ARK Disrupt Issue 110: Alphabet, SpaceX, and CRISPR-Cas9

Please enjoy ARK Disrupt Issue 110. This blog series is based on ARK Brainstorming, a weekly discussion between our CEO, Director of Research, thematic analysts, ARK’s theme developers, thought leaders, and investors. It is designed to present you with the most recent innovation takeaways and to keep you engaged in an ongoing discussion on investing in disruptive innovation. To read the previous issue, click here.

1. Alphabet’s Growth is Coming at a Cost

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Alphabet’sGOOGL fourth quarter revenue growth was impressive at 24%, but came at a high cost: gross margins declined 400 basis points, disappointing expectations. While most analysts attributed the shortfall to higher traffic acquisition costs (TAC), Google’s GOOG revenue share with its partners increased only 100 basis points, much less than the gross margin decline, as shown below.

ARK Disrupt Issue 110

Source: Alphabet

Hardware seems to have been the source of Google’s margin decline. In 2017 Google introduced several gadgets, including its Pixel 2 smartphone, the Google Home smart speaker, and the Pixelbook laptop, all of which depressed margins by roughly 300 basis points last quarter thanks to strong holiday sales.

Google is investing in hardware because companies like AppleAAPL are controlling user interfaces and gaining share of the economic pie. The iPhone’s success has proven costly: Google pays Apple billions to serve as its default search engine.

Now that the AmazonAMZN Echo has taken off, Google is facing disintermediation once again. Consequently, it is scrambling to sell its own smartphones and smart speakers, even if profit margins take a hit in the short term.

2. The Falcon Heavy is Within Days of a Historic Launch

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If all goes according to plan, SpaceX will launch the Falcon Heavy on Tuesday, February 6, at 1:30pm EST from Cape Kennedy at Launchpad 39A. Apollo launched its program on the same pad.

The Falcon Heavy will become the most powerful vehicle ever launched, comprised of three Falcon 9 rockets. After several delays and a government shutdown, SpaceX successfully completed a static test fire of the rocket last week. Nonetheless, Elon Musk has tempered expectations, saying that the Falcon Heavy launch will be a great success if it doesn’t blow up the launch pad.

Since 2014, SpaceX has perfected the recovery of rockets. In 2016, COO Gwynne Shotwell estimated that SpaceX would recover 75-80% of low earth orbit launches. While that estimate seemed reasonable at that time, SpaceX has surpassed expectations, as shown below.

ARK is looking forward to tuning in to a historic moment on Tuesday. Whatever happens, it should be a blast!

ARK Disrupt Issue 110 2

Source: ARK Investment Management LLC

3. A Chimeric DNA/RNA-guided CRISPR-Cas9 Could Reduce Off-Target Activity

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This week, in a study published in Nature, scientists at MIT claim to have replaced CRISPR-Cas9 guide RNA with DNA to solve some safety issues. The first CRISPR-Cas9 synthetic complexes were prone to unintended genomic alterations, known as off-target effects, creating permanent DNA alterations in areas of the genome other than the targeted sequence. Consequently, scientists have been optimizing the system to increase safety while retaining overall editing efficiency.

In an iteration of the CRISPR-Cas9 system, scientists decreased the Cas9 binding affinity by changing its guide’s chemical structure. The new guide swaps out individual RNA nucleotides for DNA-nucleotides, causing a more stable protein complex and reducing off-target effects meaningfully while maintaining editing efficiency.

In a separate study in pre-print, a different group of MIT scientists used a chimeric guide-DNA/RNA to reduce off-target effects while maintaining 74% of on-target activity. Leading to the improved performance, the chimeric guide-RNA had a lower DNA mismatch tolerability. Increasing the CRISPR’s gene-editing safety profile is critical as it entersin vivo applications in human trials.

Will this new adaptation be covered under the foundational CRISPR patents? The original patent pertained to a RNA-mediated guide, but blanket language like “nucleic acid” could refer to either RNA and DNA. Complicated, but important! We shall see.

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