I am swivelling my intellectual crosshairs around, as there is a lot going on, in the world. Well, there is usually a lot going on, in the world, and I think it is just the focus of my personal attention that changes its scope. Sometimes, I pay attention just to the stuff immediately in front of me, whilst on other times I go wide and broad in my perspective.
My research on collective intelligence, and on the application of artificial neural networks as simulators thereof has brought me recently to studying outlier cases. I am an economist, and I do business in the stock market, and therefore it comes as sort of logical that I am interested in business outliers. I hold some stock of the two so-far winners of the vaccine race: Moderna (https://investors.modernatx.com/ ) and BionTech (https://investors.biontech.de/investors-media ), the vaccine companies. I am interested in the otherwise classical, Schumpeterian questions: to what extent are their respective business models predictors of their so-far success in the vaccine contest, and, seen from the opposite perspective, to what extent is that whole technological race of vaccines predictive of the business models which its contenders adopt?
I like approaching business models with the attitude of a mean detective. I assume that people usually lie, and it starts with lying to themselves, and that, consequently, those nicely rounded statements in annual reports about ‘efficient strategies’ and ‘ambitious goals’ are always bullshit to some extent. In the same spirit, I assume that I am prone to lying to myself. All in all, I like falling back onto hard numbers, in the first place. When I want to figure out someone’s business model with a minimum of preconceived ideas, I start with their balance sheet, to see their capital base and the way they finance it, just to continue with their cash-flow. The latter helps my understanding on how they make money, at the end of the day, or how they fail to make any.
I take two points in time: the end of 2019, thus the starting blocks of the vaccine race, and then the latest reported period, namely the 3rd quarter of 2020. Landscape #1: end of 2019. BionTech sports $885 388 000 in total assets, whilst Moderna has $1 589 422 000. Here, a pretty amazing detail pops up. I do a routine check of proportion between fixed assets and total assets. It is about to see what percentage of the company’s capital base is immobilized, and thus supposed to bring steady capital returns, as opposed to the current assets, fluid, quick to exchange and made for greasing the current working of the business. When I measure that coefficient ‘fixed assets divided by total assets’, it comes as 29,8% for BionTech, and 29% for Moderna. Coincidence? There is a lot of coincidence in those two companies. When I switch to Landscape #2: end of September 2020, it is pretty much the. You can see it in the two tables below:
As you look at those numbers, they sort of collide with the common image of biotech companies in sci fi movies. In movies, we can see huge labs, like 10 storeys underground, with caged animals inside etc. In real life, biotech is cash, most of all. Biotech companies are like big wallets, camped next to some useful science. Direct investment in biotech means very largely depositing one’s cash on the bank account run by the biotech company.
After studying the active side of those two balance sheets, i.e. in BionTech and in Moderna, I shift my focus to the passive side. I want to know how exactly people put cash in those businesses. I can see that most of it comes in the form of additional paid-in equity, which is an interesting thing for publicly listed companies. In the case of Moderna, the bulk of that addition to equity comes as a mechanism called ‘vesting of restricted common stock’. Although it is not specified in their financial report how exactly that vesting takes place, the generic category corresponds to operations where people close to the company, employees or close collaborators, anyway in a closed private circle, buy stock of the company in a restricted issuance. With Biontech, it is slightly different. Most of the proceeds from public issuance of common stock is considered as reserve capital, distinct from share capital, and on the top of that they seem to be running, similarly to Moderna, transactions of vesting restricted stock. Another important source of financing in both companies are short-term liabilities, mostly deferred transactional payments. Still, I have an intuitive impression of being surrounded by maybies (you know: ‘maybe I am correct, unless I am wrong), and thus I decided to broaden my view. I take all the 7 biotech companies I currently have in my investment portfolio, which are, besides BionTech and Moderna, five others: Soligenix (http://ir.soligenix.com/ ), Altimmune (http://ir.altimmune.com/investors ), Novavax (https://ir.novavax.com/ ) and VBI Vaccines (https://www.vbivaccines.com/investors/ ). In the two tables below, I am trying to summarize my essential observations about those seven business models.
Despite significant differences in the size of their respective capital base, all the seven businesses hold most of their capital in the highly liquid financial form: cash or tradable financial securities. Their main source of financing is definitely the additional paid-in equity. Now, some readers could ask: how the hell is it possible for the additional paid-in equity to make more than the value of assets, like 193%? When a business accumulates a lot of operational losses, they have to be subtracted from the incumbent equity. Additions to equity serve as a compensation of those losses. It seems to be a routine business practice in biotech.
Now, I am going to go slightly conspiracy-theoretical. Not much, just an inch. When I see businesses such as Soligenix, where cumulative losses, and the resulting additions to equity amount to teen times the value of assets, I am suspicious. I believe in the power of science, but I also believe that facing a choice between using my equity to compensate so big a loss, on the one hand, and using it to invest into something less catastrophic financially, I will choose the latter. My point is that cases such as Soligenix smell scam. There must be some non-reported financial interests in that business. Something is going on behind the stage, there.
In my previous update, titled ‘An odd vector in a comfortably Apple world’, I studied the cases of Tesla and Apple in order to understand better the phenomenon of outlier events in technological change. The short glance I had on those COVID-vaccine-involved biotechs gives me some more insight. Biotech companies are heavily scientific. This is scientific research shaped into a business structure. Most of the biotech business looks like an ever-lasting debut, long before breaking even. In textbooks of microeconomics and management, we can read that being able to run the business at a profit is a basic condition of calling it a business. In biotech, it is different. Biotechs are the true outliers, nascent at the very juncture of cutting-edge science, and business strictly spoken. This is how outliers emerge: there is some cool science. I mean, really cool, the one likely to change the face of the world. Those mRNA biotechnologies are likely to do so. The COVID vaccine is the first big attempt to transform those mRNA therapies from experimental ones into massively distributed and highly standardized medicine. If this stuff works on a big scale, it is a new perspective. It allows fixing people, literally, instead of just curing diseases.
Anyway, there is that cool science, and it somehow attracts large amounts of cash. Here, a little digression from the theory of finance is due. Money and other liquid financial instruments can be seen as risk-absorbing bumpers. People accumulate large monetary balances in times and places when and where they perceive a lot of manageable risk, i.e. where they perceive something likely to disrupt the incumbent business, and they want to be on the right side of the disruption.