At the moment’s market likes merchandise. Platforms aren’t in vogue anymore. Buyers, particularly within the public markets, solely need late stage de-risked belongings. Pharma solely appears to be shopping for these sorts of asset. VCs must concentrate on scientific stage firms. Or so the standard knowledge goes within the fairness capital markets nowadays.
Whereas it might be the prevailing wind, an innovation ecosystem that allocates capital solely to later stage belongings dangers exhibiting a somewhat unhealthy mix of funding myopia and historic amnesia. The tone of at the moment’s market reveals it’s near struggling these latter situations.
As context, biotech enterprise fashions have largely had two flavors for many years: asset-centric investments targeted on particular product alternatives and platforms (discovery engines) designed to create new medication based mostly on novel modalities, applied sciences, or organic insights.
The previous is narrower in focus and sometimes extra incremental, the latter broader in aperture usually extra transformational – however the aspiration of each is to carry new medicines of worth to sufferers. Ultimately, if they’re profitable, even platforms grow to be valued for his or her later stage belongings; regardless of that convergence on valuation frameworks over time, the company journey to get there’s very completely different for these two varieties of fashions, as is their influence on the innovation ecosystem. In addition they face a unique set of dangers: scientific dangers, monetary dangers, aggressive/differentiation dangers, binary and idiosyncratic dangers, and many others…
It’s value noting, nonetheless, that the truth on the bottom in biotech firms is extra of a fluid continuum than a polar dichotomy between these two fashions; unsurprisingly, it is a nuance misplaced within the less complicated narrative of belongings vs platforms.
At the moment’s frequent chorus round “assets-in, platforms-out” is pervasive. Partially an affordable and justified response to the over-hyped “large science undertaking” platforms funded in the course of the pandemic bubble, this sentiment must thought-about within the context of how the innovation pendulum swings forwards and backwards over cycles. Historical past usually rhymes, and taking part in the lengthy sport requires integrating and anticipating these cycles into one’s funding calculus.
At Atlas, over the previous few a long time now we have at all times been science-first traders, and thus have constructed portfolios of investments that span throughout the 2 fashions: broader discovery-engine platforms and asset-centric product bets. Having a portfolio with publicity to the complete continuum permits us to generate enticing returns throughout market cycles.
The power to navigate the volatility (each in sentiment and in inventory costs) throughout longer time frames is why its crucial for early stage traders to take a long run view. Resisting the myopic temptation to solely spend money on “what’s sizzling proper now” is critically essential. With out the help of crystal balls, now we have to look out 5-10 years and make bets about the place innovation might be most impactful. Drug discovery firms we create now will probably solely be in later stage improvement in a decade, if we’re fortunate. And since capital market cycles occur over each 2-3 yr strikes and decadal timeframes, to achieve success we should look out over a number of funding horizons. The “what’s sizzling proper now” myopia that hardly sees past the present horizon isn’t very enabling if you happen to’re a long run, early stage investor.
With a purpose to be a profitable investor in early R&D platforms, the important thing guideline is straightforward: be considered the way you spend scarce time and costly cash to derisk science, and concentrate on making revolutionary medicines that matter for sufferers over the long term –most often, and throughout cycles, returns will accrue. The particular methods to do that might (ought to!) be the topic of a complete weblog, however we imagine seed-led fashions that derisk underlying science earlier than including scale-stage capital is a crucial factor: earn the suitable to develop into an enormous story. Leveraging associate capital to develop the aperture of a platform by working extra broadly, integrating the invention learnings throughout partnered and proprietary packages – this reduces the fairness burn whereas additionally enhancing the dimensions of the platform itself. Hold mounted infrastructure prices targeted on the differentiated insights and capabilities, whereas outsourcing commodity capabilities. The checklist goes on…
In brief, underwriting threat to fund revolutionary platforms that span a number of funding cycles can and can stay an essential driver of each affected person and investor worth.
That stated, nearer time period asset-centric funding alternatives additionally exist, and supply up enticing returns in numerous components of the cycle, particularly excessive price of capital environments like at the moment. In-licensing molecules from different gamers, because of a associate’s strategic shifts, funds challenges, or geographic entry, may be an effective way to jumpstart early stage firms round extra superior belongings. Lacking out on all these offers would diminish long-term returns for a fund, which is why a diversified portfolio is so crucial – and we’ve achieved our fair proportion of those type of investments. It’s very clear the market at the moment is worked up about these alternatives.
The fixed biking of sentiment, and the fluctuating willingness of the market to underwrite innovation threat, is a vital actuality in a fluid dynamic market. Areas get over-bought or over-sold at completely different levels of the sector. In enterprise, the place the ultra-long-bias of illiquid personal investments imply you may’t immediately change your portfolio building, responding violently to modifications within the cycle (and what’s sizzling proper now) is a recipe for chaos.
