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The Innovation Challenge: Assessing BioPharma Startups


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 … Next Page »

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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.