Why It Matters More biotechnology startups are valued by investors at $1 billion or more.
A laboratory space in San Francisco built by the biotechnology company Stemcentrx to manufacture cancer drugs.
In 2002, Scott Dylla, a skinny postdoc with a Minnesota accent answered a Craigslist ad for a room for rent in Palo Alto. Although he couldn’t afford to move in with Brian Slingerland, then an up-and-coming technology banker at Credit Suisse, the two got to talking.
Two of Slingerland’s aunts had died of cancer. One, only a year after she retired. The other of lung cancer. She’d always smoked Kents.
“Will we be able to cure cancer?” Slingerland wanted to know.
“Yes. By targeting stem cells,” ventured Dylla, who was starting a position at a lab at Stanford University to investigate the question.
Thirteen years later that conversation has evolved into what is one of the most highly valued private biotech startups of all time. The company the pair started, Stemcentrx, has raised $500 million and is valued at $3 billion, people familiar with its finances say, a nearly unprecedented value for a company with no revenue, facing the usual R&D obstacles, and that almost no one has heard of before.
Silicon Valley is used to “ unicorns ,” those private, usually profitless, and fast-growing tech companies worth a billion dollars or more , like Snapchat, Square, and Uber. Now the same phenomenon is spreading to biotech, where investors are throwing money at companies that promise to beat the historically low odds of drug success.
Stemcentrx thinks its chances are better than average. Its young founders have recruited grizzled biotech pros, built a “vivarium” that houses 18,000 white mice, and established a glass-enclosed factory floor where the company is already making its own experimental drugs. These drugs, Slingerland says, will be like “laser guided missiles attached to atomic bombs.” The company intends to drop its payloads on at least ten types of cancer in the next couple of years.
The company is unusual because it’s betting on a scientific idea that’s not universally accepted—that cancer is caused not by any cell that goes rogue, but by rare and powerful cancer stem cells.
Stemcentrx’s contrarian premise—that stem cells can be bad, not good—has drawn some impressive backers, including Sequoia Capital, Elon Musk, and most notably Founders Fund, the investment firm led by Peter Thiel, the Midas-touch investor who discovered Facebook.
Thiel says his fund has invested $200 million into Stemcentrx. It is the fund’s largest investment ever in a single company, he says, surpassing well-known names like SpaceX, Spotify, and Palantir. It’s also two to three times the total Thiel has invested in about 25 other biotechnology firms (see “ A Contrarian in Biotech ”).
Last month, when Stemcentrx closed its latest fincancing round of $250 million, the investors were led by the mutual fund giant, Fidelity, suggesting that plans for an IPO can’t be far off. Other companies targeting cancer stem cells include OncoMed and Verastem, both already public.
If hardly anyone has heard of Stemcentrx until now it is because the company has been hiding in plain sight. It occupies three floors on San Francisco’s bay overlooking the back gates of the Genentech campus, employs 140 people, and brings in Ronnie Lott, the former 49ers defender, as an inspirational speaker. But it hasn’t tossed out any press releases—and until last week it barely had a website. “With all the information out there, it’s surprisingly easy to remain stealth,” says Slingerland.
Monday marked a new step for the company as doctors working with it presented the results of its first clinical trial at a lung cancer meeting in Denver. They showed early results for an antibody drug it manufactures and that targets what Dylla says are stem cells that cause small cell lung cancer. That’s the same deadly kind of lung cancer that killed Slingerland’s aunt, and which 30,000 Americans are diagnosed with each year, with fewer than 10 percent surviving more than five years.
The study had 80 people in it and was primarily organized to find a safe dose of the drug, not to prove it works. Yet there are promising hints. Overall, tumors shrunk in about 20 percent of patients, slightly better than the only approved drug to treat the cancer, topotecan. For patients whose cancer exhibits the stem-cell marker which the drug aims at, benefits were seen twice as often. How much the drug really helps is a question for a larger study that the company hopes to begin soon. It’s one of three drugs the company is already testing in human trials.
Workers handle chemicals used to poison lung cancer cells.
Unlike tech companies that can sprout phenomenal valuations in a year or two, most biotech companies get there only after years of work and as evidence for an idea or drug accumulates. After the chance Craigslist meeting, Dylla went to work in the lab of Irv Weissman, a leading stem cell biologist. By then, Canadian scientists had identified that one form of leukemia is caused by a cancer stem cell, the first clear demonstration of the idea. Researchers at the University of Michigan made the case in 2003 that the same was true in breast cancer.
