Since the economic downturn of 2008, doom has become ingrained in the biopharma narrative.

According to the mantra, budgets for great science have flatlined. New startups can't find VC money to translate great science because VCs cannot find new risk capital. And VCs can't get exits because IPOs have dried up and it's a buyer's market for trade sales. For biotech, "risk-sharing" pharma deals mean "back-loaded." Pipelines are shrinking as R&D downsizes. Breakthrough drugs can't get approved by risk-averse regulators in a hostile political climate. And public and private cost controls are killing reimbursement as drug companies increasingly are relegated to "vendor" status in the healthcare system.

Have we left anything out?

The 19th annual Back to School issue says it's time to end the ritual complaining. The industry is not doomed - it is in fact busy restructuring for the future.

The question is what must come out of this process.

For 2011, Back to School argues that rebasing the biopharma space can result in better engines of value creation for patients and shareholders. But only if truly fresh thinking is allowed to replace old expectations and habits.

Indeed, the signs of fresh thinking are all around. It is only a matter of time until it is woven into a framework for the next decade.

The situation

It does not take a Tea Party hobbit to see the signs of despondency.

The 3Q11 economic numbers show the potential for a second dip recession. Profligacy by governments and thoughtless leveraging of household balance sheets mean that everything and virtually everyone will be rebasing for years to come.

Rebasing means entire industries will shrink, along with their growth rates and anticipated returns on investment. Biotech, pharma and their investors won't be excluded.

The global rebasing doubly amplifies the price of the lack of productivity in drug development. A solution to the productivity problem already was essential to maintaining biopharma's ability to compete for capital against social media or "the next big thing."

Now time really has run out. The old return mechanics for risk capital are over (maybe they were ephemeral in the first place). The revenue trajectory has flattened. The patent cliff has arrived. And even though the aging of the baby boomers guarantees unrelenting demand for healthcare, the means to pay for it have shriveled.

The doomsday crowd sees big pharma downsizing jobs and R&D, Darwinian culling of the biotech herd and transformational science left dying on the vine. In this setting, self-preservation takes precedence over leaps of faith. The appetite for risk falls.

But this does not mean biopharma's innovators, experimenters and tinkerers have given up. For starters, they can see the upside signals in the industry's fundamental indicators: ambitious newcos, pharma's post-patent cliff pipeline, and positive data on the economics of expanding access to drugs (see "Pharma Phoenix," A12; "Innovation Bandwagon," A13; and "Pharmacoeconomics," A14).

These brighter signs should not blunt the passion for transformation, even if they buy time for the biopharma world to build its new structure. The drive to innovate is compulsive. The innovators and experimenters do not ask for permission to test their ideas, nor do they spend time with the naysayers. There is too much to do.

The framework they are building is beginning to emerge. For 2011, Back to School identifies some of these building blocks. The accompanying short essays by an international group of key opinion leaders identify others.

Not all the ideas are new. But their timing may be better now. In total, they point to the industry's structure for the rest of the decade.

The path forward

Twelve years ago, Back to School examined the requirements to sustain the biotech industry.

"According to the conventional wisdom," Back to School said at the time, "there are still too many companies, they are too narrowly focused, the financing window is closed, there are fewer good startup ideas, and big pharma is learning the biology-based discovery game" (see "Structure 2000," BioCentury, Sept. 7, 1999).

In a nutshell, "Structure 2000" focused on the technology, finance and project decisions that were required to keep a steady flow of biotech companies entering the mid-cap space - then defined as $300-$800 million in market cap - and onward into the top tier.

Many of the themes in Structure 2000 ring true today.

One is the notion that an increased mortality rate among flawed companies and improvident VCs would leave better companies providing better returns on investment.

Moreover, even 12 years ago, KOLs could foresee the role of the biggest companies in harvesting winning products and technologies, and the rise of corporate strategic investing.

But while Structure 2000 was inward looking and focused on biotech, the structure for 2012 and beyond includes the entire biopharma space and will be significantly shaped by a widening web of players - by research institutions, government, patients and payers, not just shareholders.

It will require an already heavily partnered industry to be even more broad-minded about how collaborations must be at the center of value creation. This will be a recurring theme throughout the rest of Back to School for 2011:

The precompetitive space is being expanded by public and private actors so that scarce resources can be pooled to elucidate disease more efficiently.

In the competitive arena downstream, companies are acknowledging that value must be made more visible to shareholders. Rather than waste another decade on mindless aggregation, brave companies will be putting their P&Ls on new, more appealing growth curves.

In the regulatory space, new thinking about public-private collaboration can be amplified to enable clinical development to be more cost-efficient while addressing public health priorities.

In the payer space, new collaborations are showing where biopharma companies and benefits providers should be mutually focused on to create value for patients and shareholders.

All along the way, the new ideas for organizing value creation will suggest ways to organize capital pools throughout the value chain.

The precompetitive space is being expanded by public and private actors so that scarce resources can be pooled to elucidate disease more efficiently.

If it takes 15 years to go from gene to bedside, then a 10% reduction in the entire value chain gains only a year and a half. A 20% reduction - which seems implausible - gains only three years. And a 30% reduction - a preposterous objective at this point - still means it will take more than a decade to go from bench to patient.

