Animal Spirits Podcast - Talk Your Book: Investing in mRNA

Episode Date: April 4, 2022

On today's Talk Your Book, we talked with Dave Mazza from Direxion about investing in mRNA technology.   Find complete shownotes on our blogs...  Ben Carlson’s A Wealth of Common Sense  Michael Batnick’s The Irrelevant Investor  Like us on Facebook  And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation.    Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits Talk Your Book is bought to you by Direction. Go to direction.com to check out the MRNA E-TF, ticker MSGR. How do you spell direction? DIR EX-I-O-N. You know, I used to say Direction, which is so clearly not right. That's not bad. Actually, I think Dave mentioned FAS, maybe before we started, which was, I think that's the financial bull one.

I started with F-A-Z in 2009, right at the bottom. I didn't understand. Why bank's going up? Oh, that's right, because I went down 97%. You were shorting to the ground. Direction has a special place in your heart. Again, direction.com with an X. Welcome to Animal Spirits, a show about markets, life, and investing.

Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. Michael Battenick and Ben Carlson work for Ritt Holtz Wealth Management. All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Ritthold's wealth management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Rithold's wealth management may maintain positions in the securities discussed in this podcast. Welcome to Animal Spears with Michael and Ben. Michael, I pulled out my Gregory Zuckerman book for this, A Shot to Save the World, that I've been reading about the vaccine. In March 2018, scientific publication stat wrote that Moderna had baffled its peers by placing a

value of $7.5 billion on itself during its most recent fundraising effort. Articles suggested that they were relying on naive or inexperienced backers who didn't know enough to question the company's Rosie Promises. Who are their backers? Do you remember? That's a good question. I don't know. It's in here somewhere. This is from Twitter. They must be targeting the Theranos investors with slides like this one. Someone else tweeted a mocking tweet, truly visionary with a dollar sign for the S. They also said at a biotech event in New York, a well-regarded CIO at a hedge fund

who specializes in life science companies, said, I quote, it will never work. Basically, the guy who started Moderna was like derided the whole way up. People said this technology will never work. It's bizarre that this is what it took, obviously, to prove its point that this MRI technology could work. They raised the total of $2.7 billion. Wow. So they basically needed the pandemic to happen. And from the book, it sounds like the pandemic happened. He's like, all right, all hands on deck, this is it. We're going to do it now. And obviously, they did it. Hang on. They got a grant from DARPA. That's kind of cool.

They got a $24 million grant from Darbara in 2013. But there's been a lot of stuff written. And if you hadn't read in these, there's, I don't know, probably four or five good takes about the vaccine. Let me ask you this. It looks like in 2014, they got an investment from AL-E-X-I-O-N pharmaceuticals. Is that election or alexion? It can't be alexio. That's not a real thing.

It's got to be election. When you say like that, it's something. sounds like something from the Mario Brothers or something. Huh, AstraZeneca put $474 million into the... My takeaway from the book, besides all the, like, how groundbreaking it was and how many things came together and smart people is just that until this had like a proven ground, people really thought that this stuff was kind of pointless and wasn't going to have a use case. Why? Was it because nobody thought that the technology would work? Yeah, they didn't think it could do what it said it was going to do until they had this giant laboratory of a pandemic to try it out in. I think that's still

is the most mind-boggling one to me is I think like that very first weekend that they basically uploaded the way to beat this for the shots like they basically had that code the first weekend and then spent time testing it and working on it but so we talked to Dave Mazza from Direction today

they actually just rolled out an MRNA vaccine I think the most surprising part of this to me wait wait wait wait wait wait wait they actually rolled out an an MRNA vaccine ETF sorry they rolled out an ETF they're not curing Sorry, it's taking everything in my mind to be able to say MRNA without tripping over the letters here. But the fact that there's only 21 holdings in it, I guess basically shows how early it

still is in this technology because it sounds like they could have stuffed it with bigger companies like Pfizer and just didn't want to do that because that's not quite as targeted to this space. This might be a bad analogy, but I've said that crypto is going to be a lot bigger in the future than it is today. Therefore, I want exposure. Sort of maybe like with MRI technology, what's the total market cap of these companies? It's got to be a drop in the bucket. Can't be that big. And Moderna has gotten crushed lately since the roll out of the vaccine.

