Biotech’s Original Sin

If you’re of a particular religious bent, you believe we’re born into the world stained with original sin, which we struggle to overcome in order to find grace.

To trivialize thousands of years of theological debate into a self-serving metaphor: biotech, too, is tainted with its own version of original sin that it must overcome. In this case, we're stuck with the sin of hype. And we pray for the grace of business sustainability.

It is part of the fun of the annual JP Morgan health-care extravaganza to identify in company meetings the stain and then see why it’s essential. Sirtris, that hottest-of-discovery companies, is a more interesting than average example of this essential biotech trait.

Sirtris has never been shy of elaborate media coverage (including our own). And like everyone else, it dances close to the edge of credibility. In a press release previewing its JP Morgan presentation on its lead anti-diabetes candidate, the company’s head of development described its sirtuin targets as “the genes that control the aging process". Not “genes that help control” aging. But the genes.

OK, admits Christoph Westphal, the company’s CEO and a co-founder of Alnylam and Momenta, it would probably have been wiser to qualify the claim. On the other hand, he says, a phalanx of scientific papers says that activating SIRT1 (the first of the sirtuins Sirtris is targeting) does extend life – a lot -- in yeast, worms, fruit flies and mice.

But the overly loose language creates a larger penumbra of scientific interest around Sirtris’s most advanced compound, SRT501, a formulation of resveratrol. New data from a one-month, 98-patient study, showed the drug “trended” to lower fasting glucose levels and, more definitively, significantly improved results on the oral glucose tolerance test.

That’s pretty good for a Phase Ib study. And Sirtris should report out a more probative Phase II trial sometime in the second half of 2008.

But that drug needs more than its clinical data if it's to generate the kind of publicity and momentum that can lead to a blockbuster deal and its life-supporting non-dilutive cash. SRT501, however good its data is, won’t likely win a huge partnership: it’s got no composition of matter patent.

The follow-ons do, says Westphal, and they’re 1000x more potent than resveratrol. But they’re further behind. The first of these NCEs is likely to begin a Phase I trial in a few months but—as with all more potent molecules—brings with it higher risks of unforeseeable toxicities, which is why early-stage molecules for primary-care diseases – particularly those on brand new targets -- don’t generally see high-value deals.

Sirtris needs to keep the interest--okay, the hype--going until its NCEs can stand on their own feet. It has to validate its target with a molecule that won’t drive all that much licensing value so that the follow-ons will. And that’s one reason why Sirtris tells people not to expect a deal within the next 18 months or so – by then, it should have more clinical data on the target itself and, with luck, proof-of-concept data on its NCE.

Granted the company can do all that, the partnering road will be lucrative. There’s huge interest in diabetes among Big Pharmas hit by withdrawals (cf. Avandia) or left out in the cold by Januvia’s success and the difficulty of differentiating their own new DPP4’s (which are marginally efficacious in any event).

Getting there, however, is expensive. Which gets to another Sirtris innovation: it employs just 50 people but created its NCEs with the essential and inexpensive help of 40 full-time chemistry contractors in China. That’s why the company’s progress so far has kept its annual burn rate at a relatively moderate $25 million. (We're a big proponent of limiting uneccessary infrastructure, but even we don’t know of any biotechs who’ve been able to generate that kind of cost-effective discovery productivity through off-shoring. If you have other names, please send them our way.)

But the burn will now get hotter as clinical costs mount. Sirtris will need all its $130 million in cash and more. It wouldn’t have the money it has now if it didn’t have its publicity – and it probably wouldn’t have that publicity if it didn’t dance pretty close to the edge of hype.

That’s biotech’s original sin. Where there’s biotech, there’s hype. And without it, there’s no biotech.

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Yule Blog: The Virtual Are Only Virtuous Thanks to the Substantial

It’s time once again to sing the great Christmas Paradox—the annual carol that venerates the Immaterial in the temples of the Material.

And as everyone knows, it’s just fine that we do. Our economy’s fortune ebbs and flows with the CPI – the Christmas Paradox Index. That’s why – as some significant fraction of us proclaim that the only present we want is you or family or world peace -- the news we evidently want to hear is about the health of retail sales.

We are not, however, going to babble on about this particular holiday cliché. Instead, we want to point out that our industry has a parallel Paradox – the Infrastructure/Anti-Infrastructure theme now playing in the drug business almost as insistently as Deck the Halls in shopping malls.

