In early August, the FDA sent Adventrx Pharmaceuticals a Complete Response Letter (CRL) for their drug Exelbine which basically said “Hey, thanks for the NDA, but based on what you sent us, we’re not going to approve your drug.” Now CRLs can take many forms, all the way from “we have some concerns about your manufacturing controls”, which can often be resolved in a matter of months, to “your trial design is so mess up that you’ll have to repeat the whole thing”, which is often a death knell for biotech start-ups who don’t have a lot of cash.
Whenever I read about a company receiving a CRL, I’m always interested learn why their application was rejected. CRLs are not publically released (this is a bit of a hot topic lately, since many think they should be), but companies always issue press releases when they receive them since the information they contain is obviously very material to the value of the company. When I read Adventrx Pharmaceuticals’ press release, I cringed:
The FDA determined that it could not approve the Exelbine NDA in its present form. In particular, the complete response letter noted that, based on inspections at clinical sites, the authenticity of the drug products used in the pivotal bioequivalence trial (Study 530-01) could not be verified, which placed the results of the trial into question. The letter stated that the bioequivalence trial will need to be repeated to address this deficiency.
Ouch! Basically what the letter is stating is that the data from the clinical trial in question (Study 530-01) is being thrown out because the FDA doesn’t believe that the trial sponsors could tell the drugs they were using apart. After doing some searching on clinicaltrials.gov, I found the trial here. This was a bioequivalence study where the company’s product, Exelbine, was being compared to a reference product, Navelbine, to make sure that they both behaved the same way in patients. The reason this trial was run is that if bioequivalence could be proven, Adventrx Pharmaceuticals could use Navelbine data in support of its application.
The reason why this is so painful to see is that it can be so easily avoided. The FDA has very strict guidelines concerning what type of testing is required to prove what you say you are giving patients is actually what you are giving patients. It goes further than just making sure you ordered the right drug; trial sponsors are usually required to test a cetain percentage of the packages they receive (be it vials or bottles) to ensure that what is written on the label is actually what is in the bottle. And following that, once the drugs are taken from their packaging and prepared for administration to patients, they need to be carefully tracked so that no mix-ups occur. It appears that the clinics running this trial failed to do that.
What makes it even more painful, is that it’s likely that nothing is wrong with the clinical trial. In the press release, the company states:
Of note, Exelbine and the reference product come in different package presentations, require different preparation procedures and have different physical characteristics. Based on the different characteristics between the study drugs, the Company believes it is unlikely that study sites would confuse the two study drugs or fail to recognize which drug was being administered to a patient.
The company’s arguement is pretty weak (“hey, we didn’t follow procedure, but come on! only an idiot would mix those two drugs up”), but they are most likely right. However, it doesn’t matter (and it shouldn’t matter). If you don’t follow FDA guidelines for trial design you can be guarenteed you won’t be getting approval.
The only solace I can provide is that it was relatively a small phase I trial. With an estimated 28 patients enrolled, it would likely cost the company only a few hundred thousand dollars and a year or so of their time to repeat it. However, it appears they may not bother:
“In the meantime, our resources and focus are on ANX-188 and ANX-514, which we believe are the long-term value drivers for our company. Our cash and equivalents of $40.7 million at July 31, plus cost savings from delaying or potentially discontinuing the Exelbine program, will provide us the capital to continue to advance both of these programs,” Mr. Culley added.
Lesson learned I guess…
This post is a little off-topic, but I thought I would share…
Since nearly everyone has experienced the frustration of visiting the DMV, I’ll spare you the details of my latest visit. It was no better and no worse than the DMVs I’ve visited in other states. The only thing that helps keep me sane during these visits is identifying all the inefficiencies and imaging the numerous ways that service could be improved. I liken it to what world peace would be like: a pleasant though, but something impossible to achieve.
Or is it possible? Well, let me share with you what happened in my hometown almost 20 years. In Canada, the province of Alberta (prior to 1993) had a system very similar to the DMV system that you see in many states. Just like in the US, it was a painful process to get a driver’s license or register your vehicle. In Calgary, a city of about 800,000 people at the time, there were a grand total of two registry centers (the equivalent of DMVs). The hours were terrible, customer service was non-existant and the waits were long. In 1993, the Alberta government decided to privatize the registry system, or at least the front-office part.
