Matthew Engel

Prix Galien USA

Alexandria Center for Life Science – New York City – September 27, 2011

The Galien Award is given out each year by the Prix Galien Committee, a distinguished body of scientists, including seven Nobel Prize laureates, in recognition of products and agents that improve the human condition. Awards are given for Best Pharmaceutical Agent (i.e. small molecule),  Best Biotechnology Product and Best Medical Technology approved by the FDA in the past ten years. Prix Galien was created in France and has been introduced all over Europe and North America. It is the most prestigious award of its kind in eleven countries.

This year I was privileged to attend the 2nd Annual Galien Forum at the Alexandria Center for Life Sciences in New York City on Sept. 27, 2011. At the forum, the session I attended was on Funding Innovation – New Trends in the Healthcare M&A Landscape. In addition, I assisted the panel during moderation and was able to speak with each of the distinguished panelists. Below I will share my notes from this panel, which covers the impact of FDA clinical trials on M&A, biomarker/therapeutic combinations, orphan drugs, the patent cliff, medical device deals, exit strategies and M&A deal structures.

The panel was moderated by Kimberly Ha, Global Editor of Biopharm Insight, part of the a Financial Times Group.

Panelists

Les Funtleyder, MPH, Healthcare Strategist and Portfolio Manager, Miller Tabak Health Care Transformation Fund
Hunt Henrie, Managing Director at Ferghana Partners, a specialist investment banking group
Paul I. Rachlin, Partner, Proskauer
Jonathan Silverstein, Partner, OrbiMed Advisors
Jide Zeitlan, CEO, Keffi Group

Abstract

Leading Life Science business executives, investors and advisors in the biomedicine field discuss trends and developments in the healthcare M&A landscape, including today’s best exit strategies and the pros and cons of partnership versus an M&A deal. What impact will these different strategies have on the continued development of company pipelines?

FDA Clinical Trials and Biomarkers

The panel began with the a discussion of FDA clinical trials and the necessity of working with the FDA to plan strategically and effectively. The panel agreed phase II trials have not been a reliable indicator of success. It’s not just a matter of the FDA being a bureaucratic agency, but from a M&A standpoint, trails often need to be redone for various reasons i.e. dosing issues. The speaker emphasized the importance of doing these trials correctly at the early stage to avoid penalties later on. This is a tremendous challenge for early-stage/VC backed companies. When doing diligence, investors have found that at least 1/3 of companies have cut corners to save cash i.e. trial not powered enough. On the sell side, when selling the company to big pharma, the investor risks pharma asking your company to start over and go back to square one in order to repeat the clinical trial. Those on the buy side are always skeptical that not all M&A points have been covered. One way to improve this process is by making trials more efficient, which had given rise to an explosion of biomarker deals. For example, the partnership of Qiagen with Pfizer on diagnostic-therapeutic combinations. One panelist expects to see a trend of big pharma acquiring diagnostic corporations. Roche also has history of pairing drugs with diagnostics (see 1, 2) which will help aid trial design as diseases can be monitored. Will this lead to a crossover of M&A transactions? Despite this biomarker perspective, another panelist remarked that we will not be seeing pharma buy diagnostic companies, but will be looking to partner instead. There is not shareholder support for these acquisitions. Regarding the big picture, I also wanted to point out that the panel remarked that emerging markets were looking good, while the EU and US were looking pretty bad. They were interested in Asia’s reimbursement strategies. I think these remarks have become especially prudent since September, as the European economies have been shuddering causing extreme market volatility which was just in it’s early stages when this panel convened. I would personally be slightly more optimistic on the US market, though it does seem our results are tied to the outcome of the EU debt crisis.

