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The Innovation Challenge: Assessing BioPharma Startups

Opinion

Xconomy Seattle — 

Developing new medicines is really difficult and very expensive. A recent report, “Decline In Economic Returns From New Drugs Raises Questions About Sustaining Innovations,” suggests that the newest medicines are generating a negative rate of return across the industry. A viewpoint commonly found on the Web opines that Big Pharma has lost the ability to innovate, or as one person put it more plainly, “Big Pharma is useless at discovering new drugs and has to get its ideas from somewhere else.”

I’ve wanted to read some different ideas on facilitating innovation, so I picked up a copy of The Innovator’s Dilemma by Clayton Christensen. The book, which is widely cited for its business insights, left me thoroughly befuddled. Why? Because I have no familiarity with the markets used as examples in the book. I can’t envision how the lessons learned from the manufacturing of hard drives, steel, and excavators relates to drug development. Having no expertise in these areas makes it difficult for me to determine if Christensen’s arguments have merit, or if his ideas have significant flaws. A New Yorker article by Jill Lepore challenged the validity of the claims in The Innovators Dilemma, and confirmed that not everyone has bought in to the views espoused in this book.

I moved on to Peter Thiel’s (with Blake Masters) Zero to One, which focuses on how startups can change the world. Within the first few pages, I came across the following passages:

—“[T]he modern world suddenly experienced relentless technological progress from the advent of the steam engine in the 1760s all the way up to about 1970.”

—“Since 1971, we have seen rapid globalization along with limited technological development, mostly confined to IT.”

—“The smartphones that distract us from our surroundings also distract us from the fact that our surroundings are strangely old: only computers and communications have improved dramatically since midcentury.”

Somehow, Thiel seems to have missed out on what I (and many others) think was a profound series of technological advances over the past 45 years: the biotechnology revolution. What about molecular biology? DNA and animal cloning? DNA and protein sequencing. Oligonucleotide, peptide and (later) protein synthesis. Monoclonal antibodies. Manufacturing recombinant proteins. Genetically modified organisms (including bacteria, plants, and animals). PCR. Sequencing the human genome and later thousands of species. Genomic analysis of disease-causing genes. Gene editing via CRISPR/cas9. The list goes on and on. Thiel’s book (and my problems understanding The Innovator’s Dilemma) brought to mind Will Rogers’ famous quip, “Everybody is ignorant, only on different subjects.”

Thiel’s failure to either recognize or acknowledge these advances was surprising, but I soldiered on into one of the core elements of the book. These are the seven questions that everyone thinking of starting a business should ask himself or herself. Those that can successfully answer all of these questions (or at least five or six) could think about moving forward. Those considering investing in the company would want to hear a large number of positive responses to these questions before putting their money on the line.

However, clearing this seven question gauntlet would be very difficult for nearly every biotechnology company that I can think of, for the reasons I’ve outlined below. It’s fine if Thiel’s investing group, Founders Fund, wants to use these high standards. However, if other VC’s used these same criteria, future investments in the search for new medicines would wither and die. Fortunately, these criteria do not appear to be widely adopted, with $6 billion invested in biotech companies in 2014. VC investing in this sector in the first quarter of 2015 totaled $1.7 billion. These numbers contradict an assertion that Thiel made in a recent talk at Harvard University that, “there are no venture capitalists left in biotech.”

Here are the seven questions that a nascent business should be able to answer, along with my thoughts as to how answering them will be problematic for biotechnology startups:

The Engineering Question: Can you create breakthrough technology (vs. incremental improvement)? According to Thiel, a great technology company should have a proprietary technology that is an order of magnitude better (emphasis mine) than what’s already available.

Right off the bat we have a big problem clearing this hurdle in the biotechnology space. How would you define or measure this in biomedicine? What metrics should we use? Does the drug have to work in 10x as many patients, or 10x faster? Should it reduce itching or cholesterol levels 10x more than existing drugs? Reducing blood pressure 10x more than existing hypertension drugs would be fatal. Is it 10x safer (and how, exactly, would one define “safer”)? Should it cost only one-tenth as much as existing medicines (which is almost a definition of a generic drug for everything but biologics)? Does it need to kill 10x more species of bacteria than existing antibiotics (a field that, despite great need, most pharma companies have abandoned due to limited financial returns)? Does it need to extend your lifespan 10x longer, so we can all reach Methuselah’s 969 years? Would a single new indication for a drug essentially stand in for a “breakthrough”? As Bill Gates, a tech leader with a well known proclivity for biotech investing, said a few years ago, “We’ve all been spoiled and deeply confused by the IT model. Exponential improvement—that is rare.”