At an industrial level, this arithmetic is made even worse by the number of independent efforts to solve translational problems that by their nature have a low probability of success. This results in something BioCentury calls the "duplication of futility."

For example, it would be interesting to know just how much money companies have invested to find out that gamma secretase doesn't appear to be a good target in Alzheimer's disease.

Likewise, it would be interesting to speculate just how much further along the industry would be in its understanding of whether raising HDL is a good idea if this work had gone on in the precompetitive space rather than at individual companies.

Or - in today's quick-kill culture - would such an idea be discarded after one failure? Right now, no one knows, but it is hard to argue that shared knowledge won't provide faster, cheaper, better answers.

In a 2002 essay called "Bring Back Medicine," BioCentury predicted that reductionist biology was going to disappoint drug developers, because the approach did not address the reality of disease.

At the time, BioCentury argued, "the productivity bottleneck will prove to be less technological than attitudinal, with the winners being those able to develop the necessary transformational thinking to bring clinical medicine - patient observations and functional outcomes - into play as the key driver of the target-based discovery process" (see "Bring Back Medicine," BioCentury, June 19, 2002).

Ten years later, Back to School suggests the prediction has not been so far off. Indeed, the marketplace has made it quite clear: The healthcare system requires drugs that produce predictable clinical outcomes that are relevant to patients, physicians and payers.

But while academia and industry have identified thousands of targets, they have not created many drugs. Chas Bountra, chief scientist at the Structural Genomics Consortium (SGC), estimates the industry gets only 3-5 drugs targeting novel mechanisms per year.

The bottom line: There has to be a better way to sort through the chaff to get to the wheat.

Rethinking IP

One place to start - to make an attitudinal leap - is to rethink the value of intellectual property in upstream discovery.

It's not uncommon to hear biopharma executives talk about the unrealistic expectations that universities have about their early stage IP. Maybe it's time they turn the mirror inward and consider the value of some of their own early IP - especially when weighed against the costs of going it alone.

Indeed, the industry has come sufficiently far that a good portion of this discussion is now going on in public, in part stimulated by advocates of "open innovation."

For example, Paul Chapman, general manager of the Pharmaceutical Research Division at Takeda Pharmaceutical Co. Ltd., has told BioCentury, "Industry may be overvaluing some of its IP that is really more obstructive than productive" (see "Making the Case for Precompetitive Clinical Development," SciBX: Science-Business eXchange, May 19).

Under the open innovation model, at least some parts of the precompetitive space are expanded to create shared knowledge about the underlying mechanisms of disease, and a shared understanding of what constitutes true disease modification and how to measure it.

There are plenty of ideas for how to go about it. One of the most ambitious is the effort by the SGC and Sage Bionetworks to build a public-private consortium that would provide clinical validation of novel targets. The consortium, Archipelago to Proof of Clinical Mechanism (Arch2POCM), aims to generate a portfolio of small molecules that would be used to provide proof of clinical mechanism for targets up to Phase II trials.

The idea would remove IP and data access restrictions to create an environment that eliminates redundant discovery programs and thus reduces the overall cost of R&D.

The challenge, of course, is how to capture the value of the consortium's compounds despite the lack of IP protection. Arch2POCM's advocates suggest the consortium would retain possession of a viable compound's IND package, including some undisclosed information that would be necessary for regulatory approval.

Arch2POCM would auction the package to the highest private bidder. While others could develop the same molecule, they would have to redo all the preclinical, Phase I and Phase II work.

Both SGC and Sage have been busy building their own open innovation models in the preclinical space.

SGC, which operates out of the University of Oxford, University of Toronto and Karolinska Institute, is producing 3-D models of medically relevant proteins for the public domain with contributions from sponsors that include GlaxoSmithKline plc, Novartis AG and Merck & Co. Inc.

Sage has its own project pipeline, for example partnering with AstraZeneca plc to study cancer using computational models of disease genetics, large cancer genomic datasets and predictive disease models.

Sage, which aims to build better maps of disease for the public domain, said it will not gain any IP out of the deal; indeed, all of the data and models will be made available in the public domain one year or less after the end of the collaboration with AstraZeneca, which is providing funding as well as genomic data.

The not-for-profit has similar deals with Takeda for CNS diseases and Pfizer Inc. for cancer.

'Pro-competitive'

Naysayers will say open innovation is impossible, because industry and its investors require the monopolies provided by intellectual property. They do, but the open innovation model still leaves ample space for commercial players to build IP around inventions that can be directly linked to a healthcare outcome - in short, a product label that has value to clinicians, patients and payers.

Nor does the open innovation model prevent well-endowed companies from devoting their capital to creating a fundamental AND proprietary understanding of specific diseases. But Back to School would bet that collectively, industry would be more successful and more profitable if it stopped duplicating failures and focused on applying knowledge to create new molecular entities, solving pharmacology and pharmacodynamic challenges, demonstrating safety and altering the economics of care.

Moncef Slaoui, chairman of R&D at GSK, argues that the process should be called "pro-competitive," rather than pre-competitive, because it will lift the veil on new investment opportunities.

Bottom line: There is plenty of space to operate.

