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Biogen Was The Train Wreck Everyone Saw Coming: Nisen (Podcast) · Bloomberg Intelligence

• 0:02
  Speaker 1: Welcome to the Bloomberg Penel podcast. I'm Paul Swinge. You,
• 0:05
  Speaker 1: along with my co host Lisa Brahma wits each day
• 0:07
  Speaker 1: we bring you the most noteworthy and useful interviews for
• 0:10
  Speaker 1: you and your money. Whether at the grocery store or
• 0:12
  Speaker 1: the trading floor. Find a Bloomberg Penil podcast on Apple
• 0:15
  Speaker 1: Podcast or wherever you listen to podcasts, as well as
• 0:17
  Speaker 1: at Bloomberg dot com. Well, Biogen and its partner said
• 0:21
  Speaker 1: they had decided to halt a late stage study of
• 0:24
  Speaker 1: an experimental Alzheimer's disease drug, marking another setback for drug
• 0:28
  Speaker 1: maker's efforts to find a therapy for the degenerative ailment
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  Speaker 1: that knocked the stock of Biogen down nearly thirty percent
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  Speaker 1: so far today. UH to help us dig deeper into
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  Speaker 1: this story, we welcome Max Nissan. Max's the biotech format
• 0:42
  Speaker 1: and healthcare calumnist from Bloomberg Opinion. He joins us in
• 0:45
  Speaker 1: our Bloomberg eleven thirties three oh studios here in New York. So, Mac, Max,
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  Speaker 1: this is a huge deal for the company's stock down
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  Speaker 1: thirty What happened? So? This was one of the last
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  Speaker 1: really big late stage Alzheimer's studies that focused on the
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  Speaker 1: particular way of potentially treating the disease, focusing on on
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  Speaker 1: the creation of amyloid beta plaques. But um, you know,
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  Speaker 1: there have been a number of previous failures, really prominent
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  Speaker 1: ones of a very expensive of late stage trials, most
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  Speaker 1: recently Elli Lily and then Roche gave up on a
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  Speaker 1: similar medicine. So it's something that you could have seen coming.
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  Speaker 1: But you know, Biogen has always pointed to data and
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  Speaker 1: some differences in its medicine and the way it's it
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  Speaker 1: ran its trials that that had people hoping that that
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  Speaker 1: this might finally be the one to break through. But
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  Speaker 1: it's becoming more difficult to avoid the conclusion that this
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  Speaker 1: approaches is pretty fundamentally flawed in some way. Yeah, Max,
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  Speaker 1: to your credit, you wrote a column to this effect
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  Speaker 1: almost a year ago basically saying this is there's not
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  Speaker 1: really any evidence that this is going to work. In fact,
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  Speaker 1: it sort of points to the opposite. And I'm just wondering,
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  Speaker 1: given given that, I mean, yes, you are prescient and
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  Speaker 1: your your insights are are very well taken, but it's
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  Speaker 1: just curious that it would remove of one third of
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  Speaker 1: the market value of the company on these results coming out,
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  Speaker 1: How does that has that square with reality? And what
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  Speaker 1: does that say about evaluations currently? So I think a
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  Speaker 1: lot of this has to do with the fact that,
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  Speaker 1: you know, if someone actually succeeded, it would be you know,
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  Speaker 1: an instant blockbuster, an incredible scientific breakthrough. You know, the
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  Speaker 1: consensus sales for this medicine, which are supposedly risk adjusted
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  Speaker 1: for ten billion dollars a year, you know, and if
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  Speaker 1: you actually succeeded and had a clinically significant impact on Alzheimer's,
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  Speaker 1: that that estimate might be low. So it's that kind
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  Speaker 1: of tantalizing upside that had some people still invested even
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  Speaker 1: if the likelihood of success was demonstrably pretty low. And
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  Speaker 1: there's also the fact that this has been kind of
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  Speaker 1: a huge focus of biogen not just this this big
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  Speaker 1: late stage trial, but a number of other medicines focusing
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  Speaker 1: either on this approach to Alzheimer's or Alzheimer's in general.
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  Speaker 1: So this kind of diminishes confidence in those further program
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  Speaker 1: ms and just in you know, the ability to tackle
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  Speaker 1: this disease anytime soon or with existing approaches in general.
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  Speaker 1: So you kind of had to write off not just
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  Speaker 1: as you canna map this medicine, but other programs as well,
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  Speaker 1: and then also biogen strategy in general has been to
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  Speaker 1: focus on these kind of riskier neurological conditions, you know.