At Windhover’s Bio/Pharma Partnerships conference, for example, Randy Woods noted that his old biotech company, Corvas, needed plenty of scientists just to get to the clinical-stage deal its investors wanted. Now, given the gap in Pharma’s late-stage pipeline, VCs want to fund the development themselves, entirely without partner money -- but with only enough infrastructure to manage the CROs and consultants they hire to do the work. Investors want all their dollars to go into development – not offices and certainly not salaries.

That’s exactly what happened with Woods’s more recent employer—NovaCardia (12 people; two products; sold with just one of the products to Merck for $350 million) and what will likely happen with current company Sequel (which inherited the same people, NovaCardia’s second product, and its investors).

Or Bristol-Myers Squibb. Senior BD director Lynne Croucher spoke about its “selective integration” strategy (and discussed at greater length here, here, and here) which, along with risk reduction, effectively reduces requisite infrastructure – off-loading costs and responsibilities onto primary-care partners. That’s why Bristol can without significant business pain cut some 4800 jobs.

And now Peter Corr, the former R&D boss at Pfizer, the industry’s most fully infrastructured business, has ended up at Pfizer’s philosophical opposite, the anti-infrastructuralist private-equity player Celtic Therapeutics (here’s the savvy assessment by the WSJ’s Health Blog).

The fund (an outfit we first wrote about in late 2005) is an ambitious follow-on to private-equity pioneer Celtic Pharma, which has deployed nearly all its $250 million in capital (plus an additional $151 million in debt) in buying up nine development-stage programs, whose development it funds using a network of CROs. It then wants to sell the successful programs to the highest bidders (so far it’s sold one and lost one). The new fund apparently hopes to do the same thing but on a much larger scale--according to the Financial Times, it’s aiming to raise $1.5 billion. Corr expects the first close of the fund this January.

Big Pharma’s infrastructure “isn’t meeting its needs,” he says. In fact, despite billions spent on R&D, drug companiest don’t even “have the flexibility to fund new projects, or more from one project to another based on science” because they’re funding infrastructure instead. Celtic Therapeutics will employ maybe 65 people managing 20 projects.

You see the paradox, no doubt. It’s not that the infrastructure doesn’t exist. It’s still there—in CROs, for example. And it’s still there in the companies that ultimately fund Celtic’s returns. If it weren’t, Celtic would have neither advantage nor customers (low-infrastructure Big Pharmas could presumably license the same programs Celtic can).

In sum, most of those caroling along about the virtues of a virtual industry know that without the infrastructure someone else is paying for they wouldn’t have much to sing about at all.

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The Disaggregation Road

When we saw a conference selling itself with the concept that Big Pharma is likely to disaggregate, we began to realize that what we had once seen as a kind of quirky idea has now gained the respectability of promotional material.

So first, let us invite you to follow our logic for disaggregation: just click here (the presentation’s free).

Since that talk, at the Pharmaceutical Strategic Alliances conference in September, we’ve only become more convinced that Big Pharma – at least to thrive, if not survive -- has got to start thinking small.

Some are. The less-than-confirmed but more-than-rumored information we've got is that AstraZeneca is set to spin off its GI R&D organization, keeping of course its big commercial assets, the Nexium franchise, but letting private equity fund the early-stage candidates. Good idea, we say. AZ is simply too big to manage the internal research it’s got – let alone depend on the notion that it can afford big bets on areas unlikely to generate big advances in medical care. (For an in-depth discussion of GI R&D strategies, see this story in the November IN VIVO).

AZ has by no means abandoned primary care blockbusters, but is clearly moving towards an increasingly disaggregated future. That, it seems to us, is one key message of its independently managed MedImmune acquisition-now-division. We’ll see how much farther AZ is willing to push its strategic envelope – perhaps, eventually, all the way down the disaggregation road paved by the most successful drug company in the industry—the Roche-Genentech-Chugai cluster?

We acknowledge there’s risk to the AZ strategy (spending 20% of one’s market cap for a company providing an additional 5% of sales looks pretty dicey – even if it does provide 25% of AZ’s pipeline going forward). Disaggregation is no panacea. But big-bet development--witness Novartis' well-publicized struggles with its diabetes would-be blockbuster Galvus and the management reshuffle in the wake of that debacle--is no strategy, either.

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Spec Pharma: Wrong Bandwagon, Guys

Ok, so we’ve commented before on the definitional problems around ‘specialty pharma’—the topic came up at our PSA conference, and in this IN VIVO feature.

But we feel compelled to say some more. Yesterday during an industry conference in London, yours truly came across two further 'interesting' uses of this label, which is fast becoming totally meaningless as a result.