That conclusion obviously is a driver of Europe's Innovative Medicines Initiative (IMI), where the EU has contributed €1 billion in cash. Industry, through the European Federation of Pharmaceutical Industries and Associations (EFPIA), is committing a like amount in in-kind contributions to create shared solutions to roadblocks in translational medicine over 10 years.

It is also the obvious conclusion in deals among industry players such as Eli Lilly and Co., Merck and Pfizer, which have formed the Asian Cancer Research Group Inc. to study the pharmacogenomics of Asian cancer patients - a project Sage also is involved in. By jointly gathering molecular epidemiology data on a large scale, they expect to optimize their individual ROIs while gathering more data than any one of them individually could do on its own (see SciBX: Science-Business eXchange, March 11, 2010).

The partners envision potentially merging their database with others, such as the Cancer Genome Atlas being created by the National Cancer Institute and the National Human Genome Research Institute.

Roch Doliveux, CEO of Belgium's UCB Group and a member of IMI's governing board, is calling for "under one roof thinking" to move beyond defining disease by its symptoms.

"It's something that we need to do together - academia, industry and regulators," he told BioCentury This Week, BioCentury's public affairs television program (see "Public+Private," BioCentury This Week, July 31).

Moreover, Doliveux's process would be patient-driven. Rather than try to make science work in people, "one other approach is really to start with the patient, understand the disease, then go back into the theory, and go back to the patient," he said.

The competitive space

In the competitive arena downstream, companies are beginning to recognize that value must be made more visible to shareholders. Rather than waste another decade on mindless aggregation, brave companies will be putting their P&Ls on new, more appealing growth curves.

In most cases, rebasing requires vigorous downsizing. But cutting heads is not creating value. Even the very biggest pharma companies need to show shareholders that they can use capital efficiently. The value evaporation of many big companies during much of the last decade shows they were failing this test (see "Pharma Phoenix," A12).

Back to School suggests shareholder demands for capital efficiency ultimately will force more and more companies to creatively combine assets because it improves the odds of success. As part of this process, new forms of collaboration will require finding new ways to share reward as well as risk.

Rebasing also will require companies to end the fruitless effort to satisfy both the investors who want their capital returned via dividends and share buybacks on one hand, and the investors who want management focused on R&D on the other. This means picking one of the business models, and shedding shareholders who no longer like the risk profile.

Big pharma is of two minds on this, with some becoming integrated healthcare companies and others going to purer play drug companies. There will always be integrators to snatch up growth opportunities. But the fact is that breaking up many companies proactively is a better alternative to seeing market caps forcibly downsized by the markets or companies restructured by activist shareholders.

There now are signs that this kind of thinking is beginning to take hold, as big companies realize dismemberment may be more productive than consolidation.

Among recent examples, AstraZeneca sold its Astra Tech AB dental and urological business. Pfizer sold its Capsugel business, which provides capsule products, equipment and services, and is looking to sell or spin out its animal health and nutrition businesses. Bristol-Myers Squibb Co. off-loaded its Mead Johnson Nutrition Co. business. Johnson & Johnson has sold several businesses: the Breast Care business of Ethicon Endo-Surgery Inc., the Ortho Dermatologics assets of Janssen Pharmaceuticals Inc., and the Animal Health business of Janssen Pharmaceutica NV. The list could go on.

Such rebasing is hardly limited to the largest of the large. Biogen Idec Inc. is a case in point.

New management brought in in mid-2010 - as a result of activist pressure - wasted no time in breaking up the company and pruning the pipeline to focus on differentiated compounds.

CEO George Scangos took the first step last year with a restructuring that refocused Biogen Idec on neurology and immunology while exiting cancer and cardiovascular indications.

New EVP of R&D Douglas Williams picked up where Scangos left off, eliminating programs that were too late to the party and focusing resources on differentiated assets he thinks play to the company's strengths.

Shareholders now can see a more focused pipeline with eight Phase III programs expected to read out in the next couple of years, most of which have the potential to change treatment paradigms in their respective indications (see "R&D Reboot," BioCentury, Aug. 29).

Bravery & creativity

But strategic pruning and refocusing are not going to be enough. Reviving growth curves requires more bravery and creativity than have been evident over the past decade.

One place to start: combinations of development pipelines in diseases where even the biggest companies cannot generate enough critical mass to change the odds of success.

Again, experiments already are taking place.

Two years ago, GlaxoSmithKline and Pfizer launched a joint venture, ViiV Healthcare, to discover, develop and commercialize compounds to treat HIV. The newco began with 10 marketed products and seven clinical-stage compounds.

Eli Lilly and Boehringer Ingelheim GmbH have partnered to co-develop and co-commercialize a portfolio of diabetes candidates that includes two products from each company (see "Following the Leaders," BioCentury, Jan. 31).

Merck KGaA and Sanofi have cross-licensed compounds so that both companies can test combination therapies against cancer.

And Merck and Roche and its Genentech Inc. unit have combined both the commercial and development partnership approaches around Merck's Victrelis boceprevir. In addition to co-promoting the HCV drug, the partners will explore new combinations of investigational and marketed drugs to treat the disease.

Such deals aren't limited to pharma-pharma tie-ups. Genentech and Array BioPharma Inc. last month combined their checkpoint kinase 1 programs in cancer so that the best molecule will be advanced and both companies will share the upside (see "Checkpoint Match," BioCentury, Aug. 22).

