Finding the right balance

If you’ve ever met with a financial planner or investment advisor, then you know that one of the first rules of investing is diversification, an important risk management technique that ensures there are a variety of assets within a portfolio. As biopharmaceutical organizations, it is important that we recognize the dire consequences that may result if we ignore this proven strategy.

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If you've ever met with a financial planner or investmentadvisor, then you know that one of the first rules of investing isdiversification, an important risk management technique that ensures there area variety of assets within a portfolio. The rationale behind this techniqueportends that a portfolio of different kinds of investments will, on average,yield higher returns and pose a lower risk than an investment portfolio that issingularly focused.
Similarly, as biopharmaceutical organizations, it isimportant that we recognize the dire consequences that may result if we ignorethis proven strategy. Consider the high-failure, low-approval percentages fornew drugs across the entire industry. The numbers demonstrating diminishedproductivity in drug discovery have been replayed using many statistics quotedin the media, including the fact that Phase II success rates for new developmentprojects fell from 28 percent in the 2006-2007 period to 18 percent in2008-2009 (P. Mansell, PharmaTimes).
A relatively unknown fact in our industry is that all of thenearly 25,000 marketed drugs today have evolved from modulation of just 324molecular targets (J.P. Overington, NatureReviews Drug Discovery). This statistic implies that much of the progressin patient care is the result of improvements of existing drugs, and not fromadvances against a novel disease target or mechanism of action. To address thechallenges in industry productivity, companies have begun to apply two distinctdrug discovery and development strategies.
For Big Pharma, blockbuster drugs of the past may no longermeet their commercial hurdles because they risk not meeting payer reimbursementand medical society care pathway guidelines. The path to meeting those hurdlesrequires expensive health outcomes research fraught with risk and extendeddevelopment timelines. With costly investments in new genetic sequencing anddata-mining technologies, they instead focus their budgets on novel mechanismsof action, including rare or orphan diseases, which either ensure a marketposition with no comparators, or where pricing is defensible based onproprietary status and smaller patient populations.
The other group at the commercialization table is focused onsimple improvements that can drive short-term revenues using a 505 (b)2regulatory approval strategy. Using this strategy, a product may have the sameactive ingredient as a previously approved product, but is formulated in adifferent delivery system or is developed for a different indication. Thisapproach lowers risk because the applicant can rely on studies from theoriginal drug and simply demonstrate efficacy and safety with the new dose formor in the new area of use. Pricing may be the same or less than the innovatordrug, but the superiority of the new delivery form will drive prescribing fromthe older drug to the newer drug, which is allowed a patent-protectedexclusivity position for three or five years, depending on regulatory criteriathat the new compound meets. Examples are the development of thalidomide incancer by Celgene, or Zyrtec D as a decongestant line extension to theantihistamine Zyrtec by Pfizer.
Unfortunately, what's missing in this bifurcated mix is thedevelopment of drugs from first in class to best in class. Indeed, over thelast 50 years, this strategic approach has played a major role in moving careforward incrementally, and represents the place where the industry hasclassically generated its greatest share of revenues and profits. Sir JamesBlack, the Nobel prize-winning Scottish doctor and pharmacologist credited withthe discoveries of beta-blockers and H2 antagonists, and perhaps singlyresponsible for more drug revenues (calculated at dollar values today) than anyother individual in the 20th century, has said that "the mostfruitful basis for the development of a new drug is to start with an old drug."
A recent study by Accenture and CMR found that the probabilityof a new drug project reaching preclinical development was only 3 percent fornovel targets. This is in contrast to historical data from McKinsey and othersthat show follow-on drugs are inherently less risky. About 1 in 123 of themmakes it from earliest discovery all the way to market, which is a rate almostdouble that of drugs based on novel approaches.
Over the past 20 years, thehighest value has come from drugs that entered the market two to five yearsafter a comparable novel one. One needn't look far, with Pfizer's Lipitor asthe highest revenue-grossing drug of all time, and a successor from statinsthat began with Merck's Mevacor and Zocor. The introduction of Tenormin as aselective beta-blocker instead of the non-selective Inderal provided patientswith a major difference in their ability to tolerate beta-blocker therapy. Thisdata forecasts that a company pursuing only novel targets in its quest for newdrug discovery would spend more money and reap lower rewards over the longterm.
In the push by the industry to identify compounds with novelmolecular mechanisms of action and, in the case of 505(b)2 strategists, findassets that offer a short-term proprietary position along with speed to market,the potential opportunities to move first-in-class agents to best-in-class hasbeen marginalized to the detriment of patients.
The challenge for the industry is in recognizing the scientificand commercial hurdles that must be met to demonstrate improved outcomes.Companies taking this approach need to develop target product profiles thatoutline the minimal requirements to support further development, and shouldadhere strictly to the selection menu once established. By establishingcriteria around the compound's pharmacokinetic properties, in-vitro and in-vivo datahurdles, side effect and dosing profile and other key attributes, the companycan ensure the drug profile is one that will be safe and effective. And byclosely analyzing the current and future competitive landscape and marketconsiderations, a company can be more confident that a drug will becommercially accepted by patients, payers and physicians. Companies that ensurethese hurdles are met can be assured that their best-in-class compounds willnot be considered "me-too" agents, and that chemistry advances will demonstratethe health outcomes advance that change care pathways and help patients.
Outside the biopharmaceutical industry, Apple is a perfectexample of this approach in action. As John Moltz recently pointed out in aneditorial in Macworld, Apple has alot of patents (more than 4,100 in the last decade, according to some sources)but they're not around the invention of the mobile phone or the personalcomputer or the tablet. If you look at the boilerplate text on an Apple pressrelease, it says, "Apple re-invented the mobile phone with its revolutionaryiPhone and App store."
The best way to evaluate whether Apple would enter a marketis to ask whether people are satisfied with the current user experience. Applehas reinvented existing markets by making the user experience richer, easierand more pleasant, which is Apple's signature competency. The biopharmaindustry has lost touch with the importance of improving the user experiencebecause of its concerns about reimbursement, but these user experiences oftenimpact outcomes and where the two intersect, there are many opportunities fornew discoveries that can improve quality of life and lower health-relatedcosts.
Just as any financial planner stresses portfoliodiversification as the best strategy to balance risk and reward, companiesshould focus on building a diversified portfolio of projects that balances bothnovel approaches and incremental improvements to demonstrate innovation andvalue. We need to balance the allure of discovering novel molecular pathwaysand Wall Street's desire for short-term revenues with the lower risk andachievability of new best-in-class agents that can help achieve the goals oflowering health-related costs, while also enhancing the quality of patientcare.
Arthur Hiller is the CEO of SciFluor Life Sciences, a drugdiscovery company applying expertise in fluorine chemistry to create aportfolio of differentiated best-in-class therapeutics. Based in Cambridge,Mass, SciFluor was established in 2011 in part by the Harvard UniversityBiomedical Accelerator Fund and a Series A investment from Allied Minds. Priorto joining SciFluor, Hiller served as CEO of Heartscape Technologies Inc.,where he built a team that raised $22 million in B-round venture financing,achieved placement and sales growth across 30 prestigious institutionsnationwide and ultimately reached an exit for sale of the company to a medicaldevice subsidiary of a $5-billion Fortune 1000 company.

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