Why Biotech Companies Underperform Tech

Economies of Atoms & Bits

Curing diseases is objectively awesome, so it’s pretty shocking to learn that the entire biopharma industry’s market cap (Big Pharma + mid pharma + small biotechs) is roughly equivalent to Microsoft + Apple combined. 

Drugs have inherent value and will always be essential to fund (regardless of market macros). But the numbers don’t lie. It’s been ~40 years since a $50B+ bio company was founded [1]. Compare this to tech: you can probably name multiple startups founded in the past two decades clearing the $50B valuation (i.e., Stripe, Palantir). While biotech IPOs are more frequent than tech, the market cap is substantially lower. Aka higher batting average but fewer home runs. 

This isn’t an issue for traditional biotech VCs- they take huge ownership of many small wins. But the emergence of Silicon Valley-funded biotechs [2] creates a mismatch between the current track record of biotech exits [3] and the tech venture model (which underwrites to significantly higher exit multiples). 

While there are elements of drug development that make it difficult to form a large scale company today (for example- literally costing $1B to bring a drug to market), it’s theoretically not impossible. This is (or should be) the core thesis behind tech-funded therapeutics. Silicon-Valley biotechs need to justify higher potential upside than the status quo. How are they positioning themselves to become massive companies that merit tech multiples? 

What uniquely defines you as a tech company in addition to a biotech company?

Are there biotech companies suited for tech funding?

Scale. Huge if Trues warrant bolder bets.

Given it’s so risky & expensive to be in this space, you can’t afford to swing for 2nd base. Silicon Valley makes big bets on companies that will create massive new markets if successful.

At a minimum, your disease must be large enough for blockbusters ($1B+ annual sales). The most recent tranche of $50B+ therapeutic companies all had at least one blockbuster that catapulted them from biotech ⇒ Pharma: 

  • Regeneron's Eylea for macular degeneration = $8B annual peak

  • Biogen's Tecfidera for multiple sclerosis = $7B+ annual peak

  • Gilead's Sovaldi/Harvoni for hepatitis C = $12.4B in its first year

Speed & underlying science. Core bio risk de-risked in 6-12 months for less than $3M.

This sounds counterintuitive to the above point, but for institutional investors, moonshot ideas need to be tempered with a sound scientific timeline & plan [3]. There are timelines in drug development that can’t be compressed, but basic R&D is especially spontaneous. Unless you can fundraise billions off the bat (Xaira, Altos) or millions from very patient superangels, a “tech-y” therapeutic company gets to translation as quickly and cash-efficiently as possible. 

This means focusing on ideas where the risk shifts more towards translation than answering foundational biological unknowns (i.e. prioritize well-characterized targets, use clinic-ready assets if possible). 

Revenue. Long term plan = commercialize a blockbuster drug independently.

The above points are moot if you can't reap the full rewards of your blockbuster. Independent commercialization of a blockbuster is the key ingredient to building a large scale therapeutic co. Given the intense capital costs, this might not be your first drug- most biotechs are resource-constrained and forced to partner with pharma. But having a north star and path to do this eventually is critical for aspiring Pharmas [4].

More funding options for biotech = more shots on goals for disease cures

Creating a sustainable funding ecosystem requires foundational wins (successful drugs AND category-defining exits). Not a lot of numbers we can throw around right now, but if history is any indication, betting on founders (vs old guard) is the best bet to disrupt the existing system.

And any attempt to finance + facilitate more and better treatments is worth trying.

1] This is specifically focusing on therapeutic companies. With the exception of Moderna, the youngest tranche of $50B+ bio co’s were founded in the 80s (Genentech, Regeneron, Vertex, etc). Elad Gil talks more on this topic here.

[2] There have been successful generalist investments in bio historically (i.e. Kleiner Perkins/Genentech), but, arguably, the major catalyst for recent tech interest in therapeutics was Stemcentrx. Backed by Peter Thiel/Founders Fund, it was sold to Abbvie for almost $10B in 2016. From a drug POV, it was a failure. But as one of the biggest private co acquisitions at the time, it became a pretty lucrative case for tech investing in bio

[3] Research-heavy moonshots backed by high net worth individuals are an exception to this. These investors tend to be more comfortable with longer time horizons and mission-motivated. 

[4] The venn diagram of ideas overlapping “moonshot mission” x “scientifically feasible on venture timeline” are rare. Independent drug launch is extremely difficult as a fledgling startup today. But whoever thinks of a clever way to do this may find the secret sauce that becomes the defining exception of tech-funded biotechs.