Why Not Test a Supply Chain Model? What We’ve Got Isn’t Working

5/31/13

I find myself siding more with Flagship’s Noubar Afeyan than with Katrine Bosley in the intriguing conversation emerging in Xconomy in recent weeks over the supply chain model for early stage biotech.

Today neither biotech nor pharma are producing a sufficient supply of new products. If we can’t figure out a way to profitably finance early development, this industry will implode. I believe the supply chain model is an important advance, and needs careful, thoughtful consideration.

Ms. Bosley makes the point that many independent groups pursuing their own ideas within the life sciences community can be more creative than a few large corporations dictating the direction and details of exploration for the industry. She warns that the supply chain model, which enables a biotech to “prewire” its program with a future acquirer, limits the creativity and initiative of the smaller partner and subjects it to the conventional prejudices of big pharma, which are valid concerns.

Unfortunately, her market-based model of totally independent bio-venture companies that relies on a buy-sell interface (what we have today) is not sustainable from a commercial point of view. Neither side is making returns in discovery and early development sufficient to sustain investment in the space.

People like Flagship Ventures’ Noubar Afeyan and Avalon Ventures’ Jay Lichter are exploring alternative strategies like the supply chain model precisely because the market-based model is not working. The institutional investors upon whom venture depends have largely turned their backs on the industry; both pharma and venture have shifted resources and capital out of research and early development to lower risk and improve returns. Investment in innovation is declining at a time when science-driven opportunity, demand by pharma, and patient needs are exploding.

Biotech-Big Pharma: The Problem

The problem lies in the market-driven relationship between biotech and pharma. The best way to explore outside the established frontier of knowledge is to run many small experiments, rather than pharma’s traditional approach of a few gold-plated studies designed not to end someone’s career. Small biotech is good at doing small projects. But, no matter how efficient their virtual managers, investors cannot chase creative ideas unless they can count on selling the products of successful experiments for an adequate return.

The earlier the stage of development that investors target, the less efficient the market becomes, because the quality of information diminishes the further we move upstream, away from the end-user. Buyer and seller don’t have reliable feedback, like revenues and profits, on which to value the asset. So one sees risk; the other sees potential. Transactions are hard to get done. Without a deal, the early stage investor is forced to carry on until his biotech venture exhausts its resources. The timeframes are so long and the failure rates so high in early R&D, that investors cannot justify supporting multiple projects for only a few successes. The costs are overwhelming any … Next Page »

Standish Fleming is a co-founder of San Diego’s Forward Ventures, and a 24-year veteran of early-stage, life sciences investing. He has helped raise and manage six venture funds totaling more than $500 million and served on the boards of 19 venture-backed companies, including Nereus Pharmaceuticals, Ambit Biosciences, Triangle Pharmaceuticals (acquired by Gilead Sciences) and Actigen/Corixa (now part of GSK). Follow @

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  • Kyle Serikawa

    I really appreciate the ongoing conversation about how to fix the problems that appear to be facing drug development–specifically a lack of truly transformative, life- and health-changing new drugs. I think the idea of a supply chain process in drug development is worth looking at. However, I am not convinced it will actually fix the problem.

    In this piece, Standish Fleming suggests a market driven process isn’t meeting the needs of drug development because the potential suppliers in the market (the startup biotechs) don’t have a clear view of what the eventual buyers (the pharma) really want as part of their strategic goals. Alignment is often a good thing. I believe many startups may not have a clear idea of what actually constitutes a good drug as many of them arise out of academia. This is not a criticism, just a statement of how the academic and industrial systems have different cultures, goals and knowledge bases. I also appreciate the point that, with capital harder to get via venture funds, pulling pharma in to replace that investment at an earlier stage requires some sacrifice of control on the part of the biotech, with a corresponding gain in risk sharing and predictability.

    But I don’t think alignment is enough. I worry instead that the key problem is one that’s been suggested by David Shaywitz and others–we just don’t understand enough about diseases to make the next generation of drugs. It seems that the buyers themselves don’t have a clear idea of what is most likely to make a good drug. As evidence, I’d suggest that if pharma really knew what they wanted, failures in Phase I-III would be far lower since drugs would never be tested in humans until pharma were sure of an 80-90% success rate. Baseball aside, a 30% or lower success rate generally doesn’t make for a good business strategy, but that’s what we’ve got. And I agree with the point that there are a lot of smart people working on the problem across pharma, so it’s not just a question of brainpower.

