We’re excited to announce two new collaborations today from our neuroscience portfolio – Quartet with Merck (here) and Rodin with Biogen (here) – to advance their programs into early clinical development. These are both young companies that we helped create and seed in the last two years.
These transactions are what we would call “build-to-buy” collaborations: they involve a joint R&D plan engineered to deliver specific milestones, and within a defined period of time the Pharma partner has the right to exercise an option to acquire the company. We’ve done several build-to-buy type deals recently, and have successfully exited both Arteaus with Lilly (here), and Annovation with The Medicine’s Company (here), in the past two years.
These early stage build-to-buy deals only represent about 25% of our overall portfolio allocation at Atlas, but help contribute a less correlated market exposure to our aggregate fund returns. They complement the rest (~75%) of our portfolio, which is focused on building leading platform and product companies like Intellia, Padlock, Surface, Synlogic, and Unum, to name a few. In our experience, this diversified biotech portfolio construction consistently generates returns across market cycles and exit climates.
I’ve described the seven common themes we’ve seen in the build-to-buy R&D collaborations that we’ve executed in the past (here for a post on Ataxion and Spero’s deals). I’ll review them here with an emphasis on the Quartet and Rodin stories; each of these deals…
- Pursue highly innovative pre-clinical programs within an asset-centric approach. These companies are ruthlessly focused on specific therapeutic hypotheses. Quartet on the role of the de novo BH4 pathway in pain (here), and Rodin on the role of specific HDACs in the regulation of learning and memory, aimed at Alzheimer’s and other cognitive disorders. Both are tackling innovative biology (novel targets), but leveraging long drug discovery experience in those fields.
- Operate as virtual, lean startups with little fixed cost infrastructure. Both Rodin and Quartet have fully enabled drug discovery programs, but run them virtually from our incubation space at Atlas. Both have 4-6 full time employees, but 25+ dedicated scientists at our partner CROs – including ChemPartner, Charles River, TCG, Wuxi, Insight Genetics, Covance, and many others, as well as Rodin co-founder Proteros. Padlock, a sister startup to these two, has been virtual for the past couple years as well, and just announced the shift to scale its platform with a hybrid model involving targeted wet labs (here). For now, we don’t see a need to do that at Rodin or Quartet with the network of partners we have in place today, though such a transition could be warranted in the future.
- Embrace Big Bio/Pharma partners who add real value. These are neuroscience deals tackling both novel biology and translational medicine hurdles, much like three predecessor build-to-buy type deals (Arteaus, Annovation, and Ataxion). This neuroscience bias in our build-to-buy portfolio is largely one more by accident than by design, but external R&D strategies in neuro make it a fertile ground for partnering in this manner. Biogen is clearly one of the industry’s leading players in Alzheimer’s and cognition, and Merck has a long history in the field of pain research and analgesic drug discovery. By bringing partners onto the team with deep expertise in those areas, we are able to tap into real know-how and institutional memory without being subsumed by large R&D organizations.
- Provide an attractive equity capital efficiency. These deals have been incredibly efficient to date with their use of equity capital, and both deals bring significant funding from their partners to help advance the programs over the next few years. It’s anticipated that less than $25M in equity capital will be spent through key clinical data on both of these programs – which is very productive when competitively benchmarked with other de novo discovery projects.
- Preserve the potential for top-decile, non-correlated returns. Because of the equity efficiency, these deals are targeting top decile venture returns through early clinical development, with exposure to the right-hand side of the return distribution through downstream milestones. Based on our ownership positions, each of these deals could return most if not all of the entire life science allocation of Fund IX if key milestones are met.
- Offer an enhanced capital velocity.As the bulk of the investments into these deals were recently deployed (or will be in the future), the holding period to an initial exit is within a few years for both deals, leading to attractive IRRs. This enhanced capital velocity helps compliment the “go-long” investments that comprise the majority of our portfolio (i.e., the 75% of the portfolio that aren’t build-to-buy deals).
- Maintain optionality around an independent path for the future. These companies both have great programs that we’d like to advance. Should the assets advance successfully but for whatever reason Merck and Biogen decline to exercise their options, these companies will be free to push forward unencumbered on their own. Preserving these options in the deal structure was an important consideration.
So that’s the quick summary of the “themes” of these deal structures, echoing past build-to-buy type deals.
Beyond the deal structures, as board chairman and founding investor of both companies, I’d like to also stress the importance of the teams behind these great young startups. Both companies are staffed with skilled, experienced drug discovery and development veterans – led by Kevin Pojasek, CEO and co-founder of Quartet, and Adam Rosenberg, CEO of Rodin – and these teams were able to inspire the confidence of the partners across the table at Merck and Biogen. Without these two solid teams, these deals would have never happened. Great people make great partnerships.
We’re looking forward to working with our new partners at Merck and Biogen, and together advancing new, innovative neuroscience drugs into the clinic and eventually to patients.
