The AI Race Gets Litigious – The Motley Fool

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In this podcast, Motley Fool host Dylan Lewis and analysts Jason Moser and Matt Argersinger discuss:

  • Elon Musk’s lawsuit against OpenAI and Sam Altman.
  • Apple putting an end to Project Titan and its automotive ambitions.
  • Earnings updates from Axon and Okta, and a new dividend from Salesforce.
  • Two stocks worth watching: Palo Alto Networks and eBay.

Motley Fool Money host Deidre Woollard caught up with Motley Fool analyst Karl Thiel to chat about the role of patents in pharmaceuticals, and the dreaded patent cliff looming for roughly 200 big-time drugs over the next decade.

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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This video was recorded on March 1, 2024.

Dylan Lewis: The AI race gets litigious and tech finds a new word to get investors excited. Motley Fool Money starts now.

It’s the Motley Fool Money radio show. I’m Dylan Lewis. Joining me in the studio, Motley Fool, senior analyst, Matt Argersinger and Jason Moser. Fellas, great to have you both here.

Matthew Argersinger: Hey, Dylan.

Dylan Lewis: We’ve got earnings updates, a breakdown on the two most dreaded words in pharmaceuticals and, of course, stocks on our radar. But we’re going to kick off today focusing on three different updates in the race for AI. First up, this week, Elon Musk filed suit against OpenAI and it’s leader, Sam Altman. Musk famously helped found OpenAI in 2015 and Matt, his suit centers on the idea that OpenAI was originally founded to be a non-profit and mission oriented toward, ideally maybe AI help humanity. We’ve seen it pivot now to more of a private enterprise. What are you paying attention to at this case?

Matthew Argersinger: I think this is a big deal and I think Musk has a pretty good case [laughs] and I would say the implications could be pretty stark for really the whole AI landscape. If you think about it, OpenAI released ChatGPT on November 30, 2022. I think most analysts, investors would probably point to that day as the day that the AI revolution started. Maybe Nvidia‘s first-quarter results in 2023, another milestone, but clearly when ChatGPT came out, it was big deal. If you just look for a second, at the stock price of Microsoft since that day, since November 30, 2022. Remember Microsoft invested one billion dollars in OpenAI in 2019 and has been pivoting it to a more commercially viable for profit platform. Since November 30, 2022, the share price of Microsoft is up more than 60%. Over that period of time, it’s added more than one trillion [laughs] in market cap to its valuation. Now, granted, not all that can be true and attributed to OpenAI, but I think a bunch of it certainly is, I think the excitement around AI and with the idea that Microsoft is now because of its investment, a leader in this new market, it’s a big deal. I think the one of the reasons Microsoft trades for 37 times earnings today, or something like Alphabet trades for 20 times earnings. This disparity there I think is because of what investors are ascribing to the value of AI that Microsoft has. Just imagine for a second, if Musk succeeds in his lawsuit, suddenly the commercial implications of Microsoft investment and OpenAI itself goes away. I just think this has enormous implications, not just for Microsoft or the generative AI industry today, but really for the development and evolution of AI as we go forward from here.

Dylan Lewis: Yeah, the ramifications seem crazy and wild and things we’re going have to figure out over time. I think one of the things that’s fascinating about it too, is we’re not legal scholars by any stretch, Matt. But there have been a lot of behind the scenes drama with OpenAI. We saw Sam Altman seemingly leave the company and come back in a very short period. We may, through the process of discovery and this case, learn a little bit more about what’s been going on at OpenAI.

Matthew Argersinger: Absolutely. More information, more transparency is going to come out of this whole period that we’ve been only reading the headlines, but now we’ll get to really understand what’s happening and in a way it’s going to hurt Microsoft and OpenAI because all this stuff is going to be out in the open for competitors like Alphabet, maybe Apple down the road. We’ll talk about to understand exactly how they compete better with this platform.

