New models for drug discovery and marketing

Angelo DePalma investigates how emerging collaborative partnerships could alter how drug firms manage innovation and market new medicines

To value concretely the pharmaceutical industry’s reliance on drug discovery collaborations, it pays to pause and estimate the economic magnitude of such deals.

Quantifying outlays for discovery is hampered by the industry’s habit of reporting “R&D” or “research” spending, which includes almost everything that occurs in a laboratory or clinic, but does not include financial terms for discovery-stage deals, in-licensing, mergers, and acquisitions.

The US drug industry spends about $45 billion yearly on “R&D.”

By applying commencement of human studies (approximately one-third of the development cycle) as a cutoff, and approximating a cost-weighting factor of one-and-a-half to two for clinical (vs. preclinical) activities, one arrives at a figure of approximately $8 billion to $12 billion for what might be reasonably termed “drug discovery.”

The diminishing return on this ongoing investment as measured by approved innovative drugs, and looming expirations of lucrative patents, have spawned numerous calls for big pharma to reinvent its business model. (For more on innovation, see ‘Patent expiration: Innovate or die’ and ‘Will big pharma become a collection of marketing and distribution firms?’.)

Pre-competitive collaboration

In its 2011 report, Progressions: Building Pharma 3.0 Ernst and Young outlines the evolution of the pharmaceutical industry from Pharma 1.0 (vertically integrated blockbuster model) through Pharma 2.0 (the current model characterized by diversification, flexible R&D, specializations, partnerships) to 3.0, where “companies will succeed based … on their ability to improve health outcomes.”

That this definition of 3.0 should represent revolutionary, or even evolutionary, thinking in an industry traditionally dedicated to human health is quite remarkable.

Nevertheless, the report proposes some interesting thoughts on collaboration.

For example, “It will be imperative … to learn how to contribute assets and IP into new models [pharmaceutical firms] do not entirely control.”

This represents a sharp departure from the culture of exclusivity and secrecy that dominates the collaborative landscape today.

In fact, it describes a new model, pre-competitive collaboration, which is currently all the rage among consultants but has yet to catch on.

In a contributed sidebar to Progressions, Procter & Gamble managing director Chris Thoen urges readers to “only do what you can do” and not to engage in “reinventing wheels.”

Thoen claims his company’s “open innovation strategy has resulted in more than 1,000 active agreements with external parties,” which has led to such innovations as Tide dry cleaners and Mr. Clean car washes (laundry and household cleaning products, respectively).

One can only imagine the regulatory hurdles awaiting cholesterol-lowering milkshakes on tap at baseball games and antifungal cream paintball contests…

Perhaps the most revealing pronouncement in the E&Y report came from Jackie Hunter, a psychologist by training, former top-pharma executive, and current consultant.

Hunter wrote, “Firms will have to dedicate some of their best people to managing relationships … and encourag[ing] collaborative behaviors.”

Hunter is a proponent of “open innovation,” a variation on the pre-competitive collaboration theme.

“Pre-competitive collaboration has become a significant driver for innovation and productivity in drug development,” says Maria Vassileva, scientific program manager at the Biomarkers Consortium in Bethesda, Maryland.

Yet the Consortium’s initial project suffered from lengthiness, lack of collaboration tools, disagreements on biomarker qualification, and reluctance to share data.

One could expect such misgivings with new drugs, but biomarkers are not drugs.

They are surrogates for clinical outcomes, discovery tools, like microplate readers or tissue-based assays.

The chasm between biomarkers and potential blockbuster drugs, from the perspective of intellectual property and investment, presents a very high hurdle for open innovation. (For more on biomarkers, see ‘Personalized medicine: A kick-start for innovation?’ and ‘Biomarkers and oncology forecasting: How to hit a moving target’.)

Public-private collaborations

For the foreseeable future, collaboration will be of the more traditional type, E&Y’s recommendations notwithstanding.

Public-private collaborations, in particular, seem to be gaining steam.

In late 2010, the Obama Administration funded the National Center for Advancing Translational Sciences (NCATS), an offshoot of the US National Institutes of Health (NIH) dedicated to drug discovery.

NCATS will incorporate some existing NIH functions and receive additional (and as yet undisclosed) US federal funding.

News reports refer to NCATS as a “billion-dollar” initiative but much of its projected funding will come from existing appropriations.

No one seems to know exactly how much more the Center will receive.

Critics lost no time criticizing NCATS. Budget hawks excoriated yet another taxpayer bailout of an industry that privatizes profits but increasingly seeks to collectivize risk.

In a New York Times interview, Mark Lively of Wake Forest University noted, “the NIH is not likely to be very good at drug discovery.”

In the same article, Thomas R. Insel, who heads the National Institute of Mental Health, says that something must be done to mitigate the pharmaceutical industry’s abdication of its traditional research role, but admits that NIH has “never developed drugs and actually doesn’t know how to do therapeutics that well.”

Chas Bountra, who heads Oxford University’s Structural Genomics Consortium, has proposed a $200 million international drug discovery consortium funded by corporations, governments, and charities.

Like pharma consultant Hunter, Boutra is a proponent of pre-competitive collaboration, specifically open and freely accessible data up to phase 3 human testing.

“What we’re trying to do is reduce duplication” associated with multiple companies working simultaneously on the same drug target, he told NatureNews in February.

