They Call It a Lottery Ticket. The Data Says Otherwise | D.A. Wallach on The Hidden Alpha of Biotech

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Mar 16, 2026

D.A. Wallach, venture capitalist and co-founder of Time BioVentures who invests at the intersection of biotech and tech. He explains valuing development-stage drug companies as portfolios of options. Topics include why specialists can still earn alpha, how base rates and interest rates shape biotech valuations, AI’s incremental role in drug discovery, and portfolio construction for high-uncertainty investments.

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INSIGHT

Specialists Capture Biotech Alpha

Biotech rewards specialists because valuation requires deep domain-specific analysis of science, trials, and regulatory paths.
D.A. Wallach says only a small number of market participants can accurately process that information, which creates persistent alpha for experts.

INSIGHT

Valuing Biotech As A Bag Of Options

Development-stage biotechs are valuated as a bag of options where each program's NPV is probability-adjusted and discounted.
Wallach walks through preclinical → phase 1–3 transitions and recommends summing each program's risk-adjusted future revenues minus development costs.

ADVICE

Anchor Probabilities To Base Rates

Use historical base rates to anchor clinical success probabilities and multiply phase transition rates to estimate total success odds.
Wallach advises refining base rates by modality (e.g., antibodies vs small molecules) and adjusting for specific program facts.

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Biotech is one of the few areas in investing where specialized knowledge may still generate persistent alpha. In this episode of Excess Returns, D.A. Wallach, venture capitalist and co-founder of Time BioVentures, joins us to explain how biotech investing works, why development-stage drug companies behave like portfolios of options, and why specialist investors play such a large role in this market. We also explore the cycles that have driven biotech performance, the impact of interest rates and capital flows, and how AI and global competition may reshape the industry in the years ahead.

D.A. Wallach – Twitter
https://x.com/DAWallach

Topics covered include

• Why biotech may be one of the last areas where specialist investors can generate persistent alpha
• The “bag of options” framework for valuing development-stage biotech companies
• How probabilities of drug success and clinical base rates drive biotech valuations
• Why rising interest rates hit biotech stocks harder than many other sectors
• How capital flows and investor narratives create boom-and-bust cycles in biotech
• What happened to biotech during the pandemic surge and the post-COVID downturn
• Why AI and tech narratives compete with biotech for investor attention
• The role of specialist biotech hedge funds in the public markets
• How large pharmaceutical companies drive returns through biotech acquisitions
• Differences between biotech venture capital and traditional tech venture investing
• How venture investors evaluate drug development programs and scientific evidence
• Portfolio construction and diversification when investing in highly uncertain biotech companies
• The emerging role of China in clinical trials and global drug development
• Whether AI can improve drug discovery, clinical trials, and pharmaceutical R&D productivity
• Why investors should avoid rigid value vs growth ideologies and stay adaptable

Timestamps

00:00 Why biotech investing requires specialized knowledge
01:40 Is biotech one of the last places for persistent active alpha?
02:45 The “bag of options” model for valuing biotech companies
05:00 Drug development phases and probabilities of success
07:00 Using base rates to estimate clinical trial success
09:20 Estimating total addressable markets for new drugs
11:10 Why rising interest rates hurt biotech valuations
13:00 Capital flows and why biotech underperformed in recent years
15:30 The biotech boom and bust around the COVID pandemic
18:00 How AI and tech compete with biotech for investor capital
22:20 The role of specialist biotech hedge funds
24:00 How pharmaceutical acquisitions drive biotech returns
25:20 How biotech venture capital differs from tech VC
30:50 Why biotech investors must evaluate complex scientific data
34:20 Where AI may improve drug discovery and R&D productivity
42:00 Portfolio construction and diversification in biotech venture investing
44:30 Volatility, valuation marks, and private market pricing
48:00 Managing risk across different drug technologies and disease areas
49:30 Why China is becoming important for clinical trials
53:00 Why biotech investing must be viewed as a global industry
54:30 The importance of flexibility between value and growth investing
58:50 Will investing become more systematic and quantitative over time