Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy
[00:00:00] S0: What do you make of this whole peptides plus citizen pharmacology side of things? I think they just came out and said, there's going to be 14 something peptides that are allowed to be compounded. And it seems to be like deregulation of sorts happening in this space. People say peptides, I think not really knowing what that even means. So maybe define it. I'm just curious what you think of this. It really plays to your earlier point about these generations – these younger generations especially – seem to be a new attitude towards all of this stuff, which is like, I want to own this. And part of owning it is a willingness to take risks that are above and beyond what is mandated or regulated that I'm allowed to take. This subculture is fascinating to me. You read about BPC-157, I think that's the number. All these interesting different things that are being tried. Do you have a take on the impact that this will have?
· Alex Karnal
[00:00:00] S1: I think it's hard to know whether it's the commercial success of GLP-1s or you look to the massive movement around peptides. Honestly, it's not even limited to just peptides. Like if you go on Reddit, you can see people are experimenting across all sorts of different dimensions. And I think what's happened is we live in a world where people want to go and figure things out that help other people. And now we've got platforms that allow people to share that. And so we see the creation of groups that can exist today that couldn't exist in the future before we had the technology like we have today, and the communities that can get formed. Whether you're looking at it from the perspective of people coming together under shared missions – that's happened throughout the history of all of humanity. This is a shared mission where people are saying like, I want to take my future health into my own hands. And I'm not willing to wait for scientists to go take on this problem independently, for it to go down the traditional pathways. I don't have the time. I need to know the answers now. Because I think, for myself, this is going to really matter. And people have a hypothesis for this and they want to test it, and so they're fighting really hard to go and get those hypotheses tested. At the same time that you see what I would call that grassroots peptide movement, you also have a recognition by the FDA that we've got to move a lot faster. So long as we have all these frictions in the system of going from a hypothesis for a medicine to the testing of a medicine in people and then ultimately in approval, disease is going to keep winning. I think we're seeing, under Marty Makary, real leadership to want to go and try to break down those barriers and those frictions that are making the drug discovery and the drug development process be incredibly time consuming and incredibly complex. And some of the manifestation of the real world impact of that spans everything from – Marty brought in an AI system to help them be able to comb through the thousands of pages of filings that sponsors behind medicines have to submit in record time, versus the armies of people that would have to comb through that, and the days and days of days of time that are wasted.
· Alex Karnal, Patrick O'Shaughnessy
All the way through to starting to challenge every aspect of – okay, well, in what settings do we not need nearly as much evidence in animals and we could rely on cell-based experiments? In what settings do we no longer need multiple redundant studies that show us the same thing? We can cut through it with one study. I think across anywhere you look, we are seeing a movement to be able to do things more efficient, faster, and having a greater impact. And in some ways that circles back to where I began. To me, 2025 was such an exciting year because we saw not just amazing medicines doing amazing things for people's health, but we saw real movements across the consumerization of this medicine, across people wanting to take health into their own hands. And across every layer of what we just described, what we see is people wanting to be far more proactive about their health than has ever been true before. [00:00:00] S0: I've had this experience with you countless times, where I'll introduce you to somebody, we'll have a conversation like this, and somewhere between 30 minutes in and 230 minutes in, the person has a thought, which they rarely say, which is – who the hell is this guy? We've done the same thing yet again, which has gone hours into the conversation without laying any sort of groundwork for your background. Can you just tell us your personal story a little bit?
· Alex Karnal
[00:00:00] S1: I've just been super lucky. Reflecting back on my childhood, I guess my parents were training me to be a biotech builder and investor since the time I was five, but man, I had the greatest childhood ever. Grew up in a typical American home. My dad was this relentless entrepreneur. He was the type of person that worked harder than anybody I knew. And he was so all-in in any business endeavor he was pursuing, like our entire family was all in on it. Mom was doing the billing. My brother and I were in the garage refinishing furniture. Kind of grew up around business by being around my dad, and he was just such an inspirational force in my life. Despite the fact that he was such a relentless businessman, he was never successful, really, at any of those. And I think if he were sitting here today – sadly, he passed of Parkinson's over a decade ago. One of the things he told me in those last few days is that he felt like he never stuck with anything long enough to see it through over the tougher moments, and would just quickly move on to the next thing and the next thing. And so I learned that lesson from watching him in real life and kind of being in business with him. But you pair my dad with my mom, who has been an absolute force in my life. My mom is this incredible ever-optimist. From my earliest memories of my mom, I can remember her drilling into my mind – we always commit and we never quit. She pretty much convinced me that I could do anything I wanted if I put my mind to it. And so I feel like from my dad, I got to experience and see what it means to take risk, and that you can fail and life goes on. And from my mom, I developed this sense of resilience. And I think both of those attributes are very much probably connected to why when I found medicine, I fell in love with it. Particularly the discovery and the development of it. So from that early childhood, I was the first in my family that got a chance to go to college. I graduated from MIT and had just an amazing experience there. For me, being at MIT and learning more and more about business and economics and science, and connecting it back to my early days of working alongside my dad and getting a chance to – at the time not realizing – but put money into some of the deals that my dad was doing. I could put $2 into a rocking chair that we bought.
