Jason Rhodes is a two-decade biotech veteran and current Partner at Atlas Venture, an early-stage biotech investor and incubator. He has founded multiple biotechs and held C-level leadership and Board roles in successfully IPO’d and acquired biotechs including Dyne Therapeutics, Rectify Pharmaceuticals, Be Biopharma, and Disarm Therapeutics. Rhodes also led business development at Alnylam Pharmaceuticals – a leader in RNAi therapies – and is a graduate of the Wharton MBA program.

The Pulse: The theme of the conference this year is resilience, and I’d love to hear your thoughts on resilience from a biotech perspective. The high interest rate environment hasn’t been friendly to early-stage companies; how cautious Big Pharma generally is, and there’s always technical risk. From the point of view of an investor or founder, why should they stay in the space? 

Jason Rhodes: I think it’s always important to distinguish between fundamental secular forces and structural changes in an industry and to not be confused by cyclicality and volatility. 

Growth markets and biotech are volatile, and all markets are cyclical. Sometimes we can confuse volatility for a more fundamental change – that some of the underlying characteristics that drive innovation in the space are gone or have changed. I think that’s often a mistake, to confuse the two, and one that’s understandable from the point of view of the present moment. 

And then we forgot about what cyclicality looks like because, at a minimum since the 2008 financial crisis, we were in this low and declining interest rate environment that goes back to the 1980s – Paul Volcker and Ronald Reagan. I would say the lack of cyclicality in interest rates – that we’re coming through – is actually ahistorical. Now we’re in a higher interest rate environment, although arguably we’re at a peak, and we may well see rate cuts in 2024 as inflation returns to target levels.  

If I go to the first set of secular trends, biotech is in a fundamentally good place. We understand biology in a way that we didn’t not long ago. A lot of that comes out of advances from the Human Genome Project at the end of the last century, which is fun to see and say, that the science has actually paid off in terms of its impact on innovation. We keep understanding more about the drivers of disease and the ways in which we can drug them. The mechanistic and target space has gotten bigger.

At the same time, the range of therapeutic modalities – the toolkit that we have available to us to make new drugs – keeps growing in a way that’s incredible. It really is. If you rewind 10 years ago, we didn’t have approved AAV drugs (adeno-associated virus), we didn’t have cell therapy, we didn’t have CRISPR, and there were no approved RNAi products. Now we have all those things among lots of other innovation. 

Markets overshoot in both directions, and the biotech markets peaked in early 2021. The current environment is what happens towards the end of cycles – and this is the way capitalism works – and it’s a good thing, to wring out the excess, but it’s a painful thing. We overfunded the space; valuations go up, and the cost of capital goes down, and we fund more marginal opportunities than we should. That’s not a moral failing or necessarily even a failing of business judgment as you don’t know where the peak is (was) until you’re past it. It’s what markets do. 

We’re dealing with a market that was overfunded, and that had to be rationalized. There’s lots of science that hasn’t made it. That’s not fun for the companies that are going through that; it’s wrenching for those companies and for the people there because there are RIFs, and companies get shut down. We’re seeing lots of reverse mergers, which is a very rational thing to do, but not as much fun as when we’re in a building mode. 

I think what people do because of this recency bias, they mistake the stage of the cycle (the down stage) that we’re coming through for something deeper, saying, “Oh my gosh, the fundamentals are broken in biotech,” but that’s clearly not the case. And we are seeing ongoing financings, both for new companies and for post-Series A companies with compelling science and product programs, both privately and in the public markets, and a real and meaningful uptick in M&A for product companies with clinical data.

The Pulse: Atlas Venture’s model is distinct as both a seed funder and an incubator of biotechs. Can you share more on what makes it unique, and how this adapts to the specific risks of biotech? 

JR: Obviously there are lots of people who invest in companies that are already created, and they do well. That’s one model, and it’s a fine one.  

Of course, what happens with successful companies is that prices go up post-Series A, and it’s also very hard to get allocations. So even if you like the price, or even if you’re okay with the price, you may well not get as much as you would want to buy. An added advantage of founding and seeding companies is that we are the cap table along with the founders.

We then go through a seed process, and the logic of the seed process is that an awful lot of published scientific data doesn’t repeat. It’s well observed and acknowledged. You could say, “Yikes, that’s really alarming. Why isn’t all this data repeating? Is the field rife with scientific fraud?” 

But that is not the case, and it would be the wrong takeaway. Academic science is critical and, although it looks a lot like industrial R&D, they are not the same things. What we do during the seed phases, is we try to replicate and confirm the founding academic work, and a bunch of the times it just doesn’t repeat.

The challenge in biotech is that there is all this exogenous scientific risk, and I think historically, it was often the case that people over-invested before they discharged the fundamental scientific risk.