Dylan Lewis: Speaking of Alphabet, also in the news in AI this week, Google’s Gemini generative AI tool ran into issues with image and text generation. A lot of headlines this week, as users noted, Gemini declined to produce images depicting people of certain races, struggled to depict certain specific figures correctly confusing some of the racial and gender identities also had some controversy with its text-generation tool, leading to some offensive and problematic output. Jason, this is a new tool and I think we can zoom in on the Gemini specific part of the story, but we can talk broadly here about generative AI. Do you feel like some of these headlines and some of the instances that we’re seeing out here are just the growing pains that you’d expect to see with the new technology?

Jason Moser: To an extent, yes. Anytime a new technology like this is introduced, you have to go into an understanding it’s going to take a long time to develop and have to learn essentially really the true used cases for it and how it’s going to make us in society better. You have to expect some growing pains now. With that said, I would be concerned. This was a real eye-opener. Some of the stuff that this thing was spitting out was laughable, it was really just totally off the wall. We know that a lot of these large language models suffer from hallucinations, spitting out wrong information. I think with AI, one of the ideas behind it, it’s supposed to make our lives more efficient, we can get work done more quickly, things will be more accurate. We’re not quite there yet. We have a society generally speaking, there’s still somewhat skeptical of this. There’s Pew Research, I’ve quoted this several months back, but there’s Pew Research overall that says that 52% of Americans are more concerned than excited about the increased use of artificial intelligence. Just 10% say they are more excited than concerned and 36% say there’s a mix of emotions right now. I don’t think things like this help people feel more excited. No, not at all. There’s that problem in winning the people over, so to speak. But then for Alphabet specifically, I think this becomes a bigger issue because, I think probably all of us here at this table would agree that Google is seen as a laggard in AI right now, a company that has not quite kept up with the others in the space. There is some reputational risks that comes with this. These types of mistakes, it can run the risk of sending people fleeing and never wanting to come back.

Dylan Lewis: Yeah and Jason, this is not the first misstep we’ve seen. It’s fairly high-profile misstep we’ve seen from Google’s AI ambitions. They put out what was a fairly impressive demo of their AI results. I think that was as they were transitioning Bard over to Gemini. We later found out that demo was somewhat faked or edited a little bit so that the experience was cleaner, which led to a lot of controversy. It seems like not only are they a laggard in the space, but I look at the businesses of big tech and I think they are probably one of the companies that most needs to be getting things right in the zone.

Jason Moser: It feels that way. I tell you, it really speaks to I think the human element that’s involved with all of this. This is all something that is ultimately born from people building these machines, these models, and letting these models feed off themselves and learn from themselves. The big question is floating around is Sundar Pichai, the guy to lead this company forward? He is absolutely on the hot seat here. There are questions of Google and Alphabet‘s culture. Is this something that he can fix? That question, I think will remain for some time to come. I really wouldn’t be surprised, they went from Bard rebranded a Gemini. I really feel like they’re going to have to rebrand from Gemini. They really tarnished that name Gemini because I think for most people now when they see Gemini, they hear that word or they see that brand, their mind’s not going to a good place. It’s just really difficult to get that back. It’s not to say they can’t, but they were already behind. It’s really going to take a lot of work to get back to where they need to be.

Dylan Lewis: Our final AI-ish story this week. After over a decade of work, Apple is ending its vehicle ambitions. Those working on the company’s very secretive project Titan Initiative will be shifted over to Apple’s AI division. Jason, this is kind of an AI story, it’s also kind of a car story. Why don’t we take the car angle here first? Are you surprised that we never got to see an Apple car?

Jason Moser: Not really. It always stood out to me is a little bit odd that they would really do that. But then it’s Apple. This is one of the most important businesses in the world, they should be trying this stuff. If they tried it and felt like the juice wasn’t worth the squeeze and I credit them for going ahead and just backing out. Now the one question I posed earlier in the week, because I think this is an interesting way to look at this. We’ve seen recently out, EVs are under fire. Hybrids are getting a little bit more of the headlines share right now, and Gas Guzzlers are on the rise as well. How does this make Elon Musk feel? Because, of course, some would say, hey, this is great, that’s one less competitor in the space. The flip side of that is, Apple’s looking at that and saying, well maybe he’s just really isn’t worth our time and money because they feel like that EV opportunity is somewhat capped, at least in the near-term. I don’t know the answer to that, but generally speaking, I think this makes a lot of sense. It just doesn’t feel like it was something that was really in Apple’s core proficiency.