What happened? Well, this map show one change that occurred. Nearly everyone of those red dots is a registry services business. I’m sure google picked up a few other businesses by accident, but right now there are 25+ registry services businesses in a city of just over one million. Talk about options!
Before I left the city, I had a chance to experience the new system. I needed a copy of my long form birth certificate. So I looked up the closest registry services business (less than 2 miles away!). But will they be open? Why yes! Their hours, Monday through Friday are 9am to 9pm (no need to leave work early!) and they are open on the weekend too. I drove over, parked the car and walked in. There were 2 people in line. After a 3 min wait, I walked up to the counter and inquired about gettting a copy of my birth certificate. No problem! After filling out a form, the very pleasant lady entered my information into the computer, asked me a few questions to confirm my identity and said the birth certificate would be delivered by mail in less than a week. Great! I don’t remember what it cost me, but I do know they accepted credit cards. I was in and out in less than 10 minutes. I had a similar experience when I renewed my driver’s license a couple years later.
Today, the registry services businesses allow you to do the following quickly, painlessly and with great customer service: get a driver’s license (including the test), register a vehicle, register your business, get a marriage license, do a land title search, put a lien on property, change your name, get an Alberta healthcare card and even obtain a raffle license for your fundraiser.
So what’s the point of this post? Well, it’s mostly a rant, but one take away is that innovation is possible, even in those areas of our lives where we’ve grown to accept inefficient, archaic systems. Now to just get the California government to buy into the idea…
Xconomy.com just posted an interview with Dennis Purcell of Aisling Capital and while reading it, a comment by Dennis caught my eye:
So the clinical trials, the understanding of FDA regulations, the patent protection all came together for us. We made about a 15x return on Adams.
The “Adams” he’s talking about is Adams Laboratories, Inc., the company that brought you Mucinex and this guy..
Aisling Capital had invested in Adams Laboratories and that 15x return came about when Reckitt Benckiser (a maker of a number of OTC healthcare products) acquired Adams Laboratories for 2.3 billion dollars in 2007. So what made Mucinex and Adams Laboratories so valuable? Mucinex is nothing special, just an extended-release version of the drug guaifenesin, an expectorant (it helps loosen mucus so you can expel it) that has been on the market for decades. This isn’t a “new” drug by any means and it makes you wonder, is there really that much value in an over-the-counter cold medicine? If you read the press release about the acquisition, you should carefully note this part:
Mucinex, the No.1 OTC expectorant in the USA, is a long-acting guaifenesin product and the only FDA approved 12-hour expectorant.
Hmm…. the only FDA approved 12-hour expectorant? What’s going on here? Well, after a little digging a very interested story came to light (I got much of the background from this excellent Harvard Law paper by Tammy Muccio).
First, we need a little context concerning drug regulation laws in the US (I’ll try to keep it short and to the point): The Food, Drug and Cosmetic Act (FDCA) was first passed in 1938 as a means to ensure that consumers were not exposed to unsafe (you guessed it) foods, drugs or cosmetics. The regulations only concerned unsafe drugs, not ineffective drugs. It wasn’t until 1962 that the FDCA was amended and drugs were required to be both safe and effective. Great, right? Well, now the problem was, what should we do with all the drugs that were currently on the market that don’t have efficacy data? To address that question, the FDA decided to initially grandfather these drugs and in the meantime initiated the Drug Effectiveness Study Implementation (DESI) program which would examine the available data and hopefully help the FDA classify the drugs as either safe and effective or not (not a small task in the least). For OTC products, the FDA initiated the “OTC Monograph Program” in which the FDA evaluated current OTC ingredients for safety and effectiveness on a class-by-class basis. If you were an OTC drug manufacturer, you could continue to sell your product as long as you registered with the FDA and complied with the monograph and manufacturing standards. It wasn’t a perfect solution, but considering the task at hand, it was a pretty good compromise.
Fast-forwarding to 1983, E-Ferol, an unapproved IV preparation of vitamin-E for premature babies results in the death of a number of newborns. This reinvigorated the FDA and made them take a second look at all those grandfathered drugs, guaifenesin included because, at the time, it was a Category III drug (“insufficient data to establish safety and efficacy”). Eventually in 1989, guaifenesin was moved to Category I (“generally recognized as safe and effective and not mis-branded”). So everything is fine, right? Not quite. A few years later the FDA got on a new kick and started targeting extended-release drugs of all kinds (and with good reason). Guaifenesin extended-release products were now on the FDA radar.