The nice thing about the seed approach is you can find that out – whether or not it repeats and can be confirmed and extended for $2 million, let’s say. If you have a $400 million fund, you make 20 investments. If you kill five of them, that’s $10 million in losses in a $400 million fund. It’s really immaterial. If you had put $20 million into each [of those failed seeds], a $100 million hole is a very different hole to fill. 

With the seed approach, we’re able to knock a lot of that risk out early. Secondly, we’re very flexible about how much money we put into a seed and how long it takes. During that time – assuming that the science repeats – we’re thinking about what’s the best way to apply it, what kind of company do we want to build? What kind of products for patients do we want to create? 

We’re doing this very important definition of what the business will be, and we’re hiring people. If you’re hiring people to build a platform company, they’re very different from the kind of people who are going to focus on one or two products in a specific therapeutic area. And, to state the obvious, but it’s easier said than done, it’s all about the people – great leaders and great teams.

The core group at Atlas that’s building these companies is 12 people. We probably start seven to nine companies a year so that would be very hard to do with only 12 people, but we have a much larger group of venture partners and EIRs who are experienced scientific entrepreneurs, and those people help us to identify opportunities and vet them. 

They work with us during the seed phase and because they’re really part of Atlas, the seed exercise becomes a truth-seeking exercise vs. a survival exercise. If they run the right experiments, and the data is disqualifying, you decide to stop things. Then there’s still Atlas, and they work on the next thing with us. But if you put $20 million in this thing on day one, and people rent a garage on the outskirts of town for their startup, they’ll spend $20 million to get to the answer, because that’s human nature. It’s better to spend less to get to the right answer sooner, and you don’t ever want to put very, very expensive venture equity into space and lab equipment, etc.

The Pulse: Atlas has often drawn a distinction between asset-centric and platform biotech companies. What are the benefits and drawbacks when comparing the two different approaches?

JR: We only pursue platforms where we can see specific, tractable product opportunities, which doesn’t mean we lack ambition. It’s just to say that sometimes platforms come in and say, “We can do anything, we can do all these amazing things”. 

And we say “that’s really exciting, but what’s the one thing that’s really worth doing that you can do now?” It doesn’t mean that you’ve got to limit the company to that one thing, but it is very helpful to focus the technology development on a specific product application. Biotech is brutal for vaporware.

There are some breakthroughs that are truly fundamental new technologies that have to be reduced to practice and that can make multiple products. That’s where we create platform companies where it’s worth building the horizontal capability, and then thinking about the multiple vertical product applications. 

There are other technologies where it’s very clearly a single-product company. It’s a molecule against a target of interest. It might be a pipeline in a pill; maybe you’ve got a genetic mutation tied to one cancer, and so you start developing it there, but it’s relevant to other cancers as well. You can create economies of scientific and technological scope when that’s the case, through smart clinical development. That said, when you’re pursuing one molecule against one primary indication, the way you build that company looks very different from a multi-product company. 

The Pulse: What themes excite you the most for the next 10 years in biotech? 

JR: As I was saying at the beginning, we’re coming through this 10-year period of tremendous development of new therapeutic modalities plus new biological and disease insights. While there are still new modalities being developed, I think that we’re now in a period that’s more about applied product development than de novo modalities. 

When we were first developing RNAi at Alnylam, we had to make that work for the first time – the first time, that’s not easy – and it took years and gazillions of dollars. It was hard and was a sort of open field experiment. You didn’t know where it was going to end or exactly how you were going to get there. With many of these modalities now reduced to practice, there’s been such an expansion of the toolkit, that it’s now a very attractive time to focus on applications. 

The challenge of that – and it’s a high-quality problem – is what I call the paradox of plenty. The technology barriers have obviously been dramatically reduced. This is in part what led to the overfunding during the bubble that we’ve just come through. It’s so much easier to make new products, and you can have the n-th entrant, so we’ve got so many CAR-T companies and many NK companies, etc. Does the world really need all of them? Can they really differentiate themselves technologically in terms of product features? Can they really recruit patients into trials? These are the actual issues that you run into in crowded spaces.

I think the definition of what’s worth doing has changed. It’s become easier from a technology point of view, but arguably it’s become a more subtle and strategic exercise about what the product application should be. And that’s challenging and interesting. That’s a good world to be in, but it’s a different world than doing more fundamental technology development – which arguably is where we’re coming out of over the past 10 years. I can’t imagine a better time to be in biotech.

Interviewed by Brian Kuang, January 2024.

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On Feb 15-16, 2024, Wharton is excited to feature more expert perspectives at our annual Wharton Health Care Business Conference. This year’s conference is themed ‘The Resilience Edge.’ Conference details and tickets are available here.