Quants II: Drug discovery “rocket scientists” lifting off

Advanced data analysis, modeling, and model systems – quantitative domains that gained the moniker “rocket science” based on their successful and transformative application in aerospace – have also been successfully applied in several unrelated areas such as finance.

But while these rocket science tools and capabilities have long held great promise in the field of drug discovery, they have generally delivered marginal benefits. We contend that’s because the complexity of the challenges posed by drug discovery and development (the complexity of biology) is orders of magnitude greater than in the areas where “rocket science” has historically seen success.

Today, we see advancements in science and technology we believe will enable the quant approach of using large amounts of quality data and analytics to more fully realize its potential in drug discovery and development. These advancements include large increases in computing power and scale and new tools for engineering and interrogating model biological systems.

We profile a handful of companies successfully applying today’s rocket science to drug discovery and development with business models that extend beyond traditional fee-for-service to taking equity stakes in the therapeutic products they enable with their partners or undertaking proprietary therapeutic product development.

The extraordinary returns recently seen among a number of our process technology universe public companies suggest something is afoot. A commonality among these companies is they are leveraging experimentation and analytics expertise (their “rocket science”) to participate in the drug discovery and development market with models including 1) selling their services or access to their platforms on a fee basis, 2) taking equity stakes in the therapeutic products their capabilities enable, and 3) in some cases using their capabilities to develop their own drug pipeline. We believe these companies’ strong stock price performances and associated eye-popping valuations reflect the long-term potential of this drug discovery “rocket science” – potential not captured in simple short-run valuation metrics. Table 1 shows how the market has ascribed billion-dollar-plus values to discovery technology companies with near-term revenue prospects measured in the tens or hundreds of millions and typically no expectation of near-term profit.