We all should have agreed to put a floor on their share prices. That stock shouldn't be allowed to fall 70% or whatever it did. Yeah. Sorry, what were you going to say? Nothing. I got nothing. All right. So here is our talk with Dave Mazza from Direction about their MRNA, ETF, not vaccine.

Welcome to Animal Spirits. we are joined once again by Dave Milesa. Head of Product at Direction. Dave, welcome back. Thanks for having me back. So I read this book, A Shot to Save the World by Gregory Zuckerman from the Wall Street Journal,

and a lot of the stuff kind of blew me away. So they were talking about how as recently as 2018, the guy who's the head of Moderna was at some conference and all these hedge fund people were ridiculing him, being like, this idea will never work. MNRNA technology is not going to happen. It doesn't reproduce in the cells enough or whatever the scientific stuff is.

and he was kind of putting his head down saying, no, no, no, it's going to work. Obviously, fast forward a couple years, it may have saved our way of life as we know it. So you guys have a new MRNA, ETF is kind of hard to say all those letters together, that is betting on this technology. So start off with, before we get into why it's so groundbreaking, like what were people missing before and how did the coronavirus totally change all that narrative? So it's interesting. I think that story probably resonates with multiple researchers and scientists who've been

plugging away at MRNA and deconstructing DNAs in different ways to apply it as a treatment to different diseases or respiratory illnesses, things of that nature. Because it was so nascent and not necessarily as top of mind as other biotech advancements like CRISPR and gene editing, it wasn't really getting any funding. And there was really only a handful of companies, Moderna and Biointech, that did have somewhat of a pipeline. But what happened is the COVID-19 pandemic, as difficult as it was from a health standpoint, was the proof point that MRNA as a technology, meaning where, and in this case a vaccine based off of RNA, where you're coding the body to instruct the body to make copies of this particular virus is protein that then results in antibodies

for you is not just a logical way of constructing a vaccine, but an effective one and for these company is a profitable one as well. So, Dave, you've been at Direction for a couple of years now, and you've helped to expand the suite of thematic products. Where did you see the need to get as granular as MRNA as opposed to just like a more broad-based biotech fund? That's a great point. So one of the things that we at Direction have been doing is building upon our leverage and

inverse heritage as tools for tactical traders and those products need to be used. in a particular way and introducing a suite of thematics. But when I was looking at the biotech space, particularly in light of the kind of foundational, generational change that's happening, there seemed to be a gap, particularly on MRNA, because it's such a nascent area. It was misunderstood for years that we thought there was an opportunity to package together a relatively concentrated number of companies. There's 21 names in the portfolio today that has,

exposure to MNRAs. For example, not to jump ahead, Pfizer's not in this portfolio. As much as we talk about the Pfizer vaccine, it was developed by a German company called BioNTech and Pfizer's partnered with them to distribute it, produce it, things of that nature. This portfolio are those names. And there's probably only other than Moderna and Bioentech, maybe a handful of other biotech that folks may be familiar with in the CTF. That's done on purpose. Why didn't Pfizer make the cut? Their percentage of revenue that they make off of their COVID-19 vaccine is relatively modest because they're a major mega-cap pharmaceutical company. It's excellent, frankly, that Biointech was able to partner with them so that those shots could get in people's arms and be produced. But at

present, that's not where the majority of their revenue comes from, and maybe likely just because of their size and scale. Did you create some sort of threshold then that companies have to have to get into the fund here? You really need to be involved in a material way. So at least generally 50% of your revenue needs to come from RNA or what's called sister RNA technologies, micro RNA, for example. So even taking what is part of DNA, a DNA strand which is RNA and then taking even a step further. Or you need to have publicly declared that you have a active portfolio of MRI technologies and that you have one in a clinical stage funding so that there's a path toward that relatively high threshold, which is that 50% score.

Dave, you guys at Direction also have a genomics and a biotech ETF available. And I think you're uniquely qualified to talk about the evolution of the industry over the years because you spent so much of your career at State Street. Who do you see using these products? Do you see this as retail, as institutional that's looking to be hyper-targeting, maybe both? Who do you see using these things? And how do you see them like basically coming through this versus the genomics, biotech? I can say, okay, no, I want that one.

