Sohn 2021 | Josh Wolfe in conversation with Bob Nelsen

Our next speakers, Josh Wolf of Lux and Bob Nelsen of Arch, both run venture firms where they create new companies out of thin air and they seem to live in the future. They did a fireside for Sohn back in September on how the pandemic would play out. That was bizarrely accurate in retrospect. Bob nailed everything from precise vaccine timing to a second wave in December. We invited that dynamic duo back to share what's next in healthcare. Josh, over to you.

Thanks, Graham. Bob, good to see you. I was hoping you were going to be wearing your robe. You deserve it. You've got the iconic status. We are, of course, the crazy venture capitalists and we're speculating on futures and we're supposed to be the source of optimism. And You know, on the one hand, I listen to people today who are bemoaning the woefully awful distribution of vaccines. And then you stop and look at the arc of history. And it took, you know, twenty five hundred years to cure smallpox. It took 15 years to make AIDS a livable condition. It took five years for Ebola vaccine and it took weeks to basically structurally decode covid-19 and under a year for a vaccine. And I've got to confess that I was, unlike you, very skeptical that we would see a vaccine within this year.

because the historic base rates basically said five years, I thought it would be way more probable, and got into big debates here internally at Lux, that we would, just given the law of large numbers with tens of millions of people infected and being treated in hospitals, that I thought with a one-in-a-million chance of a therapeutic being discovered in one of these hospitals, we would see that scale. But you were way more confident. And as Graham noted, your predictions when we did this last year, the arrival of the vaccine and the potential therapeutics were prescient and almost dead on. So let me ask you, what is your current state of the union, and particularly on the virus, and what do you see near term ahead?

Well, I mean, I think we're—I've been traveling the country lately, so I'm watching it open up. And I've decided that the concept of herd immunity when you have mRNA vaccines that essentially give you 100% protection against death is outdated. So what we effectively have is herd immunity, but it's a psychological thing, right? Which is you're either vaccinated, you had the virus, or we don't care whether you get the virus because you're not going to infect my parents anymore, right? So there's this kind of like, if you want to ride a motorcycle without a helmet, go ahead and do it, right? So you're not going to overwhelm my healthcare system and you're not going to essentially infect my parents.

So your personal choices, as dopey as they think they are to not get vaccinated, you know, we're going to be open this summer and perversely the U.S. and maybe Israel are now ahead of the curve in terms of not worrying and not fearing the virus. So the new metric is how much do you fear the virus? And interestingly, the countries that locked down the best are going to fear the virus for a long time. And we're going to be in a place where we don't fear it. And the thing that we need to think about is the variants, right? Right now, it looks like these vaccines are going to work against the variants and maybe you get a third booster and maybe we inoculate our kind of high-risk patients with the variant vaccines in the fall and as many people as we can.

But, but we're going to be protected against the current thing. The thing that we need to worry about, and we're not worrying about, and the world needs to worry about, is the 200 million immunosuppressed people that are baking new variants. And right now we're doing—there's no coordinated effort on an international scale to vaccinate those high-risk people. So that's what I worry about, is that we need to get on that, and we need to inoculate the people in Africa that have HIV and get ahead of this. And nobody's—nobody's prioritizing that. It's interesting. We spoke a few weeks ago.

I think we were both traversing through Florida, and we were just commenting on the psychological aspect of this, that people are done, right, in the US? As you know, the fear has abated, and the fear, as in, as a natural inoculation, you know, sort of important.

The only place I've seen fear still is Seattle and DC. They're still three or four weeks behind the rest of the country. Everybody else is getting there.

You mentioned at the start of your comments mRNA, and this was an area that was highly speculative before. You are a pioneer at really identifying some of the areas of biotech that are cutting-edge. What has you excited now, which may not be known by the masses?

I think that, you know, just this ability to manipulate cells in vivo, whether it's with gene editing or even epigenetic ways of manipulating cells, we're going to be able to really cure a large number of diseases, and we're going to be able to think about biology and even aging in new ways. So instead of, like, anti-aging, we're going to think about rejuvenation, right? You're going to be able to go backwards in time to fix things in your body. And so I think we are really continuing to be in this technologic revolution that will have a major, major impact on disease—in not decades, right, in single-digit years, you'll start seeing some of this have impact in the clinic.

