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Early Moderna backer on core investing lesson from big Covid-19 bet


Scientist Xinhua Yan works in the lab at Moderna in Cambridge, Massachusetts, on Feb. 28, 2020. Moderna has developed the first experimental coronavirus medicine, but an approved treatment is more than a year away.

David L. Ryan | Boston Globe | Getty Images

The coronavirus may change the world of investing forever, but it has not changed one fundamental market lesson: Good, long-term market ideas will pay off even if you can never see exactly what’s coming in the future.

That does not only hold for a stock like Amazon or Netflix, booming amid growth in online ordering and streaming media consumption, but within the world of biotech receiving so much focus amid the global health crisis.

Moderna Therapeutics, now among the top contenders in the race to develop a Covid-19 vaccine, is one example. It has seen its stock price more than triple this year as it emerged as a major player in vaccine development and has seen its approach “fast tracked” by the FDA.

But biotech venture capitalists say that the wrong lesson for companies and investors to take away from Moderna is that it’s time to gamble on business models related directly to the pandemic.

“Big bets are long term,” said Julie Sunderland, co-founder and managing partner at Biomatics Capital, speaking at CNBC’s virtual Healthy Returns summit earlier this week.

Sunderland co-founded the VC firm, known for making ambitious investments, after having led program-related investments for the Bill & Melinda Gates Foundation, which provided financial support to Moderna while she was there. Since 2010, Moderna has been working on developing messenger RNA (mRNA) that allows the body’s cells to act like reprogrammed biological factories, producing antibodies needed to battle diseases, including viruses.

“The nice thing about big bets is that they play out over time. …  We made an investment five years ago in Moderna, and mRNA was a big bet, and you see it playing out in terms of their ability to get a rapid vaccine for Covid. … You have to take those big bets,” Sunderland said. 

She added that with Moderna the thought was not that the world would need a vaccine for a particular pandemic. “You’re thinking about the evolution of society and thinking about how to solve problems,” Sunderland said.

That view holds sway over Sunderland and other prominent health-care venture capitalists now, too, as billion-dollar biotech VC funds are raised and concerns rise about the next SoftBank-like start-up bubble coming from the health sector specifically.

“The big-bet companies I have … there is a ton of unmet need for patients, science and innovation,” she said.

Ideas that were good before the crisis may prove to be even better ideas during it, but that doesn’t always translate to sudden investment value opportunities. That is true both in the health sector and — as specific theme stocks soar in online niches such as shopping and exercise — beyond it.

“What we don’t want to do in the venture capital community is be overly reactive,” said Mike Pellini, managing partner at Section 32, a VC founded by former Google Ventures executives including Bill Maris. “What we were doing pre-Covid is similar to what we’re doing today,” Pellini said. “We’re not jumping on companies just focused on telehealth because that has become more promising.”

Telehealth has indeed boomed quickly. Judy Faulkner, founder and CEO of health-care IT company Epic Systems, said during a separate interview at the Healthy Returns virtual summit that they have seen clients go from 20 telehealth visits a day to 8,000 during the pandemic.

But Pellini said that sudden acceleration in the trend does not make this the best time to invest in telehealth. “You needed to do that a few years ago,” he said. “We invested one to three years ago with no idea we would see something like Covid-19.”

Don’t invest in companies for today

Pellini said it would be a mistake for any investor or company “to go off on a tangent” because of the current crisis.

“It’s remarkable how many texts, calls and emails I get — certainly weekly if not daily — about companies that want to jump into Covid research, Covid diagnostics, Covid therapeutics,” Pellini said. “But the companies best suited to do it, where investment dollars should flow and even ratchet up, are the ones that already developed platforms to move into these areas. … We’re not investing in companies for today,” he said.

For companies like Moderna and Vir Biotechnology, which also has seen its stock increase since its 2019 IPO on potential for a coronavirus treatment, the business models were built all along to go in this direction. “It’s not a pivot,” Pellini said. “It adds to what they are doing.”

“Vir was a classic example of a big bet,” Sunderland said, a strongly funded company that needed a lot of capital to aggregate the technology to build its infectious-disease platform. This current situation will enforce discipline on investors and companies to use capital wisely, but there is a push and pull between efficiency and demand for capital to fund fundamental innovation.