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  Speaker 1: And it's great from a kind of a human and
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  Speaker 1: scientific perspective that you're that they're doing that. You need
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  Speaker 1: someone to otherwise we're we're not going to make progress.
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  Speaker 1: But from an investment perspective, h it's it's pretty scary,
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  Speaker 1: especially when their current big money maker and multiple scourses
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  Speaker 1: medicines is starting to kind of level out and decline.
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  Speaker 1: So that strategy looks even more risky right now than
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  Speaker 1: it did a day ago. So but if you if
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  Speaker 1: you talk about a market that is maybe ten billion
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  Speaker 1: dollars a year, I mean as monstrous. These companies cannot
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  Speaker 1: walk away from this, right, I mean even Biogen, who's
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  Speaker 1: just got whacked today in a stock market, they can't
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  Speaker 1: really walk away, can they. I think they should consider
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  Speaker 1: walking away from related approaches um And one of their
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  Speaker 1: biggest Phase three Alzheimer's medicines is you know, another amyloid
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  Speaker 1: beta focused program. And then the other kind of big
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  Speaker 1: area that people focusing this is on the towel protein
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  Speaker 1: that also has a pretty bad track record, So you
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  Speaker 1: really need to kind of look take a take a
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  Speaker 1: really hard look at those programs and think about whether
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  Speaker 1: there's a compelling reason to keep investing in them, or
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  Speaker 1: is it time to move on to approaches that you
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  Speaker 1: know are less validated and even risk here in much
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  Speaker 1: earlier stage, but to take a significant step away from
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  Speaker 1: from a hypothesis that has kind of repeatedly proven to
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  Speaker 1: to fallen short, Max, I want to zoom out a
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  Speaker 1: little bit because this whole situation really raises a very
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  Speaker 1: important question about development of new drugs, uh at about
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  Speaker 1: the expense and the risk of them, but the necessity
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  Speaker 1: for the public good. Uh and sort of where development
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  Speaker 1: should happen, right, I mean there is some development at universities,
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  Speaker 1: But I mean, can you give us a sense of
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  Speaker 1: companies of their approach of how much money they'll invest
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  Speaker 1: in R and D, Whether there is sort of a
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  Speaker 1: reliance on you know, universities, how how that works and
• 5:14
  Speaker 1: they determine sort of what what's worth the investment. Sure,
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  Speaker 1: I mean, there there's a lot of spending on R
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  Speaker 1: and D, both directly in terms of internal discovery and
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  Speaker 1: development pipelines and then externally in the form of acquisitions,
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  Speaker 1: licensing deals with with little biotechs or or universities. Many
• 5:32
  Speaker 1: of those little biotexs are spun out of universities, and
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  Speaker 1: how to go about doing that is an incredibly difficult question,
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  Speaker 1: one that I think pharma has a lot of a
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  Speaker 1: big way along ways to go in grappling with because
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  Speaker 1: more of their spending is increasingly directed at at smaller populations,
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  Speaker 1: so cancer and rare disease because you have you have
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  Speaker 1: pricing power there, and the trials are smaller and cheaper.
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  Speaker 1: Alzheimer's trials are giant, expensive and they fail all the time.
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  Speaker 1: Okay when on all three fronts um but you know,
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  Speaker 1: this really raises a question, especially when you talk about say,
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  Speaker 1: vaccines that aren't very sexy and that our money losers
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  Speaker 1: to antibiotics, you know, things that actually everyone uses all
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  Speaker 1: the time and that are crucial life saving UH drugs.
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  Speaker 1: It just raises a question, you know, what is the
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  Speaker 1: correct model for this with respect to either government intervention
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  Speaker 1: or sponsorship or rewarding or you know, how do you
• 6:26
  Speaker 1: how do you incentivize these companies to do that. I
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  Speaker 1: do think there needs to be uh a kind of
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  Speaker 1: grand rethinking of of how what medicines we pay for
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  Speaker 1: and why and how much we pay for them. If
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  Speaker 1: we continue to kind of leave the system of the
• 6:42
  Speaker 1: status quo where we pay a lot for these medicines
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  Speaker 1: that treat a very small population, often not that effectively,
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  Speaker 1: and have antibiotics that are not fundamentally not profitable to develop.
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  Speaker 1: So there needs to be some kind of incentive, whether
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  Speaker 1: it's you know, the government makeing specific you know, specifically
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  Speaker 1: funding that research, some way to bring the prices up there.