Financial theory may argue that investors can manage their own risk by creating portfolios of companies pursuing, say, Alzheimer's and other cognitive disorders. But this argument does not address the duplication of futility problem. Investing to repeat failures will not solve the puzzle of how to increase the odds of success.

Antitrust worriers will warn that government will block such R&D combinations. Back to School argues that is the kind of thinking that creates dying industries. The first responsibility of innovators is to create success and force the regulators to catch up.

More aggressive use of spinouts also will allow capital to see and flow to the kinds of risk it wants to embrace.

The formation of BioCritica Inc. by Lilly and investors Care Capital and NovaQuest is a case in point. BioCritica will have exclusive rights to the pharma's languishing sepsis drug Xigris drotrecogin alfa, as well as options to license additional preclinical critical care candidates.

Lilly said it did the deal because Xigris was competing for resources within the pharma's pipeline, while the investors expect that upcoming data from a confirmatory Phase III study in septic shock will revitalize the story (see "Spinout's Gamble on Xigris," BioCentury, June 13).

Lilly provides another example with its Mirror Portfolio initiative, where the pharma has picked three VCs to seed with up to $150 million in total cash and also is contributing molecules. The VCs will add in-licensed molecules and develop them to human POC before offering them to Lilly and other potential pharma buyers.

Risk-sharing deals also will have to move outside the box to include reward sharing.

For example, there is no a priori reason why a reward system can't be set up for companies that agree to have their molecules tested in adaptive trials like I-SPY 2, where drug candidates are dropped as they demonstrate futility (see "Spies Plot Revolution," BioCentury, March 22, 2010).

I-SPY 2 started with a cohort of five breast cancer compounds from three companies: Abbott Laboratories, Amgen Inc. and Pfizer.

For the sake of argument, imagine only one of those five compounds reaches the market. Under the current system, the company with the successful molecule is the only one that makes money. I-SPY participants with failed compounds presumably will save money by ending development earlier, as well as benefiting from the knowledge gleaned from the trial. But their rewards end there.

To incent more companies to put more molecules into these kinds of studies, the losers could be offered a piece of the action, presumably a low single-digit royalty on the winning molecule's sales. Because everyone knows they will likely be losers more often than not, everyone would be better off.

The regulatory space

In the regulatory space, new thinking about public-private collaboration can be amplified to enable clinical development to be more cost-efficient, and lead to a more imaginative consensus about accelerating approvals of drugs that address public health priorities.

Globally, there is a consensus at the top levels of regulatory agencies that solutions are not flowing to patients who have unmet needs, and that they need to be more engaged with drug developers to fix the problem.

This recognition is coming at a time when shifting social and political currents could be invigorating efforts to forge partnerships between regulators, industry, academia and patients.

These include intensified interest in ensuring that public investments in biomedical research are translated into better patient care; demands from patients to be more integrated into drug discovery and development; and political recognition that life sciences jobs and profits are subject to the same global competitive forces that have obliterated U.S. and European supremacy in other industries.

These currents open the door to extending upstream public-private collaborations into the regulatory space, where the goal would be to industrialize clinical development and dramatically broaden the use of progressive approvals. Accomplishing both - even in stepwise fashion - would meaningfully address both economic and public health goals.

Importantly, FDA has stated publicly that it is open to many of these ideas.

"The foundation of science that supports both swifter and surer drug development and regulatory review is crucial to our goals, and that involves partnership between industry and government as well as academia," Commissioner Margaret Hamburg told BioCentury. "HIV/AIDS was an example of how stakeholders came together and worked in a powerful way, and I think that is a model that we have to take very seriously" (see "Margaret Hamburg," BioCentury This Week, June 12).

Moreover, there is a framework to build on: the Orphan Drug paradigm, accelerated approval, REMS and patient registries are already part of the mix. But the thinking about how they are applied must be more ambitious, and more voices need to be included in the discussion.

For example, regulators on both sides of the Atlantic already have recognized the importance of collaborating closely with patients and industry, and exercising flexibility, for politically attractive health priorities such as rare and neglected diseases. There is no reason the same regulatory science can't be adapted to other unmet needs, even if they afflict millions of people.

Similarly, regulators already have the means to fast-track trials of combinations of novel drugs for tuberculosis; the same core thinking should be applied to other urgent therapeutic areas.

Patient driven

Patients have pointed the way. Rare diseases garnered special attention largely because passionate patient advocates persuaded Congress to create unique incentives for drug development and encouraged FDA to collaborate closely with sponsors.

This experience, along with the AIDS experience, shows that vastly enhanced patient engagement is key to creating the political space for regulatory innovation.

If the new thinking upstream is to bear fruit, clinical research is an obvious place to make a new breakthrough. Industry and regulatory partnerships with patient advocates can build a consensus approach to a continuous screening and testing system to replace today's medieval workshop model with an industrialized approach.

For example, all the stakeholders would be better served if regulators, industry and academic researchers collaborated to create permanent consortia for drug testing. Independent committees could define common endpoints and enrollment criteria, design the studies, monitor their execution and publicly report the results.

