22nd Annual
JPMorgan Healthcare Conference

On the road for Info.Resource, publisher of Oregon-Bioscience.com

There’s gold in them thar molecular tailings

By Lorraine Ruff and David Gabrilska, Partners
Milestones, the critical thinking company
Seattle, WA

In the rush to get to the next blockbuster drug, pharmaceutical companies may be missing the next blockbuster drug.

"New molecular entity (NME) discovery has become so difficult to predict and localize that it may not be sensible to invest at the rates we have in the past," said Roger Longman, Managing Director of Windhover Information, Inc. and editor of In Vivo: The Business and Medicine Report. Longman was among a number of panelists who recently addressed a standing-room-only group of drug executives, investors and analysts on pharmaceutical and biotechnology licensing trends at the 22nd annual JP Morgan Healthcare Conference in San Francisco.

To maintain anything close to traditional margins, drug developers must learn to explore the entire R&D value chain for innovation, Longman said. "The business development function in a company has become as important - if not more so - than the discovery function.

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Longman pointed out that Big Pharma has been fixated on blockbuster drugs. There has been an overwhelming philosophy to create stricter entry criteria and manage the portfolio using "fast failure." As a result valuable molecules have been abandoned leaving many to ponder: can we mine existing innovations more effectively through re-profiling, re-purposing and re-discovering the novelty in those molecular tailings?

Longman presented a number of cases why the re-purposing of drug candidates made sense:

• Cyanamide relinguished rights to Medivir’s alovodine HIV drug because it was no better than AZT, the gold standard at the time. Medivir did a deal 10 years later for $135 million and 15 percent royalties for Phase II data because HIV had changed. The drug changed because the disease changed.
• GlaxoSmithKline returned right to Icos’ PDE V inhibitors because developers observed no clear value for the drug in cardiovascular or inflammation indications, GSK’s focus at the time. "But no one who participated in the trial sent the pills back," Longman chuckled, and Icos further evaluated the molecule for those side effects. Pfizer had introduced Viagra®, its male impotence drug. Icos’ PDE V became Cialis® for male impotence: Lilly did the joint venture and received 50 percent participation. GSK, recognizing the value in this space, subsequently did a late-stage deal with Bayer to get rights to an erectile dysfunction drug, Levitra®. The three drugs compete in a $4 billion market.

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• Procter & Gamble gave up rights to Regeneron’s VEGF Trap. P&G perceived no value in muscle-wasting disease. But in 2003, Regeneron licensed the compound to Aventis for an $80 million upfront payment for Phase I data, which now represents the only licensable later-stage VEGF inhibitor for cancer.

Statistically, the drug industry and financial markets are paying for recognition of value, not NME discovery, according to Longman. Upfront money for late-stage deals (Phase III) have more than tripled in the past few years, and upfront payment for Phase II deals are fetching 2-3 times what they did a few years ago for the right molecules or drugs.

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The business development officer will be critical in this evolving milieu, suggested Moncef Slaoui, Ph.D. GlaxoSmithKline (GSK). Slaoui, relatively new to his SVP post of directing worldwide business development, told the audience about GSK’s new "Power of Two," that emphasizes synergies between GSK’s internal R&D and business development, and GSK’s business development and external partners."

"Our financial success is tied to delivering and building value every year," he said. This is dependent upon a steady, rich pipeline of assets in development. The company, formerly a devotee of fast-failure, now espouses the augmentation of its pipeline through in-licensing, co-marketing and co-promotion agreements. "This focus ensures balance in our portfolio and is the basis for sustainable growth," Slaoui said.

John Milligan, Ph.D., EVP and CFO, Gilead Sciences, a veteran of mid-size biotech company drug deals, stressed that today’s opportunity in deal making is to apply new skills to old drugs, adding that a critical denominator in that process is consideration of the mutual needs of the partners.

It occurs to Milestones that the re-tasking of molecules must also include a thoughtful analysis of roles and responsibilities of those who comprise the redefined R&D value chain for innovation, from researchers to marketers and those in between. We envision cross-institutional initiatives among those charged with technology management and business development and responsibilities and an environment that results in a coordinated pass off at major development stages to ensure that the value steps are recognized appropriately.

Easier said than done. While bridges are established between discovery companies and Major Pharma, connections between Major Pharma and universities – a source of discovery innovation - are not necessarily smooth running.

Given the trends outlined above by panelists, the role of NME discovery might even increase in universities?

We continue to observe that the weakest link in the chain of technology management/business development is within universities where important discoveries are made. Researchers need to more fully understand the intellectual property and tech transfer process cycle; the attributes of technology management and what constitutes a commercially viable technology; and how those attributes relate to a go/no-go on whether a technology should be licensed at all¹ – all within institutional budget limitations. As a metric of deal flow, Stanford University’s Office of Technology Licensing (OTL) – one of the top 10 performing academic technology managers in the United States - between 1996 and 2001, Stanford OTL averaged 137 licenses per year, which generated approximately $21,000 per license.

Figure 1. The top ten universities providing technology management for research and discovery, intellectual property coordination and licensing, 1999. Source: AUTM

Institution	Millions of Dollars (US)
Columbia	89
University of California	74
Florida State	57
Yale	41
University of Washington	28
Stanford	28
Michigan State	24
University of Florida	22
Wisconsin	18
MIT	16
	$397 million

Through professional development programs, courses and meetings, organizations such as AUTM are focused on the professionalizing of technology managers, but only a handful of universities – mostly private – are staffed with expertise who are up to the task of recognizing the value of an NME and how, through collaborative relationships, they might maximize its value to the university and licensee.

Focused on State legislatures in an attempt to deal with the specter of conflicts of interest² issues construct attitudinal and public policy barriers, including lawmaking, that prevents players from moving at the speed of business. These deficiencies need to be addressed by participants in the R&D value chain and business development experts are in a unique position to provide leadership for this critical issue.

The panelists concluded that the winners in deal making will be:

• Those drug companies that are not double-spending on internal and external R&D and who have created systems to avoid the very difficult and inevitable conflicts of judgment.
• Those drug companies that have given up sole focus on chronic care molecules and are figuring out how to create increased value for shareholders by focusing on specialty chemicals.
• Those small biotechnology companies who can preferentially gain access to sources of existing molecules for which some value has been recognized, an extraordinarily difficult job.

Milestones is convinced that drug developers must learn to explore the entire R&D value chain for innovation and embrace discovery innovation as leverageable assets that must be managed as such. We are wise to do so because it proves that businesses can be made of biotech innovation, whether that innovation comes from internal sources and/or is in-licensed. Moreover, without re-purposing the human resources that drive deal making, important drugs could be relegated to the molecular tailings of a bio-mine slag heap. As an industry we’re smarter than that.

Figure 2. In an all too-close-to-home presentation, Len Schleifer, MD, CEO and President, Regeneron Pharmaceuticals, a veteran of value added biopharmaceutical deals and successful partnering activities, presented his take on the gestalt underlying drug deal and licensing trends. Elements of the deal that significantly improve the chances for success were presented in David Letterman style to a standing room only audience of appreciative executives, Judging from the laughter, many had "been there and done that."

¹On a $4 million inventory, Stanford University OTL reports that it typically writes off $.5 to $1 million per year in unlicensable cases. Further, 47%–50% of OTL’s cases produce less than $10K.

²Definition of conflict of interest: An institutional conflict of interest exists when an activity that could result in a financial benefit for the institution could, at the same time, detract from, or appear to detract from, the institution’s primary mission. Source: AUTM

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