Right now’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 traditional knowledge goes within the fairness capital markets nowadays.
Whereas it could be the prevailing wind, an innovation ecosystem that allocates capital solely to later stage belongings dangers exhibiting a fairly unhealthy mix of funding myopia and historic amnesia. The tone of at present’s market reveals it’s near struggling these latter circumstances.
As context, biotech enterprise fashions have largely had two flavors for many years: asset-centric investments centered on particular product alternatives and platforms (discovery engines) designed to create new medicine primarily based on novel modalities, applied sciences, or organic insights.
The previous is narrower in focus and usually extra incremental, the latter broader in aperture typically extra transformational – however the aspiration of each is to carry new medicines of worth to sufferers. Ultimately, if they’re profitable, even platforms change into valued for his or her later stage belongings; regardless of that convergence on valuation frameworks over time, the company journey to get there may be very totally different for these two forms of fashions, as is their affect on the innovation ecosystem. Additionally they face a special set of dangers: scientific dangers, monetary dangers, aggressive/differentiation dangers, binary and idiosyncratic dangers, and so on…
It’s value noting, nevertheless, that the truth on the bottom in biotech firms is extra of a fluid continuum than a polar dichotomy between these two fashions; unsurprisingly, this can be a nuance misplaced within the less complicated narrative of belongings vs platforms.
Right now’s frequent chorus round “assets-in, platforms-out” is pervasive. Partly an inexpensive and justified response to the over-hyped “huge science mission” platforms funded in the course of the pandemic bubble, this sentiment must thought of within the context of how the innovation pendulum swings forwards and backwards over cycles. Historical past typically rhymes, and enjoying the lengthy recreation requires integrating and anticipating these cycles into one’s funding calculus.
At Atlas, over the previous few many years we’ve got 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 allows us to generate enticing returns throughout market cycles.
The flexibility 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 term view. Resisting the myopic temptation to solely put money into “what’s sizzling proper now” is critically vital. With out assistance from crystal balls, we’ve got to look out 5-10 years and make bets about the place innovation shall be most impactful. Drug discovery firms we create now will possible solely be in later stage growth 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 in the event you’re a long run, early stage investor.
With the intention to be a profitable investor in early R&D platforms, the important thing guideline is straightforward: be even handed 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 –usually, and throughout cycles, returns will accrue. The particular methods to do that might (ought to!) be the topic of a whole weblog, however we imagine seed-led fashions that derisk underlying science earlier than including scale-stage capital is a crucial component: earn the fitting to develop into an enormous story. Leveraging companion capital to develop the aperture of a platform by working extra broadly, integrating the invention learnings throughout partnered and proprietary applications – this reduces the fairness burn whereas additionally enhancing the size of the platform itself. Preserve fastened infrastructure prices centered on the differentiated insights and capabilities, whereas outsourcing commodity capabilities. The listing goes on…
In brief, underwriting threat to fund revolutionary platforms that span a number of funding cycles can and can stay an vital driver of each affected person and investor worth.
That mentioned, nearer time period asset-centric funding alternatives additionally exist, and supply up enticing returns in numerous elements of the cycle, particularly excessive price of capital environments like at present. In-licensing molecules from different gamers, because of a companion’s strategic shifts, price range challenges, or geographic entry, will be a good way to jumpstart early stage firms round extra superior belongings. Lacking out on a lot of these offers would diminish long-term returns for a fund, which is why a diversified portfolio is so vital – and we’ve performed our fair proportion of those form of investments. It’s very clear the market at present is happy about these alternatives.
The fixed biking of sentiment, and the fluctuating willingness of the market to underwrite innovation threat, is an important actuality in a fluid dynamic market. Areas get over-bought or over-sold at totally different levels of the sector. In enterprise, the place the ultra-long-bias of illiquid non-public investments imply you’ll be able to’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 an alternative, expertise and historical past recommend that constructing balanced and various enterprise portfolios is the important thing to producing returns throughout totally different vintages – and for investing in a sustainable innovation ecosystem.