Matthew Argersinger: I’m having trouble buying your argument that Apple was too far behind. Then you’re seeing that argument that they’re too far behind it, really designed to create EV. Were they too far behind BlackBerry or Nokia when they came out with the iPhone [laughs] 15 years, 16 years ago? I just think they might have looked at a little bit at the landscape. Competition from China in the long run, extremely hard to compete against. With the low cost manufacturers that they have in that country. It’s also a little bit to Jason’s point, it’s like the infrastructure out there for EVs is very poor right now. I know this is an EV owner. Try to do a road trip in the cold in the winter but more than four hours. Good luck. I think Apple might’ve said we could design a great car. It’s just not the right landscape right now. It’s just the environment is not going to fit with the quality of the car that we want to bring to the market.

Dylan Lewis: Jason, very few companies could afford to spend about a decade and $10 billion on a project that never winds up going anywhere. Was the car part of any of the Apple thesis for you in your head?

Jason Moser: No, never was. Honestly, $10 billion for a company like that.

Dylan Lewis: How much did Zuckerberg spend on the Metaverse?

Jason Moser: He’s still spending that. I think we’re all still asking the question as to whether that’s actually going to be worth it. If you have Apple thrown out the Vision Pro there, which is raising a lot of questions right now and they follow that up with a car. Then all of a sudden maybe you’ve got a disturbing trend where this company that’s been changing our lives for so long. Now, maybe they’re on this losing streak and I know they don’t want to be on that, so it feels like this was the right call, so you appreciate the discipline there.

Dylan Lewis: No question. Coming up after the break, we’ve got an earnings rundown and a new buzzword in tech. Stay right here. This is Motley Fool Money.

Welcome back to Motley Fool Money. I’m Dylan Lewis, joined in studio by Matt Argersinger and Jason Moser. The beat is on for earnings season. We’ve got updates from Okta, Axon, and Salesforce to run through. Jason, let’s start with Axon. A great week for the company and might I add my portfolio shake-up, 13% after the body camera and Taser maker posted earnings. Strong results from the company and it seems like the good times just continue for Axon.

Jason Moser: But I feel like, well all three-year shareholders here.

Dylan Lewis: Absolutely.

Jason Moser: I think they’re going to need to change their mission from to protect life to protect life and portfolios [laughs] because they clearly are doing a very good job at both. This is a company that just continues to fire on all cylinders, they say. Revenue $432 million exceeded their own expectations up close to 29% from a year ago. Really driven by strong demand across all product categories. The Cloud software continues to really perform. You look at net revenue retention, 122%. They do such a good job of keeping their customers and upselling, innovating new devices, and whatnot. Ultimately, we saw Non-GAAP earnings per share $1.12 up from $0.70 a year ago. An annual recurring revenue grew 47% from a year to $697 million. Again, driven by that Axon Cloud software growth.

Dylan Lewis: Jason, the stock is now at all-time high and shares are up I think more than fivefold over the last five years. I’ve enjoyed that climb. You mentioned the Cloud segment and that has been a really big part of what’s been pushing this company forward. Do you feel like there’s still plenty of growth ahead?

Jason Moser: I do. Once they get those devices out there, the Cloud and services revenue is what keeps their customers locked in there. We saw that revenue growth of 44% for the quarter really just demonstrates that. Then I think ultimately they’re guiding for 20% plus top-line growth here for the foreseeable future based on that installed base and the innovations they continue to make on that software side. Along the way with a couple of little bolt-on acquisitions, they’ve now raised their total addressable market from $50 billion to $63 billion. Which the company that’s really just generating a couple of billion dollars revenue right now. You can see the opportunity that’s out there. I just don’t think that need for public safety is going to go anywhere anytime soon.

Dylan Lewis: All right Matt, before the break, a tease. We’ve got a new buzzword in tech. It popped up in Salesforce’s quarterly update and that’s dividend.