At this point in time, Adams Laboratories entered the scene. In 2000, they submitted an NDA for extended-release guaifenesin and in July 2002 it was approved and made available OTC (they also got a patent for their formulation). Shortly after approval, they requested that the FDA remove all of the “unapproved” extended-release guaifenesin products from the market and subsequently, the FDA sent out 66 Warning Letters to all of Adams Laboratories’ competitors that stated “either get an ANDA or stop selling your product.” Honestly, what more could you ask for than to have the government come in and shutdown every single one of the your competitors? Just to put this in context, take a look at what a 2006 10-Q filing from Adams Laboratories had to say:
Based on data from IMS Health—NPA TM , we estimate that, for the 12 months ended June 30, 2003, there were approximately 10.5 million prescriptions filled for long-acting, single-ingredient guaifenesin products. After November 2003, we believe that a majority of prescriptions written for long-acting, single-ingredient guaifenesin resulted in OTC sales of our Mucinex SE product. Humibid SE is now also available to meet this demand in a maximum strength formulation.
Basically, Adams Laboratories saw a huge Rx and OTC market, created a couple products, got FDA approval and then eliminated all of their competitors using the heavy hand of FDA regulators. Wow. The amazing part is, the FDA didn’t even bat an eye at this maneuver. Here is what a director from the FDA’s CDER group said in 2007 about the FDA’s continued enforcement against unapproved extended-release guaifenesin products:
“Today’s action is another example of our commitment to ensure all drugs marketed in the United States that require FDA approval have that approval,” said Steven K. Galson, M.D., M.P.H., director of the FDA’s Center for Drug Evaluation and Research (CDER). “This benefits consumers because drugs that skirt the approval process may be unsafe, may not work, and often have inadequate labeling or are improperly manufactured.”
So it all starts to make sense at this point. Adams Laboratories simply figured out how to help the FDA with their goals (getting unapproved drugs off the market) and at the same time turn a profit. Pretty remarkable if you ask me.
As a final point, I’ll leave you with this: If you think this is a smart business model to emulate, tread carefully. A few other companies have tried the same thing. URL Pharma did it with colchicine (Colcrys) and most recently, KV Pharmaceuticals did it with a progesterone (Makena) and it didn’t turn out quite so well. A quick google search will give you the story on those drugs. I think the window closed a long time ago on this business model.
The trashing of Dedreon’s stock price happened less than 24 hours ago and a lot of speculation is underway as to why they missed their revenue target. Ed Silverman over at Pharmalot just posted an interview he did with a Los Angeles urologist where he tried to find out if reimbursement concerns are the real issue behind the lagging sales. It’s an excellent article and I encourage you to read it.
I won’t spoil the punchline from Ed’s article, but it appears that Dendreon’s mistake is one that a lot of start-ups make. It’s a hard lesson to learn, but I think we can all benefit by reminding ourselves: “It’s not about the product, it’s about the customer.” It’s something that we often forget about in biotech where the “wow!” factor of a new drug can overshadow the fact we still have to get the drug to the patient.
Matthew Herper’s “The Medicine Show” blog on Forbes.com has a new series of posts on fixing pharma’s R&D machine. One post in particular caught my eye, “Seven Steps to Medical Innovation”, which lists Bernard Munos’ strategic plan to fix what ails pharma. Munos came up with this list from his observations during a 30 year career in sales at Eli Lilly and his own personal research on the issue (more on Munos here).
Let’s take a look at the list…
1. Regain the trust of physicians, regulators and payers.
I can’t argue with this point. Pharma has a bad reputation among all of these constituents, physicians most of all. A friend recently did a sales rotation and he said the tension (with many, but not all physicians) is palpable. For the most part, they would prefer to never see another sales rep again, but they do, mainly for the free samples. Many physicians are quite cynical about anything big pharma companies say and are always looking for the “catch”, assuming that drug companies have no qualms about bending the truth to increase sales. Improving the reputation of drug companies probably wouldn’t go far in fixing the R&D problem, but it’s an important goal, nonetheless.
