#227: Square Capital Releases Its Paycheck Protection Program Data, & More

ARK has argued that fintech companies should play an important role in stimulus programs because they can distribute aid more quickly and equitably than can traditional lenders. This week, validating this thesis Square released data on its PPP lending efforts:

• Square facilitated $820 million in loans for 76,000 businesses, averaging roughly $11,000 or one tenth the average loan size that large banks facilitated.
• 47% of Square’s loans were to businesses in low income zip codes averaging less than $50,000 per household.
• Square Capital originated in 6 weeks the number of loans it typically delivers in 4.5 months.
• 60% of borrowers were new to Square Capital.

In our view, traditional banks could not facilitate the smaller loan amounts profitably, ceding an important role in the stimulus program to Square and other fintech lenders. We believe Square has a battle-tested digital platform geared to small merchants while traditional lenders had to launch and debug new platforms for a new demographic and couldn’t “get to market” on time.

This week, Square announced the acquisition of Spanish peer-to-peer payments app, Verse. We believe Square will leverage Verse and its European Economic Area Payments license to launch a global Cash App payments and banking platform.

After offering Cash App users US-to-UK transfers for free with creative marketing campaigns earlier this year, Cash App quickly moved to the ten most downloaded finance apps in the UK App Store, up from the top 30. This strategy could provide a template for its European expansion.

Verse seems to have struggled recently. Besides a debit card launch in one of its 30+ markets earlier this year, Verse’s product offering hasn’t changed much since 2017, despite the funding of nearly $40 million from prominent venture capitalists such as Greycroft. Reportedly, Square is purchasing Verse at only $34-53 million, likely in a down round. Notably, one of its seed investors is a venture capital firm with close ties to Jack Dorsey, suggesting that Verse has been on Square’s radar for some time.

In 2017, as iPhone sales growth slowed, Apple pledged to double its services revenue by 2020. It seems likely to meet that goal this year but, in doing so, has strained its relationship with software developers.

This week, independent developer Basecamp cried foul when Apple removed its “Hey” email service from the App Store. Apple says the application failed to adhere to App Store guidelines. Basecamp says that Apple is forcing it to add in-app payments, taking 15-30% of all Hey sales.

Apple believes that it has the right to set the rules for its platform and is not exercising monopoly power because iPhones account for only 20% of the smartphone market. From the developers’ perspective, however, iOS support is table stakes for commercial apps, and Apple’s ever-changing App Store guidelines are a constant threat to their livelihoods. Notably, both Spotify and Netflix have stopped offering in-app payments because their low-margin businesses cannot bear the App Store tax.

Even if correct technically, Apple seems to be losing developer mindshare and perhaps loyalty. Ben Thompson of Stratechery has spoken to more than 30 “credible developers” who have complained about Apple’s strong-arm tactics in forcing in-app payments.

Despite the bad press, Apple has stuck to its guns, perhaps to its peril. With anti-trust litigation looming in both the US and EU, Apple could be forced to reverse course.

On Friday, VW announced plans to develop its own automotive operating system, noting discussions with rivals to collaborate on the project. Christian Senger, a Board member responsible for digital services and software, claimed, “In [the] future, there will likely be fewer automotive operating systems than carmakers.” In ARK’s view, that statement is half right. He should have said fewer operating systems and fewer carmakers.

To build its operating system, VW launched an independent unit, Car.Software. While a framework for enabling innovation, ARK believes that an independent unit inside Volkswagen could backfire because the integration of hardware and software will be vital to the success of autonomous electric auto manufacturers.

Perhaps a more important question in the short term is if VW will be able to attract software engineers to the new unit, instead of relying on the mechanical and other hardware engineers it currently employs.

This week, Tesla’s AI expert, Andrej Karpathy, spoke at a virtual computer vision event on the Scalability of Autonomous Driving. Karpathy suggested that Tesla’s camera-based approach to autonomous driving might be the only way to build an autonomous system that scales globally.