As a substitute, expertise and historical past counsel that constructing balanced and various enterprise portfolios is the important thing to producing returns throughout completely different vintages – and for investing in a sustainable innovation ecosystem.
Over the previous 25 years, we’ve witnessed three important durations of time the place this “asset-in, platforms-out” psychology has been embraced, and so they at all times happen throughout “risk-off” durations when the fairness capital markets tighten up. In every second, we’ve seen a reversion to asset incrementalism (e.g., me-too or decrease innovation quotient medication) as a strategy to “survive” difficult biotech capital markets.
Right here’s a historical past lesson on these asset-platform cycles…
In 1999-2001, biotech skilled what’s extensively referred to as the “genomics bubble” – enterprise capitalists and public market traders fueled an ebullient second within the markets (alongside an excellent bigger dot.com bubble). Like all bubbles, some loopy concepts obtained funded, and funded excessively. In its aftermath, the nuclear winter of 2002-2005 occurred within the capital markets, and it had a profoundly “anti-platform” bias. This was when the “spec pharma” enterprise mannequin started to take off: reformulating previous lively medication, repurposing to new indications, geographic arbitrage, and me-too/me-better’s in crowded however derisked lessons. This was all the craze for a lot of traders twenty years in the past.
Atlas invested in a lot of these, particularly out of Europe: Prestwick Pharma, which I used to be concerned with, took a tetrabenazine (Xenazine), an previous Huntington’s Illness drug out of Europe, and introduced it to the US; Horizon (then Nitec) made a delayed launch prednisone for arthritis; Ivrea took an previous anti-fungal and tried to make a greater toenail-penetrating agent; Sirion made some eye-specific merchandise from a corticosteroid and anti-viral, amongst different offers. Some labored and a few didn’t. However threat was “off”, and incremental medication with “low technical threat” have been the flavour du jour.
Additional, to make earlier stage platforms “attention-grabbing” to the markets, we did unnatural acts: for instance, SGX Pharma, an early pioneer in fragment-based drug discovery, in-licensed a somewhat me-too AML drug to grow to be a “late stage” story – stapling on that asset to “speed up” its oncology franchise. That deal catalyzed it’s subsequent financing and IPO… however the asset ultimately failed.
Fortunately, Atlas didn’t simply do these asset performs. We additionally helped begin and fund revolutionary new platforms throughout this risk-off interval: Alnylam was began in 2002 to pioneer the sector of RNAi; Momenta was geared toward harnessing an understanding of glycan biology; Vitae in structure-based drug design; and, Adnexus in novel protein scaffolds, amongst others.
Because the cycle progressed after 2005, the market’s threat urge for food returned a bit earlier than the monetary disaster, and traders began to speculate extra actively throughout the asset-and-platform spectrum once more. 
With the Nice Monetary Disaster, the risk-off sentiment returned with a vengeance. From 2009-2012, spec pharma and later stage asset performs have been again in vogue, and platforms have been actually robust to realize market traction.
Simply have a look at the IPO lessons of 2010 and 2011: nearly all have been late stage or marketed “low tech” or “me-too” belongings, like Alimera’s reformulation for eye illness, Pacira’s bupivicane reformulation, Clovis’ portfolio of in-licensed most cancers belongings, and AVEO’s tivozanib, then in Part 3 (which, like SGX, was in-licensed onto the AVEO oncology platform with a view to name it a “late stage” story).
Beginning platforms on this interval was difficult from a fundraising perspective – numerous traders wouldn’t contact drug discovery tales, and our syndicate companions modified to nearly all company enterprise strategics throughout this time. It took us two years to boost a small Sequence A for Nimbus (with two company VCs), which we co-founded in spring of 2009 as a brand new platform for computer-aided drug discovery with Schrodinger. RaNA (which turned Translate), Bicycle (macrocycle-conjugates), and CoStim (I/O) have been began throughout this time. We additionally tried to create asset-centric “platforms” just like the Atlas Enterprise Improvement Corp to resolve among the market’s challenges; Arteaus and Annovation got here out of that effort. The previous performed a key function within the improvement of Lilly’s migraine drug Emgality.
Whereas a lot of enterprise was busy specializing in these spec pharm and in-licensing tales throughout this era, early stage traders with a dedication to innovation have been additionally quietly constructing platforms: Argenx (2008), Kite Pharma (2009), Moderna (2010), Beigene (2010), and Blueprint (2011), amongst others, have been all began/funded throughout this risk-off time period. None of their seed or Sequence A rounds have been very large – however their visions have been.
