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European Biopharmaceutical Review

Financial Challenges and Shrinking Pipelines

Daniel Levy reviews the problems facing the pharmaceutical industry, examining how companies have been working round their financial difficulties

In any industry, the birth of new companies and development of novel technologies require significant financial backing. Once secured, it is the responsibility of those managing the company to minimise the burn rate and maximise the reach of each round of financing. Ultimately, the goal of young companies is to secure sufficient funds to allow venture groups successful exits – regardless of the status of their R&D efforts. This paradigm has been repeated over and over again, and has never been more apparent than in the biotechnology industry.

Since its founding, the biotechnology industry has experienced significant evolution and undergone profound changes. In the early days, the promise of novel therapeutic agents derived from natural enzymatic or immunological processes generated a rush of enthusiastic investors. All one had to do to attract financing was to assemble a skilled team and add the letters GEN to the company name. Thus was born companies such as Genentech, Biogen and Amgen. The fruits of investments in these organisations include such novel biologic agents as Herceptin, Avastin and Tarceva from Genentech, Avonex and Tysabri from Biogen, and Enbrel and Kineret from Amgen.

While the development of therapeutic biologics has provided novel treatment options where none previously existed, this class of drugs suffers from high cost, the need for intravenous administration and potential immunogenicity. Consequently, biotechnology companies that previously focused exclusively on biologics became receptive to the discovery and development of traditional small-molecule drugs as second generation therapeutics. This trend led to the evolution of terms such as ‘biopharmaceutical company’ and ‘speciality pharmaceutical company’.

As with biotechnology firms, biopharmaceutical and speciality pharmaceutical companies enjoyed a period during which venture capital came from relatively deep pockets. Of particular interest were companies focused on specific classes of diseases (Athena Neurosciences, COR Therapeutics, Metabolex) or specific classes of biomolecules (Glycomed, Genta). Further areas of interest for investors were found in technological hotspots such as antiinfectives (Microcide, Kosan), combinatorial chemistry (Affymax, Isis), liposomes (Sequus Pharmaceuticals), chiral drugs (Sepracor), personalised medicine (Millennium Pharmaceuticals) and siRNA (Silence Therapeutics, Alnylam, MDRNA). As is the case with the discovery and development of pharmaceuticals across the board, some companies have realised various levels of success, while most have failed. It is this truth that has forced financing firms to reevaluate the way they invest money in these inherently risky ventures.

Due to the risk associated with the biopharmaceutical industry, where venture capital was once readily available for early stage startups, the availability of venture capital has been generally restricted to programmes either in or entering human clinical trials. This trend resulted in the formation of significant financial voids that challenge startup organisations to this day. While government grants and angel investors can provide early stage working capital for proof of concept and lead identification, these funds are far from sufficient to enable the advancement of lead molecules to clinical trials. To elaborate, the steps required for advancement include lead optimisation identifying an active pharmaceutical ingredient (API), API formulation studies, synthetic process development, stability testing, long-term toxicity studies, GMP manufacturing of the API and GMP processing of the API into the final drug product. As a guideline, the costs associated with the successful advancement of a single lead molecule to a marketed drug are now estimated at greater than $800 million (1-3).

THE COST OF INFRASTRUCTURE – THE SHIFT TO VIRTUAL COMPANIES

One of the most significant expenses associated with any firm is overheads. This fact is particularly relevant to the biopharmaceutical industry due to the disproportionate difference between the cost of laboratory space and office space. Laboratory space being considerably more expensive, one strategy for stretching the reach of operating capital is to minimise in-house R&D operations. From the development side, use of contract manufacturing organisations (CMOs) was among the first strategies incorporated into the growing practice of outsourcing. Through CMOs, early-stage companies were able to commission the production of multi-kilogram quantities of APIs and drug products to enable full-scale clinical trials and supply market inventories. Bottom-line advantages to CMO activities are reflected in an absence of the costs associated with construction, operation, staffing and maintenance of GMP manufacturing facilities.