Such a system also would address the shortage of clinical trial subjects by seeking to incorporate virtually every patient with a serious unmet medical need into premarket trials and long-term registries. In part, this would be accomplished by using public money and user fees to extend participation from elite academic medical centers to community hospitals and individual physicians.

At this scale, the industrialized system would unmask failures fast, while qualifying important drugs for early adoption through a progressive approval system. The accretion of data also could be used to design small, fast trials to confirm safety and efficacy in the postmarket setting.

The industrialized model, especially when adaptive designs are used, would make it possible to incorporate two of the most important elements of modern manufacturing: rapid feedback and continuous quality improvement.

This scale could yield rapid readouts on safety and efficacy, and especially about the natural history of diseases. Trials would more quickly identify winners in specific patient groups.

Back to School is not proposing an instant transformation. But there needs to be a more visible effort to apply the flexible approaches pioneered in the regulation of rare disease to more common diseases, and to form public-private partnerships to bring new patient populations and the broader clinical community into clinical research.

For example, NIH's NCI Clinical Trials Cooperative Group Program has not paved the way - indeed, the Institute of Medicine concluded last year that the system is "approaching a state of crisis." But the Children's Oncology Group has moved in the right direction by building a critical mass of patients (see "Curing Cancer Trials," BioCentury, Feb. 28 & "Structure vs. Function at NCI," BioCentury, March 28).

The I-SPY 2 adaptive breast cancer study illustrates the collaborative possibilities. It is managed by the Biomarkers Consortium, which is led by the National Institutes of Health. Its lead center is the University of California, San Francisco, and it is validated by the endorsement of FDA and NIH and the participation of Abbott, Amgen and Pfizer.

Many companies still might want to resist comparative trials. But such studies are now a fact of life, and a system that can compare investigational agents is the wave of the future. Moreover, drug developers will be far better served if they participate - these trials are far better than the dubious meta-analyses that industry's opponents have employed to great political effect in the last few years.

Industry would have to give up some of the secrecy and control it has today. But in exchange, it would gain increased scale, improved speed and lowered cost. Most importantly, it would gain credibility for the results because of the buy-in from patients, clinical investigators and regulators.

Collaborating with patients is critical to another regulatory innovation that is under development in the U.S. and Europe: new models for benefit-risk assessment, which are required to change the public policy argument about drug safety.

"No one has done a good enough job listening to patients about how drugs feel to them and how they feel about benefits and risks," Janet Woodcock, director of FDA's Center for Drug Evaluation and Research (CDER), told BioCentury (see "FDA Performance," BioCentury This Week, Jan. 16).

The agency has been developing a semi-quantitative framework, incorporating patient perceptions, for assessing and communicating benefit and risk. EMA and the European Innovative Medicines Initiative are also working on new risk-benefit frameworks.

Patient-oriented assessment of risk, coupled to expanded clinical trial participation, would provide the impetus to expand the provisional approval pathway for all new therapies for serious unmet needs.

Such compounds would be eased onto the market, with strict controls over which patients could receive a provisionally approved drug, limits on marketing, and intense monitoring and collection of safety and efficacy data. Based on the accumulating evidence, the restrictions could be retained, eased or eliminated - or the product could be withdrawn.

Once again, FDA has signaled it is open to this idea. "Some kind of a progressive approval process is something we are talking about very much," Hamburg said on BioCentury This Week.

The challenge is to translate this open-mindedness into policy. The heads of regulatory agencies need to find flexibility to operate within the law and to advocate for legislative changes when the law prevents science from addressing unmet needs.

A culture of collaboration also does not dominate the ranks of line regulatory staff. Resetting this environment is a precondition for improving the productivity of the drug development enterprise.

Top regulators can begin to transform this ecosystem by pressing forward with many more experiments like I-SPY 2.

The payer space

In the payer space, new collaborations are beginning to point to ways biopharma companies and benefits providers should be mutually focused on value creation for patients and shareholders.

Without these efforts, the biopharma industry risks being relegated to "vendor" status in a healthcare system focused on bending the cost curve down.

Like many other ideas, the engagement of drug developers and payers is not new. Companies routinely talk to payers about the profiles of new compounds early on in development. And the dance between pharma companies and NICE in the U.K. has resulted in so-called risk-sharing deals that are pinned on outcomes. But the latter process is adversarial and delays the flow of drugs to British citizens - or deprives them altogether if the drug company decides not to participate or if NICE still concludes a drug isn't cost-effective.

More imagination is wanting here, and perhaps it is emerging in collaborations where payer data and access to patients are being used to inform clinical trial designs and identify places where the use of drugs bends the value curve for the payer (see "Pharmacoeconomics").

Sanofi's global partnership with Medco Health Solutions Inc. is one such tie-up, aimed at designing trials and mining data to ensure that payers get the kinds of data they need at product launch (see "Payers in Product Development," BioCentury, Aug. 1).

Accessing the real-world data at Medco will enable the pharma to identify patient subpopulations that will most likely benefit from its compounds, and allow it to use this learning at the beginning of clinical trials.

The data also will enable both the pharma and the PBM to calculate the comparative effectiveness of alternative treatments.

Meanwhile, under a deal with AstraZeneca, the HealthCore Inc. outcomes research unit of WellPoint Inc. is conducting studies in the U.S. to determine the value of a medicine to the healthcare system.

