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Sep 05, 2011
 |  BioCentury  |  Strategy

Back to School: Innovation & collaboration

BioCentury Back to School issue: How biopharma, government, academia must partnerBioCentury Back to School issue: Hamburg, Collins, other KOLs on biopharma future

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...

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