Over the previous 25 years, we’ve witnessed three vital durations of time the place this “asset-in, platforms-out” psychology has been embraced, they usually 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 medicine) as a option 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 broadly referred to as the “genomics bubble” – enterprise capitalists and public market traders fueled an ebullient second within the markets (alongside a fair bigger dot.com bubble). Like all bubbles, some loopy concepts acquired 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 outdated lively medicine, repurposing to new indications, geographic arbitrage, and me-too/me-better’s in crowded however derisked courses. This was all the fashion for a lot of traders twenty years in the past.
Atlas invested in quite a lot of these, particularly out of Europe: Prestwick Pharma, which I used to be concerned with, took a tetrabenazine (Xenazine), an outdated 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 outdated 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 medicine with “low technical threat” had 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 fairly me-too AML drug to change into 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 finally 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 aimed 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 take a position 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 had been again in vogue, and platforms had been actually powerful to realize market traction.
Simply have a look at the IPO courses of 2010 and 2011: virtually all had 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 in an effort to name it a “late stage” story).
Beginning platforms on this interval was difficult from a fundraising perspective – a lot of traders wouldn’t contact drug discovery tales, and our syndicate companions modified to virtually all company enterprise strategics throughout this time. It took us two years to lift a small Collection 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) had been began throughout this time. We additionally tried to create asset-centric “platforms” just like the Atlas Enterprise Growth Corp to resolve a few of the market’s challenges; Arteaus and Annovation got here out of that effort. The previous performed a key function within the growth 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 had been additionally quietly constructing platforms: Argenx (2008), Kite Pharma (2009), Moderna (2010), Beigene (2010), and Blueprint (2011), amongst others, had been all began/funded throughout this risk-off time period. None of their seed or Collection A rounds had been very huge – however their visions had been.
Throughout this harder a part of the cycle, ideas round fairness capital effectivity had been crystallized: doing extra with much less, digital vs in-house capabilities, managing variable vs fastened prices, and avoiding extra dilution through higher capital allocation and partnering. set of our offers in that classic had been leanly staffed, partnered actively with Pharma, and tranched investments as threat got here out of the applications. These quaint ideas are nonetheless very related at present, even when they had been largely ignored in the course of the biotech fairness increase that occurred subsequent.
The 2013-2021 interval was an unimaginable secular bull marketplace for biotech, with only some difficult quarters (e.g., late 2015, late 2018). “Danger-on” was again, and platforms had 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 optimistic 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 had 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 quite a lot of nice tales throughout this era (e.g., Intellia, Kymera, Dyne, Replimune, and so on). 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 nil rates of interest, the funding setting misplaced self-discipline and went bubblicious. IPOs had 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 an alternative of beginning 60-80 firms 1 / 4, the sector tried to begin 3-4x that quantity. Administration expertise was unfold thinly and illness areas and modalities turned hyper-competitive shortly.
Many loopy science mission “platforms” had been launched with hypelines and mega-rounds in the course of the latest bubble. Some blew up practically as shortly as they appeared (e.g., Tome, Saliogen) and lots of have needed to retool/refocus and cut back their aspirations. Past burning a lot of 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 tasks which have been 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 acquired pummeled, each good and unhealthy firms. The infant of actual innovation acquired thrown out with the bathtub 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, typically extra incremental in nature. As proof of that, the overwhelming majority of the IPOs this yr are later stage belongings, typically in Part 3, and steadily towards validated targets fairly than novel biology. We’ve seen a wave of very profitable investments aimed toward incremental improvements to recognized biology: engineered long-lived merchandise on validated MoA’s, reformulations of medication for supply to totally different organs, geographic arbitrage… looks like déjà vu from 2002-2005 and 2009-2012…
The danger-off “low innovation quotient” playbook is actually again in favor in 2024. Importantly, many of those might find yourself being vital new medicines providing higher comfort, improved tolerability, and probably higher efficacy than predicate merchandise. There’s positively a spot out there, and within the therapeutic armamentarium, for incremental innovation. And Atlas has actually checked out and invested in a few of these alternatives. However importantly, we don’t bias total 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 many years below our belts, we all know it’ll swing again: excessive threat, excessive innovation offers shall be again – hopefully bringing transformative medicines ahead for the advantage of sufferers and traders alike. Nevertheless 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.
