Michael Pellini, the current chairman and former CEO of Foundation Medicine thought Bill Maris lived in the Bay Area. Not surprising given that Maris was the founder and CEO of Google Ventures (now GV), a successful corporate venture capital fund.
And Maris, who set up his Section 32 venture capital firm north of San Diego in 2017, assumed that Pellini lived in Boston in the state where Foundation is based.
Once they realized they lived pretty close to each other in the San Diego area, talks began that ended with Pellini joining Maris as the second investing partner in Section 32 in December. Section 32’s first fund raised about $160 million and the second fund is supposed to be larger – about $200,000 million, according to Pellini who sat down recently with MedCity. [A Section 32 SEC filing shows that it is hoping to raise $250 million, but these filings aren’t meant to always reflect the final number.] And a chunk of money from both those funds is dedicated for healthcare startups.
In the interview, Pellini discussed Section 32’s investment philosophy, the reasons for the Section 32 named, and held forth on a range of topics, including Foundation Medicine’s diagnostics tests, the practice of oncology and the issue of reimbursement. Pellini will be MedCity’s featured speaker at a fireside chat at our CONVERGE conference, July 11-12 in Philadelphia.
Here is an edited version of the Q&A.
MedCity: Why is the firm named Section 32?
Pellini: The name connects back to Bill’s interest in Star Trek. He’s a Trekkie. Section 31 is a bit of an underground organization. There’s been debate as to whether or not it even exists. They play to their own tune but they are an organization that’s out for good. [Per Wikipedia and Syfy.com Section 31 appears to be a bit less sunny, though definitely underground.]
And so in many ways, it fits Bill’s personality very well. And rumor has it that in the next Star Trek movie, we might even see the emergence of Section 31. We might actually see it on the map for the first time. So from this theoretical underground organization to a real underground organization [with Section 32.]
We want to be working behind the scenes doing important things really supporting out companies.
MedCity: Why is there so little information on the Section 32 website? [For example, no team bios, no investment philosophy/mission specified and no portfolio companies to be found.]
Pellini: So, that goes back to being Section 32. The good thing is in the healthcare world, entrepreneurs don’t have to make too many phone calls to find out if I am legitimate or not. On the tech side, and Bill has done a lot in life sciences too, Bill has a name. We talked about it and we asked ourselves, ‘Should we have bios?’ It’s not just to be opaque. This is just about the fund investing in companies. We don’t want to build a 40-person team. We just want to focus on the investments. We don’t want it to be about us. I think it will evolve though.
MedCity: What stage are the companies you invest in – seed stage, Series A?
Pellini: Generally not seed stage but we have a broad mandate. If you go back to the early days of Google Ventures, in many ways that’s what we are working to replicate. Bill led the development of their framework and Bill led the development of Section 32’s framework and our sweet spot is this intersection of technology and life sciences, technology and healthcare.
In our first fund, we invested a little bit less than half in life sciences and healthcare. Our expectation is that with Fund 2, we’ll really tilt the scale in favor of life sciences and healthcare. But most importantly, what we believe fundamentally is maybe by Fund 3, certainly by Fund 4, this idea of separating out tech and healthcare is going to go away. They have to be better integrated. Foundation Medicine is a life sciences company but gosh it felt like a third of the company at least was a tech company.
Clarient [where Pellini was president and COO] did an amazing job of what tech could do in diagnostic services. We were a high-quality laboratory, high-quality testing but the secret sauce is that we changed the way pathologists practiced in their offices. We started scanning all of our information, we presented it to them on their large monitors so that they wouldn’t have to look through this information through two eye pieces. They were able to right click to order a test and four-five hours later the results would appear. We changed their practice and once they started doing that, for somebody else to break that relationship, it was extraordinarily difficult.
And so you have to do a job on the medical side, but in two companies in a row that I have been fortunate to be part of technology was just part of what we did.
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MedCity: If your sweet spot is in the intersection of tech and life sciences, would you invest in a drug company, in a medical device company?
