Today’s market likes products. Platforms aren’t in vogue anymore. Investors, especially in the public markets, only want late stage de-risked assets. Pharma only seems to be buying these kinds of asset. VCs need to focus on clinical stage companies. Or so the conventional wisdom goes in the equity capital markets these days.
While it may be the prevailing wind, an innovation ecosystem that allocates capital only to later stage assets risks exhibiting a rather unhealthy blend of investment myopia and historical amnesia. The tone of today’s market reveals it’s close to suffering those latter conditions.
As context, biotech business models have largely had two flavors for decades: asset-centric investments focused on specific product opportunities and platforms (discovery engines) designed to create new drugs based on novel modalities, technologies, or biological insights.
The former is narrower in focus and typically more incremental, the latter broader in aperture often more transformational – but the aspiration of both is to bring new medicines of value to patients. Eventually, if they are successful, even platforms become valued for their later stage assets; despite that convergence on valuation frameworks over time, the corporate journey to get there is very different for these two types of models, as is their impact on the innovation ecosystem. They also face a different set of risks: scientific risks, financial risks, competitive/differentiation risks, binary and idiosyncratic risks, etc…
It’s worth noting, however, that the reality on the ground in biotech companies is more of a fluid continuum than a polar dichotomy between these two models; unsurprisingly, this is a nuance lost in the simpler narrative of assets vs platforms.
Today’s common refrain around “assets-in, platforms-out” is pervasive. In part a reasonable and justified reaction to the over-hyped “big science project” platforms funded during the pandemic bubble, this sentiment needs to considered in the context of how the innovation pendulum swings back and forth over cycles. History often rhymes, and playing the long game requires integrating and anticipating those cycles into one’s investment calculus.
At Atlas, over the past few decades we have always been science-first investors, and thus have built portfolios of investments that span across the two models: broader discovery-engine platforms and asset-centric product bets. Having a portfolio with exposure to the full continuum enables us to generate attractive returns across market cycles.
The ability to navigate the volatility (both in sentiment and in stock prices) across longer time frames is why its imperative for early stage investors to take a longer term view. Resisting the myopic temptation to only invest in “what’s hot right now” is critically important. Without the aid of crystal balls, we have to look out 5-10 years and make bets about where innovation will be most impactful. Drug discovery companies we create now will likely only be in later stage development in a decade, if we’re lucky. And since capital market cycles happen over both 2-3 year moves and decadal timeframes, to be successful we must look out over multiple investment horizons. The “what’s hot right now” myopia that barely sees beyond the current horizon isn’t very enabling if you’re a long term, early stage investor.
In order to be a successful investor in early R&D platforms, the key guiding principle is simple: be judicious how you spend scarce time and expensive money to derisk science, and focus on making innovative medicines that matter for patients over the long run –in most cases, and across cycles, returns will accrue. The specific strategies to do this could (should!) be the subject of an entire blog, but we believe seed-led models that derisk underlying science before adding scale-stage capital is an important element: earn the right to grow into a big story. Leveraging partner capital to expand the aperture of a platform by working more broadly, integrating the discovery learnings across partnered and proprietary programs – this reduces the equity burn while also enhancing the scale of the platform itself. Keep fixed infrastructure costs focused on the differentiated insights and capabilities, while outsourcing commodity functions. The list goes on…
In short, underwriting risk to fund innovative platforms that span multiple investment cycles can and will remain an important driver of both patient and investor value.
That said, nearer term asset-centric investment opportunities also exist, and offer up attractive returns in different parts of the cycle, especially high cost of capital environments like today. In-licensing molecules from other players, due to a partner’s strategic shifts, budget challenges, or geographic access, can be a great way to jumpstart early stage companies around more advanced assets. Missing out on these types of deals would diminish long-term returns for a fund, which is why a diversified portfolio is so critical – and we’ve done our fair share of these kind of investments. It’s very clear the market today is excited about these opportunities.
The constant cycling of sentiment, and the fluctuating willingness of the market to underwrite innovation risk, is an essential reality in a fluid dynamic market. Spaces get over-bought or over-sold at different stages of the sector. In venture, where the ultra-long-bias of illiquid private investments mean you can’t instantly change your portfolio construction, responding violently to changes in the cycle (and what’s hot right now) is a recipe for chaos.