Karpathy contrasted Tesla’s approach to that of Waymo which relies on LiDAR to map every road down to centimeters of accuracy. Waymo compares the maps to real-time road conditions before making driving decisions. Tesla does not rely on highly accurate maps, preferring cameras, radar, and real-world driving data to direct its autonomous system. With a significant data advantage over its competitors, Tesla can call on data from billions of real-world driving miles while Waymo, Cruise Automation, and others have spent a decade accumulating only 20 million miles.

Tesla’s approach to autonomous development seems to have been the more difficult path, feasible now only because of its data advantage. Waymo and others, meanwhile, will have to map every road before launching their autonomous systems nationally or globally, quite a daunting task! Ford’s Active Drive Assist technology announced this week, for example, will enable autonomous driving on only 100,000 highway miles.

Karpathy also explained that Tesla’s full self-driving solution will not work perfectly in every driving scenario, an important admission because half of the solution is understanding the problem. If Autopilot is unable to drive autonomously through an intersection, for example, it will choose an alternate route that the system understands. Alternatively, and according to ARK’s forecasts, cars will navigate autonomously for the majority of time but will be able to call on “remote drivers” to guide them in rare scenarios. In other words, autonomy during the next 5-10 years will not be level 5, perfectly working at all times.

Even with rare human help, ARK’s research suggests autonomous taxis could cost consumers only 25 cents per mile at scale, roughly a third the 75 cents to drive a personal car or roughly a tenth the $2.50 to take an Uber. In other words, even if not perfect, Tesla’s autonomous taxi network is likely to be more cost-effective than human-driven transportation alternatives and could become a highly attractive business opportunity.

Despite their potency and efficacy, precision oncology drugs still seem to be underutilized, primarily because physicians lack access to molecular diagnostic testing. If oncologists cannot surface the mutations responsible for tumor growth, they will not be able to prescribe targeted treatments. ARK believes the need for comprehensive and accurate molecular diagnostic testing is growing exponentially because the majority of cancer drugs in clinical trials is targeted.

Recently, the FDA awarded a Breakthrough Device Designation for a new method to detect NTRK fusions—rare, medically-actionable mutations common in some pediatric cancers. Humans have three NTRK genes that normally aid the development of nerve tissue. NTRK genes encode proteins that have “ON/OFF” switches regulating nerve growth. If an NTRK gene accidentally fuses with another gene in a tumor cell, the resulting protein is stuck in the “ON” state, causing the tumor to grow out of control. By detecting NTRK fusions, therefore, oncologists should be able to slow tumor growth with targeted therapies that block the “ON” signal.

Until recently, NTRK fusions were difficult to detect with next generation sequencing (NGS). Diagnosticians had to attach small molecules, called primers, to both ends of an RNA prior to sequencing. Primers bind easily to the NTRK-half of the fusion but often struggle to bind the other half of the fused genes. When they fail, primers can cause false negatives, preventing oncologists from treating patients with NTRK fusion-positive tumors.

In May, the FDA gave Breakthrough Device Designation to a new approach called Anchored Multiplex PCR (AMP). AMP uses universal primers that can bind the unknown half of NTRK fusions, greatly improving analytical sensitivity. In ARK’s view, AMP could apply to other types of gene fusions, potentially accelerating the discovery of new biomarkers and therapies for cancer treatments.

Last Friday at the European Hematology Association (EHA) Congress, CRISPR Therapeutics (CRSP) and Vertex (VRTX) announced new clinical data on their gene therapies for sickle cell disease and beta thalassemia. The data on two beta thalassemia patients, one of whom was new, both transfusion independent at 15 and 5 months, respectively, was impressive. Typically, beta thalassemia patients require 17 blood transfusions per year.

The sickle cell patient did not experience any vaso-occlusive crises in nine months, another remarkable outcome. Vaso-occulusive crises is variable, but some patients experience these six or more times annually. The life expectancy for the approximately 100,000 Americans who suffer from sickle cell disease is 42 years for men and 48 years for women. Medical costs per year for patients with sickle cell disease are approximately $10,000 per child and $30,000 per adults, plus an additional $475 million in aggregate for hospitalizations.

CRISPR gene editing holds the promise of not only extending the life expectancy of patients with sickle cell disease but also cutting the costs associated with this chronic and fatal disease.