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  Speaker 1: There does need to be some kind of intervention otherwise
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  Speaker 1: we're going to continue a further down this path that
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  Speaker 1: we that our current market heavily incentivizes. So that's let's
• 7:15
  Speaker 1: just go back to Alzheimer's. Is anybody doing it right?
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  Speaker 1: Is anybody making headway? Um? Not not not yet. Yeah,
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  Speaker 1: you know, there there are companies that are taking alternative approaches.
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  Speaker 1: There's interest in this, but yeah, that that kind of
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  Speaker 1: basic research, but there's nothing right now that's kind of
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  Speaker 1: in a big potentially you know, the sort of child
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  Speaker 1: that could get a medicine approved that that is of
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  Speaker 1: a kind of dramatically different approach than things that we've
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  Speaker 1: seen that have failed in the past. So there's a
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  Speaker 1: lot of work yet to be done, and a lot
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  Speaker 1: of that's gonna end up having to be I think
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  Speaker 1: in in small biotechs and and at universities UM where
• 7:53
  Speaker 1: there's a little bit more more tolerance for failure. Uh
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  Speaker 1: So we'll see what happens. I continue to be hopeful,
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  Speaker 1: but where we're a long way off still. Max Nison,
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  Speaker 1: thank you so much for being with us. Max Neison
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  Speaker 1: is a Blomberg opinion columnist who covers the biotech and
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  Speaker 1: all things health topics. I gotta say his column back
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  Speaker 1: in July of last year, he said, this isn't the
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  Speaker 1: home runs. Some investors were looking forward respect to Alzheimer's
• 8:18
  Speaker 1: treatments that Biojean was trying to develop. The Federal Reserve
• 8:37
  Speaker 1: sent a very clear message to markets yesterday they were
• 8:40
  Speaker 1: not playing to high grades this year or possibly again
• 8:44
  Speaker 1: in this credit cycle, signaling a very devish turn. The
• 8:48
  Speaker 1: question is do they have some sort of insight into
• 8:52
  Speaker 1: the U S economy that the rest of the market doesn't,
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  Speaker 1: and are they seeing something that is weaker than what
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  Speaker 1: we have been talking about and seeing. Joining us now
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  Speaker 1: in our Bloomberg Interactive Broker Studios, God leving On, Chief
• 9:04
  Speaker 1: economists for North America at the Conference Board. The Leading
• 9:07
  Speaker 1: Economic Indicator Index came out today with an update that
• 9:11
  Speaker 1: was better than expected, showing an actual increase in February
• 9:14
  Speaker 1: to zero point two. Uh increasing to zero point I'm
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  Speaker 1: just wondering, is this indicating that the FED is responding
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  Speaker 1: to something else other than weakness in the economy. I
• 9:27
  Speaker 1: think so. I don't think the FED knows more than
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  Speaker 1: the rest of us about the economy and about the
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  Speaker 1: future of the economy. UM. I think that the weakness
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  Speaker 1: and economy that we are seeing right now is not
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  Speaker 1: a surprise. I think it's a reaction to a very
• 9:46
  Speaker 1: traumatic December in the especially in retail sales and some
• 9:52
  Speaker 1: of the declining industrial production and you orders that we
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  Speaker 1: are seeing since then. He is a result of that decline.
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  Speaker 1: But the fundamental terms of the economy I think are
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  Speaker 1: not very different than they were three or four months ago. Um,
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  Speaker 1: And I think they're surprisingly dovish. Yeah. It's interesting to
• 10:11
  Speaker 1: get the data that came up in the Leading Economic
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  Speaker 1: Indicator today from the Conference Board, better than expected, showing
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  Speaker 1: some strength. UM. So what do you think the FED
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  Speaker 1: is looking at to effectively double down on their dovishness
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  Speaker 1: if you will yesterday? What what what are they saying
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  Speaker 1: that maybe we're not? Yeah. I just think they made
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  Speaker 1: the decision when they saw that in December that they
• 10:32
  Speaker 1: are going to be blamed for a recession if it
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  Speaker 1: was to come, and they don't. They are scared and
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  Speaker 1: they don't want this responsibility. I think they because of that,
• 10:41
  Speaker 1: they made the shift, and they're using the economic outlook
• 10:46
  Speaker 1: is almost as an excuse to m justified their shift.
• 10:51
  Speaker 1: But I don't think there is indeed the reason to
• 10:55
  Speaker 1: be very dovish or very pessimistic about the future outlook.
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  Speaker 1: Think they made a mistake. Um, I think it really
• 11:04
  Speaker 1: depends on your ideology and other things. I think that thing. Yeah,
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  Speaker 1: I think that there is certainly more likelihood of increasing
• 11:14
  Speaker 1: inflation then I think the FED leads us to believe.
