The tremendous growth of small and mid-cap bio equities has attracted significant interest in biotech and biopharma from an investment perspective. There is a certain allure about the industry also, in that you can justify it to yourself in the name of eventually helping patients. The role that Moderna and Pfizer have played especially in the U.S. has turned a nationwide interest in biotechnology, and to put it plainly, biology is just simply very cool. I’ve noticed however, that the recent rise of the West coast investing mindset in bio is starting to corrupt the incentive structure for producing truly transformative therapies for patients and their families. There is a lot of misinformation that no one seems to be calling out. In this post I want to cover a few points:
People talk a lot about industrializing discovery. I would argue that we already have a discovery industry, which is basic science research. They are chronically underfunded and maligned yet have consistently come up with the basic discoveries that have changed patient care. CRISPR just won a Nobel yet would not have been discovered without the research of Emmanuelle Charpentier and Jennifer Doudna in very basic RNA and microbiology. mRNA vaccines wouldn’t be effective without basic science research into RNA and coronaviruses.
I think the holy grail for a VC is for a single company to become this engine of producing drugs. Just no matter the indication, have this platform that is able to constantly churn out drugs. I think this is misguided, as each indication has very unique pathology, and it would be silly to think that one company has the capability to first of all understand the pathology of all these different diseases, and second of all to concurrently develop therapies for all these different diseases. I guess their thesis is that there are technological platforms that can solve for many different diseases. My thesis is that each indication is too unique for this to happen, and instead we should be matching the optimal technology towards a certain disease, rather than force fitting the technology to different diseases. Instead of trying to take a hammer to everything, I think we should have a toolbox, and be able to choose the right tool based on a detailed understanding of the biology. We shouldn’t be trying to use mRNA to cure every disease, or use it for every vaccine going forward. There are different use cases.
Another point is that when you try to adapt a platform technology to a lot of different diseases, you might end up creating something mediocre, and mediocre doesn’t have a place in drug development. People forget that the drugs you develop actually have to be taken by patients. Drugs are really just toxic chemicals fed at a dose that hopefully doesn’t kill someone. The notion that we developed 100 drugs, now we should test 100 drugs is unethical unless they each provide a meaningful patient benefit. Put it another way, there is no point in developing a drug that has just the same efficacy as another drug because there is real risk that the drug won’t work or be toxic. The exception is if a new drug reduces the price or has some other therapeutic benefit, but sometimes they don’t. It takes a lot to develop a drug, and even more to do it thoroughly and effectively. The reluctance to fund single asset companies built upon decades of science is thus super confusing to me.
The whole notion that you don’t need a PhD to do great science is ludicrous. Never listen to advice like this from someone who has never even touched a pipette. In order to be a good scientist, to have the intuition necessary to think for yourself and come up with unbiased conclusions, you need training. At the end of the day, scientists have a very tough job, solving problems that no one has solved before. We can talk about the shortcomings of academia, but that doesn’t mean the entire system is flawed and without value. Software engineers and people in the general tech industry are able to be productive starting even from high school. Why? Because it is much easier to tinker and learn to code at home; all you need is a laptop and internet. As of right now, it is impossible to do Western blots, liquid chromatography, sequencing, cloning, etc. at home. It is just too expensive. A PhD allows you to explore and actually become a scientist in an environment that allows you to repeatedly fail and learn.
Another aspect in which bio is entirely different from tech is that the products you work on actually matter. There is no move fast and break things. Instead, there is move fast and kill people. The essence of the idea, which is that you should do a bunch of experiments and see what sticks is valid in some cases. But in many cases, it isn’t and instilling this kind of ethos into the next generation of scientists is not productive. Being thorough and able to notice weird things is a key quality of a great scientist. If you are constantly rushing to ‘ship’ experiments, you are inevitably missing good discoveries. We should not be encouraging young trainees to take the outsized risks of starting a company straight out of college.