Matthew Argersinger: Yes. Salesforce, not a business I follow closely but just look at the results first. I mean, really impressed by the operating leverage in this business. 11% revenue growth turns into 51% operating profit growth, pretty impressive. Even though top-line growth is expected to slow this fiscal year to 9%, we’re still targeting 45% increase and earnings per share. But you said the word dividends, which of course got me excited. Salesforce is going to pay its first dividend, $0.40 per share per quarter. This of course follows in the footsteps of Meta Platforms. Dividends are apparently the new hotness in Silicon Valley and I like it. What I don’t like though guys, is the fact that more often than not, these dividend announcements seem to be initiations are in conjunction with or even second-fiddle really two big new buybacks. To use Salesforce as an example, they just announced a $10,000,000,000 increase in their repurchases. Last year, the company spent 7.6 billion buying back their stock. Guess what happened to Salesforces diluted share count? It went from 984 million a year ago to, drum roll please, 983 million at the end of last quarter. What is that? 0.01% maybe?

Dylan Lewis: Slight reduction.

Matthew Argersinger: Yeah in the consulate. Like most big tech and software companies, they’re spending billions of dollars just to offset the dilution from new stock issuance. I just think at especially at these valuations today, to be doing these buybacks, crying out loud, NVIDIA is doing buybacks. I love the dividend part. I just wish less was being spent on buybacks, more on the dividend, focus on cost cutting and taking away a lot of that dilutive share issuance and just pay more dividends.

Dylan Lewis: Jason, as Matt mentioned, Salesforce following in the footsteps of Meta initiating a dividend, do you think we might see more big tech companies, maybe companies that hadn’t considered dividend policies in the past, start to think twice about that?

Jason Moser: Well, we’ve been talking for a while about Alphabet possibly doing something like this given their recent missteps, I got to believe that’s probably not the number one priority right now. Alphabet’s one with the same thing. They issue so many shares. The buybacks just are not bringing that countdown like we’d like to see and the top it all off, no dividend. A company that generates this kind of cash with that kind of balance sheet, it feels like a great opportunity to do it.

Dylan Lewis: It would change the narrative right now, which they could use.

Jason Moser: Obviously, Berkshire Hathaway, same argument, obviously, much different company. But it does feel like these big companies are a little bit more under fire right now to return a little bit more to shareholders.

Dylan Lewis: We’ll wrap our earnings run down with a look at Okta. Shares up 20% after the security, an identity management company reported. This was a business that had some bad news a little while ago, Jason, but it seems like they’ve been able to shift the narrative and get back on track.

Jason Moser: Yeah, this was really a nice bounce-back quarter for the company. They’ve been dealing with some headwinds here over the last several months, a recent security breach. I’m sure most people know about and left a few questions out there but it seems like they’ve gotten back down brass tax, starting to win back the trust. My philosophy with these types of companies, it’s not if there is some sort of security breach, it’s a matter of when and then it’s a matter of how they handle it, and what lessons they learn from recovery. Let’s hope that they’ve taken away some good lessons and they’ve recovered nicely from this. It seems like based on the metrics that things are going in the right direction. Subscription revenue was up 20% of $591 million. Remaining performance obligations grew to 13% and the balance sheet remains in terrific shape. Some of the other metrics, they grew total customers to 18,950. That’s up from 17,600 a year ago. I will say to be fair, customer acquisition right now, that’s something that’s slowed them down a little bit. Management is tweaking their go-to-market model a little bit. It gives teams a little bit more specific focus on either acquisition or upsell. I think there’s an opportunity there based on the model there. There’s a 111% in dollar-based net retention rate down not surprisingly, from 120% a year ago, as enterprises out there continued to be very mindful of their spending. But Okta really is one of those mission-critical style businesses that once companies start using and then they expand that identity protection portfolio of services, it becomes a little bit more difficult to extract yourself from that, so customers tend to stick with them for a while.

Dylan Lewis: That’s as-a-service at its best, right?

Jason Moser: There you go.

Dylan Lewis: We are most of the way through earnings season. We still have some companies coming up. But Matt, I’m curious, any surprises or anything you’re still looking forward to this season?