Could it be true of every cancer? In 2008, Slingerland, who had joined the technology investment bank Qatalyst Partners, decided to use his own money, and that of some early investors, to fund Dylla to begin working on the idea independently. If cancerous stem cells were real, it might explain the temporary benefits of chemotherapy. People had been killing the wrong cells. Maybe the cancer was flowing out from a few, rare cells that evaded treatment and could start the cancer all over again.
If so, drugs were needed to target and kill the stem cells. “Ripping out the root of the tree,” Dylla calls it.
Thiel says he invested so much not only because the founders had yin and yang—Dylla is earnestly technical, while Slingerland is a finance pro—but because he believed the company could reduce the odds of failure. “Our theory was that it was a biotech company that looked a little more like a software company,” says Thiel, who started investing in 2012. “The whole company was designed to get the probability of success closer to 1.”
One aspect of that design was a methodical—and expensive—way of zeroing in on what cell type in a tumor is the ultimate culprit. At Stemcentrx it’s done by inserting bits of freshly obtained human cancers under the skin of a mouse with no immune system, a so-called xenograft. The cancer that grows is collected and divided into different cell types. Then each fraction is implanted into other mice. The process, called “limiting dilution,” gets repeated as long as it takes to find the one type of rare cell that never fails to regenerate a tumor just like the original. That’s the cancer stem cell.
At the Stemcentrx labs, I saw technicians skinning dark balls of lung tumors the size of lychee nuts, then dicing them with a razor blade. Researchers run the cells through sorting machines, using chemical markers to separate them into different types. Dylla says the company grafts tumor cells into more than 150 mice a day.
The aim isn’t only to find a specific cell that can generate a cancer, but also a unique molecular marker that identifies it. One discovery Stemcentrx says it made was to find a protein, called DLL3, that appears on what it thinks are stem cells responsible for small cell lung cancer. The drug they created to kill these cells is a chemical toxin linked to an antibody that attaches to this protein, lock and key style.
Some labs study cancer stem cells by growing them in a petri dish, where they form blobs called “spheroids.” It’s a cheaper, faster way to do drug studies, but not as accurate in Dylla’s thinking. Cells grown in a laboratory dish tend to become different, accumulating unusual mutations, and end up less like the original tumor. If you find a drug that kills these, what’s the guarantee it will work the same in a person? There isn’t any: most drugs fail because lab studies can’t accurately predict what will happen when a person takes it.
At Stemcentrx, tumors from 600 different people and from a dozen types of cancer grow inside its mice. Dylla’s conviction is that if its drugs can cure the animals, the chances are higher they will help people. For Stemcentrx to justify its lofty valuation it probably needs a success rate about three times the biotech average.
What’s more, the company is betting on a paradigm that’s still hotly contested. The stem cell theory implies cancer is organized like an organ, say your liver, whose stem cells constantly make new specialized cells, like after you’ve nuked a few during a night of bar hopping. In the cancer stem cell scenario, a tumor would work in a similar way. So if you destroyed the relatively rare stem cells, the cancer couldn’t grow back.
But what if there are no special stem cells? What if, instead, most or all the cells in a tumor can do the job of spreading it? In academic labs, the two theories have been duking it out for a decade, but the stem cell theory is the one that lately has been taking some punches. For instance, scientists recently made a convincing case that in skin cancer there is no special, rare stem cell, as some had predicted. They showed that just by switching to a different kind of mouse, a quarter of the human melanoma cells were able to cause cancer. “There is a major debate that is still going on and I don’t know if it’s going to be resolved so easily,” says Ravi Majeti, a biologist at Stanford who studies leukemia. “It’s a complicated story and I would say the cancer stem cell theory is waning a little bit.”
Given evidence on both sides, Majeti says new support for the theory may need to come from a clinical trial in human subjects. “The ultimate proof is when, by targeting only the stem cells, you eradicate the cancer,” he says.
In an all-hands meeting held last week at Stemcentrx, Slingerland revealed the results of its first clinical trial as a DJ played “I Will Survive.” He introduced recent hires and previewed the company’s new website, replacing a plain-looking one with a single paragraph of text. “We asked them to make it like the Apple of biotech,” he says. He told his employees how much the new investors had put in, and what their shares and options were now worth.
It’s a lot of money, or anyway it could be. Slingerland says he doesn’t want too much focus on his company’s status as a biotech unicorn. “This isn’t worth anything to us until we get these drugs approved,” he told his employees.
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