The first was a UK drug delivery firm that has developed a technology to push tiny, splinter-shaped solid doses of biologics, vaccines or any other drug through the skin where they apparently dissolve and distribute just as fast as a subcutaneous injection. Fine. (Read more here, if you want.) But why call the firm ‘specialty pharma’, as its CEO Charles Potter insisted on doing (and insisted that I do, too)?

“We don’t want to be seen as just drug delivery,” Potter explained, “since that implies we don’t have our own products.” Yet, he continued, we don’t want to be pharma or biotech either, because then people might think we do discovery, and that’s risky. “So we decided to call it specialty pharma,” he concludes.

Ah. So ‘specialty pharma’ means ‘reformulation and delivery’. But then why is Spain’s mid-sized pharma firm Almirall also calling itself specialty pharma? In a press release announcing Almirall's acquisition of some drugs cast out by Shire, CEO Dr. Jorge Gallardo declared that the deal "..reinforces our position as one of the key European specialty pharmaceutical companies.”

Ok, so newly-listed Almirall wants to be a bit more like Shire and get into specialist niches (though it’s unclear at first glance how the $213 million worth of assets, which include peppermint oil, help further that cause). And ok, drug delivery wants to shed its service-associated image, and highlight the lower-risk nature of its game.

But jumping onto the spec pharma bandwagon in order to do that is not a good idea. First, it’s confusing, embracing, as the term now does, so many diverse strategies (and yes, biotechs are in there too). Second, the original spec pharma model is broken anyway, so why go near it?

The traditional acquire-and-market strategy, minus R&D risk, may have created substantial value in the US. But the party’s over. The winners can’t rely on in-licensed, low risk assets to sustain the growth they need. Rumors are that MGI Pharma is up for sale. Endo is looking at strategic options, including moving upstream into risky innovation. Shire and Cephalon have both long shed their specialty pharma clothes, and now prefer to be known as ‘biopharmaceutical firms’ (another popular new label, including among Big Pharma—the ‘bio’ bit supposedly adds a valuation premium).

Despite the challenges of spec pharma version 1.0, new players are emerging. But as Bryan Morton, the CEO of Europe-based newcomer EUSA Pharma, declares, we're not really spec pharma, “we’re start-up Big Pharma.” That, he reckons, captures the idea of possessing full commercial capabilities, adjusted for size.

So the industry re-branding is official, then. Big Pharma and the old spec pharma are now biopharma, new spec pharma are 'start-up Big Pharma', and pretty much everything else, from drug delivery, through mid-caps and even biotechs-with-commercial-ambition, is now spec pharma. Got it?

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On the Beach at St. Tropez

Oh please, please Brer VC, please don’t make me go to St. Tropez.

But he did, and your blogger has endured the vins de Provence, smoked salmon and paté, chevre and Roquefort, moules mariniere, and breast of duck of Atlas Venture’s Riviera hospitality to provide you some personal takeaways from its Life Sciences retreat.

We’re not quoting attendees or speeches thanks to our journalistically questionable promise to ascribe none of the chit-chat to particular attendees—a promise we assume doesn’t apply to IN VIVO Blog's own presentation, which is available here for free downloading (thanks to Atlas’ Kevin Clancy for preparing the slides).

And oh yeah, it also doesn’t apply to the other day’s Myogen vs. the VCs post.

So what did we learn midst gawking at boats the size of our house?

The increasing leverage of biotech. Everyone agrees that the pivot point of deal values is proof-of-concept (for more on why, see here and here).

But will the prices continue to increase? Yup. Despite Big Pharma’s relatively rich early-stage pipelines, thanks in part to a better understanding of chemical challenges, the biological risk has soared—and with it the attrition rates. While we at least believe in the possibility that collaborations are now inching toward the asymptotic endgame of full value, one top Big Pharma executive argued--with the authority to do so--just the opposite: given the appetite from his and other companies for post-proof-of-concept candidates, deal prices will continue to rise on just about the same steep slope they’re on now.

No end in sight to the Big Pharma biologics appetite, whetted by lower perceived risk, higher pricing, and—thanks to the regulatory Berlin Wall against biosimilars—longer product lives. (For an in-depth analysis of pharma strategies here, see the upcoming October issue of IN VIVO). Particularly mouthwatering: technologies—like Adnexus’s Adnectins—which open up the IP spaces around validated mechanisms targeted by antibodies to improved fast-followers.

But not so fast. Let’s at least admit we really don’t know the risk of biologics, at least not in quantity. Think first about manufacturing, cautioned one former research chief. Are companies whose QA/QC processes were built around the relatively straightforward chemical characterization of small molecules really prepared for the kind of QC necessary for parallel bioprocessing of perhaps a dozen biologics (a slide on Pfizer’s pipeline, chock full of biologics, showed just how possible a flood of biologics might be)?

