech and biotech. Today, I’ll do my best to answer them.
If you have a question you’d like answered next week, be sure you submit it right here. I always enjoy hearing from you.
Jeff,
Editas now has the exclusive license to CRISPR patents, but do they get 100% of the royalties as companies get FDA approval and commercialize? Or does the Broad Institute share in the royalties?
– John B.
Hi, John. It’s a good question. And the answer will be important for us as investors in companies related to CRISPR genetic editing.
As a refresher, John is referring to a long-running—and at times, pretty ugly money grab (from my perspective) —patent dispute between the Broad Institute of MIT and Harvard, and U.C. Berkeley. The question revolved around whose foundational patents related to CRISPR technology had priority.
I’ve been researching and writing about CRISPR technology now for a decade. And I’ve been providing my thoughts and analysis on the patent infringement cases since 2016. As it turns out, my analysis and prediction was correct.
It took longer than I would have liked, but last year, there was resolution. There were three appeals levied from the Berkeley team. And the Broad Institute won all three. The ownership of the foundational patents have been determined.
It’s a great development. The legal fights were always a distraction for the industry. And now that Broad has clearly won, it means that Editas— which has the exclusive license to those patents from the Broad Institute—is the primary beneficiary of the patent decision.
More directly to your question, when academic institutions contractually license their patents to a company, they tend to take a small percentage of any royalties that the company derives from the patents. The company that has the license retains the majority of future patent royalty payments.
There’s a reason for this.
Patents are typically awarded at very early stages. While they may look promising, they are at times theoretical or perhaps just proven in a laboratory setting. To oversimplify, they are an idea that has yet to be brought to fruition.
Tens, if not hundreds, of millions of dollars, and sometimes billions of dollars, need to be invested to commercialize and generate a return on those investments in commercializing a patent. That’s why the company is the primary beneficiary.
So, Editas is set to be the prime beneficiary of this decision. But what does that mean for other companies in the industry?
This type of arrangement is quite common in other areas of technology. While one company may have the foundational intellectual property – like Qualcomm in the wireless industry, for example – there are still other patents from other companies that are also supplemental to the key patents from one company.
In the wireless technology industry, Qualcomm has historically been the largest patent licensing beneficiary for wireless technology due to its foundational patents in CDMA technology.
In fact, in the first three generations of wireless technology, Qualcomm was the dominant beneficiary in the industry, earning large royalties on every cell phone shipped using CDMA technology.
Even in fourth and fifth generation wireless technology, Qualcomm is still the largest beneficiary, but there are more than a hundred other companies that contribute patents into an industry patent pool which manages and distributes patent royalties. This simplifies the patent landscape for the industry.
I predict what we will see this year is a similar “patent pool” from the major players in the CRISPR space.
The intellectual property will be pooled together and managed through a limited liability company for others to draw from. And royalties will be paid out on a proportional basis. And I expect that Editas will be the largest beneficiary, but it won’t be the only one. And a portion of what Editas receives will of course flow back to the Broad Institute.
To us, it may seem like CRISPR is a very established technology. After all, we have been covering the technology for years.
But we’re still in the very early stages. There has yet to be an FDA-approved CRISPR therapy. I predict the patent pool will be a precursor to that and that an FDA-approved therapy will come next year.
This is still a greenfield opportunity. There will be plenty of opportunities for several companies to flourish in the years ahead.
Hi Jeff,
I just read your editorial on EV’s and lithium production. I personally won’t be buying any kind of EV until they fix or replace the lithium component.
Lithium is dangerous in that it can catch fire and it’s very hard to put out, it takes so long to charge, its expensive and there isn’t a lot of it, its limited to shorter distances than ICE vehicles, etc. I wished you would do a piece on solid state batteries which are a total 180 from lithium batteries.
– Stan D.
Hi, Stan. As it happens, I’ve written extensively on solid-state batteries and the problems with current generation lithium-ion batteries.
It was the topic of one of my presentations at our most recent investor conference last year. I’m happy to share my thoughts on the topic, as it’s a favorite of mine.
I’d also add to your list of issues with EVs and lithium batteries. It is a very dirty and destructive process that requires mining and prolific use of fossil fuels. And to make matters worse, almost all EVs are “fueled” with electricity that has been produced by coal or natural gas. Put simply, that is not clean.
The problems you mentioned with current electric vehicle batteries aren’t because of lithium itself. It has everything to do with the chemistry of these batteries.
At a very high level, current generation lithium-ion batteries look a bit like the graphic below. On one side, we’ve got an anode. And on the other side, we have a cathode. The device in the middle is called a separator.
And all the little yellow circles below are lithium ions…
A Traditional Lithium-Ion Battery
Source: ResearchGate
The light blue is an electrolyte – a non-aqueous liquid material through which lithium ions can pass very easily. The separator is porous, which allows the lithium ions to pass back and forth.
The anode holds the lithium ions in a charged state. And when we need to use electricity, the power goes out, and the lithium-ion shuttles back to the cathode without the charge to get ready to be charged up again. This is the process that makes current EV batteries “run.”
The separator is important. Because if we mix an anode and a cathode together, we’re going to get fire.
And the problem with lithium-ion batteries is that the lithium ions latch onto the anode and grow dendrites – little metallic microstructures.
And the dendrites continue to grow as you use these batteries. In the worst-case scenario, they grow through the separator and into the cathode.
Here’s a visual of what it looks like:
Dendrites Crossing Separator
Source: Wikimedia Commons
When dendrites cross the separator, it happens throughout the battery, not just in one spot. And that’s when we hear about batteries catching fire.