2. Stop chasing blockbusters, which help lots of people a little bit, and start chasing breakthroughs, which help patients a lot.
Hmm… not so sure about this one. Blockbusters “help lots of people a little bit”? I think one could argue that the statins have helped lots of people a lot. Just take a look at the long-term clinical trials and the reductions in cardiac events and death. Norvasc? Enbrel? Blockbusters too and huge steps forward in treating hypertension and arthritis, heck one might even call them “breakthroughs”.
3. Do what works. Stop trying to manage drug discovery with Six Sigma processes.
Not sure how helpful “do what works” is, since if companies knew what worked, they’d probably be doing it. However, I can throw my support behind the disdain for big pharma’s attempt to industrialize R&D. I won’t say anything further on it, since it’s a widely recognized issue and has been commented on many times.
4. Lower costs with collaborative research.
Hmm… again, not so sure about this point. I can agree that collaborative research has a lot of positive aspects: access to experts who are familiar with the nuances of a biological target, access to creative thinkers who don’t come from big pharma, etc. However, I’m not sure how much it will reduce costs. The expensive part of R&D is the “D” part and the numerous clinical trials that are run (I’ve seen numbers that breakdown R&D costs about 1/3 “R” and 2/3 “D”). Doing the pre-clinical work (where most collaborations occur and discoveries are fleshed-out) isn’t what’s driving up R&D costs.
5. Mitigate risk by developing lots of potential breakthroughs, not by trying to develop projects that seem low-risk. History says the risk is never low.
6. Don’t move anything into human trials unless it is a potential breakthrough.
I’m combining these two points because I think they are related. I have a problem with Munos’ argument that developing lots of “potential breakthroughs” mitigates risk. What is the risk he speaks of? In R&D terms, it’s investing money in a project that fails to generate a positive return. The problem with his point is that even if you developed a lot of “potential breakthroughs”, they are just that potential breakthroughs. What makes or breaks a new drug are the clinical trials which is where most of the risk (and cost) lies. Pharma companies have plenty of “potential breakthroughs” (just listen to any pipeline presentation), what they don’t have is the money to send each one through the gamut of clinical trials. So choices have to be made. If Munos is arguing that the choices should be in favor of “potential breakthroughs” versus low-risk, incremental improvements, he’ll get no argument from me.
7. Cut research and development.
If nothing else, Munos knows how to get people’s attention, and I think that was the purpose of how this point was worded. Delving a bit deeper, Munos suggests that pharma companies should cut their R&D by outsourcing it to small, independent research labs that don’t suffer from the “big pharma” mentality. This is already happening to some extent through the academic collaborations that almost every big drug company has (or is planning to) set up. Munos argues that this should go further and that big pharma should open up their R&D organizations to the outside, offering up their internal resources to outside researchers. Pfizer plans to do this with their academic collaborations where they provide access to internal Pfizer technology. It will remain to be seen how beneficial it is.
So what’s the verdict? Munos makes some good points, but is a little lean on the details. My biggest concern is that this is being pushed as a “solution” to the problems of big pharma R&D and reeks of “if only these companies do X, Y and Z, everything will be better.” It’s that sort of thinking that got big pharma into the mess it is in today, with a top-down approach to R&D management. However, I do commend Munos for trying to change the system, because it certainly does need to change.
Nature Reviews – Drug Development has an interesting article in their July edition by Michael Dunn of Ferring Pharmaceuticals out of San Diego (no subscription required!). Michael did some research on the timing of various R&D events and their impact on the total duration of marketing exclusivity for a given drug.
It has some great background on how market exclusivity differs in the US and Europe and how events such as the filing of the first patent and the initiation of clinical trials impact the overall length of market exclusivity. I learned a few things from the article, so I thought I would pass it along.
I’m confident that most of the readers of this blog are familiar with Zafgen Inc. and their new obesity candidate ZGN-433. The company is hot right now and for good reason: in a Phase 1b study, ZGN-433 produced a median weight loss of 1 kg (2.2 lbs) per week and follow-up cardiovascular data showed “rapid and significant” improvement in LDL, cholesterol, triglyceride and C-reactive protein levels. To give you an idea of how impressive this level of weight loss is, FDA guidance requires obesity drugs to produce at least a 5% decrease in body weight (over and above that seen in the placebo group) over a period of one year. ZGN-433 produced a median weight loss of 3.1%, compared to the placebo, in 26 days.