Throughout this harder a part of the cycle, ideas round fairness capital effectivity have been crystallized: doing extra with much less, digital vs in-house capabilities, managing variable vs mounted prices, and avoiding extra dilution via higher capital allocation and partnering. A superb set of our offers in that classic have been leanly staffed, partnered actively with Pharma, and tranched investments as threat got here out of the packages. These quaint ideas are nonetheless very related at the moment, even when they have been largely ignored in the course of the biotech fairness growth that occurred subsequent.
The 2013-2021 interval was an unbelievable secular bull marketplace for biotech, with only some difficult quarters (e.g., late 2015, late 2018). “Threat-on” was again, and platforms have been cool once more, together with revolutionary belongings. With low rates of interest, a primed public/IPO market (by way of the JOBS Act), and Pharma’s elevated exterior innovation push, all the celebs aligned for a constructive super-cycle. The price of capital dropped steadily over the last decade, and the sector was underwriting threat and innovation extra actively. Throughout this time, novel science-heavy platforms have been “sizzling” and well-funded: CRISPR, gene remedy, CAR-T, Focused Protein Degradation, oligo/mRNAs, subsequent gen chemistry, ADCs, Radiopharm, bispecifics…
Actually a tremendous interval, and Atlas began and backed a lot of nice tales throughout this era (e.g., Intellia, Kymera, Dyne, Replimune, and many others). Even throughout this golden age for platforms, we additionally did many asset-centric offers round novel biology and distinctive pharmacology, like Delinia, Akero, Vedere, LTI, Rodin, Cadent, and others; diversification of the underlying enterprise fashions within the portfolio is a core precept for us.
Undoubtedly, the froth within the markets turned extreme. With the COVID pandemic response flooding the market with capital, and 0 rates of interest, the funding setting misplaced self-discipline and went bubblicious. IPOs have been flying out of the oven like bread at a bakery. We added 200+ public names within the few years as much as the height in 2021. As a substitute of beginning 60-80 firms 1 / 4, the sector tried to start out 3-4x that quantity. Administration expertise was unfold thinly and illness areas and modalities turned hyper-competitive shortly.
Many loopy science undertaking “platforms” have been launched with hypelines and mega-rounds in the course of the current bubble. Some blew up almost as shortly as they appeared (e.g., Tome, Saliogen) and lots of have needed to retool/refocus and cut back their aspirations. Past burning numerous investor capital, these excessive profile challenges additionally sully the identify of scientifically-sound and financially-prudent platform efforts – creating blow again that hurts the underwriting of threat subsequently. Whereas asset-centric firms nonetheless fail, and never occasionally given attrition in R&D, they appear decrease threat to some relative to the wild and loopy science initiatives which were backed.
As soon as the underside fell out of the capital markets, beginning in Feb 2021 and persevering with till June 2022, irrational exuberance modified to indiscriminate punishment. The entire sector obtained pummeled, each good and dangerous firms. The infant of actual innovation obtained thrown out with the tub water.
Because the mud settled, the markets once more cycled again to an “assets-in, platforms-out” sentiment. This risk-off psychology despatched funds predominantly to product tales, usually extra incremental in nature. As proof of that, the overwhelming majority of the IPOs this yr are later stage belongings, usually in Part 3, and steadily towards validated targets somewhat than novel biology. We’ve seen a wave of very profitable investments geared toward incremental improvements to recognized biology: engineered long-lived merchandise on validated MoA’s, reformulations of medication for supply to completely different organs, geographic arbitrage… looks like déjà vu from 2002-2005 and 2009-2012…
The chance-off “low innovation quotient” playbook is definitely again in favor in 2024. Importantly, many of those might find yourself being essential new medicines providing higher comfort, improved tolerability, and probably higher efficacy than predicate merchandise. There’s undoubtedly a spot available in the market, and within the therapeutic armamentarium, for incremental innovation. And Atlas has definitely checked out and invested in a few of these alternatives. However importantly, we don’t bias complete vintages to those asset-specific offers.
The resetting of the market prior to now two years has been a wholesome one for the long run, and hopefully helped elevate themes of capital effectivity and self-discipline again into the early stage funding mannequin. However there’s a degree the place the pendulum between belongings and platforms has swung too far, and we is perhaps reaching it.
For these of us with few a long time underneath our belts, we all know it’s going to swing again: excessive threat, excessive innovation offers might be again – hopefully bringing transformative medicines ahead for the good thing about sufferers and traders alike. However it requires a long-term view that embraces the cyclicality of our sector – and the persistence to see a number of horizons forward of us.
