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expensive to make and deliver. This (along with other factors) bankrupted the company.
The Durability Question: Will your market position be defensible 10 and 20 years into the future? The answer to this question is almost clearly going to be a “probably not,” and sometimes the defensibility time frame is significantly shorter. Let’s look at one particular example: the difficulty in predicting the future for treatments for hepatitis C.
Infection with this virus can lead to a host of serious health problems, including cirrhosis and eventually liver cancer in a subset of patients. A number of drugs have been developed over the years that have been used to treat patients with hepatitis C. However, these treatments were not always terribly effective, and they were associated with significant side effects. Things began to change with the FDA approval of telaprevir (Incivek), which was co-developed by Vertex Pharmaceuticals and Johnson & Johnson. This drug, which was created for patients infected with genotype 1 (the most common form of) hepatitis C, won FDA approval in May 2011. The approval was followed by what was, at the time, the fastest launch trajectory of any drug in history, earning $1.56 billion in its first year on the market.
Unfortunately for the drug’s developers, its rapid ascent was matched by an equally precipitous decline. The drug, when given in combination with the previous standard of treatment (peginterferon alfa-2a and ribavirin), sometimes caused serious and even fatal adverse effects in patients. More importantly though, newer, safer hepatitis C drugs were developed that did not need to be given with these two other medications, and were significantly more effective. Competition drove telaprevir off the market just three short years after its launch. Not many drugs go from hero to has-been in such a short period of time, but it can happen.
The drugs that replaced telaprevir, which are made by Gilead Sciences, J&J, and AbbVie, replicated the meteoric launch initially seen with the earlier drug. They achieved much higher cure rates with easier to administer, all-oral treatments. Their success, in turn, has led to problems for several companies that are trailing them in the quest to develop hepatitis C medicines. Not only do companies have to worry about their competitors, they have to worry about the FDA as well.
Several years ago, the FDA created a “breakthrough therapy” designation for drugs in clinical trials. The idea was that the agency would expedite the review of the most promising new medicines to speed them along to consumers. Not only can the FDA giveth, it can taketh away as well. Both Merck (grazoprevir/elbasvir) and Bristol-Myers Squibb (daclatasvir) had breakthrough therapy designations rescinded for hepatitis C drugs they are developing because competitors got effective new drugs to the market ahead of them. As a result, Merck and Bristol’s medicines will likely take longer to approve and therefore reach the market at a later date. This will reduce the revenues for these drugs, and they will be facing stiff competition right out of the gate.
After Merck’s breakthrough tag was rescinded, the FDA changed course again three months later and restored the designation, although only for two small sub-populations of hepatitis C patients. The FDA decision pushed Bristol into an alternative strategy for daclatasvir, going after patients with the genotype 3 subset of hepatitis C, which only represent about 10 percent of those with the disease in the U.S. All of this comes after Bristol pulled the plug in 2014 on getting U.S. approval for one hepatitis C drug, asunaprevir, and abandoned (due to safety problems) another one, BMS 986094, a few years earlier. Other issues that need to be considered when developing any new medicine are how long it will take, how much it’ll cost, and the limited monopoly protection available via patent coverage.
The Secret Question: Have you identified a unique opportunity that others don’t see? This can be a difficult question to answer if you don’t know what rivals may be working on. What exactly defines the “opportunity”? Is it the core technology, the treatment of a particular disease, or the fact that one already has intellectual property coverage over something?
Some unique biotechnology opportunities that have bubbled up in recent years are still percolating, but the ultimate commercial payoffs and/or their feasibility are unclear. These include such concepts as making protein-based drugs in plants, producing a form of spider silk in goat’s milk or bioreactors, and designing nano-robots to attack cancer cells. Despite enormous investments, gene therapy, gene editing technologies, and stem cell cures are still not large-scale commercial successes, although treatments involving each of these methodologies have either made in to the market in modest ways, or are still in clinical trials. Getting these technologies to work appears to take decades, but they do hold the potential for high rewards. The CRISPR/cas9 gene editing technology stands out as the most potentially rewarding investment opportunity because, if successful, it could be employed to treat not only thousands of rare diseases, but numerous cancers as well. However, given the potential of the technology to introduce heritable traits into germ cells (i.e. those that give rise to eggs and sperm), biomedical researchers have called for a moratorium on using this technology in humans. A similar ban was put in place when recombinant gene technologies were in their infancy in the 1970s.