Then think about their commercialization. Given that more and more of these biologics will end up being used chronically (after all, Big Pharma wants to replace post-expiration chronic-care small-molecule drugs and most acute-care biologics won’t fill their revenue shoes).

Suddenly, said the ex-research boss, the number of patients on large molecules will dramatically increase the likelihood that unforeseeable signals will show up – like the two PML cases which yanked Tysabri off the market for a time and which would have been impossible for any approval statistics to uncover. At least with small molecules, we’ve got the tests for the likely toxicities, allowing us to shoot compounds in the head before they ever get developed. So with biologics: what signals are companies setting themselves up to look for?

Now let’s talk pricing and patents. Our reading of the meeting’s consensus opinion: BIO made a colossal mistake in stalling a pathway to approval for follow-on biologics, pulled by the nose—accused a variety of meeting attendees--by its richest members (Amgen, Genentech, Biogen Idec, J&J) while ignoring its smaller members. A panel on Washington matters was utterly dominated by the subject, with most of the audience (or at least the many in the audience who voiced their displeasure) apparently convinced that the biotech industry had thrown away its political white hat in favor of the guise of intransigent profiteers.

The political chance lost: a Republican majority which could have at least passed a bill reasonably attractive to biologics innovators while allowing in lower-priced competition. Now it’s payback time: a Democratic majority, more closely tied to a few large-ish generics players, heel-dragging for a bill with relatively minimal exclusivity provisions, speculated attendees.

We'll have more to say about the retreat once we’ve been to the gym to repent our hedonism.

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How to Improve Drug Development? Fail Fast!

In this morning’s PSA panel on “Development Dilemmas and Opportunities,” Michael Clayman, MD, VP of Lilly Research Laboratories at Eli Lilly & Co., presented a unique option for optimizing clinical pipeline success. Perversely, it depends on failing fast. Clayman heads Lilly’s Chorus division, an organization that is trying to create a new model for drug development built on not reducing attrition but increasing the chances post-clinical proof of concept that a drug will make it to market. We took an in-depth look at Chorus in May in IN VIVO.

Clayman estimates that 90% of drugs in development will fail anyway, so why devote the time, the resources—the dollars—driving a product forward if it’s not going to make to market? The goal of his group: cut costs, and dramatically narrow the time to a decision point—typically proof of concept in man, what Clayman jokingly refered to today as “pull out your checkbook”—down to as little as twelve months.

It’s a goal Clayman claims Chorus is well on its way to achieving. To date, the company has shown that it can shave 12 to 18 months off the time it takes a drug to reach proof of concept and reduce the R&D dollar spend from $30 million to $3 million.

But, outside these metrics, there aren’t obvious ways to measure the group’s success. It’s not as if the company can use drug approvals as a measure, since the goal of Chorus isn’t to get drugs on the market, but to de-risk them as much as possible. Indeed, it’s an organizational tool to manage Lilly’s vast portfolio of drug products so that the bias is on the ultimate winners. And while nearly 80% of Lilly molecules might be pushed forward according to this program, to date the strategy has been applied to just 10.

According to Clayman, one critical component of the strategy is that Chorus is compound agnostic. No one on the 24-person team has a driving loyalty to a molecule that might sway him or her to push one project forward over another. The group also operates as an autonomous division within Lilly so that it is not hide-bound by the operational infrastructure of the larger organization. “Once a molecule is transferred to us, it’s no longer worked on by Lilly scientists. We outsource the experimentation,” he says.

That level of outsourcing is likely to be troubling to most other major pharmas. It seems unlikely that many outfits would be willing to adopt such a strategy unless there were significant proof that it improves R&D productivity. Until such time, expect the refrain to remain simply Lilly’s chorus.

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The Value of Re-Cycling: $87 million?

The drug industry’s littered with examples of products that have started life in one indication and got to market in a totally different one—think of Viagra et al.

But most of these reinvention stories involve a fair bit of luck—the right scientists taking a chance and managing to get it past the bosses. Since then, Big Pharma’s R&D productivity issues have prompted the birth of a handful of systematic re-positioners like Aspreva or Melior.

Or like Gene Logic. This firm—originally a genomics database group—has stuck its neck out and put a number on the value of repositioning assets: $87 million. That’s to say, repositioning a failed Phase II compound in a new indication creates an asset worth $87 million more, in net present value terms, than an equivalent in-licensed drug. That’s almost a 30% increase, according to the company.