And while this is rare, it is one big reason the auto industry is investing billions of dollars trying to figure out how to make the next great battery technology.
The industry believes the answer is solid-state batteries. There are a few clear benefits. Let’s a look at the image below…
Lithium-Ion vs. Solid-State Batteries
Source: C&EN
On the left, we’ve got the traditional lithium-ion battery. That’s what we’ve been discussing. On the right is an example of a solid-state battery. We still have an anode and a cathode. But the solid electrolyte in the middle acts as the barrier, the medium through which lithium ions can go back and forth.
There are some strong advantages to having a design like this if we can make the chemistry work.
On the solid-state side, we get higher energy density and lower weight with respect to the energy that we’re carrying. When we lower the weight of a car, we get more margin in the range of the vehicle.
What does this mean in terms of range? Some researchers estimate that solid-state batteries would result in 80% more range for an electric vehicle. We would be looking at potentially 400+ miles of range per charge. That’s on par with what we’d expect from many gas-powered cars.
Those same estimates predict that charging time would also decrease. Charging a solid-state battery from 10% to 90% would take less than 20 minutes. That’s a game changer.
But it’s not without problems.
Silicon is the desired material for solid-state batteries. On the surface, it sounds great. Silicon can store ten times as much energy by mass compared to graphite, which is what is typically used in the anode to store the charged ions.
The issue is that silicon expands and contracts significantly through the process of charging and discharging. And it is also impacted by temperature. This can also result in fires.
There is a lot of nuance in different approaches to using silicon in solid-state batteries, and none of the approaches has been proven and commercialized yet for EVs. This is an area that we follow closely for fairly obvious reasons. You can be sure that we’ll be talking about this more frequently this year in The Bleeding Edge.
Hi Jeff,
Could you please comment on the future of TuSimple (TSP), whom you were very excited about in the last year. Either it is an incredible buy at current prices, or it will go under. What is your take?
Thanks,
– Gordon E.
Hi, Gordon. I’d be happy to comment on TuSimple.
To catch readers up, TuSimple is a company focused on fully self-driving semi-trucks that can ship goods across the country – no driver necessary, of course.
Its technology allows a number of trucks to line up in a peloton so that they can draft behind one another. Doing so takes advantage of aerodynamics and reducing resistance for the trucks following behind the lead truck. Here’s what one of the trucks looks like.
TuSimple Self-Driving Semi
Source: Barron’s
I’ve been excited about the potential for TuSimple and other autonomous companies that have been focused on logistics and distribution. I see this as a logical application of autonomous technology with a very clear and fast value proposition for trucking companies.
TuSimple’s trucks can handle lane changes, on-ramps, off-ramps, and even traffic lights – all on its own. And the company has made great progress recently. Last year, the company announced its trucks had passed the seven-million-mile mark for autonomous driving.
The company went public in April of 2021 when IPO markets were remarkably healthy. But like so many young companies, it has not fared well since. The stock is down about 96% from its IPO levels.
That begs the question: Is it now a great buy?
This is a particularly interesting because TuSimple actually has a negative enterprise value of $772 million. How is that possible for a company with great tech, revenues and more than $1 billion in cash?
A simple equation for enterprise value is:
EV = Equity value (usually market cap) + debt – cash
TuSimple’s market capitalization is $334 million, and it has $50 million in debt, plus $1.156 billion in cash. Its negative enterprise value is a product of having such a large cash position from its IPO – when the markets were healthy – and such a low market capitalization – because the markets are so currently unhealthy.
Of course, this is a ridiculous moment in time to see these kinds of valuations; but it doesn’t mean that TuSimple can’t go lower.
My concern with TuSimple right now as an investment is that it is burning through cash. For the next two years it will average a negative free cash flow of about half a billion.
In a healthy, high growth market, that can work if there is a clear path towards positive free cash flow and ultimately profitability. But in today’s market, institutional capital wants nothing to do with these kinds of investments.
At its current burn rate, it has enough cash to survive the next two years. And if it cuts back significantly on its expenses & R&D, it could last even longer.
So I don’t think it will “go under”, as long as the management team makes smart allocation decisions with its annual budget.
But it is hard for me to get excited about TuSimple as an investment right now. Whether we agree with it or not, all growth companies burning through cash right now are being punished.
In the event of another drop in the stock markets, stocks like TuSimple could ride even lower as institutional capital flees for safety.
And we shouldn’t overlook that there is regulatory risk as well. The whole industry is counting on a regulatory framework that allows for self-driving trucks without safety drivers.
But what if the administration bends to labor unions and insists that there is always a safety driver? That would defeat the purpose and eliminate all operational savings of autonomous technology.
It would be silly of course, after all, there is a shortage right now of about 80,000 truck drivers and that gap is expected to double by 2023. But we’ve seen this kind of “punishment” of Tesla for similar reasons. As investors, we have to consider these risks.
With all that said, I just can’t recommend TuSimple right now. And for those of us that are patient, I believe we’ll have an even more attractive buying opportunity in the near future.
And Gordon, it makes me happy that you made a note of something you read, did some research, and have been tracking the company over time.
This is such an important skill for investors. We so often hear or read about incredible companies that sound fantastic. It makes us want to invest.
But without understanding a company’s financials, where it is in terms of product development, competitive positioning, go-to-market strategy, regulatory environment, valuation, and macro/micro economic factors that might impact its business, etc., we really don’t know enough to determine if it is a good investment or not.
You’re asking the right questions…
Regards,
Jeff Brown
Editor, The Bleeding Edge
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