While $200 million may seem like a trifle—Pfizer’s current round of layoffs seeks to trim $2 billion from just that company’s R&D budget—it may be a start, or model for future discovery efforts.

GlaxoSmithKline’s twist on public-private collaboration is more direct.

In February, GSK announced that it was partnering with ten leading academicians in an attempt to reduce its drug discovery risk.

The deals are nothing unusual: ongoing research funding and milestone payments in return for exclusivity.

GSK’s announcement came on the heels of the November, 2010 deal between Pfizer and the University of California, San Francisco.

This $85-million collaboration, for biological drug discovery, preceded by just a few weeks Pfizer’s announcements to close its Sandwich, UK and Groton, Connecticut drug discovery centers. (For more on biologics, see ‘Dr. Bates Talkback: How to mount an effective defense against generics’ and ‘Forecasting the future of biosimilars’.)

Private-private discovery deals

While public-private collaborations are well established, the fruits of such deals are not always obvious, and at best cast doubt on the proper role of universities and public funding.

Much less controversial are private-private discovery deals, which a simple newswire scan shows are still very much in vogue.

The last few months have seen discovery-related announcements from Ingenuity/Covance on next-generation sequencing, Phylogica/Isogenica (peptide discovery and engineering), Elan/PPD (early development services), Xenthion/Grünenthal (ion channel modulators), Receptos/Lilly (GPCR agents), Sanofi/Avila (oncology drugs), BioRelix/Merck (antimicrobials), Incyte/Novartis (kinase inhibition), and Envoy/Merck (diabetes/obesity).

With two ongoing discovery deals with Merck—one with Merck acquisition Schering-Plough—and one with Canada’s National Research Council, Helix Biopharma in Aurora, Ontario understands the value of both public-private and industry-industry collaborations.

The firm has spent 60% of the more than $50 million it has raised on drug development.

“2009 was a terrific year, relative to 2010, for oncology collaborations,” says company president John Docherty.

“There have been some fairly lucrative terms for licenseers, including some for hundred-million-dollar up-front and milestone payments, not to mention royalties.”

Docherty estimates that costs for conducting clinical trials of its phase 3 interferon cream for cervical dysplasia would have exceeded $16 million; instead, Merck picked up the tab.

Add to that the costs of an imminent phase 1/2 trial of L-DOS-47, an immunoconjugate lung cancer agent, and it’s evident how even modest success can overwhelm the resources of development-stage companies.

Docherty describes Helix’s strategy as “value-added development,” which, if conducted properly, provides relatively equal benefits to licensee and licenser (or discoverer/marketer).

Hybrid models

Achieving the goal of rapid progression to proof-of-concept has not been easy within a traditional collaborative discovery environment.

Failure rates still suggest unsustainability, according to Salim Shah, chief scientist at Georgetown University Medical Center in Washington, DC, who terms this as the “discovery dilemma.”

What’s holding everything back are costly, lengthy animal and early-stage human studies and the difficulty translating preclinical to clinical results.

Without robust surrogates for clinical testing, discovery efforts will forever languish in the current paradigm regardless of how collaborations are structured.

The answer, Shah says, lies in biomarkers and “phase zero” clinical trials that could replace—it is hoped, at little risk—traditional development stages where most drugs fail.

Phase 0, a recent FDA designation, seeks metabolism, toxicology, and other data from microdoses administered to very small (10-15) groups of patients.

Shah believes that direct deals between industry and academe, which “push professors to be business people,” are not ideal.

“The late-stage failure rate achieved through these collaborations is no different from the more traditional model,” he says.

He proposes a hybrid model for future collaborations between companies and non-profits, taking “only do what you can do” to a more refined level.

He sees the proper venue for discovery at universities and government labs, provided they enjoy complete freedom to conduct basic research.

The translational agents would be small companies specializing in specific development tasks like lead optimization or preclinical studies, which, in turn, funnel into early clinical development firms and, finally, to a sponsor for late-stage development and marketing. (For more on translational agents, see ‘Personalized medicine: The partnership imperative’ and ‘Personalized Medicine: The need for collaborative business models’.)

While the failure rate may be the same, prevailing wisdom holds that collaborations allow sponsors to fail more cheaply, with lower risk.

Smaller firms, and particularly university groups, operate much leaner than big pharma R&D units, “but whether these deals bring about significant savings compared with the older model, no one can say,” Helix Biopharma’s Docherty admits.

Cost and risk-mitigation cannot by themselves explain the significance of discovery deals.

The emergence of biologicals, the eventual approval of biosimilars, and the explosion in new targets and pathways are pushing traditional drug firms into unfamiliar territory, leading to a combination of risk mitigation and the need for specialized expertise.

For example, L-DOS-47 combines not just a pharmacologically active antibody-enzyme combination, but it draws on Helix’s experience in altering tumor microenvironments.

“We expect that pharmaceutical firms, which have derived so much of their innovation from outside their corporate walls, will continue to externalize R&D,” says Gautam Jaggi, senior manager at E&Y.

“But they will never completely abandon [internal] R&D.”

According to Jaggi, the impetus is not direct cost savings, but improved efficiencies related to “doing what companies do best.”

To learn more about the issues raised in this article, join the sector’s other key players at the 11th Annual Marketing Europe conference in November.