• 11:18
  Speaker 1: Right now, I think if we close our eyes and
• 11:21
  Speaker 1: use our imagination and use the forecast of most economist,
• 11:26
  Speaker 1: what we'll get is an economy that is growing by
• 11:29
  Speaker 1: two to two and a half percent in the next
• 11:31
  Speaker 1: six months or so, labor market tightening further, wages accelerating further,
• 11:37
  Speaker 1: and in that scenario, I think having a higher inflation
• 11:42
  Speaker 1: is a very likely outcome is that bad. I mean,
• 11:46
  Speaker 1: higher wages isn't very good thing, that's a good So again,
• 11:50
  Speaker 1: it depends what your goals are. If if your main
• 11:54
  Speaker 1: goal is to control inflation and make sure that it
• 11:56
  Speaker 1: doesn't go above what your comforts on, then I think
• 12:03
  Speaker 1: this is a mistake. If you're willing to let inflation
• 12:06
  Speaker 1: go higher or risk that inflation go higher, but have
• 12:12
  Speaker 1: more people joined the labor market and having higher wages
• 12:15
  Speaker 1: than I think that's a very legitimate decision. So to
• 12:18
  Speaker 1: what extent do you think the FED chairman power are
• 12:21
  Speaker 1: being influenced by some of the geopolitical issues in the world,
• 12:25
  Speaker 1: China slowing down, trade issues with China, European Union certainly
• 12:31
  Speaker 1: the economic weakness there and Brexit just adding on to it.
• 12:34
  Speaker 1: How much do you think they took those issues into
• 12:36
  Speaker 1: account in kind of surprising the market with their town yesterday.
• 12:41
  Speaker 1: I think it's it's a factor that affects the outlook definitely,
• 12:47
  Speaker 1: but it's not something that is new. The weakening in
• 12:51
  Speaker 1: China and Europe has been going on for several months.
• 12:54
  Speaker 1: I think, if anything, in terms of the fundamentals, they
• 12:57
  Speaker 1: are good news. In recent months, the end of the
• 13:00
  Speaker 1: down the increasing stock prices, the improvement or the smaller
• 13:05
  Speaker 1: chances of a trade war with China. I think all
• 13:07
  Speaker 1: of those are good things, and I think that would
• 13:11
  Speaker 1: be reflected in the outlook going forward. I'm still going
• 13:15
  Speaker 1: back to inflation, the idea that inflation could pick up
• 13:18
  Speaker 1: more than people expect later this year. What's going to
• 13:22
  Speaker 1: be driving that. Why is this time different, this late
• 13:25
  Speaker 1: in the cycle, since we haven't seen a real acceleration
• 13:28
  Speaker 1: inflation until now, right, I think we didn't have as
• 13:34
  Speaker 1: fast of a wage growth as we have right now.
• 13:37
  Speaker 1: I think the in twenty eighteen, it's the first time
• 13:41
  Speaker 1: that we actually saw a visible increasing wages in the
• 13:45
  Speaker 1: main measures, they're getting close to three and a half percent.
• 13:49
  Speaker 1: And I think also revenues will grow more slowly in
• 13:53
  Speaker 1: simply because the economy will slow down. So when you
• 13:56
  Speaker 1: have an increase in labor cost and slow down in revenue,
• 14:00
  Speaker 1: that will put a significant pressure on profits, and companies
• 14:04
  Speaker 1: in many cases will choose to shift some of the
• 14:07
  Speaker 1: costs to the consumer. So I think I think we
• 14:10
  Speaker 1: now have a better chance of getting higher inflation than
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  Speaker 1: any time in this expansion. God Levanon, thank you so much.
• 14:16
  Speaker 1: We appreciate you. Coming in god Lebanon, chief Economist for
• 14:19
  Speaker 1: North America for the conference board, joining us in our
• 14:22
  Speaker 1: Bloomberg Interactive Broker studio. Well, yesterday we had the FED
• 14:45
  Speaker 1: double down on its dobish stance, perhaps maybe seeing something
• 14:49
  Speaker 1: in the economy that the rest of us don't see.
