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A Biotech Education, In Progress

Peter Thiel is worth paying some attention to. And it’s not just because he’s a wealthy venture capitalist – his views on pharma and biotech research are worth noting because he’s an excellent example of an intelligent, motivated outsider, someone with a strong technical background who’s approaching drug discovery de novo. Thiel is willing (and very able) to make large investments in technologies that he thinks are worthwhile, so what does he think of drug research?

“Not much” is one possible answer, although those views are, to be sure, more directed at “Big Pharma” than at drug research in general. But a phrase like “Pharma companies are bets against innovation” does stir the blood a bit. This was part of a larger point about how many technology companies end up as “antitechnology” companies, because they’re trying to hold on to their positions, and not have done to them what they probably once did to their predecessors. When I think about that, I can’t help but be reminded of the disappearing Old Bolsheviks in the various Soviet group photos of the 1920s and 1930s – Lenin and Stalin were far from the only political revolutionaries to have decided that, now that the revolution has succeeded, the last thing they needed around the place were people with some experience in overthrowing governments. “Surely we’re past that now, eh, comrades?”

Thiel’s book “Zero to One” had many of us wondering what other paint-filled balloons would be tossed. And although there was some more of that sort of thing (the phrase “high-salaried, unaligned lab drones” comes to mind), you could also see him grappling with the differences between drug research and the types of technology that he was more familiar with. The “Andy Grove fallacy” is always a hazard in such cases – the feeling that the pace of change in computing hardware and software are the natural pace of scientific advancement, which means that any fields that aren’t moving along so briskly must be lazy or complacent. I have no desire to offend anyone by saying this, but the reason drug research moves more slowly than Silicon Valley thinks it should is because it’s harder, both scientifically and practically (see that last link for more).

So now here’s a new interview with Thiel in Technology Review, and you can see that the grappling process is continuing. Asked about his Founders Fund investing in Stemcentrx, he says “I don’t think that we would be seen as particularly sophisticated biotech investors”, this to explain why the company’s high valuation must be a result of their own technological promise rather than the fact that Founders Fund is backing them). But he also says that he invested because “it was a biotech company that looked like a software company,” and that makes you wonder.

It may well be that biotech companies that remind you of software companies are exactly what you don’t want, because it may not even be possible for that hybrid to exist in the real world. It depends on what exactly it is that reminds you of the software business – a willingness to take on big, bold projects is probably good, but a conviction that everyone else is doing it wrong (and so slowly!) is probably not. But another line from the interview is a good sign: “A big difference between biology and software is that software does what it is told, and biology doesn’t.”

That’s exactly right – software is designed by humans, and biology isn’t, and I’m very happy to see that as a feature of Thiel’s thinking. And then there’s this, on biotech startup valuations:

You have to get through basic research, preclinical, Phase I, II, and III, and then marketing. So approaching it analytically, the question is how do you discount [the risk of failure at each step]. If you do half on each step, and there are six steps, that’s 2 to the 6th, or 64. So something worth a billion at the end means you start at [a value of] $16 million.

The thing I don’t like about this as an investor is that the numbers are totally arbitrary. They are just made-up numbers. And our feeling with many biotechs is that people understate these probabilities. They say it’s half, but maybe it’s just one in 10. And if even if just one of these steps is one in 10, you are really screwed.

Well. . .that’s all true. And there are some numbers that can be attached to that – averages, at least. The clinical success rate (across Phase I, II, and III) really is one in ten. Now, those are three of the six steps he’s talking about, and three 50% chances in a row would give you 12.5% success, which is higher than any therapeutic area has shown. So a fifty-fifty chance on each of those is a high estimate, and (in my experience), it’s a high estimate for the two earlier steps as well. Thiel’s back-of-the-envelope calculation isn’t quite into “really screwed” territory, but it does suggest that a starting value of $16 million is very much a lowball figure.

Thus Stemcentrx. Thiel says that “we felt the whole company was designed to get these probabilities as close to one as possible at every step, to get rid of as much of this randomness or contingency as possible. That is something that we found deeply reassuring.” And I’ll bet that they did, but is that reassurance justified? As that last post on the company (and the comments to it) show, the whole cancer-stem-cell idea is not without controversy. Not everyone even believes that there are such things in many (or most?) types of cancer, and their general usefulness as a therapeutic target is solidly in the “unproven” category. Similarly unproven are the best ways to target them, even stipulating that there’s something to target and that it’s a good idea to do so.

