Welcome to Blue Room's Weekend Update. Each week, we're sharing what companies we're researching and the what, the who and the how that we think makes the companies interesting and unique. This roundup is brought to you weekly by a group of interns, creative minds, artists and investors who believe that through best in class investing along with the democratization of financial education we can do great things together. Enjoy, Explore and Share.

U.S. stock indices fell in the biggest weekly selloff since June as inflation data suggested the Federal Reserve would have to raise interest rates higher and longer than expected, further increasing uncertainty around how companies will fare through this rate cycle. The S&P 500 closed the week at 3,873.33 (-4.77%), the Dow Jones Industrial Average closed at 30,822.42 (-4.13%), and the Nasdaq Composite closed at 11,448.40 (-5.48%).

In economic news for the week, the August inflation report on Tuesday showed headline CPI declining slower than expected at 8.3% year-over-year and core CPI continuing to surprise to the upside, increasing to 6.3% year-over-year. This negative surprise led overnight swap contracts to price in as much as an 81 basis point interest rate hike from the Federal Reserve next week — reflecting a probable 75 basis point hike with a chance of a 100 basis point increase.

Retail sales came in above expectations at 0.3% month-over-month in August, signaling consumer demand is moderating but perhaps not as fast as the Federal Reserve may want. Aided by falling gas prices, the University of Michigan’s Consumer Sentiment survey showed inflation expectations continuing their decline to 4.6% in 1 year and 2.8% in 5 years — a win for the Fed in terms of anchoring inflation expectations, albeit with a great deal of uncertainty baked in.

Thursday afternoon, FedEx issued updated guidance for this quarter’s earnings that missed Wall Street expectations “by a landslide.” FDX stock fell 21.4% on Friday, and such an unexpected drop in financial results warned investors of the possibile impacts to equities as the economy slows. ADBE stock also fell 19.4% in trading on Thursday and Friday after Adobe announced its $20 billion acquisition (50 times forward revenues) of Figma Inc., a platform that enables software designers to collaborate in real-time in projects through a browser. The Ethereum network merge was completed on Thursday, migrating the blockchain to a “proof-of-stake” concept and decreasing its energy usage by 99%. Also on Thursday, the U.S. 2- to 30-year treasury yield spread of 35 basis points marked its most inverted level since 2000, underscoring the possibility of economic distress ahead.

Thank you Blue Room Analyst JARED FENLEY

All eyes were on the latest CPI numbers this week, with the market expecting a year-over-year August headline inflation reading of 8.1%, a drop from 8.5% in July given that energy prices have been cooling the past several weeks (e.g., WTI crude fell 12% in August, from $99 to $87 per barrel). However, the actual reading came in at 8.3%—hotter than expected—prompting markets to sell-off, with the S&P falling from Monday’s close at 4,110 to 3,933 on Tuesday (September 13), a 4.3% decrease—the largest drop since June 11, 2020 (a 5.9% decline).

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Consumer sentiment remained essentially unchanged in September at 59.5 — just 1.3 index points above August.

The one-year economic outlook continued lifting from the extremely low reading earlier in the summer, but these gains were largely offset by modest declines in the long-run outlook. Personal finance components of the index as well as buying conditions for durables remained at similar, relatively low levels from last month.

After the marked improvement in sentiment in August, consumers showed signs of uncertainty over the trajectory of the economy.

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Key Takeaways

General entertainment is the biggest opportunity for Disney+ subscriber growth moving forward
Executives believe churn from price hikes will be negligible
Disney+ ad-tier will be ARPU-neutral at worst
- In addition to contributing to subscriber growth, execs believe the ad-tier will provide a boost to operating income
The company will need full ownership of Hulu to fully integrate it into Disney+
- There is some consumer friction with having separate apps, but there are plans to integrate in 2024, potentially sooner if Disney can reach “reasonable terms” with Comcast
Disney is planning a complete membership that will incorporate streaming and parks, which will be fueled by bridging data between both segments
Sports betting with ESPN will be value-accretive but will not hurt Disney’s brand equity
Parks business has not been affected by the macro environment — currently parks have more demand than supply, and all the lead indicators indicate that will remain the case for the future.

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BLUE ROOM

VIETNAM

Tuesday
September 13, 2022
11 AM
Hanoi, Vietnam

Monday
September 12, 2022
10 PM MDT
Denver, Colorado
__________ __________

Blue Room
Vietnam
__________

Financial Modeling 301:
Ms. Huong presents various financial modeling scenarios.
+ MTCH: Match Group, $63.04
+ MSFT: Microsoft, $266.65
+ WDAY: Workday, $169.75
+ ZM: Zoom Communications, $84.08
(all prices as of close on September 12, 2022)
Economic Charts discussion ahead of CPI data release on September 13, 2022.
Mr. Thanh is unfortunately out of the office with illness.

Lilly currently enjoys the highest multiple of the group. To kick off on donanemab — and obviously, we have data from lecanemab and gantenerumab data coming. The Lilly program differs in a number of ways, beyond the molecule, with a tau endpoint as well as molecule and epitopes and activity. Could you talk to how the expectations for that data shape out and your relative confidence in it? Could you talk to the Bayesian analysis you’re using, which is very different from the frequentist analysis your competitors have used?

