Initiation Report: Generate:Biomedicines – Pioneering AI-Powered Drug Discovery

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Summary Core Thesis

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Generate:Biomedicines tackles pressing challenges in drug discovery by fundamentally transforming the process. By integrating machine learning, medicine, and biological engineering, Generate:Biomedicines shifts drug discovery from a probabilistic endeavor to a deterministic one, overcoming extended timelines, substantial costs, and low success rates. Being the first mover and the most well-funded startup in AI-powered drug discovery, the startup has established a strong competitive edge. At its core, Chroma, the company’s advanced AI model, is configured to engineer proteins with precise biophysical, biological, and therapeutic properties. The startup has validated its proof of concept, exemplified by the generation and testing of around 42,000 proteins. A skilled and seasoned leadership team coupled with a robust drug pipeline signals a bright future for the startup. The support of marquee investors, including ARCH Venture Partners, Fidelity Investments, Morningside Venture Partners, NVentures, and T. Rowe Price, among others, cements the credibility of the startup. A 29% increase in valuation during the latest funding round underscores the confidence investors place in the company’s trajectory. Fortified by one of the largest privately owned cryogenic electron microscopy laboratories in the US spanning 70,000 square feet, Generate:Biomedicines stands as a category creator in generative biology.

Methodology

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Our views on Generate:Biomedicines are derived from our rigorous research process, involving proprietary channel checks with users, competitors, and industry experts, and synthesizing publicly available information from the company and other reliable sources.

Key Points

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• Strategic Collaborations: The company is on the path to develop drugs for oncology, immunology, and infectious diseases with strategic partners such as The University of Texas MD Anderson Cancer Center and Roswell Park. Generate:Biomedicine is also collaborating with Amgen to unlock historically undruggable or hard-to-drug targets with controllable specificity.

• Well Past the Proof of Concept: Invented novel therapeutic proteins against SARS-CoV 2 in under 3 weeks and various antibodies, peptides, enzymes, receptors, and other therapeutic proteins. With over 42,000 proteins generated, built, and tested, the proof of concept is well-established.

• A Pioneer in Generative Biology: Discards conventional trial-and-error drug discovery methods by introducing programmable drug generation. Offers agility, cost-effectiveness, and precise tailoring to specific conditions. Led by an experienced management team.

• Large and Growing Addressable Market: The global drug discovery services market is projected to grow from $20.6 billion in 2023 to $41.3 billion in 2028, at a CAGR of 14.9%, per MarketsandMarkets. Generate:Biomedicines is well-positioned to capture a leading share of this large and growing addressable market.

• Key Risks - Long Timelines and Low Moat: With two drugs in Phase I trials and the rest in preclinical stages, the time to market could potentially be long. However, company’s deep and diverse pipeline should help mitigate that risk. Additionally, established contract research organizations (CROs) pose a competitive risk.

• Valuation: The last private valuation was $1.8 billion, a 29% markup from its prior round. The company is generating revenue from research collaborations, licensing agreements, and milestone payments

Executive Summary

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Generate:Biomedicines addresses the challenges of the drug discovery process by leveraging machine learning, medicine, and biological engineering to significantly reduce costs and timelines. A pioneer in AI-powered drug discovery, the startup benefits from its early market entry and substantial funding. At its core, Chroma, the company’s advanced AI model, is engineered to design proteins with precise biophysical, biological, and therapeutic properties. Ranked 25th on the 2024 CNBC Disruptor 50 list, Generate:Biomedicines has garnered strong support from marquee investors such as ARCH Venture Partners, Fidelity Investments, Morningside Venture Partners, NVentures, and T. Rowe Price. The company’s valuation increased by 29% in the latest funding round, reflecting investor confidence in its innovative approach. With one of the largest privately owned cryogenic electron microscopy laboratories in the US, Generate:Biomedicines is leading the charge in generative biology.

Company Overview

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Generate:Biomedicines is an emerging CRO at the convergence of machine learning, biological engineering, and medicine. Its core focus lies in pioneering generative biology to develop medicines. Leveraging The Generate Platform, an AI-powered platform to aid protein engineering, the company is pushing the boundary of drug development. The company is based in Massachusetts with over 140,000 square feet of space allocated across its Boynton Yards and Andover facilities. Notably, it has successfully generated, constructed, and tested 42,000 proteins, since its inception six years ago.