Matthew Argersinger: Not really. Overall, I think it’s been a pretty strong earning season I have to say. I would point to some of the [inaudible] I tend to talk about on the show. Just having done really well and still trading for just incredibly low valuation. If you’re looking for opportunities of stocks that haven’t really bounced, you want to check that out.

Dylan Lewis: Matt Argersinger, Jason Moser. Fellows, we’re going to see you guys a little bit later in the show. Up next, we’ve got to dive into the world of pharma and patent cliffs. Stay right here. You’re listening to Motley Fool Money.

Welcome back to Motley Fool Money. I’m Dylan Lewis. Over the past few years, the pharma industry has been front-and-center, bringing incredible innovations to market at warp speed but if you’re interested in buying pharma stocks, there’s a lot to learn. In this week’s interview segment, Motley Fool Money’s Deidre Woollard caught up with analyst Karl Thiel about the role of patents in pharmaceuticals and the dreaded patent cliff looming for roughly 200 big-time drugs over the next decade.

Deidre Woollard: In simple terms, as I understand it, patent cliff is simply when the value of a drug that a company develops plummets when it goes off patent. But I understand that that’s a simplification so tell us a little bit more about how patents work in the pharmaceutical space.

Karl Thiel: Well, no. That’s not a simplification. That’s absolutely what it is. Drugs are protected by patents. In some ways, the drug industry is the poster child for why patents exist. They spend sometimes well over a billion dollars to develop a drug. It takes over a decade to do it and so in order to take on that risk, they are rewarded with exclusivity. Nobody can compete with that specific drug for a period of time. That period of time is 20 years. That’s how it’s been since 1994. It has changed over the decades but you get 20 years of exclusivity from when you file your patent. After that, generics can enter and the benefit for society then is that the price of that drug should plummet. It should become very affordable to everybody.

Deidre Woollard: That’s interesting because there’s examples. Pfizer and Lipitor is the big example. In 2011, the sales fell by over 80%. But is it always a cliff like that where they sell right up until the date and then it just falls off like that?

Karl Thiel: Well, they will absolutely [laughs] sell up until the date. They will get every dollar that they can out of the drug while it’s exclusive. And then is it always a cliff? That’s a really interesting question and it’s going to become increasingly relevant in the next half decade or so. There’s different kinds of drugs out there and you talked about Lipitor, which is a drug that a lot of people are familiar with. It’s a pill. It’s what’s called in the industry, a small molecule. Which means that it’s got a relatively simple chemical structure that should be something that another company can formulate and make essentially exactly the same way as the original company. And so you get a generic version. Generic Lipitor should be exactly identical to the Lipitor Pfizer made. They should be interchangeable products. For that reason, when it suddenly becomes available and cheaper, prices tend to plummet. It’s not unusual for an innovator drug to lose 90% of its market share often quite quickly. I think Lipitor lost 70% of its markets within the first six months. They were considered quite innovative at the time for all the things they did to protect that market but that’s how it went. What’s different is that a lot of drugs these days are biologicals.

They’re the fruits of the biotech industry and they are things like monoclonal antibodies and peptide drugs and cell therapies and things that are very difficult to manufacture. If you look at the chemical structure of them, they’re insanely complicated. They’re not drugs that you whip up in a chemistry lab, they’re drugs that you grow in a vat. Something like a monoclonal antibody is this huge molecule with all these amino acids wrapped up in a certain way and those amino acids get decorated with little sugars on the outside in a process called glycosylation. The upshot is that you can never guarantee that anyone else can make a product that is identical to that. That’s why when ”generic biologic” doesn’t exist they’re called biosimilars. They’re called biosimilars because they are presumed to be similar to the original product but they’re not the same. Because of that, the market’s just developed a little bit differently.

One thing is that you can’t just say look, our chemical is the same as this chemical so let us sell it. You have to do some level of clinical studies to at least show that the pharmacokinetics and pharmacodynamics as it’s known, are similar to your drug, that your drug acts like the other drug. You have to do some studies. What you end up happening is much fewer competitors and often not quite as much of a price decrease. That is a big difference with what a patent cliff. Biosimilars have been with us since 2009, we’re about 15 years into it since the Affordable Care Act first introduced the mechanism. For a lot of the history biosimilars have not caught on all that much. You’ve tended to have the original innovators still keep a lot of their market. You haven’t seen prices come down as much as you expect. But that may be starting to change and that’s going to be critical in the next few years.