Orphan Drugs

The conversation quickly turned to orphan drugs, and companies which market products in this space have rapidly been on the rise this decade for several of reasons. One company that garnered considerable mention was Alexion, which rose to profitability in one year. Since the panel, Alexion obtained drug approval in the EU (see 3) for the treatment of atypical hemolytic uremic syndrome (aHUS), though recently its share have been down (see 4,5) perhaps making it a good buy for 2012 if you like the company. Alexion was mentioned especially in reference to the discussion on clinical trials design, and the trend towards smaller trials for early stage drug candidates, as Alexion published a study of 37 patients. This is leading doctors and scientists to find additional indications for their orphan drugs – a very critical business move, as once a drug is approved by the FDA for one indication, it is more more straightforward to get approval for additional indications (since the drug has already been demonstrated as safe). Several deals which were mentioned at this point included Sanofi’s acquisition of Genzyme, Endo buying AMS, and Varian acquiring Calypso. The Sanofi deal is the second largest biotech deal ever, which was consummated for $20.1b in order to gain access to Genzyme’s Enzyme Replacement Therapy. The deal was reached at $74 per share cash and hinged on the offer of a tradable contingent value right (CVR) whose value will depend on Genzyme’s experimental multiple sclerosis drug Lemtrada. The CVR was a critical tool in bridging the difference in value perceived by the two companies and will essentially trade like an option. Genzyme was one of the first specialty pharmaceutical manufacturers who demonstrated that profits could be made in the orphan disease space. In the past year Endo has acquired HealthTronics (urology), Penwest (nervous system disorders), Qualitest (OTC products) and American Medical Systems (AMS, pelvic health) poising themselves for long term growth. Their purchase of AMS for $2.9b cash, or $30 a share, is intended to diversify Endo’s therapeutic health areas and products includings drugs, devices and services (2011 Credit Suisse Healthcare Conference Transcript). Finally, the $10m Varian deal for Calypso stirred some mutters on the panel. Just in January Calypso had taken in $6.4m in funding, though I’m not sure what the company was valued at that time. It was my interpretation from the panelist’s discussion that investors had believed Calypso to be worth alot more not too long ago and that this was a good deal for Varian. Calypso System features GPS for the Body technology and Beacon electromagnetic transponders that continuously track tumor location to improve precision of prostate cancer treatments. The transponders are implanted into the prostate tracked with the 4D localization so that beams can be precisely delivered during radiotherapy and radiosurgery (see Calypso website). In summary, these types of deals for mature technologies indicate a general lack of innovation in the healthcare field, or at least the lack of innovative technologies making it to market.

Patent Cliff

Over the next 2-3 years, the greatest number of patents critical to the pharmaceutical industry are expiring. Lipitor, made by Pfizer, the number one and two selling drug in 2009-2010 was bringing in $5 billion a year in sales went off patent on Nov. 30, 2011 giving rise to a fury of generics from abroad. In preparation, Pfizer has been slashing costs saving $1-2b a year and laying off 20-30k people, resulting in a 5% increase in stock price. One may wonder why Pfizer’s stock rose after such announcements. The logic is that investors want Pfizer and other big pharma to buy their way out of the patent cliff by acquiring approved products. In general large pharma is not getting any credit for innovation. Some deals which were noted included Johnson & Johnson’s agreement to purchase Synthes for $21.3B, the largest purchase of the 125-year old company’s history. Synthes, a device, spine and biomaterials company based in West Chester , PA and trades on the Swiss stock exchange specializing in bone fractures and trauma, will provide J&J with a leading device company and has caused its shares to rise 8% since April when the deal was first announced. This is a deal which has nothing to do with innovation. Another deal mentioned involved Cordis. Cordis was bought in 1996 by J&J but retained its name and specializes in catheters, haemostasic values, percutaneous transluminal coronary angioplasty (PTCA) guiding catheters and PTCA balloons using nylon material.

Medical Device Companies

As mentioned, J&J has been branching into devices and diagnostics. The panelists were not holding their breath for device companies to begin expanding into pharma. Instead, medical device companies have been looking M&A for innovation, and pharma will take over this role. One deal which generated discussion was the acquisition of Ardian by Medtronic. Ardian is known for their catheters for treating chronic drug resistant hypertension. The Symplicity HTN-2 clinical trial was an international, multi-center, prospective, randomized, controlled study of the safety and effectiveness of renal denervation in patients with uncontrolled hypertension. Ardian was bought for $800m cash upfront and had the single best exit for a medical device company with a 20x multiple, according to the panel. A study of the Medtronic annual report shows a focus on drug/device combinations. It will be easier for pharma to move into the device sector, and harder for device companies to take on the traditional pharma role. In general, the panel agreed on shorting Medtronic as they are not known for quality deals. For example, the Infuse BMP (Bone Morphogenic Protein) product was used off label inappropriately and in the wrong physiological location – off label usage  in the cervical spine had inflammatory side effects while the drug was only approved for lumbar spine procedures (FDA Alert can be found here). That being said, analysts at seeking alpha as of October rated Medtronic as a long term buy for its solid 3% yield and new management.

