Venture-capital firm Atlas Venture focuses on biotechnology and entrepreneurship. In this interview with McKinsey’s Navjot Singh, Atlas partner Bruce Booth talks about the company’s investment approach, ways to catalyze innovation, and the health and performance of the pharmaceutical industry.
McKinsey: Which areas excite you from an investment perspective, and where do you see your interests taking you in the next few years?
Bruce Booth: As exclusively early-stage investors, we focus on the next generation of high-impact medicines. When we look at young companies, or even just ideas for new companies, the first thing we think about is the science and whether it will translate into medical impact. Our investment approach is agnostic as to disease areas. Recently, some areas have exploded. Take immuno-oncology, for instance: after early clinical data emerged on checkpoint inhibition in 2010, the whole area took off, with investment not only in start-ups but also within large pharmaceutical companies.
Over the next five to ten years, one of the areas poised for breakthrough is neuroscience. Some of the genetic insights that have helped with targeting therapies in cancer and rare diseases, and with the stratification of orphan diseases, can also be applied in neuroscience. Can we, say, find a subset of Parkinson’s disease with a particular genetic signature, or genotype, that looks like it progresses faster and is therefore more clinically doable with smaller, shorter trials? That’s the kind of thing that excites us: getting our hands around a clinical population that’s less heterogeneous than some of the broader areas but still has enormous unmet medical needs. It’s a form of early clinical translational medicine, taking first-in-class medicines into new areas.
McKinsey: There’s an alternative argument that says we should double down on specific disease areas. Where do you think the industry is going?
Bruce Booth: In part, our agnostic approach to disease areas works because each entity we create is a stand-alone company. These start-ups develop their own culture, mission, and basis for transformative science and run their own governance, capital structure, and funding, so they can focus on a specific disease. We, as investors, on the other hand, work with companies that span the spectrum from oncology to neuroscience to autoimmune disease, dermatology, and ophthalmology.
Being disease-area agnostic is a lot harder if you’re a big pharma company, because you run into all the classic challenges of large organizations: bureaucracy, portfolio dilution, and cumbersome decision making. We don’t have those difficulties in the more entrepreneurial, nimbler, and much more focused biotech ecosystem.
McKinsey: How do you decide which areas of science to pursue? What criteria do you use?
Bruce Booth: First and foremost, the science has to be exciting, with the potential to transform a disease. So that’s about unmet need and high impact.
The second piece is about confidence that the science can be replicated. Early-stage academic science has a poor history in this respect, and even some of the best papers in the best journals have a hard time with it. We filter out the science that doesn’t look reproducible, but we also collaborate with contract research organizations and academic labs to redo the work and validate the experiments, and engage with the scientific founder to make sure everything is structured properly. About half our investments have a seed phase that’s about validating, confirming, and generalizing early-stage scientific stories.
Then we look for the team and talent to aggregate around the opportunity. People vote with their feet, so we keep a close eye on these talent flows. Where would our entrepreneurs in residence like to work? Are the people we respect raising their hands to join in and bet their careers? That plays a huge part in getting enthusiastic about an opportunity.
McKinsey: When it comes to talent, what do you think it takes to become a high-performing team?
Bruce Booth: Experience is a big part of it, and I’m using experience as a proxy for judgment. The drug business is hard to learn from textbooks. Almost all the successful chief scientific officers or CEOs of our young companies have deep experience in the drug business and R&D. Unlike software and tech start-ups, where a lot of founders are in their early 20s, our entrepreneurs are in their mid-40s or even mid-50s.
It’s not that young people can’t have great judgment—we often hire “younger” CEOs—but in a high-risk business like drug R&D, judgment and decision making are an important differentiator. That means having good board governance and a venture group that helps teams make the right strategic decisions.
There are two key components in turning early start-ups into emerging biotechs. One is identifying risks, whether in reproducing the science or particular attributes of the molecule, and figuring out how to mitigate them. The second component is resource allocation: how you deploy scarce resources and move up the value curve in as capital efficient a way as possible.
That leads to other questions: Do you want to build your own labs, hire your own chemists? Or
do you want to use contract partners for some of that work? Some companies need big labs in house; sometimes the work can be done externally. We have companies that span the spectrum from totally virtual—three or four people running an entire project—all the way to organizations with hundreds of people and their own wet labs. So I’d say that great teams in biotech distinguish themselves by getting risk identification/mitigation and resource allocation right.
McKinsey: It seems that what you are essentially doing is bringing assets to life. What would be different if you were the head of discovery at a big pharma company?