You might be thinking, if these results hold for the phase II and phase III trials, Zafgen has a slam-dunk here! According to the CDC, 34% of adult Americans are obese and another 34% are overweight. What a market potential! Blockbuster? Of course! We’re talking mega-blockbuster here!
Not so fast!
In the past year, three different obesity drugs have been rejected by the FDA: Qnexa (Vivus), Contrave (Orexigen Therapeutics) and Lorquess (Arena Pharmaceuticals). They were all rejected for rare, yet serious safety concerns ranging from birth defects (Qnexa) to cardiovascular issues (Contrave) to tumors in a rat model (Lorquess). What is really surprising is that two of the drugs (Qnexa and Contrave) are combinations of previously approved drugs. The rejection of Contrave, a combination of naltrexone (an opioid antagonist) and bupropion (an anti-depressant/smoking cessation aid), was particularly surprising since both of the drugs in the combination are known for their high level of tolerability and safety. Of course, drug combinations can produce side effects that aren’t seen when either drug is used alone, but to reject Contrave despite the panel’s 13-7 vote to approve? What’s going on here?
Well, the FDA is doing its best to predict the future and it doesn’t like what it sees. For the same reason that obesity is such a lucrative market (the huge patient population), it is also wrought with safety issues. The FDA is concerned that if an effective obesity drug were approved, it wouldn’t be just obese people taking it. Sure, in the beginning doctors would reserve the drug for the truly needy, those who have tried to lose weight but have failed and are experiencing serious health consequences as a result. But the FDA knows better. Soon enough, people who are 10 or 15 lbs overweight would be taking it. Then, people who want to lose those stubborn last 5 lbs would somehow get their hands on it (probably through an online pharmacy). After that? Well, if it works so well, why not just take it all the time, even if you’re not overweight? Or, if you want to make a weight class for wrestling, it can’t hurt right? And so on and so on. Soon enough, tens of millions of Americans will be taking the drug and likely a good percentage won’t be following the label or their doctor’s directions. The risk of <insert terrible side effect> is only two in one million? Well, pretty soon there will be enough patients crippled by the drug to form a line out of the back of the room during the congressional hearings. I’m sure it’s scenarios like this that cause the head of the FDA to wake up in the middle of night, her heart racing and covered in sweat as she envisions her career going down the drain.
So where does that leave Zafgen? In a tight spot, indeed, but they do seem to have a game plan. In a Xconomy interview, Zafgen’s CEO, Thomas Hughes, says he’s already thinking about how to develop a REMS (Risk Evaluation and Mitigation Strategy) for ZGN-433. The company plans to target only the severely obese patient population and could use the REMS to control which doctors can prescribe the drug, which patient can receive the drug and which pharmacies can fill the prescriptions. It’s a great preemptive strategy for when it comes time to submit the NDA. Another encouraging factor is that the drug can only be administered via injection; no pills here. Normally if a drug can’t be taken orally it would be viewed as a negative, but in the eyes of the FDA, that will likely be seen as an additional barrier to widespread use.
It will be interesting to see how the ZGN-433 program works out; an effective treatment for obesity is desperately needed, not only for the patients affected, but also for the country as a whole as healthcare costs continue to increase, in large part due to diseases like diabetes and heart disease where obesity is a major risk factor. I’ll keep an eye out for any news from Zafgen and be sure to post any relevant updates.
Comment: It’s interesting to note that Zafgen has only three full-time employees. It’s a great example of the “virtual biotech” model that I touched upon in one of my earlier posts: Pitching to a biotech venture capital firm: what not to do.
If there is one thing that excites me about the biotech industry, it’s the possibility that everything that we think we know about how to treat a disease will get turned on its head. A great example of this is the Nobel Prize winning work by Barry Marshall and Robin Warren on the role of H. pylori and stomach ulcers. Despite the dogma at the time that blamed ulcers on stress and poor diet, Marshall and Warren combined creative thinking and careful scientific exploration to prove all of it wrong. And to top it all off, their discovery lead to a treatment regime that cures H. pylori infections (and typically ulcers as well) in over 80% of patients.