    If pharma can’t easily predict what kinds of drugs will succeed, then this model may just swap out VC funding for pharma funding with the same net effect. Also, the development of a drug is an incredibly long process. For a pharma to be able to predict the market ten or more years ahead of time is adding another uncertainty yet.

    Since I live in Seattle, I’d like to throw out the analogy of the Dreamliner. A key reason the Dreamliner exists is because of 9/11. Before that, Boeing was designing a supersonic passenger jet. After 9/11, the pressure for nations to become more fuel-efficient to allow less involvement in the Middle East led Boeing to change course and design a plane that would instead be a model of fuel-efficient design. So there’s an example in which changes in the market outside of a company’s control can render all its best plans moot.

    Another point about the Dreamliner is that that project relied on a supply chain that ended up delaying launch for over a year. I know people at Boeing and they have good project managers and good communicators and they told their suppliers exactly what they needed, and problems still arose. Ever after launch, unexpected issues with batteries grounded the jets again. How much messier might a supply chain relationship be between biotech and pharma? Can deadlines and milestones be guaranteed when we won’t know until Phase I if we’re dealing with the next best thing in air travel or a flaming battery?

    All this is not to say it couldn’t work; just that I’m skeptical. I agree the current method seems inefficient and difficult to make work in the current funding environment. I just wonder if maybe there is a third way. Now, if only Bill Clinton could get into drug development…

    These opinions are my own and do not necessarily reflect those of Novo Nordisk.

    • Stan Fleming, Forward Ventures

      Kyle, you raise a great “elephant-in-the-room” point: What if drug development is simply too difficult, given the current state of our knowledge, for anyone–large or small–to do profitably? I am not willing to concede that point without further consideration, hence my interest in alternative approaches such as the supply-chain model. However, it is possible that in areas of great complexity and uncertainty like Alzheimer’s disease, we don’t know enough to make drugs. Key players in both the pharma and venture worlds have come to that conclusion and ruled out further investment those indications, which does nothing to increase the likelihood of breakthrough drugs any time soon, despite tremendous need.

      The best we can do is push the envelope of efficiency with the tools at our disposal. Depending on Bill Clinton, George Bush or Barack Obama to provide innovative anything, let alone new drugs, is one experiment I would not recommend trying for reasons that could fill several editions of Xconomy. Still, I am convinced that we can to better than we have in the past 20 years. Pharma has just begun to awaken to the need for innovation in early stage business models. There is much we can try. Will it be enough to provide for the needs of patients and health-care systems world-wide? We shall see. One thing that we have established is that holding still, the traditional default for big business, won’t work.

  • Kyle Serikawa

    Stan, I do agree that current models don’t seem to be meeting the need. Today’s reporting about the article in Health Affairs which suggests that newer drugs have not led to the same degree of improvements to patient health as older drugs underscores the need for change, and I think looking for efficiencies is one way to approach the process. Kind of the Kaizen approach to drug development. A lot of small changes may add up to a big change.
    In terms of inefficiencies, another area that really needs examination is the boundary between competitive and pre-competitive efforts. For almost every indication we have several companies all working with their specific collaborators and their in house R&D groups and essentially duplicating efforts. This is done in the name of IP and in the spirit of a race, which can be kind of fun, but is also kind of inefficient. There is a romance about being first, but could the system be restructured to support and reward collaboration rather than competition at the earlier stages? I actually don’t know, but it does seem like having a number of groups working in parallel may no longer be the best model. I think that’s what groups like Sage Bionetworks are trying to get at with their drive for open access science.
    With respect to Bill, that was more an analogy to his reworking of the Democratic party to a third way, to try and move the party more towards the center. I also don’t have a ton of faith, personally, in top down approaches to solving innovation and execution in drug development.

  • Sean Carter

    Some solid advice, I found myself in a similar situation, after speaking with some JDA Consultants we were able to install a much more efficient system!