Exits

The panels conversation on exits proved to be one of the most insightful and interesting discussions of the afternoon. Several main points were laid out as fundamentals: Always have enough cash on hand, and never have a milestone event scheduled within 6 months of exiting. Investors do not like binaries. At this time, buyers are in the stronger position, putting down only 10% followed with up to 50% when milestones are passed. One panelist remarked that you are “selling dreams, and son’t want to wake up too soon”. Always advise clients on the following points things: 1) Be realistic on timing, sometimes the process takes very long. Avoid interim data. 2) Educate yourself on deal structures, many various possibilities. For example, while it may be nice to get a large slump sum up front, it may not be possible, so have contingencies. 3) Be flexible in terms of expectations- structure, amount and timing. 4) There are buyers everywhere – go far and wide to find the best buyer for you i.e. India, Asia, Scandinavia. Every good deal was born from alternatives. It is critical to make sure you are well financed. Many companies try to run right down to their cash limit, while buyers are looking for ways to push off commitment. What would provoke a buyer to do a deal now? It is so much easier to sell when two companies are bidding for you. Make sure you have professional advisers, who are focused on executing the plan. Don’t rely on a M&A transaction – show investors you have choices. “Lack of choices are the death knell for companies”. Contingent value rights have been playing an increasingly important role, for example in the Sanofi/Genzyme deal. Essentially, at specific milestones the company gets an earnout – its similar to a basic royalty transaction.

Deal Structures

The panel agreed that they have been seeing M&A at much lower valuations. Deals have been more structured, with earnouts based on contingencies to shore the risk in some fashion. Companies aren’t going to be forced into deals now, they are pushing clients to do deals where the company stays involved and not just throwing the company ‘over the wall’ to pharma. It has been becoming harder and harder to make a complete exit – this is leading to a collapsed tail which is affecting buyers. One of the panelists was a major holder of Genzyme. Those involved in the deal thought the price was too low or too high depending on whose side you were on. In all, he felt the price was good and they were really paying a fair value and that the deal seemed to have a nice balance. In the pharma sector the percentage of upfront money gas gone down by 1/3 with a large increase in future payments. Several deals were cited here, as lessons learned. The big one was the acquisition of Protez by Novartis, in which Novartis paid $100m upfront then dropped the Protez product program entirely. The decision to halt PZ-601, an experimental antibiotic, due to high rate of adverse events in patients with skin infections, costing Novartis a pret-tax charge of $152m. Another deal mentioned which saved a company money was an Eli Lilly deal that only paid post-approval. The drug was rejected by the FDA and Lilly saved a few hundred million dollars. There was also mention of the inevitable law suits, and the inability to hold back money in escrow if you are sued. Larger device companies have decided not to move as fast on these types of transactions. Small companies are now taking exits at 2.5x instead of 5x since they can’t generate enough leverage over the buyer. 50% of M&A is taking place in marketed products. Pharma is spinning off to VC with buyback rights. Another trend is waiting for a company to fail at marketing their product, then buying the company for 10x the price, then throwing 1,000 sales reps behind the product. CVRs again became a big part of the conversation, in terms or deal structure as well as independent securities. Milestones were at one point described as “just a future litigation because so few of them come true”. I found these remarks quite shocking and interesting. In the biotech industry, you are often left with milestone payments that are essentially worthless, as there are just do many factors that can affect a company’s success. Recently, one of the speakers closed on a $600m fund for structured finance and royalties. People are getting more conservative. There is less and less money available, especially in the venture business. One panelist predicted that alot of VC funds would go out of business in the next 2-3 years, though I am not sure why he reasoned that- perhaps it would follow a collapse of the markets, loss of institutional investors or dearth of successful prospects on the sell side? M&A is leaning towards more defensive acquisitions. For example, Amgen had considered strategic purchases to acquire companies which own patents that may infringe on their blockbuster product Epogen. In addition, there are royalty streams on Epogen, and companies can pool their royalties to leverage against that very drug.