Deidre Woollard: Interesting. As I understand it, if I’m making a drug like Lipitor and I just want to make a generic, it’s relatively easy but if I want to make a duplicate of the biosimilar, it’s much more complicated now. You mentioned the studies, do they have to go through a separate FDA approval, or is it because it’s already approved they can circumvent that process?

Karl Thiel: It’s a truncated process. It’s much easier than creating a drug from scratch because it’s already been proven that this particular approach will work and that’s all been done in clinical trials. You can reference the innovator companies data but you do have to do some level of clinical work to prove that your drug is in fact acting like the original ones so it is a little bit more complicated. Part of the reason this is so important is if you look at a list of the top-selling drugs in the world right now, they are dominated by biologics. A few of them are small molecules but [laughs] they are dominated by biologics. People talk about a patent cliff so there is a big one [laughs] coming up between now and 2030. There’s going to be something like 190 blockbuster drugs that are going to lose their exclusivity and they represent something like $236 billion in sales. I think somebody calculated. It’s enormous, but a lot of them are biologics. In order for this all to work for society, we need to [laughs] have the process work, have these biosimilars come along, and have them actually be adopted and actually drive down prices for people. That’s the idea behind this. We’ll see what will happen.

Deidre Woollard: Well, it’s interesting because it sounds like with the previous process with just a single drug, doctors are going to feel confident, they’re going to prescribe the generic. Why not? That’s how things work. In this case, is there going to be any concern about those biosimilars? How will that work? Or do we really not know at this point?

Karl Thiel: The biosimilars that have been approved, I think they’re faithful. They should work just like the innovator drugs and I think most prescribers are probably comfortable with that. It’s always possible that there is some individual out there who has some sensitivity to something. That’s not the reason here. I’ll tell you something, Deidre. HUMIRA, top-selling drug in the world, $21 billion in sales, beginning of 2023 had a biosimilar launched. Sorry, it peaked sales in 2022. Anyway, Amgen had the first biosimilar on the market. They launched two versions of it. One was priced at a 55% discount to AbbVie‘s price for HUMIRA and the other one was priced at a 5% discount. Which one do you think was more popular?

Deidre Woollard: I would assume everyone’s going for that 55%.

Karl Thiel: So it was the 5% one that tended to be more popular because of the way [laughs] that these Things get paid for. Usually, these drugs go through pharmacy benefit managers, PBMs. PBMs can negotiate a bigger discount if they take the 5% discounted version and then negotiate a big discount on top of that and then pocket part of that. There’s a lot of very strange parts of how our healthcare system works and a lot of it was some problem that came up 20 years ago and somebody solved it by sticking a piece of chewing gum there and now there’s more wads of gum here and there. It’s a very crufty system that often defies all sorts of logic, but that’s one part of it. And I think that’s a reason, I’m not saying that’s the only reason, but that is a reason that biosimilars have been somewhat slow to catch on. Often on the face of it, you’re like this isn’t even much of a discount.

Deidre Woollard: Well, when we were talking before the show, you mentioned that it may not be just one patent, but that there’s all these different patents that can go into a particular drug, which makes determining when this clip is a little more complicated.