• 14:51
  Speaker 1: To dig into that a little bit more, we welcome
• 14:53
  Speaker 1: our guest Bill Zox. Bill is the chief investment Officer
• 14:57
  Speaker 1: of fixed income at Diamond Hill Capital Management approximate nineteen
• 15:00
  Speaker 1: billion dollars under management, based in Columbus, Ohio, but he
• 15:03
  Speaker 1: joins us here in a Bloomberg Interactive Broker studio. Bill
• 15:06
  Speaker 1: welcomed to our studio. What did you take away from
• 15:10
  Speaker 1: the Fed's report and from the comments from chair Chairman
• 15:13
  Speaker 1: Pal yesterday? Well, I was surprised. I think the FED
• 15:17
  Speaker 1: was clearly too tight in December. The Fed needs to
• 15:20
  Speaker 1: pay attention to market signals, but in this case, now
• 15:25
  Speaker 1: the Fed is paying too much attention to market signals.
• 15:27
  Speaker 1: I think that the Fed is overcorrected and gone too
• 15:30
  Speaker 1: far in the other direction, given the market even more
• 15:33
  Speaker 1: than what it really wants or needs at this stage. Well,
• 15:36
  Speaker 1: what's the consequence, I mean, what's the what's the detrimental consequence. Well,
• 15:39
  Speaker 1: I think it's it's not a good situation when you've
• 15:42
  Speaker 1: basically priced volatility out of all assets are largely priced
• 15:47
  Speaker 1: volatility out. I think it's better when assets are are
• 15:50
  Speaker 1: priced for some volatility. So basically, the fear here is
• 15:54
  Speaker 1: that if the FED holds rates too long, it can
• 15:56
  Speaker 1: create I don't want to say bubbles, but certainly excesses
• 15:59
  Speaker 1: and different areas in different markets. And people point to
• 16:02
  Speaker 1: stocks or HW yield bonds. But the interesting thing is
• 16:05
  Speaker 1: is that following the FED meeting, you didn't really see
• 16:07
  Speaker 1: that gut reaction. You actually saw the knee jerk was
• 16:10
  Speaker 1: risk off and you saw credit spreads widen. Actually, so
• 16:14
  Speaker 1: how do you sort of square these sort of uh,
• 16:17
  Speaker 1: these these these developments. Well, we've seen such a tremendous
• 16:20
  Speaker 1: move back in risk assets since late last year, and
• 16:25
  Speaker 1: I think if you look at the treasury market, should
• 16:27
  Speaker 1: high yield spreads are about four d basis points right now.
• 16:30
  Speaker 1: If you look at the treasury market, high old spreads
• 16:32
  Speaker 1: should probably be somewhat wider than that. There's a disconnect
• 16:35
  Speaker 1: between the two markets. So where are you thinking about?
• 16:39
  Speaker 1: Where do you see opportunity? Where do you see value.
• 16:41
  Speaker 1: I know you principally play in the high yield market.
• 16:43
  Speaker 1: Is that right? So where are you seeing some opportunity here?
• 16:45
  Speaker 1: Principally in the high yield market? But uh, ironically, as
• 16:50
  Speaker 1: high yield investors are moving up in quality, they're making
• 16:53
  Speaker 1: double B corporate bonds very rich, and his investment grade
• 16:57
  Speaker 1: investors are moving up in quality, they're actually making triple
• 17:00
  Speaker 1: B bonds, certain triple B bonds attractive. So one theme
• 17:04
  Speaker 1: is to sell double bees that are priced like investment
• 17:07
  Speaker 1: grade and buy triple bees that are priced like high yield.
• 17:11
  Speaker 1: That's really interesting going forward, I'm wondering, are we out
• 17:14
  Speaker 1: of Goldilocks? Where is the FED remains? Do wish? Uh?
• 17:18
  Speaker 1: And and even stops it's a balance sheet roll off
• 17:22
  Speaker 1: that won't be as supportive for credit going forward because
• 17:25
  Speaker 1: of how much it's already rallied. That's exactly right. I
• 17:28
  Speaker 1: think Goldilocks was basically priced into the market, and now, uh,
• 17:32
  Speaker 1: for the data to confirm a Goldilocks scenario like that
• 17:36
  Speaker 1: is very unlikely. So that means that bad news will
• 17:39
  Speaker 1: be bad news when it comes to the economy. I
• 17:42
  Speaker 1: think that's right. So you know, one of the things
• 17:44
  Speaker 1: I think a lot of people. Obviously, we're surprised. I
• 17:46
  Speaker 1: think I'm sensing your sense of surprise about how doubbish
• 17:48
  Speaker 1: the FED was. You say, do you think they are
• 17:50
  Speaker 1: seeing something that maybe the market is not, and if so,
• 17:53
  Speaker 1: what do you think that could be. I don't think
• 17:57
  Speaker 1: that's the case, but the market is very concerned about that. Uh,
• 18:00
  Speaker 1: you know, I think that. I just don't understand. The
• 18:02
  Speaker 1: FED was not paying enough attention to market signals in December.