The Future and Final Comments

These remarks are a loose collection of the panelists final thoughts. As the assistant moderator, I handled the microphone during the Q&A session, so was just about finishing up my note taking. These are the final words of the panelists, which proved to be some of the most interesting remarks. The future will see a plethora of biomarker/companion diagnostics. Alliances will form around the drug. There will be a reduction in the pool of VC money available. There is a need to be creative in seeking financing. VC’s risks are spiraling out of control. Many of these technologies do not have a clear pathway. Venture capital will undergo Darwinian selection, though there has been some positive trends for VC. The economic situation in the US and abroad is making things difficult, and it is clear the economy has an impact on healthcare. No one was particularly optimistic about the next 3-4 Quarters. It is not clear how personalized medicine will work in the EU. Companies in Texas have been getting substantial money. If possible, it is advantageous to avoid going to capital markets to raise money. Companies are becoming more focused, efficient and virtual. There are less companies moving in the diabetes, cardiovascular and obesity space – the traditionally largest markets. While one panelist sees several hundred companies a year, only 2-3 are in the diabetes, cardio or obesity space. Corporate investors have finally become interesting in the vaccine space – even stem cells. Two to three years ago these were viewed as the devil, “dreamy”, now they are finally gaining attention. A recently ophthalmology company had only 2-3 buyers when it went for sale – you rather have 28 buyers. The financing model they used to see was $5m pre, $5m post, $10m series A and $10m Series B. Now Series A is only attracting $8m,5m, sometimes only $3m.

This year I organized a very exciting panel discussion on private and public equity investment in the biotech and pharmaceutical industries. After discussing the idea with several friends and colleagues, we were able to invite several very interesting speakers with diverse backgrounds and experience in consulting, venture capital, investment banking, business development, and management. Both Bryan Czyzewski and Peter Shapiro helped me brainstorm and conceptualize the event. Eric Vieira also gave alot of constructive feedback during the planning process and offered both much needed advice and support. I would like to especially thank Connecticut Innovations for generously sponsoring the networking reception following our panel discussion. Connecticut Innovations is an evergreen fund which was started by the State of Connecticut initially with $65 million in capital. Their far-reaching investments include drug development companies, medical devices, e-commerce companies, wind turbine developers and other IT and software designers. The event will be held at 1 Chase Manhattan Plaza on the 60th floor at JPMorgan Chase. Hope to see you there!

The FOBIP Alumni Network Executive Committee, New York State Center for Biotechnology, JPMorgan Chase & Co., and Connecticut Innovations Present:

Financing Biotech in 2021

Date: Tuesday, May 3rd, 2011 at 6:30PM Location: 1 Chase Manhattan Plaza, The 60th Floor, Boardroom Agenda: 6:30 – 8:00PM Introductions & Panel Discussion 8:00 – 9:00PM Networking Reception – Sponsored by Connecticut Innovations RSVP Online Required: Click Here (A $10 donation is suggested to support future events) Must RSVP 24hrs in advance to be admitted

 

• Moderator
  

  Stephen Davis

  Partner, Goodwin Procter, LLC

• Panelists
  

  Milena Adamian		Director, Life Sciences Angel Network
  Noah Kroloff		Partner, NGN Capital
  Jennifer Friel Goldstein		Director, Pfizer Venture Investments
  Philip Ross		Executive Director, JPMorgan Healthcare Investment Banking Group
  Daniel Wagner		Director, Investments, Connecticut Innovations

Executive Summary

The goal of this event is to discuss some of the various sources of capital available to emerging pharma and biotech companies and the current trends affecting the market. We have established a panel of investors ranging from angels to investment bankers who will explain their role in financing companies in the healthcare sector. The panel discussion will touch on current technologies attracting investment, promising new sectors, selection mechanisms for targeting companies for investment, factors contributing to successful exits, and upcoming challenges facing the industry in the future. Click Here for Speaker’s Bios

Thank You to Our Sponsors and Supporters!