I always love that. First of all, we're going to see you next year when we sit down again to do this, and it'll be Benjamin Button, Bob Nelsen, reverse-aged. But it's that intersection of the inevitable, where we're able to see some cutting-edge trend that's on the horizon, with the perception of the impossible, which, of course, means that asset prices are going to be low because everybody that's listening is like, "No way, that's crazy," right? And it takes guys like you to believe and fund it and make it so. A related area that I want to talk about, and as Bill and Brad were talking earlier, and Bill says, "Look, I'm not a macro guy. We're not macro guys." But I want to talk for a minute about China and specifically China biotech.

And I think the pattern historically is we imported or attracted the top scientists from China who ended up training at our elite institutions—the Harvards and MITs and Stanfords, et cetera. They stay in the US, they joined startups, and then we would use China for contract research organizations, for CROs. And now that appears to be changing. Will we be importing our future drugs from China and China biotech?

I mean, I think China wants to make their own drugs, right? But that takes a long time. So I think that they are focusing on reinventing their innovation infrastructure and ecosystem, as all countries kind of are looking at—they're looking a bit more internal lately, whether it's supply chains or innovation networks. China has a big challenge in reinventing its university system to allow for risk-taking. And so when you have, when you have structures that don't reward risk-taking, then you, you have kind of a bit of a challenge to try to create that infrastructure. So the US should just keep doing what we do, which is welcoming all people from all places to come here and innovate. And with some of the new bills coming through Congress, there's going to be more money.

And we will continue to be the world's leader in investment in R. And as long as we're fueling the engine of research and as long as we have the best people, we're gonna be in a highly competitive situation. I think China will make their own drugs and if they're great drugs, we should import them. And whether they make them as fast as some people think is gonna be how good they are at reforming their kind of educational and risk-taking institutions.

Yeah, the other dimension, of course, is, you know, something that I used to joke that China lacks and therefore they will be ascendant. And it's a bit unfair and maybe exaggerative, but we've got a pretty robust regulatory and FDA process and the ethics and the, you know, potential ethical transgressions are very high here. And it may be that some of the most pressing diseases, be it CNS disorders and neurodegenerative for aging populations, see earlier experimentation on humans than you would here in the U.S. Would you agree?

I don't know. I mean, it's surprising how they're very worried about safety in their regulatory infrastructure. So I don't see it as that different. There may be a different level of experimentation in the earlier, you know, kind of in the science labs. But I don't see it as that different. I think from my perspective, we need kind of more aggressive regulatory regimes and more technologically savvy regulatory regimes across the globe. Right. We have a system that hasn't yet flexed to the advent of all these new technologies, which are quite complex, but are going to be more personalized. And you can't treat a personalized drug the same way that you treat Lipitor in a clinical trial or when you make a manufacturing change.

And that's going to be a challenge for regulators all over the place.

You mentioned the R of the R&D. People may know this, but if they don't, ARCH was really one of the early pioneers of taking advantage of the Bayh-Dole Act, which said, you know, money's going to go into universities. Our taxpayer dollars are going to universities. It will fund some of the brightest minds, as you noted, that will come from all over the world. The university will own some of that intellectual property, and then it will attract venture capitalists to be able to come in and start new companies with entrepreneurs and license the IP from those universities and give them an equity stake and structure a royalty and a licensing deal and create vast wealth for the endowments. Are you still walking the halls of academia and talking to scientists and, like us, reading Science and Nature and PNAS and finding these cutting-edge scientists?

And where are they coming from? Is it still the elite Harvards and MITs?

I mean, there are concentrations. So this is still the elite Harvards and MITs and Stanfords and a few others. But, you know, you find them in Michigan and Iowa. And so we always say that, you know, it's not the 99-1 rule. It's probably more of a 10,000-1 or 100,000-1 in terms of finding these incredibly productive scientists. But, you know, that's where the U.S. competitive advantage lies. It's this unbelievable innovation infrastructure between publicly funded research and startups. That's where all of the innovation happens. And we need to kind of think of that as an ecosystem we need to preserve and enhance, not one that we kind of need to go after, because it works pretty well.