“Sometimes it goes too far and sometimes not far enough. I’m a believer in big bets, and they require lots of capital,” Sunderland said. “They [Vir] are now positioned so well to develop some really great treatments for Covid,” she said.

Fears of ‘SoftBank bubble’ in biotech

A lot of capital had come into biotech before Covid-19, and that did have implications on valuation. “Valuations were going high and fundraising going high,” Sunderland said, but she added that a lot of capital is needed to invest in innovative themes, like mass testing for cancer.

Thrive Earlier Detection raised $110 million in a single round of fundraising last spring from investors including Biomatics Capital and Section 32. “Thrive will need a lot of capital for mass testing for cancer,” Sunderland said.

Recent biotech funds have raised billions, including Arch Venture Partners raising roughly $1.5 billion across two funds, and Flagship Pioneering raising $1.1 billion, both in April.

Pellini said he has no concerns about a $1 billion fund indicating a bubble, and he said there’s no comparison to be made to something like a $100 billion SoftBank Vision Fund, which can change the dynamics of an entire industry. “It’s important to tease that apart from money that’s being thrown against the wall at times by funds that are logarithmically larger than a billion-dollar fund,” he said.

“There has not been a dramatic shift, and that may be the biggest surprise of all,” Pellini said.

Biotech has been among the few sectors to see initial public offerings completed since the crisis took hold in the U.S. market, and recent IPOs have traded well.

Biomatics Capital portfolio company Aledade, which has a business model focused on primary-care physicians, closed a fundraising round during the crisis, and there is additional portfolio fundraising under way now. Section 32 just closed a new fundraise, and Pellini said he was surprised by how much could be accomplished on video calls, “as tiresome as those can become.”

Section 32 was raising a fund as large as $350 million this spring, according to documents filed mid-April with the Securities and Exchange Commission.

React, but don’t overreact, and if we don’t, we will end up in a reasonable place. … Don’t get distracted.

Mike Pellini

Section 32 managing partner on avoiding emotional reactions to the Covid-19 crisis

The start-ups that will have the hardest time are the ones that did not have fundraising plans already underway, or are not in a position to receive follow-on funding based on having already reached a key growth milestone, but will still need more capital in the next six to 12 months. “Twelve to 24 months of cash is the real key,” Sunderland said, whether that comes through an additional fundraise or being conservative on spending and hiring.

Some specific niches within health care deserve to see greater valuations afforded to them in the future as a result of this crisis, such as diagnostics, which Pellini said has been undervalued and underfunded.

“There is so much innovation left on the table in the diagnostic industry,” he said.

Over the past two decades, the regulatory and reimbursement models for diagnostics have stalled innovation, even though 80% of decisions are diagnostics-based.

“Now is the time for an overhaul,” Pellini said, noting that regulators have not wanted to hold back new tests from coming to market during the coronavirus, and both private payers and Medicare have shown a willingness to adapt quickly. “We haven’t figured out a way to value diagnostics,” he said. “Am I certain? No. But I am hopeful the diagnostics industry will be transformed by this.”

If not, he added, “We will be in the same health-care dilemma with the next dangerous virus if we have not fixed the diagnostic underpinning of this whole industry.”

Don’t panic

Both VCs are focused on a core investing message: Avoid emotional reactions to the crisis.

“We don’t want companies taking a right turn,” Pellini said. “Don’t overreact. React, but don’t overreact, and if we don’t, we will end up in a reasonable place. … Don’t get distracted.”

Sunderland has been sending copies of Douglas Adams’ “The Hitchhiker’s Guide to the Galaxy” to millennial founders of portfolio companies with the core message she wants to send on the book’s cover: “Don’t panic.”

“You don’t want to get into denial. … We’re asking them to deal with reality,” she said, which could include layoffs as part of a plan to preserve enough cash to last 24 months, or avoid having to take a bad deal to get through this crisis. “But to operate from a place of fear and be overly conservative will impede companies,” she said. “Optimism and hope — that is necessary for any high-functioning biotech in the early stage.”


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