Relating a drug's performance to a host of clinical outcomes and total resource utilization goes well beyond the requirements needed to show efficacy to FDA and EMA. As with the preclinical and clinical spaces, it wouldn't be surprising to see broader consortia emerging to address these caregiving and economic questions. AstraZeneca and Healthcore have already said they plan to expand their partnership to other provider groups, doctors and hospital groups to increase the robustness of their data.

These kinds of deals should do more than give drug developers the ammunition they need to speed reimbursement after launch. Successful collaborations will actually give payers a vested interest in delivering the value to patients.

Once proof of concept for this outcome is demonstrated, it will provide the basis for a virtuous circle leading back upstream. It would not be too far a stretch for drug companies to negotiate something like a commercial advanced purchase commitment - some form of guaranteed access to the formulary - based on a drug candidate's ability to address the predefined demands of the marketplace.

Capital allocation

All along the way, the new ideas for organizing value creation will suggest ways to organize capital pools throughout the value chain.

The capital crunch is not simply about lack of money. Indeed, it's hard to argue the industry is starving. Even with VCs scaling back, it's possible to project more than $640 billion being available from corporate, venture and capital market sources through 2015. And that's not counting NIH and other taxpayer contributions (see "Trying to Make Do," A19).

The question is not so much whether there's capital, but why it doesn't flow to bottlenecks where value is waiting to be created. To paraphrase serial bioentrepreneur John Mendlein of aTyr Pharma Inc. and Fate Therapeutics Inc., all the low-cost capital seems to go to the wrong places.

Some of the VC drought is a long-needed correction that provides the impetus for better investing. Ineffective second- and third-tier investors chasing mediocre ideas are being weeded out. A smaller number of smarter investors will create more value with their money, even if the total venture pool actually were to shrink.

But better investing is not enough. Returns must be produced throughout the value chain. The "valley of death" problem is not the same thing as the "VC model is broken" problem.

In the valley of death, there have not been effective mechanisms for channeling the relatively small amounts of money that are required to perform important translational science.

In the VC case, the timelines for value creation and exit are not aligned. Therefore, asking venture capital to move upstream only compounds its dilemma. In fact, the valley of death solution must provide more mature assets to the VCs.

Moreover, the same capital efficiency requirements can't be applied in each case. The solutions are not going to be identical. But at least two benchmarks for capital efficiency can be applied across the board.

First, capital should not be forced to duplicate futility. It no longer wants to take on this risk. This is a key reason for embracing new thinking about collaborations and reward sharing throughout the value chain. Creating asset pools likewise enables investors to pool their capital.

Second, capital needs to be returned in stages. It no longer wants to wait until the end of the line. This suggests pools of specialty capital will need to aggregate along the value chain. Some of it will be investment capital. Some of it will be strategic capital. Some of it will be foundation funding. Some of it will be taxpayer money.

The ROI metrics should be different for each pool, and therefore it is unreasonable to apply the same investment models to them.

For example, one can argue that the vast bulk of translational funding is not the province of professional risk capital.

Likewise, one can argue that the investable VC space is smaller than advertised. Save for the truly exceptional opportunities, many assets simply should not be pitched to VCs unless they obviously fit inside fund time horizons or clearly provide incremental monetization milestones along the way.

Making pools

While capital pools always have existed, the old structures can't be taken for granted. Nevertheless, some important pools already look to fit into the Structure 2012 model. Indeed, it's clear money already is going into the feeder system.

Europe's Innovative Medicines Initiative is a €2 billion capital-pooling exercise in the translational space, as it involves taxpayer and corporate resources.

More experimentation will be needed to bridge IMI and open innovation efforts such as Arch2POCM to the commercial world. One place to start is asset auctions, which could be a basis for sustainable funding of research to answer really important translational questions where the value can't be questioned.

Further downstream, strategic venture capital is a pool that straddles translation and early clinical development. By BioCentury's count, there are at least 30 corporate venture funds at 24 companies. While a few of these have a later-stage focus, the vast majority are looking at early stage assets.

This does not include the latest round of blockbuster pharma-university collaborations, like Pfizer's $85 million partnership with UCSF. The collaboration - the first of the pharma's eight planned Global Centers for Therapeutic Innovation - brings company scientists to academic centers and backs them with a host of drug discovery technologies (see "Pfizer Goes Back to School," SciBX: Science-Business eXchange, Dec. 2, 2010).

Smaller buckets are being tried in projects such as BioPontis Alliance LLC, a consortium-like set of industry and academic partners. BioPontis is proposing to perform killer translational experiments on technology with high unmet industrial need. It would sell or license the winning technologies and share the proceeds with the academic institution (see "Gap-filling alliance," SciBX: Science-Business eXchange, Aug. 4).

Industry partners include Merck, Pfizer and the Janssen Biotech Inc. unit of Johnson & Johnson. University alliance participants include Columbia University, Memorial Sloan-Kettering Cancer Center, New York University, the University of Florida, the University of Pennsylvania, the University of Virginia and the University of North Carolina at Chapel Hill.

At the same time, cross-institutional collaborations will make themselves more attractive to these pools of capital.

