The Awesome Power Of Risk

Posted March 3rd, 2014 by Michael Gilman, in From The Trenches

Humans are supremely lousy at evaluating risk. We get nervous when we fly but not when we drive. We worry about terrorist attacks when we’re far more likely to die in our own bathrooms. We flock to buy tickets for lotteries we will never win in a thousand lifetimes. And those of us who’ve dedicated our lives to discovering medicines are probably the biggest suckers of all. It’s not even a matter of risk in our business — like that Powerball ticket, failure is virtually a certainty.

But we’re still here and we’re still trying. And we know that the rewards are significant — there are lives to be saved. How do we make it work?

The answer, I believe, is… risk.

We need to be great at managing risk — at identifying it, articulating it, allocating it appropriately, and discharging it systematically and efficiently. Because if you’re great at managing risk, you can take bigger ones. And if you take bigger risks you can accomplish greater feats. So, am I saying that risk management needs to be our core competency as an industry, as if we were actuaries at an insurance company? Damn right — that’s exactly what I’m saying.

I learned many painful lessons in my first startup experience at Stromedix. But probably the most profound was figuring out that our investors were really trying to do one simple thing, which I wish someone had just told me – it would have spared me much aggravation. Anyhow, it’s this: investors try to ensure that each new dollar they invest in a company is invested at lower risk. Think about that for a moment. And think, in particular, about what it means in a business where each subsequent step is five to ten times more expensive than the previous one. As you write those bigger checks, you want them to carry a lot less risk. And if you’re really good at doing that, you will make your dollars go far.

So how you do that? In our business, you do it by being as explicit and precise as possible about your hypotheses and as focused and efficient as possible at testing them. If they test out negative, you cut your losses and move on. If they test out positive, you’ve now converted risk to knowledge. Now the next check your write carries the same potential return but much lower risk – in short, it’s a much better investment. And if the larger checks are the better investments, you can afford to take bigger risks with the smaller, earlier checks – where the real breakthroughs happen in our world.

Let me give you a specific example. Stromedix was founded around an antibody that had been dropped by Biogen Idec. This antibody, STX-100, had strong preclinical data in numerous models of fibrosis and organ failure and a compelling rationale for development in a disease called idiopathic pulmonary fibrosis (IPF). Biogen terminated the program for a variety of legitimate business reasons, but the overarching challenge, in my opinion, the problem they couldn’t figure out how to solve at the time, was how to tease out clinical data in a typical Phase 2 study that would derisk their investment in an expensive Phase 3 program. And, frankly, that’s probably impossible to do in this disease. Absent a solution to that problem, they were looking at a decision to commit to going all the way to Phase 3, at a cost of probably $200 million or more, before they turned over the first card only to learn, perhaps, that they shouldn’t have spent a nickel on the program. That takes a very strong stomach; who can blame them for passing?

If I had to point to one thing we did at Stromedix to create value for patients and shareholders, it was this: We disaggregated the problem. We accepted that we could not test the clinical hypothesis – that STX-100 slows fibrosis and disease progression in IPF patients – in a short, small, and inexpensive Phase 2 study. But what we could do was to robustly test the biological hypothesis, which was that STX-100 attenuates TGFβ signaling activity in the lung. And we could do that for roughly a tenth of the cost. If the answer was no, we were done. But if it was yes, the next experiment, asking whether TGFβ blockade affects disease progression, is a lower-risk and much more palatable investment. Once Biogen understood what we were trying to do, that we’d figured out how to remove roughly half the risk in the program on a tenth of the investment, that’s when they made the offer to buy the company — before we’d even dosed a patient in the trial.

This is the same logic behind the seed model here at Atlas. The seed I’m working on (the poorly-kept secret Padlock Therapeutics) is ultimately focused on developing inhibitors to a family of enzymes that have not been extensively tackled in the past by pharma. We have a reasonable level of confidence in the biology of these enzymes, which is to say we have strong biological and clinical hypotheses, and we think we know how to test these hypotheses once we have a suitable compound in hand. What we don’t know is if we can get such compounds, molecules that look like they might grow up some day into real drugs. So why commit $20M, enough to get a couple of compounds to development stage, before we have any idea whether we’ll have hits worth taking that far?

Hence, the seed: commit $2M (10% of the full round) to answer that question – put the targets into a full set of screens and see what we get. At the end of that period, we open the envelope. If we hate what’s in there, we wrap up and get on with our lives – we will have built no infrastructure and hired no employees, so it will be easy to unwind. But if we like it, then the investors will happily commit the remaining $18M, knowing that they’re much more likely to get a development candidate. And I’d feel much better about committing a couple years of my life (which, by the way, is a finite resource; the investors can always get more money). We’ve both lowered the risk on our next investment.

Imagine a world in which the whole pharma industry was this deliberate about risk reduction. Imagine what it does to the arithmetic of drug discovery if you could systematically reduce by half or more the risk borne by expensive pivotal trials. Imagine the great leaps forward in medicine if we enabled more aggressive and creative risk-taking by focusing on rigorous and rational risk management.

Honestly, it’s not that hard. But like other aspects of risk in our lives, we humans just aren’t as rational as we think we are. And our institutions are even worse. But get it together, people. We can do it.

Michael Gilman

CEO of Obsidian Therapeutics and Atlas Advisor, Ex-CEO of both Padlock and Stromedix
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