This is more of a note on messaging. VCs and others in tech talk like scientists aren’t doing enough, aren’t thinking big enough. The people doing the actual work; making discoveries, carrying out procedures, etc. are working 100 hour weeks that is both physically and mentally exhausting and getting paid often below minimum wage. VCs get paid 2/20 and write emails all day. Meanwhile, they pollute Twitter and Medium with articles filled with rocket ship emojis, name dropping, and senseless commentary about “moonshots”. VCs are notorious for using jargon, speaking in broad strokes, and not giving specifics. Its time to build was out of touch and ignorant of the tremendous work that scientists do every single day. If you really want to help, please fund basic research and give credit to the scientists who actually built the science and companies that are changing the world. Scientists cannot run a lab, apply for grants, do great science, mentor students, and on top of this start and run companies. Situations like Harvard/MIT or Stanford/UCSF/UCLA are special talent magnets which allow for very special entrepreneurial activity. Not every campus or lab can be like this, and these hubs cannot translate all the science worthy of translation all by themselves. If VCs really wanted to be helpful, they would run operations at these companies like Delian Asparouhov. Tradeoffs exist, and I’d rather have VCs trade emails for the day to day of running a company than for scientists to trade away mentoring students. Remember the just like everything else, talent and workload is a marketplace. Don’t trade away the activities that are important to your lab and the scientists you work day in and day out with to work on something where all the risk falls on you.
Sorry one last point on messaging: there is this idea out there that there are tons of ideas sitting in academic warehouses ready to be commercialized, and that it is the onus of the lab or scientists within the lab to commercialize it. Firstly, if I were to ever have this discussion with someone, we could really easily settle it by digging in below surface understanding. I’d ask for examples of several ideas that they claim were limited by academia. We’d dig a little deeper and find that maybe there really isn’t the market opportunity for this idea. VCs are guarded with their checkbooks especially with non-experienced founders and maybe the market size isn’t so big and that is why they can’t get this to market. So isn’t it the funder’s fault that this isn’t getting off the ground? No one is going to work on an idea for free. I also think that the idea that most discoveries do not make it past lab is a misconception and misleading. Science builds upon itself, and not every discovery leads to a business. Science is done to improve understanding, improve decision making. This doesn’t necessarily need to be a business, and in fact I would argue that very few discoveries warrant getting past the lab.
I don’t think many people will disagree with me when I say that the funding structure for science and the commercialization of science has room for improvement. I think one of the many problems in the funding structure is spreading people too thin and asking them to do too much. For example, grants that force basic science researchers to do experiments to show translational relevance without understanding of basic mechanisms might be distracting. On the other end of the spectrum, large institutional bio investors asking companies to do very basic science research is somewhat ludicrous. However, both large scale investors who invest in making clinical trials happen, and the NIH, who invests in making sure basic science research happens, are adding a lot of value to the ecosystem. Some are more cynical of the big name players, but I think they do a very valuable job.
What do ARCH, 5AM, Flagship, Polaris, Third Rock, etc. do that actually provides value to the bio ecosystem? First of all, in each of their companies, they take on a significant portion of the ownership and risk, and each of these companies is seeded at a very large valuation. It isn’t like the starting valuation is 8 million and they are trying to 100x their money. Second of all, these investors have been in the game for a long time, which is important for establishing reputation and trust. Why is tenure important specifically in bio? It is because going public doesn’t mean that value actually reaches patients, far from it actually. The risky part is especially the part when a company goes public and starts pivotal clinical trials. Investors need to be there with founders for this risky part of the process and see the investment through to patient impact. With these larger institutional investors, they have a track record of bringing therapy to patients, and not just cashing out at the IPO. Building this trust is important for the sustained health of the ecosystem. Finally, these larger investors are testing out a biological hypothesis, providing very rare feedback for scientists. Scientists need to know what is and isn’t working in clinic, and these large companies are essentially experiments to test these hypotheses out.
On the other hand, I do think there is a lot of sketchy behavior on the private side, especially for smaller investors. For smaller VCs, it makes sense to want to chase outsized returns, especially when you are being compared to tech investors. In the modern investing environment where investing is becoming democratized, it is easy to tell stories, get buy in on Twitter, and really sell (pump or hype) the companies you invest in. Any market functions based upon liquidity and in bio especially, getting to the IPO is much easier. I’m worried that companies are getting pumped to the IPO, where early stage investors are able to exit, and there isn’t much follow through to become a scalable business or to reach and benefit patients. Not all companies are venture scale unicorns and most are better off getting acquired earlier in their lifecycle to co-build the product with a larger player. Trying to sell services or infrastructure companies as eventual therapeutics companies might not be the best thing for patients or the industry. We all have roles to play and trying to be greedy and do everything has risks. Just as one example, CRISPR and cell therapy startups are already way way overvalued relative to their commercial potential and someone will be holding the bag when clinical readouts come out. Or maybe this is just how stocks trade. idk.