A few years ago, news articles in Business Week, Nature, and elsewhere described a veritable stampede among big pharmaceutical companies like Roche, Eli Lilly, Pfizer, and GlaxoSmithKline to work with contract research organizations in China and India.
As it turns out, some of San Diego’s smallest biotech startups have been doing the same thing.
The reason—for big and small drug development companies alike—is that the scientific capabilities of laboratories in places like Shanghai and Mumbai are proving to be very high, while the costs are very low. As I recounted a few weeks ago, aFraxis CEO Jay Lichter said the San Diego biotech saved millions of dollars by conducting preclinical research on a drug therapy for Fragile X syndrome by working with a contract research organization in Moscow.
Recently, Ivor Royston, a founding managing partner at San Diego’s Forward Ventures, told me a similar story about TargeGen, a San Diego biotech developing drug candidates for blood-related diseases that target JAK2, a protein kinase implicated in a host of myeloid proliferative disorders that include multiple leukemias. For Royston, TargeGen’s chairman, the San Diego biotech also serves as an example of how early stage drug development can still be conducted despite an ultra-lean business operation.
The San Diego biotech began working with a Shanghai-based contract research organization, or CRO, WuXi PharmaTech, within a few years after TargeGen was founded in 2001. WuXi itself had just gotten started the previous year. But Richard Soll, who joined TargeGen in 2002 as chief scientific officer and vice president of research and development, was confident he could rely on WuXi to do important early-stage experiments because he was personally acquainted with WuXi’s founder.
“Wuxi PharmaTech was in the business of making compound libraries,” said Soll, who decided to use contract research as a way to keep his research group lean. TargeGen was initially skeptical and cautious about working with the Chinese CRO, and Soll says WuXi’s work was limited to fee-for-service projects of well-defined scope. Yet WuXi’s scientists, many of whom had previous experience in U.S. research laboratories, were eager to expand their responsibilities. Over time, TargeGen has asked WuXi to help identify and analyze compound libraries using X-ray crystallography and computer modeling, supply intermediate compounds for drug development in accordance with U.S. good manufacturing practices, and use its FDA-approved laboratory facilities to measure drug concentrations from clinical trial blood samples.
“WuXi has gone from 12 employees to almost 3,000,” in less than a decade, said TargeGen co-founder and CEO Peter Ulrich. WuXi has focused its business on pre-clinical research services, but as Ulrich puts it, “Now they are a one-stop shopping center for clinical trials, medicinal chemistry studies, primate studies, you name it.” WuXi went public on the New York Stock Exchange in 2007 (NYSE: WX), and acquired Minnesota-based AppTec Laboratory Services, which provides contract research and testing services, in a 2008 deal valued at nearly $163 million. (Last month, Fast Company magazine ranked WuXi at No. 8 in its list of the top 50 fastest growing global companies.)
Ulrich emphasized that TargeGen didn’t go to WuXi “from the perspective of low-cost outsourcing.” Instead, the relationship has grown so deep that he now thinks of WuXi “as an extension of our own chemistry group.” By 2005, TargeGen and WuXi were working together “in a very synergistic fashion,” said Soll. “I was running with a chemistry group of about eight people. I supplemented that with another seven or eight people at WuXi, and we were only spending $1 million a year.”
For Ulrich and Royston, the key benefit was speed. “The drug that just completed Phase II clinical trials went from nothing more than an idea to everything needed to begin clinical trials in less than 18 months,” Royston said. “I consider that phenomenal.”
The potential for drug development really became apparent, however, during the economic downturn that began in 2008. Facing a serious cash crunch, TargeGen laid off most of its 59 employees, and Ulrich says he was forced to jettison the company’s drug discovery operations in order to conserve its cash for mid-stage clinical trials. (The company, which now has 11 employees, has raised $118 million through four venture rounds since it was founded nine years ago, Ulrich told me.)
Soll, who said he saw the cutbacks coming, joined WuXi and is now the Chinese company’s senior vice president for integrated services. He told me he has been working with Royston on ways to make the full spectrum of WuXi’s contract services available to other early stage life sciences startups.
“VCs like to get deals de-risked as much as possible, and they don’t like to build a lot of infrastructure,” Soll said. “So I think the future model for VCs is not really building companies any more. They want to be very, very flexible. They want to find out if this asset that they have acquired—whether it’s from a university or a Big Pharma—is viable.” And Soll maintains that a CRO like WuXi can make such determinations—rapidly, efficiently, and affordably.
Royston agreed. As I reported last year, he has been concerned for some time about the business model for biotech startups and the funding gap, a.k.a. “valley of death,” for early stage drug development.
Royston noted that partnerships between biotech startups and Big Pharma companies have been increasing—from 165 collaborations in 1995 to 517 in 2005. But he said today’s biotech startups must cross a threshold he calls the “clinical proof of concept”—getting encouraging results in mid-stage clinical trials—before a Big Pharma company will seriously consider an acquisition. As a result, Royston said, the venture capital syndicate that provides funding for a startup’s drug development effort must provide more funding and for many more years. In some cases, that can mean hundreds of millions of dollars to fund more than a decade’s worth of drug development.
Nevertheless, Royston says, “I firmly believe there is still a role for traditional venture capital.”
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