Competitive Landscape

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Generate:Biomedicines is well-funded, highly valued, and has the biggest drug pipeline amongst its peers

An Attractive Investment Opportunity

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Generate:Biomedicines holds a leading position in AI-powered drug discovery, benefiting from being the first mover and the most well-funded startup in this space. This strong market position reduces the bargaining power of pharmaceutical customers. Additionally, its state-of-the-art AI-powered protein engineering technology minimizes the threat of substitutes. As part of Flagship Pioneering, a life sciences venture capital company, providing ample data for AI model training, Generate:Biomedicines faces low bargaining power from its suppliers, companies with pharmaceutical databases. While established CROs and pharmaceutical companies could potentially enter the market, cross-vertical technological expertise serves as a barrier to new entrants, moderating their threat. Operating in a burgeoning market with robust growth prospects, Generate:Biomedicines faces low competitive rivalry. These factors collectively position Generate:Biomedicines as a highly promising investment opportunity.

Key Investment Positives

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Strategic Collaborations to Improve Technological Prowess

Generate:Biomedicines is actively enhancing its technological capabilities through strategic collaborations with renowned institutions and industry leaders. By partnering with The University of Texas MD Anderson Cancer Center and Roswell Park Comprehensive Cancer Center, Generate:Biomedicines is pushing the boundaries of oncology drug discovery. These collaborations focus on developing protein therapeutics and CAR T-cell therapies for various cancers, including advanced and drug-resistant forms. The partnership with MD Anderson leverages the clinical and translational research expertise of the TRACTION platform, aiming to create optimized therapeutics that can rapidly advance into clinical trials. Similarly, the collaboration with Roswell Park integrates Generate:Biomedicines’ generative AI platform with Roswell Park’s expertise in cell therapy design and manufacturing, aiming to tackle the challenges of treating solid tumors with CAR T-cell therapies.

In addition to its academic partnerships, Generate:Biomedicines has formed a significant collaboration with Amgen, a biopharmaceutical giant. This agreement involves a substantial investment from Amgen to discover and develop protein therapeutics for multiple clinical targets across various therapeutic areas. By combining Amgen’s strengths in protein engineering with Generate:Biomedicines’ AI-driven drug generation platform, the partnership aims to accelerate drug discovery efforts and create novel protein sequences with optimal therapeutic properties. This collaboration exemplifies how Generate:Biomedicines is utilizing its innovative technology to forge partnerships that enhance its research and development capabilities, ultimately aiming to bring transformative therapies to patients more efficiently.

Well Past the Proof of Concept

Generate:Biomedicines has convincingly passed the proof-of-concept stage through several key achievements. One of the most notable was their rapid response to the COVID-19 pandemic, where they successfully generated novel therapeutic proteins against SARS-CoV-2 in less than three weeks. This included the invention of various antibodies, peptides, enzymes, receptors, and other therapeutic proteins specifically designed to target the virus.

The platform’s ability to produce over 42,000 proteins, all of which have been built and tested, underscores its capacity for high-throughput, efficient protein generation. These proteins were evaluated for their molecular characteristics and iteratively improved based on high-quality data, confirming the platform’s effectiveness and robustness in real-world applications.

Several factors contributed to Generate:Biomedicines’ recent success. The integration of machine learning with biological engineering enabled rapid design and optimization of proteins. Additionally, their iterative platform approach, involving continuous testing and refinement, ensured the proteins met the desired therapeutic criteria consistently. Moreover, strategic collaborations with leading research institutions and biopharmaceutical companies provided validation and support, enhancing the platform’s technological prowess.

Looking ahead, Generate:Biomedicines plans to expand its focus on developing drugs for various diseases, including oncology, immunology, and infectious diseases. The company is leveraging its generative biology platform to create novel proteins addressing complex and previously undruggable targets. They are also advancing several clinical candidates through their pipeline, with plans to initiate multiple clinical trials soon. This continuous innovation and expansion aim to solidify its position as a leader in the field of generative biology and revolutionize the way new medicines are developed.

Technological Prowess Provides Competitive Edge

The Generate Platform is a unique platform introduced by Generate:Biomedicines. It extrapolates universal biological principles from extensive observations to systematically creating medications targeting humanity’s most challenging diseases. This platform disrupts conventional drug development methods, signifying a pivotal transformation in therapeutic innovation.

Drug development, typically spanning over a decade with only 12% of clinical trial entries reaching approval, presents significant uncertainty and cost challenges. The Generate Platform signifies a paradigm shift in drug development, departing from traditional trial-and-error approaches to a more efficient and predictable process. By swiftly generating and refining therapeutic proteins, the Generate Platform not only accelerates development timelines but also improves treatment specificity and efficacy. This technological leap establishes Generate:Biomedicines as a frontrunner in the industry, pioneering innovative solutions to meet complex medical demands previously deemed unattainable.