And that, folks, is what innovative drug discovery looks like. This is exactly the situation in many another therapeutic area; you find yourself stepping off into the unknown very, very quickly. This interview makes it clear that Thiel believes that Stemcentrx’s approach has significantly cut down the potential risks, and he basically has to believe that, because here’s his take on the alternative:

But if biotech companies tend to invest money in ways that are pseudo random, then a lot of it must get wasted. You end up doing things where you say, “I am not sure it’s going to work.” Well, that sounds like a wasteful thing to do. The standard excuse that biotech companies have is that, “We don’t know if it’s going to work, so we have to do it this way.” That has to be inefficient.

It sure is. I’m just not sure yet how much we can do about it. And the incentives to believe that someone has done something about it are so strong, and so pervasive (and have wiped out so many times in the past) that I hope an outside observe can be forgiven for wondering if things really are different this time.

Update: some thoughts on the same interview from Wavefunction.

33 comments on “A Biotech Education, In Progress”

  1. Hap says:

    Shouldn’t the valuation of $16M be a high figure and not a low one? If the chances of getting through all six gates is less than 1/64, then the valuation of the initial concept and research at $1B*(probability of success) should be less than 1/64th of a billion dollars. If it’s one in a hundred, then the beginning would only be worth $10M, for example.

  2. Ash (Curious Wavefunction) says:

    My own take on Thiel’s interview:

    He has some sensible thoughts on the goal of reducing randomness, but the problem is that you can’t reduce randomness with technology if you don’t understand what gives rise to it in the first place.

  3. Peter Kenny says:

    It might be interesting to hear Thiel’s (and Grove’s) thoughts about free intracellular concentration?

  4. Morten G says:

    No, no, no Peter! No!
    You must show that the edges of your system is where the model predicts. You must perform good negative control experiments. You must perform wasteful experiments. You can’t convert all heat energy in a system to electrical energy either. I’m sure there’s an argument in information theory to the same end.

  5. qetzal says:

    Doing things that might not work isn’t a wasteful thing to do. It’s the only thing to do! The only way you can be sure something works is if someone else already did it. And if they did it first, they’re ahead of you and they probably own the IP.

    Avoiding things that might not work is a guaranteed route to failure.

  6. Rule (of 5) Breaker says:

    @ qetzal – Well said. Attempting to avoid failure, I feel, is one of the main drivers of diminishing return on investment in R&D. Pretty hard to be innovative when you are too busy playing it safe.

  7. CMCguy says:

    I also like qetzal point and isn’t biological science mostly about taming the uncertainty of life’s functions? Most the time people are approaching problems for sound and rationale reasons having expectation of success, especially when advance compounds to development candidates, and sometimes the overconfidence that we understand causes as much trouble as not enough of the right data. Inefficient as heck but until there is software that can accurately model diseases living systems there will be extensive waste with rare enlightenment.

  8. Dr Manhattan says:

    The computer/technology/software companies don’t have a Regulatory agency like the FDA examine their products and demanding (as they should) high standards of performance. If such an agency did exist for computers/software/apps, a lot of IT wouldn’t even make it to the market. Pharmaceuticals also don’t get to deliver “patches” to cover glitches in performance or safety. Instead they get Black Box warnings or even market withdrawals. Again the point is to highlight profound differences in the two areas beyond the points made above about the differences between engineering and biology.

  9. b says:

    Sometimes I’m curious if Silicon Valley types understand the scientific process at all. Science advances by testing hypotheses, and a huge percentage of them are wrong. That doesn’t mean that testing the hypothesis was a waste of energy and nothing can be learned from it, but to an investor, this is a “waste of money”. The gov’t doesn’t ask for or expect a monetary return on their scientific investment. It’s understood that this is an investment into development of knowledge, not investment to grow a bank account. If you want to push the frontiers of scientific discovery, you have to expect to miss. It’s very difficult to monetize scientific discovery, and the hypotheses get harder to support the more you push the frontiers.

  10. Egoa says:

    If Peter Thiel doesn’t have money, would any listen him? His success is built on physics, which advanced in the beginning of last century. The science of cells is still evolving. If one consider the knowledge of molecular cell biology is the equivalent of money, Peter Thiel has zero $$.

  11. flem says:

    the difference between the rate and cost of innovation of drug discovery and development and engineering technology is their rate limiting factor is application of know physical laws.
    Drug innovation is limited by our understanding of human biology. We can calculate how to land a probe on a comet traveling at 17000 mph but we still don’t know if butter is bad for you.

  12. Jim Hartley says:

    Thank you, Dr. Manhattan, excellent points.

  13. PorkPieHat says:

    Qetzal (without a “u”?) and Dr. Manhattan are spot on.
    And the concept of risk vs ROI…you don’t get an ROI if you don’t have ANY risk.

  14. Magrinho says:

    We treat these comments as if they are coming from a disinterested party. Not the case – he is selling and his selling points are that he is smart and not a hostage to the “old way of thinking”.

    What else is he going to say given that he has virtually no experience in drug discovery?