Donanemab is differentiated with a different mechanism of action targeting the pyroglutamate form of amyloid β
- That’s a discovery they made in the labs that resulted in a molecule that’s very specific for plaques
- It does a really good job of clearing plaques
- Probably the fastest and deepest plaques clearance
If you believe clearing plaques is important for Alzheimer’s drugs, this is probably the best way to test that
Other mechanisms can get to pretty deep levels of plaque clearance, but it takes longer
If you have an 18-month trial and only achieve plaque clearance at 12-15 months, you don’t have as much of a window
On the design side, there are a couple of improvements Lilly made

Lilly is in a unique position with the number of potential new drug launches you have. Mounjaro is front and center for a number of investors, for obvious reasons. One of the other big picture questions is on the Inflation Reduction Act. As we think of potential implications, how do you think about navigating any impact to Lilly? What are the implication in terms of investing going forward?

Anat Ashkenazi — Senior Vice President & Chief Financial Officer

The Inflation Reduction Act is 3 pieces:
1. Changes to the ability to increase list prices beyond inflation
If that occurs, there are penalties associated
The impact is limited
It will have more impact on companies that regularly do double-digit list price increases
The last time Lilly increased prices on the insulin portfolio was in May 2017
- So, there is little impact for Lilly there
In the rest of the portfolio, Lilly takes low single-digit price increases each year, with the highest around 5% for Trulicity and Verzenio
2. The changes to Part D, the Part D reform
Out-of-pocket costs will now be capped at $2,000
- That should help people when they’re at the counter and Lilly sees abandonment rate

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Could you give a quick overview of the ARCUS platform?

Derek Jantz — Chief Scientific Officer & Co-Founder

ARCUS is a completely different class of gene editing technology than CRISPR, ZFN, or TALEN
ARCUS is based on a naturally-occurring gene-editing enzyme called I-CreI
- It’s a very rare example of gene editing that evolved in nature
There are 3 advantages:
1. It has the best safety profile — The lowest likelihood of editing at off-target sites in the genome
- ARCUS has the ability to turn itself off after it makes an edit
2. It’s particularly good at adding DNA to the genome, due to the unique enzymology
3. ARCUS is by far the smallest of the editing technologies
- That enables Precision to take advantage of all gene delivery technologies: LNP, AAV, and small viral vectors that aren’t compatible with CRISPR-Cas

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On the news on the multi-cancer development, can you give us an overview of the multi-cancer data presented at ESMO?

Jeff Elliott — EVP, Chief Financial Officer & Chief Operating Officer

The goal of the multi-cancer program is to catch more of the 70% of cancers where there is no current standard-of-care screening
If you can find cancer early, you can save a lot of lives
This is the first time Exact’s internal work was combined with Thrive’s
This brought together 4 different biomarker classes
Exact is pleased by the performance
The test could find 61% of cancers at a 98% specificity
With a 2% false positive rate
For cancers where many times there is no good screening method
If you can find 3 or 4 out of 10 cancers early with no standard-of-care screening, Exact can have a profound impact on human health outcomes

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This week saw the release of monthly reports from OPEC and the IEA alongside new governmental initiatives in Europe to help quell surging electricity prices in what can be best described as a continuation of the narrative that has been driving the volatility in energy markets over the past few months.

Beginning with the September Monthly Oil Market Report released by OPEC, the analysis continues to echo the sentiment held by Saudi Arabia. The report opens with the following statement:

The paper and physical markets have become increasingly more disconnected. In a way, the market is in a state of schizophrenia, and this is creating a type of yo-yo market and sending erroneous signals at times when greater visibility and clarity and well-functioning markets are needed more than ever to allow market participants to efficiently hedge and manage the huge risks and uncertainties they face.

While this may not seem like a huge departure from previous statements made by OPEC and Saudi officials, this description of the current state of the crude oil market makes any future supply-side action on the part of OPEC seem mission-driven. It is important to recall that OPEC’s raison d’etre is to “ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry.” Thus, their comments made in this month’s Oil Market Report could provide justification for any future decreases in production if the price of crude continues to trade below the $100 price level – seen by most analysts as OPEC’s desired equilibrium price.

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Could you highlight key accomplishments over the last year for Guardant? What are you most looking forward to over the next 12-18 months?

Helmy Eltoukhy — Co-Chief Executive Officer

It’s a culmination of bringing to market transformational tests in each of the 3 key areas
- Late stage with Guardant360
- Continued drumbeat of CDx approvals
Guardant estimates that 25% of all lung cancer patients are getting a Guardant test in the U.S.
Very pleased with Reveal in MRD
- Just got Medicare coverage for colorectal cancer
  - It’s a very large indication in colorectal cancer survivors
- Just launched Reveal in Breast and Lung, which make up a pretty large fraction of cancer survivors
  - Breast cancer is the single largest indication with over 4 million women who could be monitored with Reveal
Guardant set out a goal when they started the company for a simple blood test for early detection
- They accomplished that with the Shield launch a few months ago
That’s a great setup for the next decade at Guardant

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