Invest Like the Best with Patrick O'Shaughnessy
· 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.
· Alex Karnal
How do we create advantages that would allow Deerfield to become the epicenter of capital to move innovation? I got lucky. I found like the one person in the world who cared about the things that I had to say. After going and presenting on my ideas there, to what at that point was a tiny team of about 12 people, I got hired to join Deerfield. And I spent then the next 15 years of my career helping to build Deerfield into that dream state of being the go-to source of capital for the industry. I didn't realize it at the time, but I guess I was 24 when I joined. And I think the next youngest person at the firm was probably 40. These were all people that were super seasoned, had incredible experience. And I think I was a bit of a novelty in the room, because I would ask like almost a thousand questions every single day. And these amazing people would spend the time to teach me. And so the apprenticeship that I was able to get from my time at Deerfield was like nothing I could have ever imagined. And I was all-in. Fully in love with investing in building and backing anything – whether that was a medical device, a diagnostic, a medicine – anything that could move human health forward. That spanned everything from helping these companies figure out how to finance their innovation, all the way through to spending time with our team on how do we design and help a company design a clinical study in a way that would give them an advantage to showing something that's really special. That stayed true for about the first decade of my time at Deerfield, and then something just really, really tragic happened. At Deerfield, we were constantly building capabilities and constantly wanting new sources of data. And one of the sources of data that we had acquired and had built out was now taking us deeper and deeper into understanding a patient's journey from the moment where they are prescribed the medicine to where they actually get the insurance approval to get that medicine, and then how long they stay on the medicine. And of course, we all know, medicine only works if we take it. And what I was quickly learning about a decade into my obsession –for all the amazing work that was going on around me is that, yes, medicine only works if people take it – but they weren't.
· Alex Karnal
That was a really dark period for me in my own journey, because as I was reflecting on all the time and effort and capital that I was a part of putting behind innovation, it became pretty quickly evident to me that you have to start asking the question – well, for what purpose? If people need to be on a medicine for the rest of their lives and they're taking it for a year on average and then quitting, are we just optimizing for maximum expected returns but no impact on public health? I had been married at the time. I got married in 2012, so I'd been married for some number of years and I started thinking about what does my life mean and how am I as a partner to my wife if I'm spending my time just focused on making money and not actually doing something that can move the world forward? We had had our first baby at that point and I was reflecting on just how impactful my parents were in terms of teaching me and what they armed me with as I went forward. And I was like, well, what lessons would I be teaching my daughters? And I got to the point where the combination of thinking across all of those dimensions made me question, am I just doing the wrong thing? Do I need to go in a different direction? The answer was no. What I needed to do was take sort of the innate entrepreneurial energy that comes from my upbringing and from my childhood, the skillset that I was able to develop from this amazing apprenticeship that I had at Deerfield, and be able to point those talents not just at the discovery side of being able to have invention, but be able to point that at the impact that's required to actually see these medicines have the impact that they're intended to have. A lot of that was my inspiration for leaving Deerfield and wanting to go build Braidwell. I'm so fortunate because one of our dear friends, Brian Kreiter, who's an incredible person – he's an amazing husband, father, incredibly talented business person – was also just as inspired as I was about where we found ourselves in the world, and the type of impact that could happen, but wasn't yet happening. He was the chief operating officer for Bridgewater. I was co-running Deerfield.
· Alex Karnal, Patrick O'Shaughnessy
And we decided to spend some really deep time trying to put our lessons learned and our insights together, and try to design from a first principles perspective, what would the operating system for human health look like, and what could we do to be the driving force behind making that happen? How could we be the force that is not just okay with a once in a decade, $100 billion GLP-1 revolution, but how do we be the force behind making sure that this once in a lifetime trillion dollar cost savings revolution happens, because we can be the force behind medicines having their moment where they can prevent diseases that are already preventable today. And that really inspired us. And after seeing it, we couldn't unsee it. And then we spent many more months thinking about, well, how do we go do it? How would we build it? And that became Braidwell, where I'm spending my time today and we're having the most fun that we've ever had. [00:00:00] S0: And if you could sum up the investment approach in its simplest form, how would you do it?
· Alex Karnal
[00:00:00] S1: I think I'd just bring you into what we call our morning meeting. So at Braidwell, we get together as a team every morning from 9.15 until we're done. And I want you to imagine like, so you're in this room – you've seen it. So you're in this room, it's a big room. And we've got an amazingly talented team of scientists, biostatisticians, commercial experts, AI experts, investors, operating people, traders, structured finance people. We have a pretty significant team. Everybody on the team has some special superpower that they contribute to us trying to figure out what companies have amazing technologies that we should be getting behind and backing, and helping them to go as fast as possible to have human impact. That cuts at some of those big unlocks that would be the difference between having something and having it have its impact. And then as we get to look across the ecosystem of everything that is moving forward today, where do we also see the major gaps where medicine should exist, but they don't yet? To me, being in that room is the most fun part of the day. And I think it very much epitomizes what our philosophy is, which is that in order to be a great backer of innovation, we essentially need to be able to answer three questions. Are the innovations we're getting behind going to work or fail? Are they ultimately going to be relevant from a market potential or not? And is there a way by which we could back this company, invest in this company, enable this company to move forward faster with capital, that produces a return that's attractive enough for the investors that are trusting us with their capital? We want to bring together the most talented minds at each of those different areas of domain expertise to give us an advantage that we can, in a replicable manner, deploy day after day after day to both be backing the companies that should be moving forward faster, and making exist the companies that don't, but should.