About the Organizers: The FOBIP Alumni Network is an established, non-profit, all volunteer, industry focused biotech club. It is exclusively composed of young professionals and graduate students from the biomedical sciences who have completed the Fundamentals of the Bioscience Industry Program (FOBIP). The program is taught by industry executives focusing on intellectual property, entrepreneurship, FDA regulations, finance and venture capital in the healthcare sector. The goal of our Alumni Network is to provide educational seminars, industry outreach, and networking opportunities for our members, guests, and followers.

In the New York Times on Monday, there was a very important article on young entrepreneurs entitled: No Jobs? Young Graduates Make Their Own. With the lack of traditional jobs on the market, young people are blazing a path to success by creating their own companies. These organic businesses, started from the ground up are what the U.S. needs to revitalize it’s economy. One must never forget about the roots of companies such as Facebook and Google, which of both started in a college dorm room or one bedroom apartment. And in 2010 you could look to Groupon, for example, which started in 2008 and recently refused a $6 billion bid by Google. Granted, most of us will not be forming the next multinational enterprise, but with a vision, tenacity, and good business acumen there are always possibilities available to the budding entrepreneur.

The NYT article describes the failures and success of a NYU film student, Scott Gerber, who used nothing but his passion and the last $700 in his pocket to start an internet company. While there are many opportunities for forming novel businesses online, I think the biggest game changers will be in the energy sector. Since starting his business, Gerber has also founded the Young Entrepreneur Council which mentors early stage entrepreneurs primarily through web forums, Q&A articles and video conferences. Scott also writes prolifically for several websites, such as this article on how to raise capital for your business based on first hand experience from various new entrepreneurs on youngentrepreneur.com.

While there is still room for virtual businesses to grow, a truly sustainable company should focus on solving unmet needs. In the U.S., the primary unmet needs are in the energy sector. Therefore, many investors and serial entrepreneurs are moving into this arena trying to bring new products to market and bridge the cap between new technologies that are challenged by consumer adaptation and habit.

A passive house is a living structure designed to recycle and trap heat. It is essentially built as a highly insulated enclosure with a special ventilation system that transfers warmth lost from the outgoing hot air to the incoming cool air. The owner is reducing waste and conserving a significant amount of thermal energy – these types of homes have been known to reduce heating bills by up to 90%, as they don’t contain any specific heating element. All heat comes from intrinsic sources of energy such as lighting, appliances, and the human body. Passive homes were originally pioneered in Germany, and are already popular in Europe and becoming more so in the United States. Below is a recent video which was posted in the New York Times Business Section in September 2010 which tells the story of a New England family who designed and built their own passive home.

Long term economic outlook

I thought it was interesting to note that according to the video, the cost of building a passive house in Europe in 2010 can be as little as 2-3% greater than building a traditional house (without these energy efficiency features), compared to the 15-20% increased cost in the U.S.. Therefore it is more expensive to build a passive house in the U.S. than in Europe. Assuming current price stability over the next decade (which is unlikely), passive homeowners in America will generally make up for the cost difference in 10 years through energy savings. I found the topic of passive homes first discussed online in the Times in December 2008, in a fantastic article entitled “No Furnaces But Heat Aplenty in Passive Houses” – however, I credit first hearing the about concept and construction of passive homes in 2006 from a German girlfriend. The 2008 article quotes the cost of building a passive house in Germany as 5-7% more than a traditional home. So, in Germany the costs for building passive homes have dropped 50% in the last two years (which is great news)! If the U.S. were to experience a similar trend in the coming decade due to increased demand and improved supply chain efficiency and production of raw materials, the cost of building passive houses could proportionally fall here as well, potentially allowing American builders to recoup costs within just 5 years.

U.S. government promoting energy efficiency at home

The U.S. Department of Energy published an article Building America Research in Action: Air Sealing in Existing Homes in their Building Energy Efficiency News, part of the Building Technologies Program and greater push towards Energy Efficiency and Renewable Energy (a great website). The mission of the Building Technologies Program (BTP) is to develop technologies, techniques, and tools for making buildings more energy efficient, productive, and affordable. In the coming century, as the demand and cost of energy rises, homes which use less energy and conserve more will provide their inhabitants with greater and greater cost benefits- making the passive house a smart long term investment.