For example, the Sanford-Burnham Medical Research Institute has built infrastructure that provides researchers with structural biology tools, genomics technology, imaging analysis and drug screening. Now, a partnership with Florida Hospital provides access to patients (see "Sanford-Burnham's Disease Deals," SciBX: Science-Business eXchange, Feb. 3).

A deal between the University of Rochester Medical Center and Temple University School of Pharmacy aims to address the critical mass problem for mid-tier institutions that do not command $500 million or more a year in research funding.

Under the deal, target-rich but chemistry-poor Rochester will collaborate with Temple's chemistry-rich but target-poor Moulder Center for Drug Discovery Research. In some cases, Rochester will pay for fee-for-service projects, but costs would be shared in joint collaborations (see "Opposites Attract," SciBX: Science-Business eXchange, Aug. 25).

Further downstream, the private equity fund venBio has created another bucket, focusing on companies that are ready to collect human proof-of-concept data for their compounds but are finding few investors that want to pay for the clinical studies needed to get the answer.

While capital is clearly amassing in the preclinical to IND space at one end, and money is available to fund companies that have definitive POC data, the firm has identified the space in between as a place where the opportunity for value creation is not matched by investment capital.

venBio's vehicles include a fund for strategic investors such as Amgen (see "Amgen's ven Biogram," BioCentury, Nov. 22, 2010).

Further down the value chain, the most important capital pool may be the growing group of mid-tier biopharmas ($5-$20 billion in market cap). Companies in this space need asset partnerships and acquisitions to grow and, unlike private biotechs, aren't locked out of the public capital markets.

While BioCentury has documented the growth of this space many times over the years, these companies are not yet recognized as a powerful financing arm for the pre-commercial assets locked in private companies (see "Sweet Spot Revisited," BioCentury, Feb. 21, 2010).

Meanwhile, efforts to make value visible need to be accompanied by creative ways to unlock the value for investors beyond cash dividends and share buybacks. Spinning assets into new public entities can be shareholder monetizing events. Distributing the newco's shares also allows investors to vote with their feet - staying with the R&D project or selling out. Such newcos thus are in a position to draw investors who embrace their risk profiles.

All this begs the question of what to do about the IPO pool, which has largely dried up. Here, as in the VC space, it's time to recognize that only some assets deserve access to the public markets. Fund managers not only operate on even shorter timelines, but also no longer want to take on execution risk, as witnessed by the current trashing of biotechs in the midst of product launches.

The fact is that more companies will demonstrate public market profiles if the upstream capital is invested more effectively. For the very best companies, that should narrow the valuation gap between the public markets and strategic investors. Then it will be up to private investors whether to engage in company building with public capital or bail out through the trade sale.

Thinking bigger

Biopharma is in the midst of a chaotic paradigm shift in the drug discovery-development-approval-reimbursement-marketing system. But inchoate in that chaos is the embryonic form of a new system that will be better than the last.

For those who take the time to look around, it will be apparent that many of the pieces of the new world order for biopharma are already being put in place by skunk works of creative people and companies. They don't spend their time asking permission or worrying about the naysayers.

The precompetitive landscape is the most unformed, but is benefitting from a jolt of energy and multiple experiments. There probably will not be a single model, but multiple items on the menu for the players to choose from.

The spaces downstream also are likely to see multiple models, with some big companies choosing to be pure-play drug companies and others choosing to be umbrellas for multiple businesses; with some companies choosing to pair their portfolios with other companies; with others choosing to spin out disease areas, and so on.

Ironically, for all the hand-wringing about the regulatory space, it is here that the potential for a singular new paradigm is clearest, and pieces of this system are already in place: accelerated approval, REMS and patient registries and postmarket studies. They point in the direction of industrialized clinical development collaborations and patient-driven progressive approval regimes. What's missing is a critical mass of experiments to give all the stakeholders some skin in the game.

The payer discussion is still early stage, but experiments have started and the shared economic interest of the parties should drive more collaborations, all to the benefit of patients.

Not everyone who is driven to experiment will be successful - or even good - at what they try to do. But some of the new ideas inevitably will succeed. Some investors will make money. And the process will continue. Those who cannot innovate - or cannot happily ride on the coattails of the innovators - will disappear. That is how it should be.

In a conversation with BioCentury at the close of his tenure as chairman, president and CEO of Genzyme Corp., Henri Termeer went out of his way to refute the common wisdom that the industry has gone from thinking big to thinking small, and to reject the notion that today's CEOs are more risk-averse than those of the past.

Genzyme, which was founded 30 years ago, was acquired by Sanofi in April. By Termeer's reckoning, biotech today is thinking far bigger than it ever dreamed of doing in its early years. And CEOs are taking far bigger risks.

At biotech's beginnings, he said, "we weren't changing the world - we weren't saying we're going to cure cancer. We were trying to make a technology work."

Today, he said, "people talk about big things, not little things - going after Alzheimer's, going after Parkinson's."

The bottom line, according to Termeer: "Today, if you can't cure cancer, you've no business to be in this industry."

The 19th Back to School Commentary is a collaborative work by BioCentury President & CEO David Flores, Chairman & Editor-in-Chief Karen Bernstein, and Washington Editor Steve Usdin. Data were developed by Research Director Walter Yang and Staff Writer Meredith Durkin. The package was edited by Managing Editor Jeff Cranmer and Senior Editor Susan Schaeffer.