• 18:06
  Speaker 1: Now they're paying too much attention. That's all I can say.
• 18:08
  Speaker 1: I thought I thought it should be more of a
• 18:10
  Speaker 1: give and take with the markets. When you talk about
• 18:12
  Speaker 1: the high old bond market, there have been a number
• 18:15
  Speaker 1: of idiosyncratic moves. It's sort of up moving from a
• 18:19
  Speaker 1: macro driven market to a very micro driven market with
• 18:22
  Speaker 1: specific companies either doing really well, they're dead, or really poorly.
• 18:27
  Speaker 1: I'm just wondering, specifically within sectors companies, where do you
• 18:31
  Speaker 1: see the opportunities right now? Yeah, you know, I'll give
• 18:36
  Speaker 1: you one example that's sort of interesting and there to
• 18:39
  Speaker 1: Detroit companies. It's consistent with a theme that I just mentioned.
• 18:43
  Speaker 1: It's Motor City, a single casino credit in Detroit and
• 18:47
  Speaker 1: Ford Motor and we're buying Ford motor and we've sold
• 18:51
  Speaker 1: motor City. That's what I was talking about before. Motor City,
• 18:54
  Speaker 1: a double B low double be credit priced inside of
• 18:57
  Speaker 1: two d basis points credit spread. Forward opened up the
• 19:01
  Speaker 1: investment grade market this year with a three year bond
• 19:03
  Speaker 1: priced at three basis points over treasury. So there's a
• 19:08
  Speaker 1: disconnect for you. Are there some sectors in the high
• 19:10
  Speaker 1: yield to sectors within the hig yield that you like
• 19:12
  Speaker 1: right now? Um or? Is everything a little rich from
• 19:15
  Speaker 1: your perspective? I mean it's you have to be careful.
• 19:18
  Speaker 1: We're late cycle. You've got to be careful in the
• 19:21
  Speaker 1: high yield market. But we always like financials more than
• 19:24
  Speaker 1: our peers, and and we definitely find things to do
• 19:27
  Speaker 1: in financials. I'll give you another Detroit Credit Credit Acceptance,
• 19:31
  Speaker 1: a subprime auto lender, which is a very well managed company.
• 19:34
  Speaker 1: You're bullish on Detroit? Do we do like Detroit? Even
• 19:37
  Speaker 1: though from Columbus, Ohio? I like Detroit Credits. So, Bill,
• 19:42
  Speaker 1: you said late cycle. When do you expect the cycle
• 19:46
  Speaker 1: to turn and defaults to really meaningfully pick up? Yeah?
• 19:50
  Speaker 1: I mean that that that's hard to call. Uh, you know,
• 19:53
  Speaker 1: I think that the cycle the FED is doing what
• 19:58
  Speaker 1: it can to extend the cycle, but things can shift
• 20:01
  Speaker 1: very quickly and and markets will probably drive it like
• 20:04
  Speaker 1: they did in the fourth quarter, where fundamentally not a
• 20:07
  Speaker 1: lot was happening, but the massive increase in volatility and
• 20:10
  Speaker 1: markets increased the probability of recession quite dramatically. Thank you
• 20:15
  Speaker 1: so much for being with us. Bill's ocks. He is
• 20:18
  Speaker 1: the chief Investment Officer of fixed Income at Diamond Hill
• 20:21
  Speaker 1: Capital Management. Joining us here in our Bloomberg Interactive Brokers
• 20:25
  Speaker 1: Studios Well Levi Strauss. They priced their ip O last
• 20:42
  Speaker 1: night at seventeen dollars per share, that was above the
• 20:45
  Speaker 1: I p O range of fourteen and sixteen, and looking
• 20:48
  Speaker 1: on my Bloomberg terminal right now, the stock is not
• 20:50
  Speaker 1: open for trading yet today, but it is indicating even
• 20:53
  Speaker 1: higher at twenty and a half to twenty one and
• 20:54
  Speaker 1: a half is the range. So clearly a lot of
• 20:57
  Speaker 1: investor appetite for this name. To help us kind breakdown
• 21:00
  Speaker 1: the deal and take a look at the company in
• 21:01
  Speaker 1: the space is Hen razutas Hen is the apparel and
• 21:05
  Speaker 1: Footwell Footwear an also Bloomberg Intelligence. He joins us on
• 21:08
  Speaker 1: our Bloomberg Interactive Brooker's studio. Hen, thanks so much for
• 21:11
  Speaker 1: coming in. So what does the market really like about
• 21:14
  Speaker 1: this name? I mean, again, it seems like a lot
• 21:16
  Speaker 1: of demand above where investors are or the investment bankers
• 21:19
  Speaker 1: initially put the ip O range on, right. So obviously
• 21:24
  Speaker 1: a big name with a long legacy, big history in
• 21:27
  Speaker 1: the apparel space. Um that we don't see too many
• 21:29
  Speaker 1: I p o s and in the space in the
• 21:31
  Speaker 1: last year's you know, we would more companies bankrupt or
• 21:33
  Speaker 1: going private. So that's that's a that's unusual. What I
• 21:37
  Speaker 1: think people like about it is a very uh, relatively
• 21:40
  Speaker 1: low valuation they put on the deal in the first place,
• 21:43
  Speaker 1: UM on an if it that basis, it was about
• 21:45
  Speaker 1: eight and a half UM, where the industry averages around eleven.