Above is the interior of a Passive House at Darmstadt Kranichstein, published by the Passive House Institute in Germany. Each passive house has the following characteristics: optimal solar alignment (i.e. solar building design), superinsulation, advanced window technology, airtightness, high efficiency natural or mechanical ventilation, and heat recovery systems. There are many different design features available, but the general schematic is to the right. In a nutshell, a special air circulation system is used to recover the thermal energy. This can be accomplished by a mechanical High Efficiency Recovery Ventilation (ERV or HRV) system which are over 90% efficient.

Thermal energy recovery using an erv

As of January 2010, there was only one Energy Recovery Ventilator actually made in the United States, the RecoupAerator 200DX by UltiamteAir. This machine is attached to the duct work of your home and exchanges the entire air of the house every 2 hours. The incoming air is run through a filter removing spores and pollen, which is why passive homes have especially clean air, while outgoing air exchanges its heat and moisture with the incoming fresh air.

RecoupAerator 200DX

It is possible, with enough motivation, awareness, and financial support through tax-credits that the building and re-modelling of most new houses could be accomplished in this manner. The desire to create a home which is essentially energy independent, clean, and green can now be accomplished and is being implemented by builders all over the U.S., especially California and the Northwest. A final comment I heard, was that perhaps specialized, more favorable mortgages could be designed for homeowners who adhered to the standards of ultrahigh efficiency passive homes to help defray the increased up-front costs.

Additional Information

The 100K House – Passive House (Passivhaus) Standard for Energy Efficient Design – April 10, 2008 – 74 comments

The Eco-House Manual by Nigel Griffiths

“Passive houses” yield aggressive carbon cuts

Passive house: The idea of the airtight home takes hold among green-building experts – February 4, 2009

One June 3rd, 2010 Nature Biotechnology hosted a ‘Meet the Author’ event at the Nature Publishing Group New York City headquarters. The invited speaker was Mark Kessel, Founder and Partner at Symphony Capital, LLC. Mr. Kessel is a world expert in innovative product development, mergers and acquisitions, and has spent the last several decades advising companies and financiers. His goal during this well attended and intimate event was to summarize the challenges facing the drug discovery endeavor and analyze previous and future scenarios in order to distill important lessons which can help the industry produce continued success. Before attending, each participant had each read an interview with Mr. Kessel and other business leaders from Bioentrepreneur entitled ‘Other ways of financing your company‘ which discussed trends in early-stage biotech investment. Currently, Mr. Kessel is composing an article for Nature Biotechnology regarding challenges in the pharmaceutical sector, and the business development initiatives designed to deal with them. This report will attempt to summarize the talk given by Mr. Kessel to a group of ~20 graduate students and young professionals, and the information he shared will be incorporated into his upcoming article.