T. suis ova
Coronado Biosciences isn’t there yet, but they just announced that they will be submitting an IND application later this year for their novel treatment of Crohn’s disease, CNDO-201. What makes this treatment so unique is that it composed of T. suis ova, or, as they are more commonly called, pig whipworm eggs. The theory behind this treatment is the so-called “hygiene hypothesis“, or the idea that as we improve our living conditions through the elimination of what were once common infections, we are disrupting the development of our immune system. Since humans have suffered from these infections for hundreds of thousands of years, the thought is that our immune system depends on exposure to these pathogens for its proper development. Immune system regulation pathways are far from simple, so I’ll leave it up to the reader to investigate the details, but simply put, the hypothesis is based on T-helper cell feedback between Th1 and Th2 cells. Basically, stimulating Th1 cells (through exposure to bacteria and virus) downregulates Th2 activity, which is responsible for the inappropriate immune responses that lead to conditions such as allergies and eczema. It gets even more complicated when we start talking about autoimmune diseases such as Crohn’s disease or multiple sclerosis, since these are Th1 mediated immune responses, however, theories have been put forth to explain the role of pathogen exposure in these diseases as well.
What makes this news so exciting is that Coronado Biosciences is prepared to move forward with clinical trials in this area based on some very positive data from a number of independent investigator trials (you can find the trial results on their website). In one open-label, non-comparative study of 29 patients with Crohn’s disease, 66% of patients entered remission at 12 weeks and this increased to 72% of patients at 24 weeks. This is quite remarkable as the tool-of-last-resort for treating Crohn’s disease, anti-TNF-alpha drugs such as Remicade and Humira typically see remission rates in ~30% of patients. The caveat of course is that this was a open-label study with a small number of patients and until more rigorous studies are completed, we won’t truly know the efficacy of this treatment. Until then, I’ll keep my fingers crossed and continue to give Coronado Biosciences a pat on the back for exploring a truly novel treatment paradigm, that if successful, could fundamentally change how we treatment autoimmune diseases.
I heard this phrase a number of times while working in the pharmaceutical industry. It was used to describe the behavior of the big pharma R&D departments when it came time to decide what were the “hot” development programs. For example, we would go years with only a token interest in schizophrenia and then suddenly the company would label the program as “high priority”, seemingly at the same time as every other big pharma. One couldn’t help but make the comparison to a team of 5-years who don’t play their positions in a soccer game, but rather just run after the ball. For the more cynical types, it seemed like another example of big pharma’s inefficient R&D strategy.
For those who keep up on the industry news, you can’t help but notice a new ball that all the companies are chasing: oncology. At the moment, nearly all the big pharma and biotech companies have substantial investments in oncology, not to mention the huge number of start-ups who are also focusing on new cures for cancer. But are they really just mindlessly chasing the newest flavor of the month?
If we look a little closer at the oncology space, particularly in light of the research, regulatory and reimbursement issues facing the industry, the strategy starts to make a little more sense:
- There is a lot of scientific knowledge out there about cancer, be it new targets, genomic data or disease mechanisms and more coming out every day, particularly from academic labs. If you’re going to work in a therapeutic area, it’s not a bad idea to choose one where you’re not completely in the dark (yes, I’m thinking of amyloid plaques and Alzheimer’s disease).
- There are many rare cancers that affect very small patient populations. Targetting these cancers makes it easier to justify smaller clinical trials to the FDA which translates into lower development costs.
- The high unmet medical need for many cancers can often help get fast track, accelerated approval or priority review for your application from the FDA, reducing regulatory burden and decreasing time to market.
- There is a clearly defined approval pathway (relatively speaking) with FDA-accepted clinical trial endpoints (i.e. overall survival, progression-free survival, etc) that reduce the risk associated with clinical trial design.
- If you’re developing a drug for a cancer with no currently available treatments, the FDA will often relax clinical trial requirements (i.e. single arm trials vs. a placebo or a best available treatment comparison trial).
- With respect to the more rare cancers, it’s easier to justify a therapy that costs tens of thousands of dollars when an insurance company will only have to pay for a handful of patients.
- Although personalized medicine is only in its infancy, some of the more robust biomarkers have come from oncology namely ER, PR and HER2 for breast cancer. As comparative medicine increases in importance, being able to identify patients who are likely to respond to your drug can help with reimbursement.