Bruce Booth: Large companies need to figure out how to wire in entrepreneurship in a way that allows them to innovate more effectively, and to compete with young, emerging biotech companies not only for output (drugs) but also inputs (talent). They need to allow risk taking and push early-stage projects forward with much more nimbleness in their decision making. Big organizations develop biases about protecting projects, and that often stifles innovation. I would look at breaking these biases down by creating much smaller teams and giving them multiyear budgets to use as they see fit as long as they hit their milestones. What that does is break discovery down into a set of small start-up companies. Not everybody in pharma-discovery organizations is wired to want that kind of high-risk environment, so you’d have to work out how to deploy the model in an experimental way. Companies have to go a lot further down the path of disruptive innovation in discovery.
If you want to unleash entrepreneurship, you need to appreciate what its currency is. Fundamentally, it’s equity in the drugs and companies you’re working in. Right now in big pharma, if you’re sitting in drug discovery, you’re not moving the needle for the value that accrues in your company. That disconnect—not being able to create value, measure it, and benefit from it—is a big issue.
McKinsey: When we look at intellectual and scientific horsepower, some people have real depth in certain areas, but do heads of discovery and their teams have enough breadth as well as depth?
Bruce Booth: We talked earlier about recruiting 40- and 50-something entrepreneurs from pharma companies. When you reach that stage in a large organization, more and more of your time is focused on things that take you further and further away from science. If you’re the head of discovery, you won’t have a lot of time to spend on shaping the research. But if someone takes you out and puts you in a small biotech where you’re working on just a handful of programs, it’s liberating.
I believe there’s an enormous amount of talent locked up in constraining organizations. Look at the brain drain coming out of pharma companies and moving into biotech, especially in the mid-Atlantic region. We’ve recruited dozens of executives to work on risky young start-ups, and the flow is accelerating, so I don’t see any lack of talent. There may be a risk-averse contingent wanting to stay in big companies as the journeymen of the R&D business, but the really smart drivers and leaders are abundant, too, which is why pharma is such a great place to recruit.
McKinsey: If scientists in big companies are keen to get into management and leadership roles because that’s where the incentives are, would it help to have a different track that rewards people for scientific excellence?
Bruce Booth: If you’re going to be a leader in a science-driven industry like ours, you need to be at the cutting edge of your field whether you’re in big pharma or a small biotech. Whatever mechanisms and incentives you need to put in place to make that happen, so be it. When you have insular silos for different disease areas and the attitude that “we’re doing everything right, so let’s just focus on what we’re doing,” invariably it will fail. You recognize you’re cut off from that crucial exposure to the external environment.
Exploring the disruptive potential of synthetic biology
If I were running drug discovery in a big pharma organization, I would try to get my rising stars onto the scientific advisory boards of young biotech companies. I’d want them to be exposed to the external world even at the risk of losing them, because the ideas they bring back to the organization will be critical. It’s all about taking the core of pharma and pushing it out to the periphery, and taking the periphery where biotech is and pulling it into the core of R&D. That tension is so important in catalyzing innovation in large pharma organizations.
McKinsey: Looking at the pharmaceutical industry overall, how do you see its health and performance, and where do you think it’s going next?
Bruce Booth: I’m optimistic about the industry’s long-term prospects. The tailwinds of a graying population and unmet needs are still prodigious, and drugs are the most powerful tool for addressing them in terms of value and cost effectiveness. I see enormous continued demand for the innovative medicines we’re bringing out to R&D and the marketplace.
There are also a few things that worry me a great deal. One is the fact that a lot of commercial organizations and even innovator companies have become addicted to double-digit biannual price increases for their established products, and that’s where they’ve got the bulk of their revenue growth for the past 10 or 15 years. I think we need to get back to believing we can achieve premium returns for taking the outsize risks required to create transformative medicines and that it is in line with the social contract we have with the public.
McKinsey: What about trends in research and development? Do we need to reinvent the R&D model?
Bruce Booth: R&D is still a business with incredibly high risk, high capital intensity, and long cycle times. Shaking that up will be important, and lots of experiments are going on with new models, whether it’s a model for building broad collaborative relationships, the academia model of relationships between pharma companies and university labs, or the global footprint model of working with China and India and other low-cost countries to access the kind of workforce that lets you build and advance new medicines. All these experiments should help R&D reach new productivity goals.
Another important factor is the maturation of applied technology. The human genome may not have borne fruit as quickly as people expected 15 years ago, but when you look at the most interesting new classes of medicines, a lot are driven by genetics and our understanding of human polymorphism. Insights from the technologies that have matured over the past 20 years are starting to generate positive outcomes.
Computational drug design is another key area. We’ve spent a lot of time in this space, including creating Nimbus Therapeutics in collaboration with Schrödinger, a world leader in the field, to apply the power of its computational engine room to the heart of drug discovery. It’s been extraordinary to see this exceptional horsepower generating new insights and models and helping to crack very hard challenges in drug discovery. As an industry, we aren’t quite ready to design drugs in the computer that go directly from the screen to patients, but we’re making progress.
For more interviews on how the pharmaceutical industry is evolving and how leaders can adapt, see