A Category Leader in Generative Biology

Generate:Biomedicines is pioneering a revolutionary approach to drug discovery through the creation of a new category called Generative Biology. This method discards the conventional trial-and-error process of drug discovery, which is often time-consuming and expensive, in favor of a more efficient and precise approach. By leveraging generative AI, Generate:Biomedicines can programmatically design and generate therapeutic proteins tailored to specific conditions. This technology allows for the rapid identification and optimization of potential drug candidates, significantly reducing the time and cost associated with traditional drug development processes.

Generative Biology offers a level of agility and precision that is unmatched by conventional methods. The ability to generate proteins de novo, or from scratch, based on learned rules from millions of protein sequences, enables the development of therapies that are not only more effective but also better suited to target specific disease mechanisms. This approach allows for the creation of novel proteins that may not naturally exist, thereby expanding the potential therapeutic options available to address a wide range of diseases, including those that have been historically difficult to treat.

Moreover, the cost-effectiveness of Generative Biology is a game-changer in the biotech industry. By streamlining the drug discovery process and reducing the reliance on extensive trial-and-error experiments, Generate:Biomedicines can bring new therapies to market more quickly and at a lower cost. This efficiency not only accelerates the timeline for delivering new treatments to patients but also enables the company to explore a broader array of therapeutic targets. As a result, Generative Biology has the potential to transform the landscape of drug discovery and development, setting a new standard for precision, speed, and innovation in the creation of life-saving medicines.

Large and Growing Addressable Market

The global drug discovery services market is projected to grow from $20.6 billion in 2023 to $41.3 billion in 2028, at a CAGR of 14.9%, per MarketsandMarkets. This growth is driven by escalating R&D investments in the pharmaceutical and biotechnology industries, an expanding drug development pipeline, and heightened efforts in researching rare diseases and orphan drugs. Generate:Biomedicines is strategically positioned to capitalize on this large and growing market opportunity, poised to innovate and potentially transform the landscape with its advancements in generative biology.

Another market Generate:Biomedicines is well-positioned to tap into is the protein engineering market. The global protein engineering market was valued at $2.6 billion in 2023 and is projected to grow at a CAGR of 16.2% from 2024 to 2030, per Grandview Research. This growth is driven by heightened biotechnology and pharmaceutical industry focus on developing protein-based therapies, which offer superior cost-effectiveness and improved patient outcomes compared to non-protein drugs. Additionally, the rising demand for targeted therapies in cancer and autoimmune disease treatments is accelerating the adoption of protein engineering. The COVID-19 pandemic further bolstered the market, with protein engineering playing a critical role in developing COVID-19 vaccines and diagnostics.

Leadership Team

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With a talented and experienced leadership team, Generate:Biomedicines is poised to spearhead the mass adoption of a new category: generative biology. The team brings a wealth of expertise from leading roles in biotech and pharmaceutical companies, as well as R&D in healthcare and technology.

Key Investment Concerns

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Long Time to Market Relatively

Low Moat The startup has two drugs undergoing phase I clinical trials, with the remainder in the preclinical stage, the time to market could potentially be long. However, company’s deep and diverse pipeline should help mitigate that risk. As a pioneer in its category, the startup encounters distinct challenges. Introducing a new category necessitates educating the market and persuading customers of its value proposition. There’s a risk that the market might not embrace or comprehend the new category, resulting in sluggish adoption. Additionally, innovations in the pharmaceutical industry are subject to stringent regulatory requirements that could impede market growth.

Relatively Low Moat

Established CRO such as Labcorp, IQVIA, Parexel, and Icon, among others, can integrate AI-powered solutions into their existing portfolio. Moreover, Pharmaceutical firms such as Abbvie, Merck, and Novartis, among others, can also integrate AI in their in-house drug discovery processes. Such developments can hinder the market growth of Generate:Biomedicines. However, the cross-vertical technological expertise of generative AI and protein engineering serves as a barrier to new entrants. Moreover, Generate:Biomedicies is a potential acquisition target for large CRO

Industry Overview

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The drug discovery process is notorious for its extended timelines, substantial costs, and modest success rates. According to NIH data, developing a new drug from concept to market launch typically spans 12–15 years and exceeds $1 billion in expenses. Pharmaceutical companies are increasingly relying on CROs specialized in drug discovery services. While some firms handle drug discovery internally, outsourced services have grown significantly, from 36.5% in 2017 to 49.3% in 2023, according to Statista. The CRO market is concentrated, with the top 5 firms seeing flat revenue growth in 2023. In response, AI-driven drug discovery startups are becoming attractive acquisition targets for CRO leaders. These acquisitions promise accelerated revenue growth and seamless integration of AI capabilities into their service offerings.

