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have a significant amount of cash from a wide range of investors. Kim says Moderna has amassed this war chest by selling investors on “breadth.” A typical biotech might go public on the promise of one drug, or even a few. Moderna, valued at more than $7 billion after its last round, has a pipeline of 19 programs, 10 of which are in human testing. It aims to become a company worth more than $50 billion, Kim says. To put that in perspective, only four biotechs—Amgen (NASDAQ: AMGN), Gilead Sciences (NASDAQ: GILD), Celgene (NASDAQ: CELG), and Biogen (NASDAQ: BIIB)—are currently worth that much.
“We’re saying we can draw a picture that articulates an outsized return over time, and that outsized return comes from not one drug singly advancing by itself to approval, but instead by a technology that is pushed forward over time,” Kim says. “The key thing for investors to wrap their arms around is: can we offer that sort of upside? We believe we can.” (As these reports in STAT and the Financial Times note, Moderna has plenty of skeptics, especially given that many of its more advanced candidates are vaccines, a lower-margin business than other types of drugs.)
There are, of course, benefits to raising this type of cash. It creates momentum for further financings, and those fundings give a company a longer runway. Management teams can focus on developing drugs and pursuing more ambitious clinical pipelines, and not just get stuck trying to raise more money, Stern says. They also already “have the basis for the IPO book” in place, she says.
Cash also begets more cash, which can help a large private company. Davis adds that in the biotech market there’s a sense of haves and have-nots. Companies can be considered “best in breed” by raising the largest rounds, which makes it easier for them to get even more. In a market flush with cash for biotechs, “it’s a bit of a self-reinforcing situation,” he says.
Yet loading up on cash from the private markets before an IPO invites complexities as well, venture investors say. Borisy says that getting a guaranteed, massive bankroll early on, rather than earning smaller sums of cash step by step, can lead executive teams to take on more programs than they can handle. Davis notes that managing a large number of investors means building “layers on the [investor] syndicate” with groups who bought in at different valuations or have been involved for different lengths of time. Some might have different expectations, or handle bumps in the road differently. As more rounds are stacked on, says Polaris Partners partner Amir Nashat, investors start to get preference rights and more protections so “they can’t get bossed around by the earlier rounds.” “Term sheets never get less complicated,” he says.
Such a lofty valuation could lead to angst that comes to a head at the IPO. Raising a ton of cash privately sets high expectations. And the IPO market has yielded a “pretty tight range” for biotechs of late, typically valuing them in the roughly $250 million to $500 million range, Nashat says. Will public investors value Moderna the same way the company and its investors have? Will its price be above the last round it raised before an IPO? The perception of a super-capitalized company can change if expectations are not met at the IPO, Borisy says. Or unhappy investors might dump shares, which makes it harder to raise cash in the future; or management becomes undisciplined, feeling it’s wasted money.
“For some of these big visionary companies that have raised a lot of money in the private markets, they become very good selling the vision. ‘This is going to change medicine, change the way we’re going to treat patients. Believe us,’” Davis says. “The public markets are going to scrutinize the details of that vision.”
According to Kim, with each round, Moderna has tried to set the same expectations and be clear on the company it is trying to build for the long haul. Investors are “broadly aligned with us on timelines and the vision for the company,” he says. Raising more money hasn’t created conflict or strategic shifts, it’s “just enabled us to do more,” adds Kim.
Wall Street investors will get the chance to judge whether it was money well spent when the time comes.
Photo courtesy of flickr user woodleywonderworks via a Creative Commons 2.0 license.