• 21:50
  Speaker 1: So I think that's kind of the movement we've seen
• 21:52
  Speaker 1: this morning. Why are they doing an IPO or why
• 21:56
  Speaker 1: have they just one one? I guess and we're waiting
• 21:58
  Speaker 1: to see how it actually trades. But why now? Right?
• 22:01
  Speaker 1: So eve Strice is a company, you know, family owned
• 22:03
  Speaker 1: company house family, um, you know own it for ages
• 22:06
  Speaker 1: and I think you know, to have some liquidity in
• 22:09
  Speaker 1: their stake they have in the company. They're they're putting
• 22:12
  Speaker 1: out the percent of the company. So what is all right,
• 22:15
  Speaker 1: So what's the investment case here is this? Is this
• 22:17
  Speaker 1: like any kind of growth in this business? UM? What
• 22:20
  Speaker 1: are investors buying here? Right? So first of all, the
• 22:22
  Speaker 1: core business is the bottoms, right that the genes, it's
• 22:25
  Speaker 1: about sev The revenue, it's a it's a big category,
• 22:28
  Speaker 1: all right, it's about hundred billion dollars. And then I
• 22:31
  Speaker 1: think about this specific company, UM a lot like Nike
• 22:34
  Speaker 1: what we see in Athletic. In every region that they
• 22:36
  Speaker 1: operate there they hold the number one position. So in
• 22:39
  Speaker 1: the US it is almost thirteen percent of market share
• 22:41
  Speaker 1: just one company. UH in any other region are number one.
• 22:44
  Speaker 1: Europe they're only number two. So I think people are
• 22:47
  Speaker 1: looking at it saying, you know, it's the best in
• 22:48
  Speaker 1: breed in that specific category that's to start. UM. I
• 22:52
  Speaker 1: think after they're going public, they do have opportunities to
• 22:55
  Speaker 1: venture out of the core business, to go into there's
• 22:58
  Speaker 1: a story today about going into tops, sweatshirt, T shirts, etcetera. UM, accessories, footwear,
• 23:04
  Speaker 1: those are all under penetary categories that they can use
• 23:06
  Speaker 1: the brand name to venture into. This is such an
• 23:09
  Speaker 1: interesting I p o at a time when retail is
• 23:11
  Speaker 1: called under question in an Amazon era, when branding doesn't
• 23:15
  Speaker 1: necessarily mean quite as much. Uh, for them to sort
• 23:19
  Speaker 1: of bring back the nostalgia of the nineties eighties and
• 23:22
  Speaker 1: say anything or you know, the blue jeans and the
• 23:25
  Speaker 1: gene jacket, the jean shirts, etcetera. Uh, it is sort
• 23:29
  Speaker 1: of interesting. I actually want to go there is it
• 23:31
  Speaker 1: Does branding matter in an era of Amazon when people
• 23:35
  Speaker 1: just are really looking for the item and not necessarily
• 23:38
  Speaker 1: the name. Well, absolutely, I think branding matters, and I
• 23:41
  Speaker 1: think you know that's something that Paul talked about yesterday
• 23:44
  Speaker 1: and turn on Netflix. Content is a king right. So
• 23:46
  Speaker 1: in our our business, um so retail, the brands are
• 23:51
  Speaker 1: the content. So for them it doesn't necessarily you know,
• 23:54
  Speaker 1: matters if you sell it through the materior department stores
• 23:57
  Speaker 1: at J. C. Penny or Macy's, or you sell it
• 23:59
  Speaker 1: on your own website, or you sell it the Amazon.