Exactly how are “competitors” defined? Does cancer immunotherapy compete with radiation and surgery, or just other immunotherapy treatments? Nearly all medicines are incrementally better than existing treatments. Very few of these would pass the ‘should be an order of magnitude better’ threshold, which makes for a fair criticism of the industry (even though these incremental drugs can be highly profitable). There are a few new treatments that do solve problems, or at least tackle an unaddressed need: curative treatments for hepatitis C (several of these have come to market in the past year and are already competing fiercely), new T cell immunotherapy treatments that have the potential, at least in some patients, to wipe out tumors, and drugs for treating cystic fibrosis patients with specific genetic mutations.

Most biotech startup founders will have no idea if they can actually meet this formidable threshold (or indeed, if their “product” even works at all) until they have invested hundreds of millions of dollars for research, development, manufacturing, and clinical trials. Even then, safety issues or competition from other medicines could easily torpedo their drugs.

The Timing Question: Is now the right time to start this particular business? For the sake of argument, I will state that the founders can convince their investors that now is indeed the right time to start the company.

The Monopoly Question: Are you starting with a big share of a small market?
This would indeed be doable in the biotech space and is a path often taken. For example, Alexion Pharmaceuticals’ only product, eculizumab (Soliris), which is the world’s most expensive drug, was initially approved in 2007 for treating patients with paroxysmal nocturnal hemoglobinuria (a disease afflicting only 8,000 people in the U.S.). Four years later, the drug was approved to treat atypical hemolytic uremic syndrome (with about 300 U.S. patients) as well. Indeed, many companies are focused on developing treatments for rare diseases that have only hundreds or thousands of patients. Some of these drugs will be expandable into other (likely small) markets, but many of them will never treat larger populations.

How a drug works is directly tied into the underlying biology of each disease. This can’t be randomly expanded just to drive product sales. Having said that, an understanding of diseases at the molecular level means that drugs developed for one disease may work quite well for others if they are caused by the same underlying defect.

Expansion of drug indications can occur in large markets as well. Tumor necrosis factor (TNF) inhibitors initially developed to treat rheumatoid arthritis in adults (which is actually a very large market) are now also approved for treating juvenile arthritis, ankylosing spondylitis, plaque psoriasis, ulcerative colitis, and Crohn’s disease. At their core, all of these are inflammatory disorders that result, at least in part, from the overproduction of TNF.

The People Question: Do you have the right team? Once again, for the sake of argument, let’s concede that the right team can be found.

The Distribution Question: Do you have a way to not just create but deliver your product? For most pharmaceuticals, the answer is yes. There are very well defined distribution pathways that new companies can tap into. However, for some of the newest approaches, such as personalized medicine treatments where each patient gets something uniquely different from any other patient, this is a huge problem. Dendreon’s Sipuleucel-T (Provenge), the first immunotherapy treatment that needed to be custom generated for each patient, was extremely expensive to make and deliver. This (along with other factors) bankrupted the company.

The Durability Question: Will your market position be defensible 10 and 20 years into the future? The answer to this question is almost clearly going to be a “probably not,” and sometimes the defensibility time frame is significantly shorter. Let’s look at one particular example: the difficulty in predicting the future for treatments for hepatitis C.

Infection with this virus can lead to a host of serious health problems, including cirrhosis and eventually liver cancer in a subset of patients. A number of drugs have been developed over the years that have been used to treat patients with hepatitis C. However, these treatments were not always terribly effective, and they were associated with significant side effects. Things began to change with the FDA approval of telaprevir (Incivek), which was co-developed by Vertex Pharmaceuticals and Johnson & Johnson. This drug, which was created for patients infected with genotype 1 (the most common form of) hepatitis C, won FDA approval in May 2011. The approval was followed by what was, at the time, the fastest launch trajectory of any drug in history, earning $1.56 billion in its first year on the market.