· Alex Karnal
And if we sold it for 200 bucks, I thought that was amazing. And if we didn't sell it, I was pissed. I didn't realize I was learning in these early days about risk and reward from my dad. And then when you get to a place like MIT and you start to see the black-and-white version of the equations associated with that, it was a real major step forward for me that inspired me to want to then go on to New York City and to Wall Street. I thought to myself, no better place to really learn about business, and how capital connects to business and what it takes, than to come to the epicenter of that here in New York City. And so I ended up at Merrill Lynch and had some amazing mentors that were really inspiring to me. I had two major stops at Merrill, one on the capital market side, and then after doing that for a while, I wanted to go see how these crazy securities, derivatives securities traded. And so I had a chance to move to the Merrill Lynch derivatives desk. I think what was just so fun for me about reflecting back on that time is I actually never picked biotech. When I got moved over to the derivatives desk, I was just put into biotech. I was assigned to the biotech subgroup of the derivatives desk and knew nothing about it, but I fell in love with it so quickly. Because the risk reward in that setting was about life and death. And when I was looking at what was going on and the companies that I needed to be understanding to be able to price risk, it was wild to me what was going on. I had no idea about this entire field of the development of medicine. I had no real appreciation for just the sheer capital that's required to move it forward. And here I am, through total serendipity, I find myself at the epicenter of needing to understand these companies deeply enough to price risk and getting a chance to be in front of all of the buy-side investors that are building and backing these companies that I became inspired by the work that they were all doing. I was so inspired by it that in my seat, I got to be out with these people a lot because they were curious what activity was going on at the trading desk and what it meant for them and their investments. And I was always interested in learning more about, how did they build and back these companies.
· Alex Karnal
And what I came to quickly realize in talking to all these people from all these different investment firms was that their strategies were actually very similar. I said huh – knowing what I know about derivative securities and that I had learned from my days at MIT, my time at Merrill Lynch, and recognizing that most people in the life science investment world were just using equity securities – it struck me that there was a better way to build these portfolios and select securities, ways in which we might be able to either maintain the type of return that they needed for their investors, but at lower risk or maintain the risk and produce a higher rate of return. I went off and I spent my nights and weekends writing this beautiful deck that I thought had really cracked the code on what portfolios needed to look like in the life sciences sector, to allow a scale of capital to get behind these amazing medicines that had never before been achieved. And when it was done, I could not wait to send it out. I remember telling my roommate, Dom. I was like, "Dom, I'm ready to send this out. I'm going to send it to everybody. And you just watch, my phone is going to be ringing off the hook. Everybody in the world is going to want to do this and put this strategy to work. And my days at Merrill Lynch are numbered. I'm going to be out of here soon enough." I sent it out – crickets. I didn't get one single response. And I couldn't believe it. It's like, how does nobody want to do this? How does nobody want to run a portfolio that can produce the same amount of reward but with lower risk, or produce more reward for the same risk? It didn't make any sense to me. It turns out that – months went by before my phone finally rang, but then one day it did. And it was, who is today a dear friend of mine and mentor, Jeff Kaplan, who was the head of trading at that time in 2005, a tiny little firm named Deerfield Management. In its early days where Jim Flynn had just taken over as general partner. Jim was a really unique leader of Deerfield, because one of the things that I learned from spending time with him, was he obsessed over what is every which way by which our investment firm can have every type of advantage in producing our returns so that we can attract more and more capital and have more and more impact on the future of human health.