With the success associated with outsourcing manufacturing activities, additional targets for staff reduction were identified, and included areas such as clinical trials, pharmacology and toxicity screening. In addition, companies providing biological assays, screening services, computational chemistry and compound libraries began to emerge. While all of these services provided necessary support to research organisations, it was not until the advent of outsourcing chemistry activities to CROs that drug discovery companies could become fully virtual – requiring no in-house laboratory facilities.

In practice, the shift from onsite operations to fully virtual operations is not an absolute. Most companies incorporate a combination of these philosophies in accordance with corporate needs and business plans. Furthermore, problems associated with the complete outsourcing of chemistry include establishing oversight of activities, design of synthetic routes and overall quality control of delivered products. One solution to these issues is to maintain critical chemistry activities in-house and to outsource activities where established chemistry protocols are robust enough to ensure reasonable success. Thus, through aggressive use of contract vendors, biopharmaceutical companies of today require less laboratory and office space, fewer full time employees and less investment capital than their predecessors.

FROM DISCOVERY TO THE CLINIC – ADDRESSING FINANCIAL HURDLES

While, through the incorporation of outsourcing activities, biopharmaceutical companies have become much smaller in size and structure, the amount of investment capital available to fund fledgling organisations has also shrunk. Thus, any advantages to burn rate reductions associated with slimming down corporate sizes are offset by the smaller rounds of financing. The outcome of this situation is realised in the fact that there still remains a financial void that must be filled in order to bridge the gap from research to development.

Due to today’s financial environment, biotechnology startups are finding it difficult to pursue both research activities and development activities. Furthermore, in order to conserve capital, many mid-stage biopharmaceutical companies are minimising or eliminating their research activities and are focusing entirely on development. While this strategy may prolong a company’s life, it does little to hedge against the likelihood that the potential products in a given development pipeline will never make it to market. To illustrate, a 2003 government report concluded that approximately only one in eight drugs entering clinical trials will ever make it to the US market (4).

With the overall shift from research to development, the biopharmaceutical industry is facing a severe shortage of drug candidates emerging from research pipelines. This trend must be reversed if the industry is to continue to be a source of novel and innovative therapeutic agents. To make matters worse, the broader pharmaceutical industry is faced with a growing crisis reflected in the expiration of patents protecting blockbuster drugs from Lipitor to Plavix (5). To counter this situation, pharmaceutical companies are looking to development-stage biotechnology companies as a lifeline to fill their dwindling pipelines (6). Examples include Roche/Genentech, Merck/SIRNA, J&J/Scios, Gilead/CV Therapeutics and Novartis/Chiron.

Recognising their value to big pharma, leaders in biotechnology are devising business plans with goals of bringing programmes far enough to make them marketable as acquisition targets. While this paradigm potentially bypasses the deficit in available funds for research and development activities, it does little to replenish the research pipeline upon which the development pipeline is fully dependent. As evidenced by the recent Pfizer/Wyeth merger and the announced J&J layoffs, the industry is currently experiencing a massive consolidation that will result in fewer companies producing fewer new drugs.

LOOKING FORWARD – REINVIGORATING THE RESEARCH PIPELINE

As the biopharmaceutical industry is an evolving entity, new ideas are continually being generated to address changing needs. With the shortage of drug candidates emerging from research pipelines, there is now a school of thought suggesting that academic institutions should fill that deficit – essentially building drug discovery groups. While there are examples of successful academic contributions to drugs targeting diseases of limited commercial interest (7), the greatest contributions from academia to drug discovery come from the innovative biochemical research identifying novel and important druggable targets (8). According to Christopher Lipinski (Lipinski’s Rule of 5), “drugs are almost exclusively discovered in industry and not in government laboratories or in academia.” Furthermore, “profiling performed either computationally or (even better) experimentally by big pharma has very little counterpart in academia” (9). So, if not from academia, from where will the next generation of drug candidates emerge?