Pellini: Yes. On the therapeutic side, we invested in Relay Therapeutics back in December. We have recently invested in another therapeutic company – and we will continue to look at therapeutics. But these therapeutic companies have common themes — they are platform based. We are not taking a bet on a single compound but oftentimes these companies have three four five, in one case, nine INDs that are lined up to be filed in the next 18 or 24 months. We don’t expect a 100 percent success rate but these are organizations where if 2 or 3 of these INDs make progress through Phase I trials, that’s enough to justify the investment and justify the platform can be a tool to develop additional compounds in the future.
Also, these are platforms and often there is a big data element. If you take a look at Relay, it’s therapeutics but they are using machine learning, AI, an element of understanding protein motion, so that’s really important.
If it’s data and AI trying to find a home and solve the world’s drug discovery problems, then we don’t have an interest. But if we have a team of biologists and chemists that really understand drug discovery and we have an AI team that is integrated and just another department in one of these companies where they are able to share ideas. And the AI team appreciates the drug development efforts and the drug development team appreciates what the team on the AI side is doing and we have a sense of integration there, that’s important.
MedCity: Let’s talk about Foundation Medicine and the reports it issues. As a lay person, you feel there is a straight line between getting the test and a treatment recommendation. So you feel that once you get that treatment, it will have a meaningful impact on your disease. Is it incumbent on companies like Foundation to explain that it’s not a silver bullet?
Pellini: It’s a good question. Let’s look at it from the provider side and the patient side. First of all, it’s important to understand that it is not a recommendation. The way information gets connected to the report is if there is published literature in a peer-reviewed journal that associates a finding with a therapy or clinical trial, then it gets on the report. And so this is important to understand. Foundation Medicine and even the industry needs to evolve because when that information goes to the academic medical center and an oncologist there, the vast majority of the time, that oncologist is trained to take this information, interpret it and make a decision. As we get into the community setting, it becomes trickier.
And so one of the most important advancements with the FDA approval is that the first page of the report contains the FDA-approved links. So companion diagnostics, therapy associations that are approved by the FDA. When you go to page 2 and beyond, we have the peer-reviewed links, so in the community setting of course, when an oncologist doesn’t have an appropriate amount of time often with their patients and when they haven’t been exposed to this, it gets trickier. To your point, it is one of the reasons why we don’t routinely send patients the reports because we do understand the risk of misinterpretation.
I think there’s also a good bit of onus on Foundation Medicine and others to make sure that we all continue to evolve the message to make it more and more straightforward.
I believe where this is all going is if we put ourselves in the shoes of community oncologist and he or she is evaluating a patient with, let’s say, a complex cancer – meaning it’s not a very early stage colon cancer, where it’s not a very early stage breast cancer where they know exactly what they are going to do. With complex cancer, rather than that community oncologist having to think through, ‘Gosh, I have 50 different tests to select from and am I going to have enough tissue’ they can simply say FoundationOne CDx – let’s order it. That information comes back within about 10 days now and then that information is really presented in a fashion where all the alterations are identified and the FDA-approved connections are made to a therapy. That’s where the practice of oncology should be today. I am optimistic that we are going to get there.
How do you see the field of reimbursement evolving? Does CMS signaling that it will cover broad-based gene testing mean private insurers will follow suit?
After all these years, having been in multiple companies and thinking about how reimbursement plays out, no. 1 it’s always more challenging than we expect it will be even with what we believe is the right data. And with Foundation Medicine it’s been no exception. It’s taken longer than we all would have hoped. But I don’t believe it’s just CMS covering it. I don’t think it’s just NCCN guidelines. I don’t believe it’s just Paper No. 246 that we publish. I think all these pieces come together and then somebody says, ‘You know what this is being covered for all Medicare patients. NCCN is recommending it across all these therapeutic areas. The company has published almost 300 publications that do support in some fashion the utilization of this approach,’ and it’s when these pieces come together yes, I do believe it helps knock down that big domino or open that big door. I can’t predict – and I am not on the front lines of Foundation anymore – when that’s going to happen.
On the investor side, it scares me away from innovative companies in the diagnostic space. Companies like Foundation Medicine have reached critical mass. We have all this pharma support. It’s coming together for them, but it’s daunting for these early-stage companies.
Photo: Jon Chomitz Photography