Karl Thiel: So there’s different kinds of patents. There is almost ever a single patent that rules the fate of a major drug. When a company realizes that it has a successful drug on their hands, they are gonna do everything they can to protect it. So the rocket Gibraltar is what’s called the composition of matter patent, which is the patent that says, we’ve invented this chemical. It never existed before. This is plainly our invention and that’s the patent. Those are very seldom with anybody even try to get around that patent, you just wait for it to run out. But there are lots of other ways [laughs] to patented a drug in to try to extend that life a little bit. So you’ll often find that in what’s called the FDA Orange Book, which collects all these Things, there can be hundreds of patents on a single product. So there will be an argument. So when a drug actually goes generic, so for instance, the drug Eliquis is one that’s coming up. This is a drug that’s an anticoagulant drug, it’s used for Things like Afib and stuff like that. I believe their original patent expired in 2023. But they got it extended by the patent office, because you can do that in certain stack circumstances. That’s one strategy you can use. They gathered extended because you can argue that, we filed but you took too long to issue where we lost time there; or you can say, FDA took too long to review the drug, we lost time there. So you can sometimes argue with the Patent Office to extend it. They extended it to 2026. But then you start this legal battle in which you say, look, that’s that patent, but we have a whole bunch of other patents that we think protected out to X date and you start fighting it out in court. Usually what will happen is the generic manufacturers will settle and they’ll come to some date where they say, OK, we all agree you can launch on this date. That way, we don’t really have to determine whether these other patents aren’t going to be enough to protect it or not. With Eliquis that happens to be April of 2028, which is when generics will launch. But you can argue that that’s five-years too late.

Deidre Woollard: Interesting. My mother ticks Eliquis, so I’m particularly interested in that one. So that’s one way to extend the patent cliff and it seems like there’s other strategies. I know one of the Things, some companies say they don’t want to be in an area where there’s going to be a lot of that generic competition, so they focus on certain diseases, maybe with a smaller market. Some of them they tried to put out another drug, almost a piggyback, so that they don’t lose that revenue. What other kinds of strategies do you see in play there?

Karl Thiel: Ideally, what a company tries to do is it has a drug that works for a certain disease and they tried to make a better one. Then everybody will switch to that hopefully because it’s just a better drug. I would say a company like Gilead Sciences for instance, which is very much the leader in HIV treatment, has made its name in many ways about both improving drug’s effectiveness but also just improving the convenience. So that’s one thing you might do is like, hey, you’d probably don’t want to take a pill three times a day, we’ve come up with a way to have just once a day pill. Sometimes you can say, well look, is the difference between some of these convenience factors such that this one should really be priced at 50 times this other one. But in fact, if you have insurance, you’re often insulated from that and if you don’t, you’re often caught out by it. So it’s a very complex and interesting situation, but certainly yeah.

Coming up with different ways of delivering drugs, coming up with next-generation versions that work better or that maybe have fewer side effects, Things like that are all certainly legitimate strategies to try to keep your leadership in an area.

Dylan Lewis: Motley Fool Money listeners, want more industry dives like this one? Let us know what you want to hear by shooting a snowed at [email protected]. Coming up next, Matt Argersinger and Jason Moser return with a couple of stocks on their radar. Stay right here. You’re listening to Motley Fool Money.

As always, people on the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against. So don’t buy or sell anything based solely on what you hear. I’m Dylan Lewis joined again by Matt Argersinger and Jason Moser. We’re going to get over to our radar stocks in a minute. But first, it was an up and down week for surge pricing and restaurant chain Wendy’s, the company announced plans to test dynamic pricing, which was met with swift blowback. They later clarified that would not be using the surge pricing we might be familiar with, with Uber and some of the other ride-hailing companies when demand is high, but instead might test offering discounts during slower times of the day for customers. Jason, do you think we’ll see more businesses play with dynamic pricing?

Jason Moser: Probably. I mean, we probably will. There’s clearly not the only company that has done that. I mean, we see a ride-sharing, I think is one that stands out or poor while surge pricing really play into the model. It feels to me like with restaurants, particularly fast food restaurants, it’s probably not the best idea. I mean, it just seems to add a level of complexity that creates a bad experience for everyone, from the employee to the customer. You’re talking about baconator arbitrage. Most people out there don’t even know what I mean when I say that. But the fact of matter, I think it makes for a less-than-optimal experience for everyone and when it comes to restaurants, they’re just a million substitutes out there. I mean, my Uber shows up and I got to get somewhere. I’m kind of stuck, I got to take the ride. Unless I want to wait another 30 minutes for a lift and they’re going to do the same thing to me. But with restaurants, that’s a little bit of a different story. You can just go across the street to the Mcdonald’s or Burger King and maybe get that.