Returning to discussions of burn rate and cost of infrastructure, drawing at least in part from decentralised resources still seems to be the most efficient means of realising R&D goals. However, at present, opportunities do exist for further streamlining in these areas. If, for example, CROs came together to provide fully integrated drug discovery engines, these resources could be utilised as corporate research departments to be released when development needs override further research pipeline expansion. In fact, recognising such opportunities, many CROs are now going beyond the traditional fee-for-service model in speciality disciplines (such as chemistry, biology and pharmacology) and are incorporating more of the infrastructure necessary for drug discovery activities (10). As such, CROs adopting this model may serve to produce the drug candidates necessary to feed the development pipeline.

CONCLUSION

Financing for early stage biopharmaceutical companies generally comes from multiple sources. Due to the current risk-averse mood from venture capital firms, this type of funding is generally only available for later-stage programmes. However, financing from government grants and corporate partnerships and collaborations can help to fill early-stage financial needs. Furthermore, in contrast to limitations associated with utilising academic institutions for drug discovery activities, both Big Pharma and biotechnology companies routinely collaborate with academic research groups. Such collaborations are generally designed to further understand the utility of, or mechanistic basis behind, pre-development compounds. Finally, outsourcing programmes to fully-integrated drug discovery CROs can provide significant burn rate reductions through decentralised business activities. While there is no unique solution regarding the shortage of adequate financing available to give small biopharmaceutical companies reasonable opportunities for success, the strategic use of CROs, corporate/academic partnerships, venture capital and government grants can help leaner organisations to realise their goals in this high risk but high reward field.

References

  1. Research and Development in the Pharmaceutical Industry, Congress of the United States, Congressional Budget Office, October 2006, www.cbo.gov/ftpdocs/76xx/doc7615/10
    -02-DrugR-D.pdf
  2. Watkins KJ, Fighting the Clock: Pharmaceutical and Biotechnology Companies Seek Ways to Reduce the Time Required to Discover and Develop Medicines, Chemical and Engineering News 80(4): pp27-33, 2002, www.pubs.acs.org/cen/coverstory/8004/
    8004pharmaceuticals.html
  3. Thompson JD, Applications of Antisense and siRNAs during Preclinical Drug Development, Drug Discovery Today 7(17): pp912-917, 2002
  4. Adams CP and Brantner VV, New Drug Development: Estimating Entry from Human Clinical Trials, Bureau of Economics, Federal Trade Commission, 7th July 2003, www.ftc.gov/be/workpapers/wp262.pdf
  5. Method K, Going, Going, Gone: Patents Set to Expire Soon on Many Brand-Name Drugs, 10th August 2009, http://drugtopics.modernmedicine.com/drugtopics/
    Modern+Medicine+Now/Patents-soon-to-expire-for-many-brand-namedrugs/ArticleStandard/Article/detail/617015
  6. Nucleonics, Inc, Biosimilars 2007: Emerging Biotech Perspective, 25th September 2007, www.biosimilarstoday.com/Fitzgerald.pdf
  7. Verkman AS, Drug Discovery in Academia, Am J Physiol Cell Physiol 286: ppC465-C474, 2004 http://ajpcell.physiology.org/cgi/reprint/286/3/C465.pdf
  8. Lowe D, In the Pipeline – What Can Academia Do? 28th January 2007, http://pipeline.corante.com/archives/2007/01/28/what_
    can_academia_do.php
  9. Frantz S, How Academia Can Help Drug Discovery, Nature Reveiws Drug Discovery 3: p541, 2004, www.nature.com/drugdisc/news/articles/nrd1462.html
  10. Outsourcing in Drug Discovery: The Contract Research (CRO) Market, 3rd Edition, Kalorama Information, 1st May 2008, www.kaloramainformation.com/Outsourcing
    -Drug-Discovery-1646603

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Daniel E Levy is an organic/medicinal chemist and holds a PhD in Organic Chemistry from the Massachusetts Institute of Technology. Since 1992, he has contributed to drug discovery programmes targeting inflammatory, cardiovascular and oncologic indications. His work is documented in numerous patents and peer-reviewed journals. In addition to his industrial activities, Daniel has taught short courses and authored books on various aspects of carbohydrate and mechanistic organic chemistry. He is currently the Director of Synthetic Chemistry at Silence Therapeutics pursuing novel delivery vehicles for therapeutic siRNAs.
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