  15. Spanky says:

    I worked a short time in chemistry and then software devlopment and always found it extremely frustrating to try to describe the difficulty of drug discovery to computer people that have no knowledge of the industry. To me Its complete nonsense to try to compare the industries.

  16. cancer_man says:

    “…his views on pharma and biotech research are worth noting because he’s an excellent example of an intelligent, motivated outsider, someone with a strong technical background who’s approaching drug discovery de novo.”

    Far from Peter Theil having a strong technical background, he actually has no technical background that I can see. His undergrad degree is in philosophy and then got a law degree.

    Theil also discusses economics a lot, but he makes elementary mistakes with his sweeping statements on that topic.

    Overall, I’m glad he’s out there — I think…

  17. Inside says:

    People really do fail to realize how much of it is just plain dishonest , let’s blind them with science, bunk.
    Cellceutix, Arqule, Smartcells, RGO bioscience, and many many more.
    Small wonder VC’s are jaded and sceptical.

  18. matt says:

    I’m curious what other readers think about the question of what has driven Stemcentrx’ valuation. Thiel thinks/hopes its belief in the company, not him. Does anybody else think that likely? I see former PayPal golden boy, like Elon Musk, and hordes of investors looking for the next big thing by following the herd of their buddies’ shared tips. And their buddies don’t know jack about biotech, but they’ve heard of PayPal and Elon Musk and the Silicon Valley stories.

    Another interesting bit is the way he acknowledges one reason for picking the company was a good feeling about the two founders of the company and their complementary expertise. Seems like there is a meta observation about reducing the randomness in the investment picking process, and he’s going about it more by trusting his gut and the quality of his intuitions about character and expertise, and less by writing code and using technology to algorithmically pick a higher percentage of winners. There are some similarities, I think; both trigger images of monkeys throwing darts at a dartboard, but some monkeys seem to do better than others over time.

  19. David Borhani says:

    I’ve weighed in before on Peter Thiel’s ideas. I think Egoa is on-target: if Thiel didn’t have a lot of money, people wouldn’t listen to him. But face it, that’s simply human nature. Let’s look more closely at just two of his comments:

    1. “The reason we invested in Stemcentrx at a valuation that would have been higher than many other biotechs we looked at is that we felt the whole company was designed to get these probabilities as close to one as possible at every step, to get rid of as much of this randomness or contingency as possible. That is something that we found deeply reassuring.”

    That’s what every technology-based biotech startup has said for the past 30+ years. Glad to hear it from Stemcentrx and Thiel as well. How exactly do they intend, for example, to get from 10% to 90+% in the clinical development stage? Looking at results reported this week for their antibody-drug conjugate, rovalpituzumab tesirine, I see more of the same old, same old. Some promise, to be sure, but it’s a very long road from a 44% partial response rate in a small Phase I trial to an approved and useful drug. For details, see:

    2. “One of the very unusual things they [Stemcentrx] do is graft human cancer into the mice. It’s a somewhat more expensive way to do this than studying cancer in cell culture. It’s a somewhat harder structure to build. But drugs tested this way are much more likely to work in humans.”

    Not new. Not shown to be a game changer. Perhaps Theil should do his homework a bit more carefully?

  20. Philip says:

    #20 (I wish we still had numbered posts, so I gave myself one)

    @Spanky (#15) and Dr Manhattan (#8), I work at the intersection of medicine and computer programming.

    Working on projects that will go before the FDA can be a pain in the rear. Keeping track of empty rabbit holes is not something I enjoy. I also do not think it improves software, but it can save time in the future. As for non-FDA projects, it really is amazing how much bad software is sold. Windows 8 for business use? Come on, did the focus group consist of only the programmer’s mothers? EHR/EMR, what a crock. Most of the doctors I talk to about it, would never have bought an EHR system, if not for the government carrot and stick.

    As for getting computer people to understand any biology, it is next to impossible. If you want good software for any biology or medical application, hire somebody that first worked in the field, then learned how to program. If you cannot find that, than find a programmer that can be and is willing to be trained to work in the field. If the programmer cannot at least speak to the users in the user’s language, the project is doomed.

    Sorry for the ramble.

  21. EdM says:

    In response to Dr. Manhattan’s comment somewhere around 11:00am, there is an agency that performs a function like the FDA for avionics software. The FAA requires a rigorous regime of testing, inspection, and documentation for software that performs a safety-critical role in an aircraft.

    This results in software that costs an order of magnitude more to deploy, and is far less “agile” than say, Facebook. On the other hand, it does what it is expected to do and life-threatening software failures in aircraft are essentially unheard of.

    When lives are on the line, and you want to be safe, software development starts to look more like pharmaceutical development. It’s still cheaper because we actually understand how the systems work, but it’s an order of magnitude less cheap than people familiar with commodity software realize.