Instead, experience and history suggest that building balanced and diverse venture portfolios is the key to generating returns across different vintages – and for investing in a sustainable innovation ecosystem.
Over the past 25 years, we’ve witnessed three significant periods of time where this “asset-in, platforms-out” psychology has been embraced, and they always occur during “risk-off” periods when the equity capital markets tighten up. In each moment, we’ve seen a reversion to asset incrementalism (e.g., me-too or lower innovation quotient drugs) as a way to “survive” challenging biotech capital markets.
Here’s a history lesson on these asset-platform cycles…
In 1999-2001, biotech experienced what is widely called the “genomics bubble” – venture capitalists and public market investors fueled an ebullient moment in the markets (alongside an even larger dot.com bubble). Like all bubbles, some crazy ideas got funded, and funded excessively. In its aftermath, the nuclear winter of 2002-2005 occurred in the capital markets, and it had a profoundly “anti-platform” bias. This was when the “spec pharma” business model began to take off: reformulating old active drugs, repurposing to new indications, geographic arbitrage, and me-too/me-better’s in crowded but derisked classes. This was all the rage for many investors twenty years ago.
Atlas invested in a number of these, in particular out of Europe: Prestwick Pharma, which I was involved with, took a tetrabenazine (Xenazine), an old Huntington’s Disease drug out of Europe, and brought it to the US; Horizon (then Nitec) made a delayed release prednisone for arthritis; Ivrea took an old anti-fungal and tried to make a better toenail-penetrating agent; Sirion made some eye-specific products from a corticosteroid and anti-viral, among other deals. Some worked and some didn’t. But risk was “off”, and incremental drugs with “low technical risk” were the flavor du jour.
Further, to make earlier stage platforms “interesting” to the markets, we did unnatural acts: for example, SGX Pharma, an early pioneer in fragment-based drug discovery, in-licensed a rather me-too AML drug to become a “late stage” story – stapling on that asset to “accelerate” its oncology franchise. That deal catalyzed it’s next financing and IPO… but the asset eventually failed.
Thankfully, Atlas didn’t just do these asset plays. We also helped start and fund innovative new platforms during this risk-off period: Alnylam was started in 2002 to pioneer the field of RNAi; Momenta was aimed at harnessing an understanding of glycan biology; Vitae in structure-based drug design; and, Adnexus in novel protein scaffolds, among others.
As the cycle progressed after 2005, the market’s risk appetite returned a bit before the financial crisis, and investors started to invest more actively across the asset-and-platform spectrum again. 
With the Great Financial Crisis, the risk-off sentiment returned with a vengeance. From 2009-2012, spec pharma and later stage asset plays were back in vogue, and platforms were really tough to gain market traction.
Just look at the IPO classes of 2010 and 2011: almost all were late stage or marketed “low tech” or “me-too” assets, like Alimera’s reformulation for eye disease, Pacira’s bupivicane reformulation, Clovis’ portfolio of in-licensed cancer assets, and AVEO’s tivozanib, then in Phase 3 (which, like SGX, was in-licensed onto the AVEO oncology platform in order to call it a “late stage” story).
Starting platforms in this period was challenging from a fundraising perspective – lots of investors wouldn’t touch drug discovery stories, and our syndicate partners changed to almost all corporate venture strategics during this time. It took us two years to raise a small Series A for Nimbus (with two corporate VCs), which we co-founded in spring of 2009 as a new platform for computer-aided drug discovery with Schrodinger. RaNA (which became Translate), Bicycle (macrocycle-conjugates), and CoStim (I/O) were started during this time. We also tried to create asset-centric “platforms” like the Atlas Venture Development Corp to solve some of the market’s challenges; Arteaus and Annovation came out of that effort. The former played a key role in the development of Lilly’s migraine drug Emgality.
While much of venture was busy focusing on those spec pharm and in-licensing stories during this period, early stage investors with a commitment to innovation were also quietly building platforms: Argenx (2008), Kite Pharma (2009), Moderna (2010), Beigene (2010), and Blueprint (2011), among others, were all started/funded during this risk-off period of time. None of their seed or Series A rounds were very big – but their visions were.