I think it's primarily retail and to some extent advisors, maybe less so on the institutional side. But as you know, with the beauty of VTS is that whether you're putting in a billion dollars or a hundred dollars, you're going to pay the same price and get access to the same securities. But to me, when I think about how this really can be used, and frankly, this can apply to a lot of different thematics, maybe outside of kind of your multi-themed ones. This is a satellite holding in a portfolio. It shouldn't be comprising a significant part of anyone's portfolio. But really, it's for someone who believes that these companies have been out of favor

or misunderstood it's a better way of putting it. And now there's an opportunity, again, because the pandemic put a spotlight on this as a technology in the biotech space to be used broadly. So this is a very narrow exposure. Again, it's intended to be so that if someone believes that just like the data is pointing toward that the path toward MRNA to get additional funding to be used for a, a multitude of different applications, whether it's Lyme disease to HIV AIDS or different cancers, it's going to be there that this might be an attractive fund, as opposed to trying to

take the lottery ticket of just owning Gritstone Bio, which is a really interesting company that's in the portfolio, but it's very, very small. One of their drugs may pay off and it would look at the stock chart of a Moderna or even a biointech and it can maybe follow a similar path, or it may not. You do get some of the diversification benefits, just like any ETF, but particular for something as narrow as this, as opposed to trying to pick that one or two names. How do you view that the binary nature of the biotech space when there's this regulatory framework that is almost a different risk, both to the upside and the downside, I guess. How do you view that for investors?

That's one of the reasons why biotech broadly, I think, has obviously had a great run in 2020 and then it kind of pulled back in 2022. Some of that is just kind of the macro environment rates and the transition. from growth toward value and inflation. But at the end of the day, you're right, many people, I worked for a PM at the beginning of my career who said, think about biotex as call options, or think about them as in some cases, particularly early stage ones as lottery tickets. And some of the names in this portfolio are that. There's names in the portfolio that have 100 employees, 500 employees. So do you have any market cap sort of threshold here, too?

Do you have like pretty low market caps in some of these companies? We're comfortable having relatively low market cap. There's some kind of companies that are $100 million market cap in the portfolio. Moderna is a $66 billion market cap. So if I'm going to own this fund, I do need to be comfortable, but there's microcap names in the portfolio. But in the biotech space, I think that actually can be beneficial, at least in this market, where there is all this regulatory risk, there's focus on health care in general

coming from Washington, but there is innovation happening all the time and it's generally going to be happening at companies that are not household names, especially in this area. There is a biotech ETF that's been around since 2006, and it just experienced its deepest drawdown ever, which is kind of shocking. Could you bring us up to speed? What is happening? Did the market get overheated based on people chasing this theme? What's the state of biotech right now? I think as a whole, there's a confluence of events which happened in this space. So 2020 saw massive, not just in the MRNA or even broadly speaking, CRISPR, genomics, all of the exciting themes that were emerging, particularly in your smaller biotechs,

we're all looking to show some fruit, meaning their growth projections were massive, people were bidding up growth companies, particularly those that are on the bleeding edge of growth, meaning their payoffs might be five, ten, fifteen years down the line. That, of course, got kind of a bit of a screeching halt in 2020. And whether your biotech or other areas that were focused on hyper growth, that story was derailed a bit and valuations have come down pretty sharply because of that. So I do think there was a bit of over-excitement, but now there's an opportunity to kind of peel back and say, what are the groups of companies or types of companies that actually have

that longer-term potential for true disruption? So it doesn't surprise me that it was its largest ever drawdown, but I think a lot of that it's coming from the broad macro influence. What are some of the breakthroughs that now seem realistic from this technology that could help other diseases? I know you mentioned a couple. There's been a number of stories saying that, like, the breakthroughs here could just be enormous for other huge diseases that impact a lot of people.