• 24:01
  Speaker 1: Um it really you can shift between channels and actually
• 24:06
  Speaker 1: moving away from meteor department stores, moving to your own channels,
• 24:09
  Speaker 1: selling it on your website, you sell it for a
• 24:12
  Speaker 1: higher price point, you sell it for a higher margin. Um,
• 24:15
  Speaker 1: you do have to pay fulfillment shipping, et cetera. UM,
• 24:17
  Speaker 1: but it does give you a lot of growth opportunities
• 24:19
  Speaker 1: that didn't have before. So Levi Strauss obviously is an
• 24:22
  Speaker 1: iconic name here in the United States, cowboys and all
• 24:25
  Speaker 1: that kind of stuff. How has that brand traveled outside
• 24:28
  Speaker 1: of the US. What percentage of the sales are outside
• 24:30
  Speaker 1: of the US And is that an area they think
• 24:32
  Speaker 1: they can grow? Right, So it's it's about outside the US. UM,
• 24:37
  Speaker 1: it's definitely an area they that can grow. They're really
• 24:39
  Speaker 1: penetrated UM in a lot of different markets globally, UM
• 24:42
  Speaker 1: or Asia. UM. You know, China, it's only two percent
• 24:46
  Speaker 1: on their total sales. So obviously China is a much
• 24:49
  Speaker 1: larger market than that. And traditionally what we've seen with
• 24:52
  Speaker 1: China with American brands is they come in, they get
• 24:54
  Speaker 1: the brand perception in the market can be a lot
• 24:56
  Speaker 1: more premium than what it's getting here in the US U,
• 25:00
  Speaker 1: so they might have, you know, more price power in
• 25:03
  Speaker 1: markets like Asia. So there's definitely opportunities there. Can we
• 25:07
  Speaker 1: just touch quickly on Nike because it is March madness, right,
• 25:11
  Speaker 1: So is Nike really benefiting here or are we going
• 25:15
  Speaker 1: to have a potential problem because of the little snaffoo
• 25:19
  Speaker 1: in the speaker situation. Right, let's hope that no shoes
• 25:22
  Speaker 1: are going to be blowed up. I mean it's not
• 25:25
  Speaker 1: on the first day and definitely not the Duke. Um.
• 25:28
  Speaker 1: You know, Nike does well every year in the ncu
• 25:31
  Speaker 1: W in terms of the number of teams that they're sponsoring,
• 25:34
  Speaker 1: and in the end of the day, it comes down
• 25:35
  Speaker 1: to how much exposure they're getting. And we put out
• 25:38
  Speaker 1: a number out there that we calculated it based on,
• 25:41
  Speaker 1: um the number of of of how much time you
• 25:46
  Speaker 1: the logos are visible on the live broadcast the entire
• 25:50
  Speaker 1: n C double A. It's probably equivalent about two fifty
• 25:52
  Speaker 1: million dollars in advertising dollars. Yeah, that's it's a big number.
• 25:57
  Speaker 1: And my jaw just dropped because the thing that that
• 26:00
  Speaker 1: you can calculate sort the value of every second on
• 26:03
  Speaker 1: a court. That's right, And that's why they're paying the
• 26:05
  Speaker 1: big bucks to school. They are and they're putting you know,
• 26:07
  Speaker 1: they're putting a lot of money and behind those those teams. Um,
• 26:11
  Speaker 1: Nike's leading the you know, over fifty of the teams,
• 26:14
  Speaker 1: but under Armer has the teams. That's the record number
• 26:18
  Speaker 1: for them. Um, I think they wish that the rest
• 26:20
  Speaker 1: of the business we do as as good as as
• 26:22
  Speaker 1: the number of teams they they sponsoring. Yeah, Is, thanks
• 26:26
  Speaker 1: you so much for being with us. Is is the
• 26:29
  Speaker 1: apparel and footwear analyst for Bloomberg Intelligence. Thanks for listening
• 26:33
  Speaker 1: to the Bloomberg P and L podcast. You can subscribe
• 26:36
  Speaker 1: and listen to interviews at Apple Podcasts or whatever podcast
• 26:39
  Speaker 1: platform you prefer. Paul Sweeney, I'm on Twitter at PT Sweeney.
• 26:42
  Speaker 1: I'm Lisa abram Woy. It's I'm on Twitter at Lisa A.
• 26:44
  Speaker 1: Bramwoit's one before the podcast. You can always catch us
• 26:47
  Speaker 1: worldwide on Bloomberg Radio.