In early 2013, I enlisted as an entrepreneur-in-residence (EIR) with the Atlas Venture life science investment team as the firm focused on a seed-led investing strategy as a core tenant of Fund IX (here). I viewed it as a great opportunity to see a range of discovery through early clinical stage opportunities, one or two of which might align with my interests. After 18 months of twists and turns, I’m pleased (and pleasantly surprised!) to say that it’s gone largely as I hoped. In a similar spirit to Jonathan Montagu’s recent “under the hood” posting on Nimbus (here), I thought it might be interesting to share some observations from operating inside the Atlas seed portfolio.
Some quick background information… Since the beginning of 2013, Atlas has invested in about a dozen new seed companies most of which are based, in part, on academic findings from the Boston/Cambridge area (here). Each company received an initial bolus of up to $1M from Atlas (and, in some cases, more from other co-investors) to confirm and expand upon key scientific findings providing the “wet” diligence that, along with corporate investor or partner interest, is required to graduate out of the seed pool into a Series A backed company. Spero and Ataxion are a couple recent examples of successful seed pool graduates, each receiving sizeable Series A’s, as well as option-to-acquire deals with Roche and Biogen, respectively (here). And as expected, there are also a couple seeds that are unlikely to sprout having failed to deliver on their early promise.
The majority of these Fund IX seed investments are asset-centric plays, with tightly defined hypotheses, run out of the Atlas offices by fellow EIRs; this narrow initial focus preserves the optionality of either advancing a single-asset company or using the seed-stage validation to nucleate a broader, biology-led platform company. This seed-led portfolio construction also places a large emphasis on lean, virtual teams advancing research programs through carefully managed collaborations with contract research organizations (CROs) and academic collaborators.
In preparation for an Atlas offsite earlier this year, I informally polled the management teams of 16 life science portfolio companies for how they engage with CROs to advance their programs. We captured metrics around the numbers, types, and geographical locations of CROs, along with who’s delivering and who’s not. Finally, we asked for insights on lessons learned, as well as creative deal structures or other strategies to ensure alignment between external FTEs and the internal team.
Most of the Atlas companies surveyed have ?10 employees and range in stage from discovery through Phase 2. Half the surveyed companies are current members (or now, recent graduates) of the 2013 Atlas seed pool. All these seed stage companies are working on a specific target, pathway, or biologic concept linked to a critical disease mechanism, ranging from cerebellar ataxia to cancer cell metabolism. And nearly all are entirely virtual (i.e., no fume hoods or lab coats).
Some of the results:
- Operating virtually requires significant external leverage – On average, portfolio company respondents collaborate with ?2.0 individual service providers for every internal team member. This ratio expands dramatically when you factor in all the external FTEs per employee. For example, at Annovation Biopharma there are over 50 CRO-based FTEs and >15 consultants that are managed by a team of only 2.5 FTEs. Quartet Medicine, an aspiring seed pool graduate, has ~15 external CRO FTEs with a lean, internal team of 1.5 FTEs. This 10-20x ratio of external-to-internal FTEs is commonplace among the virtual companies in the Atlas portfolio.
- Creative deal-making helps stretch seed budgets and align teams – Half of the Atlas seed company respondents have struck risk-sharing agreements with their drug discovery partners. These arrangements typically involve either reduced or deferred research costs in exchange for equity grants and/or milestone payments tied to timely achievement of goals. These deal structures also help align the project teams and senior management at the CROs with the deliverables of the smaller, virtual biotech – an additional driver beyond the near-term cost savings.
- The preferred “one-stop shops” are all overseas – Several Atlas companies work closely with drug discovery vendors that can provide an integrated service offering, usually some combination of high throughput screening, medchem, critical in vitro assays, ADME and PK. All of these service providers are based in the UK, EU or Asia despite the fact that all the survey respondents are US-based. Groups like Aptuit, Evotec and ChemPartner rose to the top of the preferred integrated service provider list amongst the portfolio. This is a clear indication that, despite being small, virtual companies are willing to seek out best-in-class CRO partners regardless of their time zone.
- US vendors tend to provide specialty services – Of course, US CROs also play a prominent role in the Atlas portfolio. Although, the domestic groups are tapped to provide more focused offerings (e.g., crystallography, in vivo pharmacology models) or services at a later R&D stage, such as GLP toxicology testing. Emerald Bio, PsychoGenics, Pharmatek, Charles River Labs and Huntingdon Life Sciences all received high marks in their various disciplines.
A couple candid lessons (re-)learned:
There were also some insightful lessons learned, several of which centered on “one size does not fit all” when it comes to managing a virtual company.
For example, one earlier vintage seed company (which shall remain nameless to protect the innocent) elected a virtual operating model for proving out a promising, early stage antibody discovery platform. The platform required complicated cell based manipulations, in vivo immunization and B cell expansion, followed by downstream cell harvesting and cloning procedures. In this case, the founding science proved challenging to replicate in the hands of a group of CROs, in part because key steps had not been properly optimized prior to outsourcing. Having a couple dedicated cell biologists/antibody experts at a bench in LabCentral may have helped crack the code on the protocol. A reminder that companies with platform technologies often require their own labs with their scientists banging away on hard science that’s best cracked by a dedicated team getting their hands dirty on a daily basis.
In a similar “one size doesn’t fit all” vein, another (again nameless) company embarked on a collaboration with the same CRO for both GMP manufacturing and GLP toxicology with the promise of a significant cost savings. The GMP campaign was completed to a high standard, although the preclinical toxicology team failed to execute the admittedly challenging tox program. The company’s management team proactively recognized the problem and was able to change toxicology vendors to deliver a high-quality IND without taking a major hit to their timelines or budget. As is often the case with law firms, one stop shopping with CROs, especially ones that bundle services across disparate disciplines, can fail to deliver on the cost or efficiency savings promised at the outset.
Insights and lessons from managing outsourced R&D continue to be frequent discussion threads amongst the Atlas team given both the importance of and inherent challenges with collaborating with CROs and academic labs to build successful virtual companies. Although, last week’s Zafgen IPO (ZFGN), an Atlas Fund VII investment and early virtual company pioneer, is a wonderful testament to what a superlative management team can achieve by successfully executing a virtual operating model.
Next up from me – a case study of assembling the nuts (entrepreneur & investors) and bolts (high quality science, early team & research collaborators) of a 2013 vintage Atlas seed company…stay tuned