Jordan Wong - Portfolio Specialist

Marcello Montanari, CFA - Managing Director & Senior Portfolio Manager, North American Equities

Robert Cavallo, CFA - Managing Director & Senior Portfolio Manager, North American Equities

Jordan Wong: Hi, everyone. Welcome back to Tech Talk. Of course, my name is Jordan Wong and as always, I'm joined by Marcello Montanari and Rob Cavallo, both Managing Directors and Senior Portfolio Managers on the RBC GAM North American Equity Team, best known for their work running RBC Life Science and Technology Fund, as well as RBC Global Technology Fund.

We use this web series once a month to talk about all things technology and health care related. Gentlemen, welcome back.

Marcello Montanari: Hey, good to be back.

Jordan Wong: All right, so why don't we jump right in? Already there are a number of things to talk about. For this month's episode, I want to focus on recent health care news. A pretty big headline came out just the other day around Nvidia and Eli Lilly - so, Robert, I'd love to get your thoughts on that. And then towards the end, we'll transition over to a conversation on Anthropic's latest LLM: Claude Code. So, Rob, maybe start us off with your initial thoughts and what this might mean for both Nvidia and Lilly – so what this might mean for both of these businesses. There's a $1 billion partnership announced between Nvidia and Eli Lilly, so, maybe your first thoughts and the market's initial reaction to this as well.

Rob Cavallo: Thanks, Jordan. So I would say it's important to think about time frames here. This is a very interesting announcement, I think it has long term implications that are very positive for Lilly, and I don't think this is going to be something that's unique to Lilly. I think that you're going to see a whole number of companies across the biopharma landscape partner with Nvidia, and or others, that can specialize in developing models and AI instances that are specific to the needs of that particular industry, which is very different than just general open source or open model type LLMs that might be useful in a range of industries. So basically, what you're doing is you're taking Nvidia's expertise and compute capacity in terms of developing a health care specific cloud. Lilly will be taking essentially their data and some of their drug discovery tools, kind of putting it together, and let's see what happens. You know, being perfectly honest, I don't think you're going to see 2026 results come from this.

You know, I think people will talk about this. It'll come up on conference calls, like, are you seeing early benefits from the collaboration? I wouldn't bet on this being 2026: we see tangible results. I think it's possible moving into 2027 we start to hear that, you know what? We've actually been able to fast track some of our early drug discovery work and get something into the first preclinical type testing environments in a quicker and timely, or more cost-efficient fashion.

I think that's something we'll see probably not this year, but maybe into 2027. And again, it's something we're going to see across the industry. It's not going to be something as unique to Lilly, but Lilly as the leader in this space. Today, it makes the most sense that this is where we see the initial collaboration.

But Nvidia has talked about developing cloud AI environments for the health care industry for many, many years. Nvidia has talked about a few verticals across the economy which require very specialized expertise, and it's not something that you're going to be able to necessarily buy an off-the-shelf product from AWS or Azure, or any of the other clouds.

This is something that's not a new thing Nvidia is trying to do. It's something that's been a work in progress for at a minimum five years, if not longer, since Nvidia has started talking about this. It’s great to see the announcement, but I would pump the brakes on how quickly we see anything tangible come from it.

But I think just speak to our outlook as to how health care is going to be one of the leading areas across the economy - in terms of the deployment phase of AI - really, over the next five years we'll start to see a lot of real benefit flow through to various parts of the sector, including biopharma.

Jordan Wong: And do you think, Rob, this is kind of like the first domino to fall? Does this kind of prompt others, like Lilly competitors, to also fast track?

Rob Cavallo: So I would say that when I have discussions with these management teams, they're all talking about using AI across different functions already. Some of it is in drug discovery, some of it is in the clinical processing (clinical identification of patients), or like the actual filing documents - so companies are already working on it.

I wouldn't be surprised if you see another Nvidia announcement from, and I'm just going to say AstraZeneca, Roche, Merck, would sort of be my three that I bet on coming next, maybe even a Vertex. But this is something that is going to happen, it’s not going to be unique to Lilly.

The timeframe again is an unknown, but I think it's just the first of a series of announcements we'll probably see along this vein.

Jordan Wong: All right. Maybe that bodes well for my bold prediction from December, we'll see. Rob, there's been some M&A activity in the health care space around a business that perhaps most people are not familiar with, but one that you've been following for a little bit. Maybe just bring us up to speed on what's going on there.

Rob Cavallo: Actually, just this morning we had a nice M&A win. So, a small mid-cap company that we have in the portfolio, it's a company called Penumbra. They're a leader in a technology that works in a number of neuro conditions, but really their focus or specialty is in strokes, so removing blood clots. For a very simplistic way to think about it, they're a leading technology in how these blood clots are removed.

They were actually taken out today, or an agreement was announced, for Boston Scientific to acquire Penumbra today, and it's a nice win. Penumbra has been one of those companies that it's made sense strategically why a number of companies would be interested here. The deal terms, I believe, is a 20 plus percent premium to recent average pricing.