Incorporating AI technologies presents a promising avenue for enhancing these processes. AI can expedite drug discovery by forecasting molecule properties and pinpointing potential drug candidates. Machine learning algorithms sift through extensive chemical and biological datasets, uncovering patterns and correlations that facilitate the identification of new drug targets and compounds.

The rise of telehealth, huge databases in Electronic Health Records, accessibility of high computer power, and the proven tangible benefits through AI integration in various industries, are driving the adoption of AI in drug discovery. Moreover, regulatory bodies are also accepting AI integration. For instance, FDA’s Center for Drug Evaluation and Research, in partnership with the Center for Biologics Evaluation and Research and the Center for Devices and Radiological Health, has issued an initial discussion paper to engage stakeholders and explore the use of artificial intelligence and machine learning (AI/ML) in drug and biological product development. Continuous feedback is sought to advance regulatory science. Highlighting AI/ML’s significance, the FDA intends to establish a flexible, risk-based regulatory framework that encourages innovation while safeguarding patient safety.

The AI in drug discovery market is projected to grow from $0.9 billion in 2023 to $4.9 billion in 2028, at a CAGR of 40.2%, per MarketsandMarkets. Startups such as Generate:Biomedicines, BigHat Biosciences, Seismic Therapeutics, and Benchsci, among others, are well-equipped to capitalize on this rapidly growing market.

In addition to drug discovery, AI can significantly contribute to drug repurposing strategies, a method focused on identifying existing drugs or those with established safety profiles in humans, which can be applied to treat conditions different from their original indications. This approach expedites the delivery of effective treatments to patients awaiting medical interventions. Moreover, it offers substantial financial advantages for pharmaceutical enterprises seeking to introduce new medications to the market, in contrast to conventional drug discovery methodologies. Implementing drug repurposing can slash costs to below half a billion dollars, thereby exerting a profound influence on a company’s research and development budget.

Financials

While it is early to project revenue estimates for Generate Biomedicine, based on our in-house model the company is well-positioned to generate material revenues from research collaborations, licensing agreements, and milestone payments from partnerships. Owing to its first-mover advantage in generative biology, integration of machine learning, medicine, and biological engineering, we expect Generate:Biomedicines to capture a 5-7% share of the drug discovery services market and protein engineering market by 2028. Given these assumptions and projections, our revenue estimate for the company will be in the range of $2.3-$3.3 billion by 2028.

Funding Rounds & Private Valuations

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Generate:Biomedicines has raise $643 million in funding across three rounds. Generate Biomedicine’s approach to AI-powered protein engineering and drug discovery has resonated with both customers and investors, leading to significant investor interest since 2021. Notably, the company raised $370 million in 2021. The company’s ability to attract investment has continued to grow, with its latest funding round – a $273 million Series C in September 2023 with investors including ARCH Venture Partners, Abu Dhabi Investment Authority, Alaska Permanent Fund, Altitude Life Science Ventures, Amgen, Fidelity Investments, Flagship Pioneering, MAPS Capital, March Capital, Mirae Asset Global Investments, Morningside Venture Partners, NVentures, Pictet Group, and T. Rowe Price. The latest funding round valued the company at $1.7 billion, a 29% markup from its valuation of $1.4 billion post-series B in November 2021.

Comparative Public Multiples

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The following table shows the public peer multiples of various CROs. These multiples provide a useful reference for valuing Generate:Biomedicines. Given the first-mover advantage of Generate:Biomedicines in AI-powered protein engineering, we believe the startup’s valuation multiple should command a premium over its public peers.

About the Analyst

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Santosh Rao

Santosh Rao has over 25 years of experience in equity research with a primary focus on the technology and telecom sectors. He started his equity research career at Prudential Securities and later moved to Dresdner Kleinwort Wasserstein, Gleacher & Co, and Evercore Partners, where he followed Telecom and Data Services. Prior to joining Manhattan Venture Partners, he was the Managing Director and Head of Research at Greencrest Capital, focusing on private market TMT research. Santosh has an undergraduate degree in Accounting and Economics, and an MBA in Finance from Rutgers Graduate Business School. While at Gleacher & Co he was ranked leading telecom equipment analyst by Starmine/Financial

Times

Disclaimer

I, Santosh Rao, Head of Research, certify that the views expressed in this report accurately reflect my personal views about the subject, securities, instruments, or issuers, and that no part of my compensation was, is, or will be directly or indirectly related to the specific views or recommendations contained herein.

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