Bloomberg Law
Jan. 17, 2023, 9:00 AM

DAOs Might Be Cure for Biotech Startups and New Drug Development

Joseph Perkins
Joseph Perkins
Orrick Herrington & Sutcliffe
Stephen Thau
Stephen Thau
Orrick Herrington & Sutcliffe

Capital markets remain tight for early-stage biotech companies, and ripple effects are casting a pall over venture capital financing. As a result, many early-stage biotech companies are struggling to find their way through the valley of death—that time period between initial scientific discovery and proof-of-concept human clinical trials, when funding sources are sparse.

Decentralized autonomous organizations might provide an alternative to traditional sources of capital, giving early-stage biotech companies the boost they need to get across the valley and develop life-saving drugs.

For example, VitaDAO and Molecule are two DAOs that were created to fund longevity research. Pfizer recently committed $500,000 to VitaDAO, suggesting that DAOs might be entering into the mainstream.

People With Shared Interests

DAOs enable a community to fund projects of interest to that community. While the formal definition of a DAO can vary, it is simply a collection of people with a shared interest in the outcome of a particular project. That interest may be financial, artistic, or manifested in some other form.

One becomes a member of a DAO by holding a token in that DAO. At the time of initial launch, a DAO will often have a stated purpose or goal, then raise money by selling tokens. Holders of tokens can voice their opinion about what the DAO should do, how it should use its resources, and so on. This is done through voting mechanisms governed by a smart contract on a blockchain.

DAOs have been used to raise capital for a variety of activities, like ConstitutionDAO, which raised $47 million to try to purchase a copy of the US Constitution at auction. While ConstitutionDAO was not successful in its bid for this historic document, it highlights the possibility of raising funds for a common purpose without necessarily focusing on financial goals.

People join DAOs because they have a deep interest in the success of a project, often irrespective of any direct financial benefit.

Medical Research

Within the world of therapeutics, a DAO could be created to focus on an interested patient group, a particular disease, or for some other medical interest to benefit the greater community. Virtually every disease has a community—from the American Diabetes Association to the American Cancer Society to the Aarskog Syndrome Parents Support Group and the American Porphyria Foundation.

A disease-focused DAO could be a natural extension of the efforts of these groups. The newly formed DAO would raise money by selling tokens to fund early-stage projects that might benefit the community. DAO members could then submit proposals for how to use the money, such as what opportunities to fund and where the community can do the most good.

Once a funding proposal passes, the DAO would automatically send funds to the target recipient, either as a grant or an investment—depending on the proposal. Any returns on investment would be put back into the DAO treasury and could be used for additional grants or investments.

The key here is that no DAO member has any financial interest in the target projects by reason of being a DAO member.

Membership Perks

Besides funding specific projects, DAOs could create additional benefits through the creation of tokens with unique rights or properties. As a condition to funding any particular project, a DAO might demand that its members be granted certain rights or benefits.

This could include front of line access to clinical trials—subject to any eligibility requirements for trial participation—discounted therapies derived from the DAO funding, first access to information and reports from the target company, rights to any intellectual property developed with DAO funding, and many other benefits.

In this sense, the tokens issued by the DOA will represent much more than just a vote on proposals coming before the DAO.

Whether a disease-focused DAO will ultimately choose worthy projects to fund is an open question. The democratic decision-making process used by DAOs reflects the collective will of the organization. Many disease-focused organizations consist of very knowledgeable members, particularly in rare diseases, so there is a reason to believe that the wisdom of these crowds will lead to good decisions.

There are also legal issues to navigate. Negotiating any tokenized rights can be complicated, and whether tokens are securities subject to Securities and Exchange Commission regulation is a hot topic. SEC rules are evolving and will likely depend on the specific features of the tokens and the rights they represent.

Folks like to say, “Where there’s a will, there’s a way.” When it comes to developing new drugs, there’s certainly a will. The question is whether DAOs can be the way?

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Author Information

Joseph Perkins is an Orrick partner in the technology companies group.

Stephen Thau is an Orrick partner in the firm’s technology companies group and co-chair of the life sciences practice.

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