I don't really see any issues in terms of deal closing, and I think this bodes well for the set up for M&A across health care. I think probably you see a bit more in the biopharma space, just because of different requirements that we're seeing for large caps and a lot of mid-caps that are ready to be sold for, quite frankly.

So, hopefully this is just the start of a trend in the space and it's something that could bring back more interest broadly into health care, into a sector that we already feel is set up well for 2026. This could just be like another kind of optionality upside driver, this M&A tailwind across the sector.

Jordan Wong: We didn't talk too much about M&A last year in the context of health care. Is it safe to say you think 2026 is maybe a better environment for some increased activity on that front?

Rob Cavallo: I mean it's one of those spaces where there's continual deals. I would say we started to see some of that pick up towards the end of last year, we saw like a number of deals in the biopharma space. Nothing that's huge dollar value, but I think you'll start to see more activity as these drug companies in the large-cap space get comfortable with the tariffs and the drug pricing environment, and feel that they can start putting money to work.

There was also a disconnect on where biotechs thought their valuations were, and I think some of that landscape is kind of clearing up. I think the bid-ask spread is kind of getting back into an equilibrium here, so I wouldn't be surprised if we do see continued pickup in activity across the sector.

Jordan Wong: That's really helpful, thank you. Marcello, some interesting news around the latest from Anthropic, Claude Code.

Marcello Montanari: Opus 4.5.

Jordan Wong: Opus 4.5. Something that you've been paying a lot attention to, and that you're seeing a lot of excitement around. So, no specific question - I just want to kind of hand it over to you to walk us through what this is, what it might mean, and how you're thinking about it right now.

Marcello Montanari: So, if we back up a little bit, what we're kind of seeing is that there's the AI infrastructure, in terms of the hyperscalers, models, and all that, which is kind of broken down into these ecosystems. So, you’ve got the OpenAI with Microsoft, Oracle and the CoreWeave ecosystem, and Nvidia's a big part of that. You've got the Google ecosystem, which includes Broadcom, in particular. Here in Canada, you’ve got Celestica. Then, you’ve got Anthropic, which is their closest partner, and I think somewhere just below 20% ownership is Amazon. That's their main guy. But their chips that they've been using is Trainium, it's an Amazon design, and Inferentia.

But increasingly they're using other chips, and they've made some announcements to that. So, we've been kind of watching developments amongst the models and stuff, and what happened just before Christmas was, Claude Code, Opus 4.5 came out. As you know, we've been watching all the developer communities, the way they're talking about things, and kind of helped us pick up the fact that the Google ecosystem last spring was really gaining ground. The Gemini models, Gemma and Nano Banana, were just taking everyone by surprise at how good they were.

So we're kind of seeing the same thing right now with Opus 4.5 in the domain of coding. When you're listening to people who really know what they're doing, a perfect example is Tobi Lütke from Shopify, who is an absolute monster coder. He knows what he's doing. He made a quote on it, he put it on X. He goes, I shipped more code in the last three weeks than in the decade before. So, there's probably quite a bit of hyperbole in that and I'm sure he's exaggerating, but he's just talking about how good this tool is. And what it is, basically, it's a framework tool to help programmers basically develop programs, and this is part of a very long trend.

There used to be a time when the only people who could program computers were the guys who actually coded for the chip itself. And then we kind of abstracted that, and we brought in operating systems, and then we got applications.

Then you think about Excel, you've got macros in there. So, with each level, more and more people were able to kind of get deeper into the computer and basically code them, make them, and give them instructions. And so, we're now at the point where the coding language is becoming English - which is a game changer.

We're basically democratizing the coding of machines.

Jordan Wong: Have you played around with it at all?

Marcello Montanari: Well, not with Claude Code, but for example, one of our developers here convinced me that I got to spend a couple of hours just with Google's anti-gravity offering. And basically, I coded my own app. I logged in, there was some videos of some of the other people there who had done stuff, and I basically just took one of the frameworks that they used to code it.

I just changed the parameters of what I wanted, and I basically built myself my own app. I haven't coded anything since, you know, Commodore 64 days. But, anyway, I think this is a game changer that we're seeing here - we're completely democratizing this. We're making it very easy for people to basically just request code, and have machines do things for them.

And, I don't think it's a coincidence that Amazon's stock price has been acting pretty well in the last couple of weeks. I think it's kind of part of that whole ecosystem. So, there's a lot more work to be done on our part here, but this looks like it's really important.

Some guys have called this like the ChatGPT moment, some other guys have said this is the reinvention of the printing press. So, I'm taking those things really seriously, looking at this very closely. On the flip side, this has basically brought another layer of pressure on the software names. In some case, it's merited, and in a lot of cases, it's not. But the market will do what it wants to do, and right now it's basically taking all the software companies and kind of giving them a kick in the back.

Jordan Wong: Now, maybe just to elaborate on that, software has been kind of beaten down for the last little bit, what's your approach to investing across the sector right now? Do you see pockets of opportunity for 2026 and beyond, or is it always a wait and see?

