Life Sciences 2031: What about 2011?


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the possibility that a real clinical benefit could emerge. In the unlikely event that this type of trial produces a statistically significant result, the resulting new drug application (NDA) is either a poor reflection of the real potential of a new drug to produce dramatic rates of cure for a specific population, or it’s drivel that results in “breakthroughs” of a few days of increased survival.

How would we start evolving our development and regulatory vocabulary? Should this be a top-down effort, mandated by the FDA, or should individual research teams and companies lead the effort? I prefer the latter approach. I have been impressed that many of the companies in drug development are already “bi-lingual” in the way they define and discuss disease processes and drug mechanisms. The approach is more transparent, more honest, lends itself to a better understanding of negative results, and lends itself to salvaging failed assets by repositioning into other indications. At the same time, companies that rigorously define disease by pathway or mechanism and show dramatic improvements will be well prepared for a rigorous conversation with the FDA over the design of subsequent pivotal trials.

Perhaps, then, changing the vocabulary we use to more precisely describe diseases, patient groups, or mechanisms of action will remove some of our developmental and regulatory inefficiencies.

What else can we do in 2011 to bring about constructive change?

While the Xconomy New York Life Sciences 2031 panelists addressed funding and life science investment only briefly, the “black holes” that delay or stop many development programs need to be part of any comprehensive plan for the future of the life sciences. Biotech companies lead double lives: They increase the value of their assets by successfully completing preclinical, clinical and regulatory steps, while managing a cycle of raising and spending money in order to keep the company alive until it is commercially viable.

Unfortunately, advancements in clinical development do not always coincide with the availability of risk capital. Furthermore, overall market declines can obscure important value inflections. Faced with an inefficient market that fails to reflect the value of a company’s assets, company management teams face the unappealing choice of selling assets (whether by issuing stock, partnering the asset or selling the company) too cheaply or waiting for better market conditions that may not appear, and then settling for even poorer terms as the balance sheet deteriorates.

Solving management’s dilemma requires two things: a mechanism that provides more frequent liquidity and a means by which the company can reacquire or un-partner an asset if they later feel that it was sold too cheaply; in other words, a program option.

Let me give an example. I sell an option for a compound late in phase 2, for a large indication, for 5 million dollars. The option holder can buy (or partner) the program at pre-specified terms for the duration of the option; presumably it is timed to go past an important value inflection, in this case efficacy data. A novel provision, however, would allow the company to buy the program back, again at pre-specified terms, if the company feels that a) the value is much higher than they had sold it for, b) they can raise sufficient money to buy back the option and develop the asset themselves, or c) they can now make a much better strategic transaction for the same asset.

Why would the company that bought the option agree to the buy-back provision? Obviously the buy-back price would have to generate a sufficient return to the option purchaser to justify removing some of the potential upside.

The buy-back option addresses only one of the two needs we identified to improve the efficiency of life sciences financing market. While it does remove some of the pressure to sell an asset too early, it does not increase the liquidity of the marketplace. How could we add this provision? We could make the options freely trade-able. If we were sufficiently ambitious, we would establish an exchange for these pharmaceutical project options, and if we had sufficient capital we would become market makers in the options. This would provide liquidity to smaller companies, an ability for companies to hedge against market conditions without losing their assets too early without recourse, and an ability for potential acquirers to more easily transfer assets to others.

Of course, changing the vocabulary of an industry and its regulatory agency is a long process, and creating a new marketplace for a novel type of security requires a tremendous amount of specialized expertise, capital to seed an options exchange, and an ability to sell the concept. These are ambitious goals, but not inappropriately ambitious for an industry that will improve the lives of millions between now and 2031.

David Sable directs healthcare and life science investing for the Special Situations Funds and is portfolio manager of the Special Situations Life Sciences Fund. Follow @

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