To find out exactly how they get to these numbers—there is rhyme and reason—you’ll have to wait for June’s IN VIVO. But it’s based around the notion that a re-positioned drug has an additional two-to-three years of patent life over its non-repositioned counterpart. Since there’s no “original” indication (the drug failed, right?), then once the compound’s composition of matter patent—typically seen as the strongest IP protection—expires, the method of use patent, filed later based on a novel indication in Phase II, still has bite. (Normally, when a drug’s composition of matter patents expire, generics can compete in the original indication that the drug was approved for, and in practice also compete off-label in other, unexpired indications.)

The arguments look reasonable. At least, they do to the five Big Pharma partners that Gene Logic has attracted in the last couple of years, including, earlier this month, Abbott Labs.

But are these partners really buying into Gene Logic’s economic model—which is, by the company’s own admission, without precedent and totally unproven—or do they simply figure that they’ve got nothing to lose? Gene Logic takes on all the early risk in identifying a new indication. There’s no cost to the larger partner unless and until Gene Logic finds a viable new indication for the compound—in which case it will owe milestones (estimated at $60-$100 million per compound) and, potentially, royalties. There’s no automatic opt-in for Gene Logic—it can only take rights to repositioned compounds if the pharma partner explicitly rejects them.

Effectively, Gene Logic’s had to bend over backwards to persuade Big Pharma to hand over shelved assets---everyone knows this isn’t a favorite pastime. They’ve had to remove all the hurdles and pitfalls.

The tactic has worked, thus far. But Gene Logic won’t be able to afford this deal-structure for long. Either they won’t find new indications, in which case they’ll go bust (or change strategy again). Or they will, but that will push up development costs, so they’ll have to get more from their partners.

So if you’re a Big Pharma with stuff on the shelves, move fast.

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Can P&G Stomach the Risk Even When It's Reduced?

P&G Pharmaceuticals has been the Henny Youngman Rodney Dangerfield! of the drug industry: it couldn't get no respect. And so last year it remade itself, becoming what it calls a “search and development organization,” apparently on the model of Shire and Endo.

When it announced it was abandoning discovery, in February 2006, P&G was both admitting it couldn’t compete in research—and that it couldn’t stomach the risk. It laid off, or transferred, most of its researchers; it has spun off at least three research programs (more on that in another post); and now it’s got 45 people scouring the earth for licensable products in its chosen therapeutic areas: gastro-intestinal, musculo-skeletal and women’s health. Two key criteria: P&G only want drugs for patients that have “high involvement in their disease”; and they want products for which the development risk is “reduced.”

They’ve got some ambitious goals. To reach their growth targets, they want to launch one new product every 4-5 years – and that drug needs to become – echoing Jack Welch’s famous maxim for GE—number one or two in its category. To get to their launch target, P&G figures it will need to do 2-3 deals per year.

The question, however, is whether the kind of products that get to be #1 in their categories are also the kind of products that P&G management will be willing to pay for. It’s a challenge, admits Jeff Davis, who runs new business development. P&G has a shareholder base which demands 4-6% growth a year—that’s the kind of growth that justifies not reduced-risk research, but no-risk research, the sort that figures out how to get more or less pulp into orange juice or no-drip caps onto detergent bottles.

Moreover, while Big Pharma isn’t generally ponying up for reduced-risk development projects (in general, they still want NMEs), spec pharma is, and paying Big Pharma-sized upfronts. But P&G figures it can win these deals by emphasizing its consumer-focused marketing approach (it had an entire team of R&D, finance and marketing execs outfitted with an electronic system that, for a week, at all times of day, signaled them to react to the unpleasant gastrointestinal events of ulcerative colitis patients). And if—as this blogger believes--spec pharmas are going to be P&G’s biggest dealmaking competition, then P&G really will have an interesting advantage.

The pitch worked for Aryx Therapeutics, one of two companies with whom P&G has signed deals since its reorganization (the other is Nastech, for nasal-delivered parathyroid hormone). The Aryx drug, for GERD and gastroparesis, hit all the P&G criteria: a GI product (for GERD and gastroparesis) and risk-reduced (works like Propulsid but, apparently, avoids the drug-drug interactions which killed it). “We had three virtually identical term sheets,” says Aryx VP and COO John Varian but chose P&G because of their “focus on the consumer.”

Still, P&G is hardly burning up the dealmaking track. They’ve done two deals since their restructuring—the last in July 2006. Davis is confident that in ’07 his group will be able to get to terms sheets on 2-3 programs. There are plenty of biotechs who'll appreciate the P&G approach. But we wonder whether the Consumer King will tolerate the risk of signing them.

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