In summary, I see most biotech startups having trouble addressing the questions of engineering, market durability, and identifying new opportunities that have not been seen by rivals. After reading Zero to One, I came away with the strong impression that Thiel knew little about biotechnology. I was therefore quite surprised when I came across an article pointing out that he is, in fact, a big investor in the industry. Most of his investments are not through Founders Fund, his venture capital firm, but via his charitable foundation.
One of these investments was in Counsyl, a genetic testing company that is apparently a big success. His charitable foundation also created Breakout Labs, which makes small investments in biotech startups, enabling them to test out novel ideas. If they’re successful they can escape the “valley of death” and attract additional funding. It would be interesting to know what percentage of these Breakout Labs’ investments are in drug developers, as opposed to diagnostics, hardware, or data analysis startups. Here in Washington state, our Life Science Discovery Fund performs a similar function to Breakout Labs using money obtained from the Tobacco Master Settlement Agreement, not the state’s taxpayers.
Thiel’s Founders Fund has also invested in a few biopharma businesses. It’s backing Emerald Therapeutics, where a majority of the employees are focused not on drug development, but on building out a high-tech “laboratory robots-for-hire” business. The idea is that other companies can offload some of their experiments to Emerald’s robot assemblage and get their data back the next day. It’s not clear to me how many labs would actually want to do this, but given the lack of resources devoted to the company’s other vaguely stated mission to develop breakthrough anti-viral therapies, I wouldn’t classify this as a traditional biopharma company. It’s more of a service provider.
Founders Fund is also backing Stemcentrx, which according to its website, “was founded in 2008 with the intent of developing life-changing therapies for cancer patients. We have developed proprietary discovery platforms that yield unprecedented insight into the biology of tumors and are being exploited to develop potent new cancer drugs.”
Unfortunately, Stemcentrx’s website contains no information as to the management of the company, its pipeline, core technologies, peer-reviewed publications, financials, or anything beyond the jobs they are hiring for. All that’s available for public consumption so far is a rather pedestrian pile of hype. This isn’t stealth mode; this is a “cloak of invisibility” approach. A search of the clinicaltrials.gov website revealed that the company has one drug in clinical trials for patients with small-cell lung cancer—an antibody-drug conjugate, which is not a new approach to cancer treatment. It’s difficult to judge how this concept satisfied Thiel’s criteria above, but since he’s funded Stemcentrx, he must think it could offer an enormous reward if successful. We’ll just have to see what comes out of it.
To be fair, there were a lot of interesting points discussed in Zero to One regarding the nature of monopolies and the financially destructive nature of competition in business. Thiel also does a nice job of explaining his thoughts on the importance of the power law in business (essentially, 80 percent of profits will come from only 20 percent of the companies invested in). On the engineering and IT side of tech, I can see that his approach defined by the seven questions may indeed be valuable.
I would argue, however, that there is something unique about biotechnology as a business. Basic biology is often too complex to allow for the same type of problem-solving solutions that work for things like engineering or coding. Established dogma can change over time, such as the role of an enzyme that for decades was believed to promote cancer, but may actually suppress tumors. The time it takes to develop drugs can easily be an order of magnitude longer than in other types of technology products. The time from the launch of Sputnik to men walking on the moon was only 12 years. In contrast, the war on cancer has been ongoing for well over a century (or 44 years, if you set the start date at Nixon’s 1971 National Cancer Act legislation), with much of the hard work still ahead of us.
The path to cancer cures has been long and difficult, and may require some novel ideas about how to adequately fund much of the work that lies ahead. Biotech and pharma business models are currently in flux. Asking ourselves hard questions is good, but it must never distract our eyes from the prize of creating new medicines that will benefit all of us.
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