The largest ever investment bet by the storied venture firm Founders Fund has paid off.
The drug company AbbVie, based in Massachusetts, said it would pay $5.8 billion in cash and stock to take over Stemcentrx, a little-known biotech backed by Founders Fund and whose strategy for treating cancer we first wrote about in September.
The deal includes another $4 billion in cash payments if Stemcentrx’s experimental drugs, still in clinical trials, actually pan out. According to Business Insider, the full value would make it one of the very largest acquisitions of a private, venture-backed company in history, possibly trailing only the $19 billion acquisition of WhatsApp by Facebook.
The head-turning price tag reflects intense demand for new cancer drugs, but AbbVie is also taking a big risk. “I think that this deal is going to end up looking either very smart or very stupid,” writes Derek Lowe, the well-known drug blogger. About $100 billion worth of cancer drugs are sold annually worldwide and new cancer treatments dominate the list of medicines in clinical trials.
Stemcentrx was unusual because its financial backers weren’t well-known biotech VCs. Instead, its largest single investor was Founders Fund, better known for backing outfits like SpaceX and Palantir Technologies, but which believed it could improve the typically low odds of drug success. Brian Singerman, a partner at Founders Fund, tells Fortune the fund managers aren’t space experts either, but still invested in Elon Musk’s SpaceX.
Now the biotech “dumb money” looks pretty smart, and that could tempt other venture funds to shift their cash away from social media and software and into biotech, too. "There’s a tsunami brewing," Stuart Peterson, a founder of Artis Ventures and an early investor in Stemcentrx, told Business Insider. "[Cancer] is a big problem that’s meaningful for us on a global basis. This is where we should be focused."
Stemcentrx was founded on the theory that certain cancers have stem cells that drive them to spread. It built a slick manufacturing center and a huge colony of more than 18,000 mice. The setup allowed them to try and launch a large number of drugs against different cancers. So far, it has reported results for only one drug, to treat small-cell lung cancer, but has several others in early testing.
Clearly, with the sale, Stemcentrx has decided it’s not going to try to be the next Amgen or Genentech on its own. That could be seen as an astute move by Peter Thiel, the investor who leads Founders Fund, and his partners. They and other investors will net several billion dollars in profit, but are letting AbbVie now take on most of the risk, since drugs generally fail in costly human trials.
There is disturbingly little intuition into what biotech companies are worth. If you are able to produce a drug that cures some sizable disease for which there is no cure at all, that is worth billions, or tens of billions of dollars. And if you don’t succeed it’s worth nothing.
(Read more: Fortune, Business Insider, Founder’s Fund statement on Medium, “Peter Thiel Backs Biotech Unicorn Fighting Cancer Stem Cells,” "Peter Thiel Explains Biotech Investing Rationale: Get Rid of Randomness")