James Peyer: Navigating the “Biotech Valley of Death”

Ever hear about an exciting discovery in the biomedical world, then later wonder why it seemingly dropped off the face of the Earth? In fact, it’s par for the course for potential therapeutics to fail before they ever get off the ground, guided unwittingly by their enthusiastic champions straight into a boneyard strewn with the skeletons of discoveries past. So how do medicines escape this trap?

James Peyer answers below, drawing from his experiences in the vastly different worlds of basic research, management consulting for pharmaceutical companies, and finally venture capital (find the transcript underneath, and see the full interview here):

JAMES: The “biotech valley of death” comes right at the point when you have a really interesting assay or validation of an animal model, you’ve been able to attract grant funding, you have your scientists of whatever flavor–professors, PhDs, postdoctoral students–all pushing the science forward, and then it reaches the point where it has to spin out into a company and attract early stage funding. But that funding is now so far from the clinic, nine years or so on average from market approval, that finding the funding to go build that technology into a therapeutic that will make it all the way through preclinical development, clinical trials, and then market approval is very rare. There are a few groups around who do that very well, especially Boston, San Francisco, London-based biotech venture capital firms, and pharma companies can also do that very well, but there aren’t so many of those actors compared to the quantity of research being generated in every major city around the world. And so a lot of biotechs get started and then immediately stumble by failing to find funding or the right strategy to go forward, which is why we call it the “biotech valley of death”. It’s just a tough transition for a basic research scientist to enter this world, where the next step for their invention requires all of these fields that they’ve never had to care about before.

TEGAN: So in simple terms, what is the main bottleneck? Is it primarily funding?

JAMES: I would argue not really–it’s a combination of money and strategy. I mentioned that there are a couple of transitions a compound has to go through in its development, from understanding the basic science and the development of an assay, to the development of a compound, and then usually the optimization and toxicity testing, which is a completely different field. So it can go from basic biology, to animal models, to synthetic chemistry and physiology for the toxicity piece, and then it switches again and goes to the clinical piece, where you figure out how you’re going to appeal to clinicians. And then it switches again to go to the market piece, where you talk about pricing and reimbursement from insurance companies. And with each of these steps, a lot of groups have trouble crossing from one side to the other, so finding a partner that can enable a company or a project to jump from A to B to C is really the biggest value. And yes, it does take a lot of money, but I think money is just one part of the equation.

TEGAN: Is the regulatory structure a major hurdle with translation?

JAMES: I don’t spend too much of my time talking with the FDA (or the EMEA in Europe). I think they have pretty clear rules, and especially in the last decade they’ve been much more responsive than they’ve ever been. I think that overall the regulators are doing a pretty good job of things. The tougher part, in my mind, has been the stuff that comes before the FDA: how are you identifying and validating your drug before you ever start a clinical trial? How are you optimizing it to make sure it has the maximum chance of being safe in humans? How are you setting up your company so that, even if the first drug fails for some unforeseen reason, the whole project isn’t jeopardized by one unexpected failure? These are all of the sorts of things that I think are the biggest stumbling blocks for early stage biotech companies, and that I spend most of my time dealing with. Certainly regulatory approval is a big one that we’re always thinking about, but the company should be built in such a way that regulatory approval is achievable if you meet certain clinical milestones. And the return on investment is certainly there in pharma–from a returns perspective, it’s actually been better in the past decade for investors to put money into early stage biotech companies than into early stage tech companies. So the point is that the return on investment is there, the regulatory structure is working and rewarding drugs that succeed, but not all of them are able to get there. And that’s partially a funding bottleneck, and partially a strategic bottleneck.

TEGAN: As an investor, how do you choose projects with good prospects?

JAMES: So if you ask any VC investor, they will give you some statistics about their “deal flow ratio”, which is basically how many projects they see every year, versus how many they invest in. And the reality for almost all investors is that you see a whole lot of projects for every one that becomes an investment. Apollo is a little different from many other investors in both our appetite for risk and stage, but also our willingness to go in and build something that doesn’t exist yet. We have a very clear focus in the biology of aging, which to us means a rather defined set of things, and so we’ve been going out, seeing scientific presentations (often before a paper has been published), talking with researchers, going to conferences, etc. And then because my whole diligence team is scientists, we go and get excited about some scientific aspect. We’ve all been trained a little bit on the translational side, seeing what other biotech companies are doing, and then we jointly hatch plans to say how a project would work if we turned it into a biotech company. And I think that starts with exceptional science right at the unique stage where it’s ready to jump from bench to biotech, where it’s an academic project that has proof of concept in some way. So sometimes it’s in animal models, whether it’s mammalian or a lower organism, and then potentially a compound that already exists in addition to a target (but usually not an optimized compound). And if it hits that checkpoint, then you dive one level deeper and ask if there’s a way to turn this into a biotech company that makes strategic sense. If all of those checkboxes are ticked, then you ask “How can we make this work?”, which involves pulling together a team, launching something, and then growing it. But how we find that project starts and ends with identifying great science in the aging space.

TEGAN: Is there anything in particular you avoid? Anything that you watch for as a bad sign?

JAMES: Red flags to me as an investor include going for dementias as a primary indication. There’s all sorts of really fascinating research going on right now with Alzheimer’s disease, and there are a number of interesting theories–about metabolism, lysosomal degradation, ways to target tau and beta together, and so on–all sorts of interesting ways to go after Alzheimer’s disease (and many of them apply to Parkinson’s as well) that are fascinating, and I think some of them are absolutely going to work. But the history of biotech companies makes projects that only have applicability to Alzheimer’s or Parkinson’s, or that want to go after those things first, incredibly difficult to fund. There have been around 200 Alzheimer’s trials since 2000. There have only been 2 successes out of those 200, and neither of those has created a disease-modifying drug. And so while there’s still a lot of appetite for something new, being able to wrap those new things in a shell where there’s a safer piece to it, and then a more exciting piece behind it, is kind of core to how we think about the Alzheimer’s space from a business perspective. So even if you’ve got animal models and a market strategy and good scientists and so on, we’re still always a little bit cagey about Alzheimer’s, just because it takes so much money and it’s so risky to do a big phase III Alzheimer’s trial. I would add that, especially in the geroscience space, most of the work suggests that intervening early in Alzheimer’s is the best way to prevent the continued degradation of memory. And that makes the trials that you would need to perform for that drug even longer, tougher, and more challenging, with a higher bar for safety and efficacy.