So on top of the human ingenuity trade that markets soaked up over this past year, there's what we could call this Resilience trade. And it's born out of this heightened attention that COVID really sparked or catalyzed on supply chains—and supply chain risk, not just for toilet paper, as we experienced early on, but critical technologies, from semiconductors to medicines and their manufacturing. We at Lux extremely feel very lucky and grateful to be invested alongside you in what you created and put together with Resilience. I wanted to talk about it last time and you're like, 'Absolutely not. We're not revealing it yet. It stays in stealth. First, I have to go raise hundreds of millions of dollars,' and you did.

This is a huge idea and we have just a few minutes left, but I want people to understand: what is Resilience, what's the background, and what's the current status and the future of this?

So Resilience is essentially taking the lessons of semiconductors and applying them to the biotech supply chain. So biotech is living in an analog world and we're bringing it into a digitized, miniaturized world of systematizing the manufacture of biology. So we want to be Intel with some flavors of AWS in there as well. And that's how you make these very expensive drugs more cheaply. That's how you make vaccines more rapidly. That's how you create resilience for the next pandemic by having a decentralized, cloud-like network of people. And the human capital is super expensive. And people are like, 'How come you can't make more vaccines?' Because there aren't that many people in the world that know how to run vaccine plants.

So when you typically used to do your seed and Series A, I would compete for an allocation on a $5 million round and a $20 million post or something like that. How much have you raised here in the first one or two rounds in the two years that this company has barely existed?

I think we've raised close to a billion dollars, and we'll probably spend close to a billion dollars in year one. So we expect to be the largest investor in manufacturing R&D in this space, and then we have 1,000 employees and 750,000 square feet of manufacturing space today. And we expect that to kind of go up rapidly. You know, there's a lot of money available, but we're always, you know, we always take that very seriously, but we're, you know, probably the fastest-growing company that's been created in the space.

It truly has been breathtaking and exciting to watch. And you know, it's amazing how few people know that it's existence yet. Um, I think we've got another minute or two, but I just want to get a sense for you. Uh, biggest error of omission, you know, as a long time biotech investor, the one that got away, the one that, you know, you were there and either the partnership didn't see it or you didn't see it. And it went on to become a 10 or a hundred billion dollar business.

And you say, 'Well, there's a lot of those.' It's probably in tech, you know, when I missed Uber. But I have to think about that one. I mean, there's been so many. One of the things we try to keep is some sense of humbleness and understanding luck in this business.

And there's a huge component of kind of

being in the right place at the right time and just being able to make a decision. But I've missed, you know, 10x as a fund, and, you know, a bunch of these companies that have become rocket ships, I'm sure we'll miss a lot more. Actually, Moderna, we never saw, but that's one that, you know, kind of, we should have been in, right? We should have seen that, but we didn't.

Let's do a quick rapid-fire. We've got a minute in terms of sort of hot or not. Scientific instrumentation, something that I know you guys have invested in the past. We're excited about this, this tech of science. Is this an area that you think is going to see?

Yeah, super hot. Like, miniaturization, creation of data, rapid creation of data is, is going to be very, very important, and, and characterizing cells and cell processes fast is, is a big deal. And number one overheated area that you think maybe is overhyped or too much capital chasing and returns are likely to be low in the future? I think, um, I would say anything in the middle, like incremental things, right? Uh, we're in a world where there's going to be pressure on price, and, and so all of these kind of drugs that are, that are attacking things that are, you know, mildly important, um, are going to come under great pressure. And I think pharma will, will come under, you know, great pressure in that sense because the innovation is

happening in biotech. So I think the premiums in a, in a capitated world like that, the big innovations become more important and more valuable because there are more people competing to get them essentially. And that will be the pressure on pharma is, is, is, you know, many pharma is competing for fewer, very high-impact, uh, you know, drugs or technologies.

Bob, always great to spend time with you. Thank you for all that you do. True Midas touch of VC. And I'll turn it back to Graham now.

Thank you.