Current Problems within the Pharmaceutical Industry

In the future, business development functions will hold the key to success for large pharma, which is composed of the top 15-20 largest pharmaceutical companies worldwide. The well worn traditional model, which has focused on short term successes, is limiting new breakthroughs in R&D. The traditional model for big pharma is as follows: identify new blockbuster compounds, conduct large phase III clinical trials, and mass market approved drugs to the developed world. However, Mr. Kessel asks if this model can really address the world’s current unmet need for new drugs and continued to describe hurdles facing the industry today and in the future. With pipelines becoming depleted, development costs increasing and a timeline of 10-15 years to market, the US pharma industry is encountering strong earning constraints. Unfortunately, Wall Street evaluates companies based primarily on their short term gains and punishes them for not meeting quarterly expectations. This is in contrast to investment in China which is following a controlled and purposeful ten year plan. From 2009-2014 there will be $130b lost in sales by big pharma due to products going off patent. Companies such as Pfizer are buying other companies (i.e. Wyeth), not to replenish their pipeline, but to increase their earnings in order to satisfy investors. In fact, parts of their R&D pipeline are actually being shut down. There has been an increase in direct-to-consumer advertising, which should be examined more carefully and may be promoting products inappropriately. There is growing pressure from generic manufacturers. The FDA has been under increasing scrutiny to look more closely at safety, and the regulatory environment is becoming tougher. For example, Mr. Kessel asked the audience a rhetorical question: do you think the FDA would approve an oncology compound that has been demonstrated to extend life for several weeks, but produces horrendous side effects? The FDA is under Congressional oversight, and there are concerns about how the industry is conducting itself. Another question: If the customer is currently paying $0.10/pill, would they pay $1.00/pill next year for a drug which provides marginal benefit? Mr. Kessel suspects that patients might not be willing to pay more for incremental benefits during these times of budgetary constraints. He wonders if consumers will even be able to buy the drugs they have been paying for in the past. In an effort to demonstrate the direction in which the healthcare industry is moving, Mr. Kessel shares the example of HUMANA. This is an example of an insurance provider and payer, which is currently collaborating with another company BG Medicines to discover and implement biomarkers for patients. One of the overarching problems with non-personalized medicine is that drugs will often benefit only a minority of patients afflicted with an illness. It would be ideal to target those who will respond to therapy and identify them with biomarkers, and avoid dosing patients who will be non-responders. Insurance companies are  willing to pay for the test, and patients who don’t carry the markers will not get the drugs, increasing efficiency while reducing side effects and costs.

Mr. Kessel foresees a convergence of the FDA and EMA (European Medicines Agency), with a greater focus on safety which will slow down the approval process. All drugs have a safety/toxicity trade off. In the US, we are looking for perfect safety. However, in some fields, we have deemed side effects acceptable, such as oncology. The future will show an increased focus on longevity. However, big pharma is not prepared to capture new innovation, due to their corporate structure and administrative weaknesses. Their strength lies in their ability to recognize and capture external breakthroughs. There is a need to bolster drug discovery. Cutting costs to maintain earnings is not the panacea. The use of outdated business models and flip-flopping strategies i.e. diversifying pipelines/focusing on core competencies is showing inefficient and non-optimal strategic business development.

The Role of Biotech and Generics

Biotech is viewed as a collective of small and nimble companies capable of performing high level R&D. What’s happening in biotech? There are major capital shortages. Programs are being cut and slowed down. Small companies without a year of cash reserves are being unduly punished by the market. There were 17 bankruptcies in the biotech sector last year, which is more than Mr. Kessel had seen in any year since he began practicing law several decades ago. VC’s have moved their interest to late stage compounds. Biotech is looking to big pharma for capital. The biotech industry is trying to distinguish themselves from large pharma – they don’t want to be “tainted” and need to retain their image and ability to charge as much as possible for their products.

China, Brazil, India, and Russia are viewed as rapidly growing global markets. Consumers in those nations will be frequently purchasing from primary generics producers – Pfizer, Teva, Sanofi. They are willing to pay more for name brand generics, which have increased perceived safety assurances. They are frequently opposed to generics produced in their home country. Most new compounds in development are coming out of the US. China will soon have a robust pipeline, as well. Their is a diminishing pack of Phase III compounds to pursue, creating a very small universe for pharma. There are many in-licensing deals occurring. The number of new compounds produced has been cut in half, while the budget spent on bringing them to market has doubled. Compounds which are in-licensed should be deployed. The need to maintain earnings is the most pressing issue for management. Pharma has the cash on hand, this is not the problem. However, that cash is only generating 2% interest sitting in the bank. For example, pharma is engaging in share buyback programs and purchasing outstanding shares with cash in order to control their per share income (less shares creates more revenue per share when revenue is held constant). Shareholders expect their investment to go towards innovation, instead of buying a financial instrument.

Approaches to Addressing Cutting Edge Science

Companies are assessing the cutting edge science being produced at academic institutions. VC is focusing less on early state companies. Pharma has set up their own VC wing. Sometimes they outsource their VC arm to third parties. They are investing in companies that have new platforms. Accelerator programs, such as Lilly’s Chorus have been developed as independent divisions to carry out drug development until Phase III, independent of corporate management. These divisions are sometimes spun out as new companies. There are new partnering deals occurring, drugs are becoming pre-partnered. Other companies are even experiencing foreign take overs.