Unfortunately for the drug’s developers, its rapid ascent was matched by an equally precipitous decline. The drug, when given in combination with the previous standard of treatment (peginterferon alfa-2a and ribavirin), sometimes caused serious and even fatal adverse effects in patients. More importantly though, newer, safer hepatitis C drugs were developed that did not need to be given with these two other medications, and were significantly more effective. Competition drove telaprevir off the market just three short years after its launch. Not many drugs go from hero to has-been in such a short period of time, but it can happen.

The drugs that replaced telaprevir, which are made by Gilead Sciences, J&J, and AbbVie, replicated the meteoric launch initially seen with the earlier drug. They achieved much higher cure rates with easier to administer, all-oral treatments. Their success, in turn, has led to problems for several companies that are trailing them in the quest to develop hepatitis C medicines. Not only do companies have to worry about their competitors, they have to worry about the FDA as well.

Several years ago, the FDA created a “breakthrough therapy” designation for drugs in clinical trials. The idea was that the agency would expedite the review of the most promising new medicines to speed them along to consumers. Not only can the FDA giveth, it can taketh away as well. Both Merck (grazoprevir/elbasvir) and Bristol-Myers Squibb (daclatasvir) had breakthrough therapy designations rescinded for hepatitis C drugs they are developing because competitors got effective new drugs to the market ahead of them. As a result, Merck and Bristol’s medicines will likely take longer to approve and therefore reach the market at a later date. This will reduce the revenues for these drugs, and they will be facing stiff competition right out of the gate.

After Merck’s breakthrough tag was rescinded, the FDA changed course again three months later and restored the designation, although only for two small sub-populations of hepatitis C patients. The FDA decision pushed Bristol into an alternative strategy for daclatasvir, going after patients with the genotype 3 subset of hepatitis C, which only represent about 10 percent of those with the disease in the U.S. All of this comes after Bristol pulled the plug in 2014 on getting U.S. approval for one hepatitis C drug, asunaprevir, and abandoned (due to safety problems) another one, BMS 986094, a few years earlier. Other issues that need to be considered when developing any new medicine are how long it will take, how much it’ll cost, and the limited monopoly protection available via patent coverage.

The Secret Question: Have you identified a unique opportunity that others don’t see? This can be a difficult question to answer if you don’t know what rivals may be working on. What exactly defines the “opportunity”? Is it the core technology, the treatment of a particular disease, or the fact that one already has intellectual property coverage over something?

Some unique biotechnology opportunities that have bubbled up in recent years are still percolating, but the ultimate commercial payoffs and/or their feasibility are unclear. These include such concepts as making protein-based drugs in plants, producing a form of spider silk in goat’s milk or bioreactors, and designing nano-robots to attack cancer cells. Despite enormous investments, gene therapy, gene editing technologies, and stem cell cures are still not large-scale commercial successes, although treatments involving each of these methodologies have either made in to the market in modest ways, or are still in clinical trials. Getting these technologies to work appears to take decades, but they do hold the potential for high rewards. The CRISPR/cas9 gene editing technology stands out as the most potentially rewarding investment opportunity because, if successful, it could be employed to treat not only thousands of rare diseases, but numerous cancers as well. However, given the potential of the technology to introduce heritable traits into germ cells (i.e. those that give rise to eggs and sperm), biomedical researchers have called for a moratorium on using this technology in humans. A similar ban was put in place when recombinant gene technologies were in their infancy in the 1970s.

In summary, I see most biotech startups having trouble addressing the questions of engineering, market durability, and identifying new opportunities that have not been seen by rivals. After reading Zero to One, I came away with the strong impression that Thiel knew little about biotechnology. I was therefore quite surprised when I came across an article pointing out that he is, in fact, a big investor in the industry. Most of his investments are not through Founders Fund, his venture capital firm, but via his charitable foundation.