COMPANIES AND INSTITUTIONS MENTIONED

Abbott Laboratories (NYSE:ABT), Abbott Park, Ill.

Ablexis LLC, San Francisco, Calif.

Acylin Therapeutics Inc., Seattle, Wash.

Afferent Pharmaceuticals Inc., San Mateo, Calif.

Amgen Inc. (NASDAQ:AMGN), Thousand Oaks, Calif.

Array BioPharma Inc. (NASDAQ:ARRY), Boulder, Colo.

Arsanis Inc., Vienna, Austria

AstraZeneca plc (LSE:AZN; NYSE:AZN), London, U.K.

aTyr Pharma Inc., San Diego, Calif.

BeiGene Ltd., Beijing, China

Bicycle Therapeutics Ltd., Cambridge, U.K.

Biocon Ltd. (NSE:BIOCON; BSE:BIOCON), Bangalore, India

BioCritica Inc., Indianapolis, Ind.

Biogen Idec Inc. (NASDAQ:BIIB), Cambridge, Mass.

Biomarkers Consortium, Bethesda, Md.

BioPontis Alliance LLC, Raleigh, N.C.

Blueprint Medicines, Cambridge, Mass.

Boehringer Ingelheim GmbH, Ingelheim, Germany

Bristol-Myers Squibb Co. (NYSE:BMY), New York, N.Y.

Children's Oncology Group (COG), Arcadia, Calif.

Columbia University, New York, N.Y.

Convergence Pharmaceuticals Ltd., Cambridge, U.K.

Cyterix Pharmaceuticals Inc., San Francisco, Calif.

Delenex Therapeutics AG, Zurich, Switzerland

Eli Lilly and Co. (NYSE:LLY), Indianapolis, Ind.

European Federation of Pharmaceutical Industries and Associations (EFPIA), Brussels, Belgium

European Institute of Innovation & Technology, Budapest, Hungary

European Medicines Agency (EMA), London, U.K.

Fate Therapeutics Inc., San Diego, Calif.

Florida Hospital, Orlando, Fla.

National Institutes of Health, Bethesda, Md.

Galapagos N.V. (Euronext:GLPG; Pink:GLPYY), Mechelen, Belgium

Genentech Inc., South San Francisco, Calif.

GlaxoSmithKline plc (LSE:GSK; NYSE:GSK), London, U.K.

Harvard Medical School, Boston, Mass.

Innovative Medicines Initiative (IMI), Brussels, Belgium

Intercell AG (VSE:ICLL; OTCQX:INRLY), Vienna, Austria

Johnson & Johnson (NYSE:JNJ), New Brunswick, N.J.

Karolinska Institute, Stockholm, Sweden

Lotus Tissue Repair Inc., Cambridge, Mass.

Medco Health Solutions Inc. (NYSE:MHS), Franklin Lakes, N.J.

Memorial Sloan-Kettering Cancer Center, New York, N.Y.

Merck KGaA (Xetra:MRK), Darmstadt, Germany

Merck & Co. Inc. (NYSE:MRK), Whitehouse Station, N.J.

MorphoSys AG (Xetra:MOR), Martinsried, Germany

National Cancer Institute (NCI), Bethesda, Md.

National Health Council, Washington, D.C.

National Human Genome Research Institute (NHGRI), Bethesda, Md.

National Institute of Biological Sciences (NIBS), Beijing, China

National Institutes of Health (NIH), Bethesda, Md.

National Venture Capital Association (NVCA), Arlington, Va.

New York University (NYU), New York, N.Y.

Novartis AG (NYSE:NVS; SIX:NOVN), Basel, Switzerland

Novo Nordisk A/S (CSE:NVO; NYSE:NVO), Bagsvaerd, Denmark

Oncofactor Corp., Seattle, Wash.

Pfizer Inc. (NYSE:PFE), New York, N.Y.

RaQualia Pharma Inc. (JASDAQ:4579), Aichi, Japan

Receptos Inc., San Diego, Calif.

Roche (SIX:ROG; OTCQX:RHHBY), Basel, Switzerland

Sage Bionetworks, Seattle, Wash.

Sanford-Burnham Medical Research Institute, La Jolla, Calif.

Sanofi (Euronext:SAN; NYSE:SNY), Paris, France

Structural Genomics Consortium (SGC), Oxford, U.K.

Takeda Pharmaceutical Co. Ltd. (Tokyo:4502), Osaka, Japan

Temple University, Philadelphia, Pa.

UCB Group (Euronext:UCB), Brussels, Belgium

University of California, San Francisco (UCSF), San Francisco, Calif.

University of Florida, Gainesville, Fla.

University of North Carolina at Chapel Hill, Chapel Hill, N.C.

University of Oxford, Oxford, U.K.

University of Pennsylvania, Philadelphia, Pa.

University of Rochester, Rochester, N.Y.

University of Toronto, Toronto, Canada

University of Virginia, Charlottesville, Va.

U.S. Food and Drug Administration (FDA), Silver Spring, Md.

WellPoint Inc. (NYSE:WLP), Indianapolis, Ind.

XORI Corp., Seattle, Wash.