Marcello Montanari: Well, I mean, there's always a wait and see element in this business. I'd say first of all the valuations have come down, and for a select set of names, I think that presents opportunity. But right now, the sentiment on software is just absolutely terrible and it's gotten very terrible, very quickly. The market tends to overshoot on the downside and the upside.

So, I suspect that there will be some sort of recalibration of all of this. I think the key to all this is for sure there's going to be a lot of software companies that are going to be in the crosshairs, that perhaps their application is not complex enough or doesn't have the domain expertise of something else.

I don't know how to say that better, but there's - let’s call them simple apps - or simple apps that can probably be copied very quickly. And then there's things that are very complex, like enterprise resource planning systems, CRM systems - these things become the big systems of records.

What they do is they automate a whole bunch of processes. So, it's very hard to replicate something like that, and then with the amount of integrations that are involved between these systems and other systems, and perhaps with clients, with customers, suppliers, you name it. The more tentacles these systems have, the more difficult it would be to basically replace them.

So, we tend to gravitate towards things like that. That's something that's quite simple. I'm not going to name names just to keep us on side with the powers that be, but we're keeping an eye on that. I think ultimately what we're going to see is that some of these big systems, some of these big software providers, and I forgot to mention domain expertise - domain expertise is super important.

I think we're going to start to see these software providers actually implementing all sorts of AI solutions, user interfaces, agents within their software, that basically raises the entire value of the software package and actually makes them even stickier. That stickiness has two sides: there's the financial stickiness, but there's also the operational stickiness.

You know, it's very hard to get a company to just change the way they do things. So, I know you've been using Oracle for the last 15 years. We're going to swap you out and put you on this thing that was coded by the accounting department.

Rob Cavallo: Can I add one piece? I think one more thing that could be important too, is which of the companies are also willing to amend their operating model to some degree? And, how do you rejig your revenue model? Who's willing to kind of give some upfront for the longer-term benefit? This might go a long way as well; it's coming from my perspective from the cheap seats.

Marcello Montanari: Yeah, for sure. We already saw that when we went from on-prem software to the SaaS world. Eventually, every company transitioned. So right now, we'll probably start to see more and more transitions towards what they call consumption-based pricing and things like that. But, more and more, we're going to hear about value-based pricing and things like that.

Marcello Montanari: So, we're going to start to see companies start to transition some of their revenue models and so on and so forth. I fully expect that'll happen.

Jordan Wong: Oh, that's all great.

Marcello Montanari: Coming back to Nvidia just for a second, I just wanted to make the point when Rob was talking about it in the health care, that Nvidia has been cutting deals with like a lot of companies and all sorts of different verticals. They've got their fingers everywhere, and as Rob was speaking, what clicked in my mind was I think it was a week ago, maybe two weeks ago, Nvidia made a big announcement with Boston Dynamics, which is a robotics company that's well known for their crazy dogs. But other than crazy dogs, they also have a humanoid that used to be all hydraulics and now it's all electronics, all electric. And incidentally, it’s owned by Hyundai Motor Corp, which a lot of people don't know deals with Google itself, and has lots of different places and verticals that they're getting their fingers in.

Jordan Wong: Now, this is all great. I think it sounds like 2026 is shaping up to be a pretty interesting year, and certainly lots to talk about in the months to come on this program. Maybe before we sign off, Marcello you mentioned you built an app over the holidays, do you mind just giving us a quick overview of the app that you built?

Marcello Montanari: Oh, it's just an application that basically goes to the EDGAR database, which is the SEC's filings database. It looks for the last seven days, and then I changed it to 14 days. Well actually, it has two buttons, a seven and a 14, and it basically goes and searches for the filings to see if any companies had lost their head of sales, head of global sales, chief marketing officer. Specifically, anyone who's involved with the sales and the top-line revenue of a company - chief marketing officer, those type of people - if any of them had basically left.

At first, I wasn't sure if it worked because I hit the seven-day button and nothing came up. And then for a few days I kept hitting seven, seven, seven. Nothing came up. Then I added the 14 and I got one company, I forget what it was. It was basically some small company that's a public filer, but not in the S&P500. So I think it works, but you could see when you're doing it how it's creating all the code. As you're going along, it's asking you questions and you basically just answer it.

It's very kind of give and take, and at the end of it, you end up with an application. Now, the problem is: here at RBC, we can't just take something that we've developed somewhere else and move it here. So, it's basically just on my machine at home.

Jordan Wong: It’s probably not coming to the App Store anytime soon?

Marcello Montanari: No, no. I don’t think so.

Jordan Wong: Okay. Fair enough.

That was great. Gentlemen, thank you so much. As always, I really appreciate your time and insights. We'll wrap things up here, and we'll be back next month. All the best. Thanks everyone for watching.

Rob Cavallo: Thank you.

Marcello Montanari: Thanks a lot.

Jordan Wong: All right. Cheers.