- And finally, cancer affects nearly everyone, either directly or indirectly through friends and family. That makes it a hot-button issue (just look at the row between Roche, the FDA and patient groups over Avastin for breast cancer) and less likely that an insurance company will deny reimbursement when the data isn’t 100% clear.
Going one step further, these benefits seem to translate into higher success rates. Just look at BIO’s presentation here (slide #9).
So maybe the observation that companies are acting like a 5-years playing soccer isn’t exactly fair. There are real reasons that certain therapeutic areas are more attractive than others and as scientific knowledge, regulatory rules and reimbursement strategies change, these differences can be substantial. Moreover, since these reasons often relate to issues that affect the industry as a whole, it shouldn’t be surprising that companies exhibit what appears to be a herd-mentality.
However, the question remains, is it the right strategy? Should companies be chasing diseases that provide the path of least resistance, or should they be breaking new ground in areas where the path isn’t so clearly laid out? What should the balance be between the two? I’m interested to hear what you think.
Update: Ernst & Young just released their “Beyond Borders: Global biotechnology report 2011” which you can find here. If you need any further convincing of the shift towards oncology, look no further than page 95 of the report where you’ll find this graph of US companies pipelines’ by indication:
For the biotech entrepreneur looking to raise funds for a new start-up, pitching to a venture capital firm seems like a straightforward process, right? Highlight your management team, the unmet need, your development plan and the potential return to the investors. Not so fast. The biotech VC industry is being seriously squeezed at the moment: limited partners are shying away from biotech investments and profitable exits are becoming scarce as the public markets and big biopharma companies push down valuations. Biotech VC firms are still making investments of course, however, they are using much different selection criteria. So what should a biotech entrepreneur do to increase the odds of getting VC funding?
It starts with an understanding of what biotech VC firms don’t want.
Biotech VC firms don’t want an expensive, long-term development plan
As the cost of drug development continues to rise, biotech VC firms are increasing their focus on capital efficiency. You want a ten million dollar financing round to set up a new lab, hire a team and run a variety of preclinical studies? It’s probably not going to happen. VC firms want to see a development plan that will get them to a meaningful milestone as quickly and cheaply as possible. Need to hire another scientist to run a preclinical study? Forget it, outsource it to a CRO. Want to test your drug in one more animal model? Don’t bother unless it’s critical to reaching your next milestone. Get familiar with terms like “lean proof-of-concept” and “virtual biotech”.
Biotech VC firms don’t want to do an IPO
Biotech VC firms don’t just want to know what you’re going to do with their money, they also want to know how they’ll get their money back (hopefully with a healthy return). You may have dreams of your own NASDAQ ticker symbol, but if you want VC funding, don’t even think of mentioning an IPO as an exit option.
Why? The chart below from BIO answers that question.
Since the IPO market reopened in 2008, almost every biotech that has gone public has been forced to take a very large discount on their target price. This not only reduces the VC firm’s return, but the smaller amount of capital raised often puts a fear in the public markets that the biotech will have to do another dilutive financing round just to raise enough capital to reach the next development milestone. This just depresses the share price even further.
Biotech VC firms don’t want vague exit plans
So we know that biotech VC firms want to understand how they’ll exit their investment, but an IPO is out of the question. Maybe the biotech entrepreneur should just focus on an “acquisition” or an “out-licensing deal” with a big biopharma company as an exit? That won’t cut it. The days of biotech VC firms investing without a detailed and carefully thought out exit strategy are long gone. A much better approach is to include specifics: Who are the potential buyers of your company? Does your technology fit with their portfolio strategy? Does your development milestone provide a candidate profile that acquiring companies look for? How much do they usually pay for an acquisition? How do they structure it? Do they pay in one lump sum or do they provide a small up-front payment followed by a series of earn-outs? The more homework you do and the more you can make the VC firm believe in your exit strategy, the better.
You may be thinking “Not all VC firms are the same! I’ve got a game-changer here and the rules don’t apply to me.” That may be true. Not all VC firms are the same and this article only addresses the broad trends occurring in the industry. However, the more you understand the challenges being faced by biotech VC firms and address them in your pitch, the more likely you’ll secure the funding you need.
This post was taken from an article I wrote for the Dartmouth Entreprenurial Network newsletter, which can be found here.