One of these investments was in Counsyl, a genetic testing company that is apparently a big success. His charitable foundation also created Breakout Labs, which makes small investments in biotech startups, enabling them to test out novel ideas. If they’re successful they can escape the “valley of death” and attract additional funding. It would be interesting to know what percentage of these Breakout Labs’ investments are in drug developers, as opposed to diagnostics, hardware, or data analysis startups. Here in Washington state, our Life Science Discovery Fund performs a similar function to Breakout Labs using money obtained from the Tobacco Master Settlement Agreement, not the state’s taxpayers.

Thiel’s Founders Fund has also invested in a few biopharma businesses. It’s backing Emerald Therapeutics, where a majority of the employees are focused not on drug development, but on building out a high-tech “laboratory robots-for-hire” business. The idea is that other companies can offload some of their experiments to Emerald’s robot assemblage and get their data back the next day. It’s not clear to me how many labs would actually want to do this, but given the lack of resources devoted to the company’s other vaguely stated mission to develop breakthrough anti-viral therapies, I wouldn’t classify this as a traditional biopharma company. It’s more of a service provider.

Founders Fund is also backing Stemcentrx, which according to its website, “was founded in 2008 with the intent of developing life-changing therapies for cancer patients. We have developed proprietary discovery platforms that yield unprecedented insight into the biology of tumors and are being exploited to develop potent new cancer drugs.”

Unfortunately, Stemcentrx’s website contains no information as to the management of the company, its pipeline, core technologies, peer-reviewed publications, financials, or anything beyond the jobs they are hiring for. All that’s available for public consumption so far is a rather pedestrian pile of hype. This isn’t stealth mode; this is a “cloak of invisibility” approach. A search of the clinicaltrials.gov website revealed that the company has one drug in clinical trials for patients with small-cell lung cancer—an antibody-drug conjugate, which is not a new approach to cancer treatment. It’s difficult to judge how this concept satisfied Thiel’s criteria above, but since he’s funded Stemcentrx, he must think it could offer an enormous reward if successful. We’ll just have to see what comes out of it.

To be fair, there were a lot of interesting points discussed in Zero to One regarding the nature of monopolies and the financially destructive nature of competition in business. Thiel also does a nice job of explaining his thoughts on the importance of the power law in business (essentially, 80 percent of profits will come from only 20 percent of the companies invested in). On the engineering and IT side of tech, I can see that his approach defined by the seven questions may indeed be valuable.

I would argue, however, that there is something unique about biotechnology as a business. Basic biology is often too complex to allow for the same type of problem-solving solutions that work for things like engineering or coding. Established dogma can change over time, such as the role of an enzyme that for decades was believed to promote cancer, but may actually suppress tumors. The time it takes to develop drugs can easily be an order of magnitude longer than in other types of technology products. The time from the launch of Sputnik to men walking on the moon was only 12 years. In contrast, the war on cancer has been ongoing for well over a century (or 44 years, if you set the start date at Nixon’s 1971 National Cancer Act legislation), with much of the hard work still ahead of us.

The path to cancer cures has been long and difficult, and may require some novel ideas about how to adequately fund much of the work that lies ahead. Biotech and pharma business models are currently in flux. Asking ourselves hard questions is good, but it must never distract our eyes from the prize of creating new medicines that will benefit all of us.

Stewart Lyman is Owner and Manager of Lyman BioPharma Consulting LLC in Seattle. He provides strategic advice to clients on their research programs, collaboration management issues, as well as preclinical data reviews. Follow @

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  • AB

    Great read. Your point regarding the time to commercialization is absolutely spot-on. I work in the Financial Services industry in the Bay Area and its clear that its difficult for a GP to market their Fund with projected returns 10-15 years out when that same investor could just as easily invest in a IT/Tech centric company cranking out commercialized product within months. To add to that, with longer “start to finish” times come more funding rounds/dilution.
    I’m a relatively recent fan of Biotech/Pharma (became involved/interested in the past two years), so I wasn’t around for the “drought” of a few years ago… but I think a key to the continued success of Biotech/Pharma funding is the involvement and publicity of the geniuses behind the companies. How many laymnas know of the history of Facebook but couldn’t even nut-shell the Human Genome Project?

  • MineMan

    Article and assessment of paradigm shift in the way we treat diseases in the future, (not so distant future) through “engineering genetic cures”.
    See sangamo Biosciences, and see the IP they have and control.