E353: Why Biotech Is Struggling in Today’s Market (and the Future of Healthcare)

Episode Summary

Executive Summary: The conversation argues that biotech drug development faces worsening economics due to higher development costs, IRA/MFN pricing pressure, and compressed returns, while healthcare technology and AI offer a more attractive investment frontier. David targets the undercapitalized middle of the market, believes China is reshaping drug discovery, and emphasizes team quality, focus, and differentiated strategy in fundraising and investing.

Main Topics: Why biotech investing is getting harder (Priority: 5/5): Drug development costs keep rising while pricing and revenue ceilings are being pressured by the IRA and possible MFN policies, reducing expected returns despite mission importance. China’s growing role in drug discovery (Priority: 5/5): China is accelerating early-stage drug starts, lowering costs and increasing deal flow, creating competitive pressure on U.S. biotech and pushing the sector toward AI adoption. Health tech transformation vs. biotech (Priority: 5/5): Averin is focused on tech transformation of health rather than classic biotech, viewing healthcare as a $5T market being reshaped by AI, decentralization, consumerization, and automation. AI in clinical development and study design (Priority: 5/5): AI can reduce trial time and cost by improving patient selection and study design, with Hologen cited as a company using longitudinal data and AI to potentially cut a clinical study. Longevity, biohacking, and personal measurement (Priority: 3/5): The discussion covers sleep, wearables, and next-gen sensors that measure biomarkers in real time, enabling more individualized health optimization beyond general wellness advice. Fundraising strategy and market structure (Priority: 4/5): Averin raised a strong Fund One by focusing on absolute MOIC, staying disciplined on strategy, and targeting the undercapitalized middle stage where supply-demand imbalances can create alpha. Team dynamics and brother cofounding advantage (Priority: 3/5): David and Eric’s complementary skills and lifelong trust are presented as a major advantage in investing, operating, and making hard decisions together.

Key Arguments: Biotech returns are deteriorating because the floor is higher but the ceiling is lower: drug pricing pressure reduces upside while development costs keep rising. The IRA meaningfully hurts NPV; small molecules are hit hardest because they face shorter timelines to price negotiation. Drug pricing reforms, including MFN rhetoric, are bipartisan and likely to continue across administrations, so the pressure is durable. Life sciences remains attractive, but classic drug-development biotech is becoming less compelling relative to tech-enabled healthcare models. China is now a major source of new drug starts and assets, forcing U.S. innovators to compete on speed, cost, and AI-enabled efficiency. AI can materially change clinical development by improving trial design, reducing false negatives, and shortening timelines. The most attractive capital opportunity is the underfunded middle stage of healthcare/life sciences, where great companies struggle to raise money. Successful fundraising depends on a clear, durable strategy and the ability to convince a small subset of investors who understand alpha-oriented approaches. Team quality matters more than academic pedigree or speed; trust and complementary skills are critical when conditions get hard. Longevity investing is increasingly about measurable biology: sleep, wearables, and sensors that provide actionable individual-level data.

Data Points: Averin AUM: $450 million - Described as David’s current fund size Flagship tenure: 18 years - Length of time David spent at Flagship before launching his own platform Health market size: $5 trillion - David’s estimate of the U.S. healthcare market opportunity IRA NPV impact: ~30% NPV hit - Estimated impact of IRA pricing negotiation on drugs Small molecule investment decline: ~70% down - He said investment in small molecules has fallen since the IRA M&A transactions 2024: ~$60 billion - Referenced as biotech M&A deal value in 2024 M&A transactions 2025: ~$140 billion - Referenced as biotech M&A deal value in 2025, on the same number of transactions China share of new drug starts last year: ~60% - Statistic cited for new drug starts originating from China last year China share of new drug starts currently: ~30% - Current share of new drug starts mentioned later in the discussion China asset deal value vs EVs: More than China EV deal value in 2024 - Used to illustrate scale of drug asset transactions coming from China DPI in private funds (1980s Swenson model): ~24% - Historical benchmark for private fund distributions cited from the Swenson model DPI in 2024: ~9% - Allocator Training Institute data referenced for current private funds DPI in 2025: ~9% - Projected/finalizing data for 2025, showing continued liquidity pressure Hologen trial efficiency: Potentially 1 clinical study instead of 2 - AI-based study design may allow FDA approval path with fewer studies Development time saved: ~2.5 years - Estimated time reduction if one study can replace two

Pivotal Quotes: "“the price is up, but the ceiling is coming down.”" — David: Summarizing why biotech economics are deteriorating even as company valuations and deal values rise "“Tech transformation of health is perhaps the single most important trend over the next decade or several decades even.”" — David: Explaining Averin’s core thesis and why he prefers healthcare technology over classic biotech "“AI has agreed that they can theoretically get it approved on just one clinical study where often in this case it would have required two.”" — David: Describing Hologen’s AI-assisted clinical development approach and its potential impact on timelines

Implications: Biotech may remain mission-critical but is a tougher venture market. Expect more capital, talent, and alpha to migrate toward AI-enabled health tech, data-driven trials, and undercapitalized growth-stage companies.