How did Big Pharma Become the Partner of Choice?

The ultimate solution would be to combine the best of biotech with the best of pharma. Biotech has the entrepreneurial spirit, which can move fast and make quick decisions. Pharma has a global sales force in place, are experts with large clinical trials, regulatory affairs and has cash on hand. Pfizer has attempted a hybrid approach by creating a unique business development unit for each of its therapeutic areas, independent of each other. However, to change big pharma there needs to be a mandate from the top which awards risk taking. These companies are not taking on great compounds in order to avoid risk. Mr. Kessel suggests a change in compensation which allows leaders to shed their “risk avoidance” behavior. He mentions that “no one has ever been fired for not taking on a great compound”, but one can sure be fired for not getting their compound to pass FDA approval. Management consultants, such as McKinsey could be used to help change the corporate culture, though this often takes 5-10 years. There needs to be a creative approach to deal making which helps support innovation on the drug development side. The one size fits all approach needs to be dismissed, and the industry needs to consider new areas of opportunity. For example, the healthcare IT industry is developing databases on how patients respond to various compounds based on previous clinical trials. This could be used in the future to predict the human response to new drugs and streamline the regulatory pathway.

Final Comments

Biotech traditionally suffers from poor management, in that they don’t abandon their failing compounds early enough. Many opportunities still remain for large in-licensing deals (20-90 deals next year). Biosimilars will play an important role, though there will be less of them with more focus on generics. In the future, diversification will be key. Productivity will get worse and we will look to biotech for compounds. The Novartis Model will become more common, as big pharma purchases branded generics, consolidates, and acquires.

On Oct. 25, 2009 the Fundamentals of the Bioscience Program Alumni Organization launched its official alumni website: fobip.org/alumni. The Fundamentals of the Bioscience Industry Program is a semester long collaborative course covering information critical for students to prevail in the biotechnology, pharmaceutical, and business worlds. Graduate students are able to hear and watch seasoned professionals from both start-up and established companies describe their career paths and discuss their business models. The program has an excellent reputation for producing bright, motivated students who have been extremely successful in their careers.

The target audience for the alumni website is professionals working in the biotech and pharma industries. I wanted to create a resource that would feature useful articles from alumni and guest authors with experience relevant to program graduates. One of my goals was to put a spotlight on the alumni and draw attention to the high caliber of its course instructors, graduates, and applicants. We hope to feature articles covering the the financial industry, venture capital, intellectual property, technology transfer, recruiting, and academia in relation to biotechnology. We want to provide information that will be useful to the start-up entrepreneur, industry veteran, and job seeker. Without any advertising we have had already 1,000′s of page views and hundreds of unique visitors. I am hoping that the content we generate will be a useful resource and we are aiming to add interviews and new articles approximately every 2 weeks.

I dreamed up this concept in early Summer 2009 and discussed it with Kate Posnanski, Manager of Programs at the Center for Biotechnology. With the help of many program alumni such as Jenne Relucio and Banke Fagbemi, we were able to bring the project to fruition and launch the website this Fall. I decided to use my experience creating websites use WordPress to generate the blog format with some additional features. We have an alumni page we are trying to build on every day featuring over a dozen of our graduates.

On the techie side, I used WordPress as my publishing platform with the Red Evo News Blue theme from Red Evolution installed. This theme evens offers a modest support forum which was able to answer some of my questions about theme customizations about controlling the length of the except. The except is the text displayed on the homepage describing the content of an article in brief. Also, I took advantage of using custom fields for the first time. Before creating this site, custom fields were a complete mystery to me. I found this video tutorial EXTREMELY helpful, and now I use the custom field to display images on the homepage for each post. There are both thumbnail and featured image custom fields available, built into the Red Evo News Blue theme. This was also the first time I embedded a Google Calendar into a website. That part was extremely simple, and if you want to know how to do that check here.

In summary, I hope to continue building this special website, which I hold dear to my heart and hope it will bring alot of benefit to the Fundamentals Program and its graduates. Cheers!