Episode summary
They Call It a Lottery Ticket. The Data Says Otherwise | The Hidden Alpha of Biotech
Excess Returns
· · 1 hr 5 min · Guests: D.A. Wallach
Summary
Biotech development companies are being valued less like operating businesses and more like portfolios of options. D.A. Wallach argues that early-stage drug makers are dominated by uncertainty because their products may not reach market for 8 to 10 years, and that specialist investors can still generate alpha because they are willing to process the domain-specific scientific and regulatory information required to price that uncertainty.
He says the right framework is to anchor each program to historical base rates, then adjust for the probability of success, the eventual market size, pricing power, and development costs. A preclinical drug may have only a 5% to 10% chance of making it to approval, but those odds improve as it moves through clinical phases. The public biotech market, he argues, is especially sensitive to higher rates because future cash flows are discounted far out in time.
Wallach also ties biotech’s recent cycle to capital flows. He says rising rates, the rotation into big tech and AI, and post-pandemic sentiment all drained money from the sector, while a resurgence in 2025 brought a sharp rebound. He sees AI as a real but incremental tool for speeding parts of drug discovery, not a near-term replacement for scientific judgment or specialist underwriting.
Key takeaways
- Wallach says public biotech still offers persistent alpha because only a small set of investors can properly process the scientific and regulatory details.
- He values development-stage biotech as a sum of each program’s net present value, adjusted for historical base rates and development costs.
- He says a preclinical drug may have only a 5% to 10% chance of reaching the finish line, so probability work is central to underwriting.
- Wallach argues that higher interest rates hurt biotech disproportionately because much of its value sits 8 to 10 years in the future.
- He says biotech’s 2025 rebound showed how quickly sector flows can reverse after years of capital leaving for AI and big tech.
- Wallach believes AI will improve parts of biotech gradually, but the transformation will be investable only in specific workflow components.
Notable quotes
“The development stage biotech companies are really distinguished by the fact that there is a high degree of uh uncertainty that any of their products will get to the market”
“so the argument would be that the biotech hedge funds that basically drive most of the activity around these stocks are being paid by the market for the service that they're providing”
“a drug at that stage might have somewhere between a 5 and 10% chance of making it to the finish line”
“interest rates went up. That's a major headwind to these companies”
“what matters is what are the ways in which that transformation are investable”
How the episode opens
The development stage biotech companies are really distinguished by the fact that there is a high degree of uh uncertainty that any of their products will get to the market. These companies are heavily dependent upon cash flows that are in many cases 8 to 10 years away in the future. Covid was a rude awakening because you know at the outset people were just desperate for a solution.
The biotech industry ended up providing a pretty decent solution but then that of course became itself highly contested. There is sort of a superficial story that you can tell again in any sector about AI is going to change everything and that may over the long run be true but what matters is what are the ways in which that transformation are investable. You're watching Excess Returns, the channel that makes complex investing ideas simple enough to actually use or better questions lead to better decisions.
Biotech investing. It's like a lottery ticket. Nobody knows what's going on.
Nobody knows anything, right? So, who's with me here today? I have DA Wallak, musician, venture capitalist, co-founder of Time Bio Ventures.
He thinks he believes that actual persistent alpha still exists in this space. So, I'm excited for this conversation. DA, welcome to excess returns.
Thank you. Let's dive right into the deep end. Biotech, one of the few places where if active alpha is real and persistent, every quant kid in the community and everywhere else is yelling at you right now saying, "How dare you?
Why do you think this is to be true?
Sure. Well, basically making sense of biotech companies and valuing these companies requires processing a lot of very domain specific information and that is still a type of work that only a small number of market participants are really expert at doing.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- biotech investing
- persistent active alpha
- bag of options valuation
- interest rates impact
- ai and drug discovery
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Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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