Matthew Argersinger: I guess if you’re a customer who values his or her time, I think it makes sense. Imagine like you look at your screen, Starbucks might be example, I get my afternoon coffee at 2 o’clock, I see that there’s high demand right now and prices are high I’m going to hold off a bit. Maybe get my coffee at 3 o’clock and watch the app. Prices to go down, I’m I’m buying my latte. I think there’s something to it.

Jason Moser: As an economics major, I love it. I mean, supply demand, it really warrants, but from a customer experience, certain markets, I don’t know that it creates the optimal experience and their goal is to keep people coming back.

Dylan Lewis: Yeah, we’ll see. Burger futures maybe in heart. Alright, let’s get over to stocks on our radar. Our man behind the glass, Dan Boyd, is going to hit you with a question. Matt you are up first, what are you looking at?

Matthew Argersinger: I am looking at eBay ticker, E-B-A-Y. A lot of investors presume that you have to have revenue growth for investments really worked out. But I think there are cases like eBay where you simply you get smart, shareholder-friendly capital allocation. Things can work out. I mean, no one’s stealing eBay’s growth. I mean, if you look at the most recent quarter, revenue was up just 2%, gross merchandise volume up just 2%, but GAAP earnings of 13.8%, and a big reason for that is buybacks. Ebay made 1.6 billion in share repurchases over the past year and unlike Salesforce, they actually reduce the share count by almost 5%. Over the last five years, eBay’s reducing share count by over 40% and they raise their dividend again by 8% and the stock price got a nice bump and I think if eBay can just keeps sales steady, keep it’s massive network of buyers and sellers and keep allocating capital in shareholder friendly ways, I think that it’s an investment i could really work out. I’m a shareholder,.

Dylan Lewis: Dan, a question about eBay.

Dan Boyd: So Matt, you are a known comic book collector?

Matthew Argersinger: I am.

Dan Boyd: Do you ever use eBay?

Matthew Argersinger: I use eBay all the time Dan, buying and selling. So I’m a big power user, but probably makes me biased.

Dan Boyd: That’s kind of the heyday of eBay in the ’90s and early 2000s collectibles. That was a market for it.

Dylan Lewis: Alright, Jason, what’s on your radar this week?

Jason Moser: I’ve been digging a little bit more into Palo Alto Networks. Ticker is P-A-N-W’s. A Palo Alto is a cybersecurity company focused on delivering value in four fundamental areas; it’s network security, cloud security, security operations, and then threat intelligence and security consulting. So they really are one of the cybersecurity companies that offers the whole kit and caboodle as they say. Now, I think it’s interesting with the company they recently reported earnings, the stock got shellacked. Management pulled back on guidance for the year they cited in the call, I quote, spending fatigue. It’s kind of like investments pricing. I mean, its just spending fatigue that raised some eyebrows. Again, it’s not new news that enterprise customers are being more mindful of their spending. Cybersecurity is in a little bit of a different bucket, because that really is a non-negotiable, you got to have it this day and age and it’s a very competitive space. It was interesting to me also to see Zscalers call a competitor to a degree of Palo Alto. Z-scalar kind of pushing back on that spending fatigue comment, noting they’re not really seeing such spending fatigue, yet Zscaler’s stock just got pummeled on that earnings release as well. So it could be a little bit of a downtime for the cybersecurity companies right now and in Palo Alto, $100 million market cap company, one that is very important in the space. So learning a little bit more about it and if it’s gotta spot in one of my services.

Dylan Lewis: Dan, a question about Palo Alto Networks.

Dan Boyd: Yeah, Jason, what does Palo Alto Networks doing being headquartered in Santa Clara? It is confusing, isn’t it Dan? We really need to straighten them out. I’d imagine it has something to do with with taxes or some sort of little sweetener that the county or city gave them.

Matthew Argersinger: Dan, which one’s going on your list this week?

Dan Boyd: I’m a big user of eBay too. I love buying motorcycle parts from them and with Palo Alto being headquartered in a place that isn’t Palo Alto, I don’t know if I can accept that kind of thing.

Dylan Lewis: Dan doesn’t like misrepresentation. That’s going to do it for this week’s Motley Fool Money radio show. Show’s mixed by Dan. I’m Dylan Lewis. Thanks for listening. We’ll see you next time.

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