D.A. Wallach Explains Why Biotech VC Is So Different
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
In this fascinating episode of Odd Lots, hosts Joe Wiesenthal and Tracy Alloway explore the complex world of biotech investing with D.A. Wallach, co-founder of Time BioVentures. (06:47) Wallach shares his unique journey from being the lead singer of indie rock band Chester French to becoming a venture capitalist focused on healthcare innovation. The conversation delves deep into the challenges of biotech investing, where success rates are notoriously low but potential rewards can be transformative. (10:28) They discuss the stark differences between traditional tech investing and biotech, where companies are essentially "bags of options" with each drug potentially worth billions but facing only a 5% probability of success from concept to FDA approval. (34:15) The episode also examines China's emerging dominance in biotech development, the role of AI in drug discovery, and the complex relationship between medicine and capitalism.
Main themes: The unique challenges of biotech investing, the regulatory and financial hurdles in drug development, China's competitive advantages in biotechnology, and the intersection of art, commerce, and scientific innovation.
Speakers
D.A. Wallach
D.A. Wallach is the co-founder of Time BioVentures, a biotech-focused venture capital firm. Before entering the world of healthcare investing, Wallach was the lead singer of the indie rock band Chester French. His transition into venture capital began with an early investment in Spotify about 13 years ago, which led to investments in other notable companies including SpaceX and Ripple, before ultimately specializing in biotechnology and healthcare startups.
Joe Wiesenthal
Joe Wiesenthal is co-host of the Odd Lots podcast and a senior editor at Bloomberg. He brings extensive experience covering financial markets and economic trends, with a particular interest in understanding complex industries and market dynamics.
Tracy Alloway
Tracy Alloway is co-host of the Odd Lots podcast and a senior editor at Bloomberg. She specializes in covering global markets, finance, and economics, with a focus on making complex financial topics accessible to a broad audience.
Key Takeaways
Biotech Investing Requires a Different Mindset Than Traditional VC
Unlike traditional tech startups where companies can "fail fast" and pivot quickly, biotech investments are fundamentally different beasts. (10:28) Wallach explains that biotech companies are like "bags of options" where each drug could be worth billions but faces extremely low probability of success - typically around 5% for small molecules from concept to FDA approval. This creates a unique investment paradigm where investors must manage portfolios of low-probability, high-reward bets, requiring a higher batting average than tech investing but with smaller individual wins. The implication for investors is that biotech requires specialized scientific expertise and a fundamentally different risk management approach than other sectors.
Experience and "Gray Hair" Matter More Than Youth in Biotech
Contrary to the Silicon Valley ethos of young founders disrupting industries, biotech places a premium on experienced leaders with "gray hair." (18:23) Wallach notes that clinical trials cost $30-40 million and once you embark on that path, "that's not an easy door to walk back out of." This makes pivoting extremely expensive compared to software startups. The only way to truly learn biotech is through repeated experience with failures, making seasoned executives who have navigated multiple drug development cycles invaluable. This challenges the "tech bio" movement that assumes young Stanford graduates can revolutionize the industry through pure technical prowess.
China Represents the Future of Global Biotechnology
(34:50) Wallach predicts that "China is going to be the big story over the next decade or two" in biotechnology, representing "a fundamental structural shift in the global biotechnology market." China's advantages are multifaceted: faster regulatory processes, significant talent that was educated in US graduate schools but has returned home, and the ability to conduct clinical trials at much higher volume and speed than US infrastructure can handle. Increasingly, US companies are outsourcing parts of their research and clinical development to Chinese firms, making this a global rather than purely domestic industry trend.
AI's Impact is More Hype Than Revolution in Drug Discovery
While AI technologies like AlphaFold have produced genuine breakthroughs in protein structure prediction, (23:46) Wallach argues that the current AI enthusiasm in biotech is "full of hot air and making claims that are preposterous unless you are a zealot." The fundamental bottleneck in drug development isn't generating ideas - "we already are drowning in good ideas" - but rather the expensive, time-consuming clinical trials required to prove safety and efficacy in humans. (27:17) AI might put more candidates into the top of the funnel, but it doesn't solve the core constraint of needing to test drugs on "living, breathing human beings," which remains extraordinarily expensive and time-consuming.
US Healthcare Pricing Reflects a Societal Choice About Innovation
(41:41) The reason US drug prices are higher than other countries isn't simply corporate greed, but rather a societal decision about medical innovation. Other countries' governments negotiate prices and choose which drugs their citizens can access, essentially telling pharmaceutical companies "take it or leave it." The US could adopt similar price controls, but Wallach explains this would have two consequences: Americans would go without certain drugs, and fewer drugs would be developed globally because the total profit pool would shrink. (43:54) The patent system creates "legalized monopolies" for limited periods, and society can choose to shorten or lengthen these to control how much pharmaceutical innovation occurs worldwide.
Statistics & Facts
- Small molecule drugs have only a 5% probability of success from the original idea to FDA approval and market launch. (10:28) This statistic highlights the extremely high-risk nature of biotech investing and explains why the industry requires such different evaluation criteria than traditional tech investments.
- Clinical trials for biotech companies typically cost $30-40 million once initiated, making pivoting extremely expensive compared to software startups. (18:55) This substantial financial commitment explains why experience and careful planning are so crucial in biotech leadership.
- The biotech sector recently emerged from a four-year "Great Depression" that significantly impacted company funding and IPO activity. (39:45) This downturn was caused by a confluence of higher interest rates, generalist investors leaving the sector, and a comedown from the COVID-era focus on healthcare innovation.