  22. Biotech student says:

    I have this feeling that everyone is equating “biotech” to its drug discovery branch, in spite of the fact that there are other branches of biotechnology, like agricultural, environmental, pharmaceutical and fine chemicals biomanufacturing, etc.

  23. johnnyboy says:

    I think Matt (9:05 PM) above is spot-on. Non-life science VCs investing in life science have zero perspective on what the companies are doing (as shown perfectly by Thiel’s comment (cited by D. Borhani) that PDXs are somehow unique to Stemcentrx), so they depend on what their VC pals are telling them and what they’re investing in, on whether the biotech’s executives speak the same SiliconValley-ese as them, on whether they previously went to schools or worked at other companies they like, etc… All the usual human relationship factors that have nothing to do with science. The whole thing about reducing randomness and increasing probability of success is in direct contradiction to his investment; if he really understood about probability of failure, he would invest in companies using approaches that have a track record of success (eg. small molecules or antibody kinase inhibitors), not something that is totally out there with a lot of unresolved science like CSCs. But hey, it’s his money…

  24. steve says:

    Why did Thiel invest in Stemcentrx? The reasons he gives are because of their revolutionary approach to cancer. They use xenografts! They make their own antibodies! They go after “cancer stem cells”! Given these criteria I have a really advanced technology that he might want to invest in as well. It’s a unique transportation device to move vehicles and passengers across a moving body of water that separates two islands. It’s called the “Brooklyn Bridge”.

  25. johnnyboy says:

    This discussion reminded me of when I worked at ‘insert pharma behemoth here’, back in the days when there was still lots of money being thrown around research. They had hired someone who was evidently a ‘Big Thinker’, evidently at a big salary (he drove around campus in a new BMW Z4 convertible), who went to a lot of meetings to think his big thoughts. At one meeting, where it was mentioned how Viagra for ED was a serendipitous discovery, he spoke out, saying “what we need to do is find a way to implement this serendipity in a systematic way in discovery”. How I wish I could think Big Thoughts like that.

  26. MoMo says:

    Why does the thought of the ultra-wealthy engaged and with no experience in biotech or drug discovery cause so much consternation here? What’s it to you if they spend their money extending the lives of fruit flies, looking for the fountain of youth or using business management practices reserved for unregulated industries?

    Its none of your business how the rich spend their cash in a democratic society. Besides, they’ll figure it out just like Gates did trying to fight 3rd world diseases, and after losing 10’s if not 100’s of millions. That’s just chump change to the super-elite.

    And who knows, they might actually do some good.

  27. steve says:

    Their right to spend isn’t in question, neither should our right to criticize be questioned when they do it ignorantly.

  28. steve says:

    BTW, the harm he does is to artificially inflate the worth of a biotech stock with a lot of nonsense hype, pull a lot of naive investors in, and then exit when his profit is high enough (and maybe even make money shorting what then becomes obvious as a crappy company). The technical term is “Pump and Dump”.

  29. MoMo says:

    Until Thiel breaks a law and gets caught, alarms the SEC and wakes them from catatonia or until you provide evidence of such a scheme it sounds like what all Pharmas and start-ups do-promote their technologies and future drugs via nonsense hype. \

    Get used to it.

  30. steve says:

    Thanks Peter. Some of us believe, though, that the best response is to expose these things to the light of day.

  31. cchen says:

    MoMo, you seem to have fallen victim to the age-old fallacy of thinking that just because something is legal means that it is perfectly fine. Thiel’s spiel is harmful for the pharma industry because it creates warped expectations amongst investors and the general public. People will get (and indeed already have) the impression that pharma has been doing things wrong all this while and the only people who can save it are the knight-in-shining-armour VCs who come in and “disrupt” the industry with their cutting-edge insights (because “disrupt” seems to be the buzzword nowadays).

  32. Leo says:

    As a former Medchemist who now does software, perhaps an analogy;
    Think of each molecule of drug as a system test. A typical dose of drug might be on the order of a micromol so this is around 10^18 tests. The vast majority are redundant (most molecules will interact with the system in the same way, this is an effect of potency and selectivity). Perhaps 1 in a million go down some other ~random path. So that is a trillion tests. Every one of these tests that results in a system crash is a ‘serious adverse event’. Naturally, all this testing is repeated under different starting conditions for each dose on each patient in a clinical trial. How much would it cost to get a complex software product to pass this type of testing?

  33. MoMo says:

    cchen- Warped expectations is what Pharma does best! Not to worry!

    And The Smart know the all about VCs and how they operate.

    Stock market investors have much more to worry about than anything Biotech has to throw at them, like the stock markets themselves!

    But why all this whininess? Is it because it originates in Massachusetts?

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