During this tougher part of the cycle, concepts around equity capital efficiency were crystallized: doing more with less, virtual vs in-house capabilities, managing variable vs fixed costs, and avoiding excess dilution thru better capital allocation and partnering. A good set of our deals in that vintage were leanly staffed, partnered actively with Pharma, and tranched investments as risk came out of the programs. These quaint concepts are still very relevant today, even if they were largely ignored during the biotech equity boom that happened next.
The 2013-2021 period was an incredible secular bull market for biotech, with only a few challenging quarters (e.g., late 2015, late 2018). “Risk-on” was back, and platforms were cool again, along with innovative assets. With low interest rates, a primed public/IPO market (via the JOBS Act), and Pharma’s increased external innovation push, all the stars aligned for a positive super-cycle. The cost of capital dropped steadily over the decade, and the sector was underwriting risk and innovation more actively. During this time, novel science-heavy platforms were “hot” and well-funded: CRISPR, gene therapy, CAR-T, Targeted Protein Degradation, oligo/mRNAs, next gen chemistry, ADCs, Radiopharm, bispecifics…
Truly an amazing period, and Atlas started and backed a number of great stories during this period (e.g., Intellia, Kymera, Dyne, Replimune, etc). Even during this golden age for platforms, we also did many asset-centric deals around novel biology and unique pharmacology, like Delinia, Akero, Vedere, LTI, Rodin, Cadent, and others; diversification of the underlying business models in the portfolio is a core principle for us.
Undoubtedly, the froth in the markets became excessive. With the COVID pandemic response flooding the market with capital, and zero interest rates, the funding environment lost discipline and went bubblicious. IPOs were flying out of the oven like bread at a bakery. We added 200+ public names in the few years up to the peak in 2021. Instead of starting 60-80 companies a quarter, the sector tried to start 3-4x that number. Management talent was spread thinly and disease areas and modalities became hyper-competitive quickly.
Many crazy science project “platforms” were launched with hypelines and mega-rounds during the recent bubble. Some blew up nearly as quickly as they appeared (e.g., Tome, Saliogen) and many have had to retool/refocus and scale back their aspirations. Beyond burning lots of investor capital, these high profile challenges also sully the name of scientifically-sound and financially-prudent platform efforts – creating blow back that hurts the underwriting of risk subsequently. While asset-centric companies still fail, and not infrequently given attrition in R&D, they seem lower risk to some relative to the wild and crazy science projects that have been backed.
Once the bottom fell out of the capital markets, starting in Feb 2021 and continuing until June 2022, irrational exuberance changed to indiscriminate punishment. The whole sector got pummeled, both good and bad companies. The baby of real innovation got thrown out with the bath water.
As the dust settled, the markets again cycled back to an “assets-in, platforms-out” sentiment. This risk-off psychology sent funds predominantly to product stories, often more incremental in nature. As evidence of that, the vast majority of the IPOs this year are later stage assets, often in Phase 3, and frequently against validated targets rather than novel biology. We’ve seen a wave of very successful investments aimed at incremental innovations to known biology: engineered long-lived products on validated MoA’s, reformulations of drugs for delivery to different organs, geographic arbitrage… seems like déjà vu from 2002-2005 and 2009-2012…
The risk-off “low innovation quotient” playbook is certainly back in favor in 2024. Importantly, many of these may end up being important new medicines offering better convenience, improved tolerability, and potentially better efficacy than predicate products. There’s definitely a place in the market, and in the therapeutic armamentarium, for incremental innovation. And Atlas has certainly looked at and invested in some of these opportunities. But importantly, we don’t bias entire vintages to these asset-specific deals.
The resetting of the market in the past two years has been a healthy one for the long term, and hopefully helped elevate themes of capital efficiency and discipline back into the early stage investment model. But there’s a point where the pendulum between assets and platforms has swung too far, and we might be reaching it.
For those of us with few decades under our belts, we know it will swing back: high risk, high innovation deals will be back – hopefully bringing transformative medicines forward for the benefit of patients and investors alike. But it requires a long-term view that embraces the cyclicality of our sector – and the patience to see multiple horizons ahead of us.