Exactly. So the pandemic warranted it as first and form of a potential for vaccine. So the way vaccines usually work is that you get injected with inactivated proteins. And the crazy thing that has kind of come to bear is that, particularly if you're really, read Scott Gottlieb's book, the way vaccines used to be developed is in chicken eggs. And so you needed these farms, it's how the flu vaccine gets done every year. Wait, literally? I didn't know that. Yeah, so that's how it grows. So there's a critical supply chain issue potential there. And that's what one of the concerns was when they were thinking about this at the beginning of the pandemic

of how are we going to accomplish this, particularly if people can't work together. I don't know if you've ever been in a chicken coop, but not to get off topic, but it's not a very comfortable place. So there was that. So this is MRNA. It's simply a technology. You're teaching your body how to fend off the spike protein in the case of COVID-19. So imagine if we could do the same for a combined COVID booster and the flu shot. That's something Moderna is working on. Just in the last couple of weeks, they've started their first trial on MRNA-based technologies for HIV and AIDS. That's something which the amount of money that's been spent on that over the years is remarkable with limited success. And now that there's a kind of a proof point that the

MRI is highly effective, but also highly adaptable. Think about how quickly the boosters were able to come out. Again, it's a political discussion of how many shots someone should get or what have you. I don't want to get into that today. I got 11 just in case. Yeah, exactly. Simply put, but they were able to tweak it modestly, and then we can fight Delta or we can fight Omicron. If we take a step back and say, hey, there's either rare diseases or even some basic cancers or something, and this is down the line, is that if I kind of change the code and teach my body to do that on its own, the potential becomes limitless in some ways, which is why there's

so much excitement on it from a future youth perspective. You said that these are lottery tickets. Some people think of them as lottery tickets. some of these early stage companies. Where are these companies in terms of like FDA approval? How does that work when you're, I guess they must have revenue in MRNA, so maybe they're past that or just, what does this look like? Well, some do and some don't. Moderna, Bioentech, Vertex, which is a relatively larger pharmaceutical company, Surrepta, they've been around for some time. They have recurring revenue in the case of Moderna and Biointech

from MRI from the vaccines. But others are pretty modest. because they have an early stage trial. Even if we look at Moderna, they just started stage one for HIV, and there's going to be setbacks along the way with that, just like anything else that's really trying to transform the world. Other folks are looking at Lyme disease, for example, which can negatively impact millions of people in a sneaky way. Growing up in the woods in Massachusetts and New Hampshire,

that was, I think, many mothers biggest fears for boys going in the back is getting bit by a tick and then you're ill for the rest of your life. So that's why there's so much excitement. But again, at the end of the day, there's not that many companies. That's why there's only 21 names in this portfolio today that are materially involved with this, at least at present. You mentioned like HIV and AIDS is the next one. One of the things I didn't realize from the Zuckerman book I mentioned earlier was that was

kind of the precursor to the COVID vaccine, is that a lot of that research they were doing in like the 80s and 90s was to try to find a vaccine for HIV and AIDS. And then you had this unintended consequence of that. some of that research spilled over and then helped with the COVID vaccine. I guess you don't ever want to bet on like a ricochet shot like that or something, but I'm assuming that there's got to be a ton more money going into the year and then some of the unintended consequences and some of the things that we're not even thinking about now are the other possibilities from this. 100%. And that's the right way to think about it. So yes, look, I am not a biologist, but there was

a lot of work done on proteins, in particular spike proteins. So we know they've learned the coronavirus, the primary tool for invading the body, hence the crown name. and we've all seen the pictures and at this point memes. But the original work was done on HIV AIDS, exactly. But people thought it was insane that you're going to teach your body to fend it off. And that's not where there was just a handful of people that were plugging away at it, both in scientific institutions and then to some extent companies. And now finally, it's been proven to be effective, to be adaptable,

to work as a vaccine, that now we are seeing the funding kind of go up markedly. in the space. Can you talk about some of the financial incentives involved in getting these things to market from the beginning to the end? Why haven't we cured some of the diseases that have been around for so long? Is it? Because there's not enough end demand and therefore the companies aren't incentivized to cure AIDS, for example, just plugging that I've ever had. What does that all look like? Well, one I think it's a recognition that it's really hard. So we have to understand that. So it's a disease that's a difficult one, but to your point, it can be detrimental to populations and continents and things of that nature. We're just day-to-day living

because there was such fear of it and stigma that happened when it was first identified. Now, that got the right amount of attention, but not the financial attention because I think oftentimes pharmaceutical companies and biotechs go to where they can make an easier buck, whether that's curing depression or helping with that or the multitude of other things that we get advertised on a daily basis if we turn on our TV, where people might think that they would go talk to your advisor, or sorry, you're a doctor. Now we know that this is proven, and I think that's a bit of the game changer here. And the forecasted revenue coming from COVID-19 vaccines starts dropping off markedly, according to the journal Nature, which is a pretty prominent medical

journal. How does the process of funding these things work from the sense of, let's say that Madner was like, all right, we want to go for it. Whatever disease it is, we want to go for it, but it's not like really what we do. Do they have to go to their board of directors? Can they set up like a venture side fund to like fund these things? Where does the actual funding come from? There are 66 billion dollar companies. They've issued shares along the way to take advantage of that. They're getting a model where you're self-funding. But yet, if you're an early stage biotech with 30 people or 100 people in Brooklyn or in Cambridge, Massachusetts or San Diego, of just three areas where there tends to be concentrations of biotechs in the U.S., yeah,

you're going to do a raise and you're probably going to list on the NASDAQ and get a small amount of capital or have different venture series from some venture companies that are focused just in the medical field. But until you show some success, I think actually especially, as I understand it, after what happened with Theranos and Elizabeth Holmes and all that, there's a much higher threshold just for checks to be written in this area, which is why even as something, which was, on one hand, far afield, but as exciting as the MRNA applications could be, wasn't happening until the last couple of years.

With a strategy like something like merger ARB, that has the ability to sort of march to its own drummer a little bit because it has that regulatory framework and you're dealing with the different component of stock market investing. I've never looked into this, but does biotech have that a little bit too because the regulatory risk? Is it still a correlation to the stock market is still pretty high? Stocks are stocks, not to sound like a nays there, is that they tend to have higher correlations to one another than many people realize, even international versus U.S. But in the case of biotex, particularly smaller ones, there is some proof to that, where they're not immune to the issues

that can happen from interest rates and all the things that go into valuing a particular company, particularly one that has growth projections far in the future. But you tend to see the behavior as a group looking a bit differently than just what's happening with other sectors that may be similar on paper. So if we were venture capital investors right now, we ask you for your Tam or whatever, would you expect that in the years ahead because of all the money pouring in here that there's going to be a greater list of companies that you can invest in in this portfolio, I think it'll still be relatively concentrated. I think it's going to remain relatively concentrated, but there's going to be more companies that are going public in this particular space.

On one hand, which we've already seen, there has been some companies that were purchased, even from when we launched in December, because people are excited about the potential here. So larger pharmaceuticals and biotechs are going to use this as a hunting ground. at the same time for say, hey, this is something that could become profitable for us. The universe is going to remain, I think, relatively small. Even as new companies go public, there's going to be others that find existing ones very attractive. In terms of geography, where are we talking here?

Where are most of these companies located? Almost entirely the United States. But there is a handful of companies in Germany, bio-intech and cure of acts come to mind, a couple others in Europe and then some in China. But it's really, as of now, really U.S.-based companies. and that's where the majority of the research on MRNA as a technology has occurred. All right, Dave, what did we not cover that you wanted to get to? I think the only other thing I'd add is, again, when I think about the utility,

look, thematic funds had seen a massive run-up in interest and assets. Some in our lineup benefited from that as well, whether it was working home, moonshots, but have you. There's been a resetting of expectations of the role that these funds can play in portfolios and what the expected outcome should be. I really, regardless of what we're talking about, really consider them to be satellite holdings, but the old school benefit of the ETF structure

getting that diversification can really be important here, especially when we're thinking about smaller and microcap companies. All right, Dave, this is great. Thank you very much for coming back on. Where can people find your work and directions work? Yeah, please visit our website, direction.com, to get more information on the funds or any of our thought leadership as well.

Thanks again. Thank you, Dave. Thank you, Direction. Go to Direction.com to learn more. Animal Spiritspot at gmail.com. We will see you next time.