The Business of Biotech
- Article 1 of 7
- iSight, July 2003
The role of start-up biotechnology companies is becoming ever more important as the big pharma companies look to partners to provide innovation and inspiration.
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Biotechnology promises much for healthcare: more and better drugs; medical treatment tailored to an individual patient’s biological make-up; and the potential for reduced side effects, for example.
The commercial rewards of biotechnology are also clear. Last year, sales of biotech drugs rose 23% to $20 billion, and they should jump 25% more this year, according to consultants Bain & Co.
Stocks are following suit. The Standard & Poor’s Biotech Index is up 19.6%, while the broad-based S&P 500-stock index has only risen by 2%.
But paradoxically, there is virtually no money for new biotechnology ventures at present. The sector has been through funding crises before, but almost everyone agrees that this is the worst one yet. “Availability of capital has been tighter in the last nine months to a year than it has been in my entire 35-year career,” says John Norris, chairman of Coprindm and former deputy commissioner and COO of the FDA.
Capital for new ventures has dried up, and the big pharma companies won’t jump in to finance start-ups until they see positive late-stage trial results.
Initial public offerings (IPOs) have stopped, and over the past three years, the share prices of some publicly quoted companies have declined so much that many firms are worth little more than the cash they have in the bank.
As a result, the top 10 biotechnology deals of 2002 were worth just $3 billion, down from $25 billion in 2001, according to PricewaterhouseCoopers.
But there is hope in sight. And for biotech start-ups, that hope stems mainly from the big pharma companies’ inability to develop the next blockbuster drugs themselves.
ALL DRUGGED UP
According to the Centre for Medicines Research (CMR), an industry think-tank, 31 new drugs were launched on the market last year, compared with 52 a decade earlier. So to maintain their profit growth, the giants of the industry need to create roughly three new drugs apiece a year.
Since 2000, however, Pfizer and GlaxoSmithKline, two of the largest pharma companies, have produced just three between them.
Jerini, a drug discovery company based in Berlin, argues that the problem is a lack of new methods of attack. “If you look at all potential drug targets with conventional methods, you could address 50% of the targets,” says CEO Jens Schneider-Mergener. “What do you do with the remaining 50%? You need novel discovery strategies.”
The suggestion is that, with big pharma companies spending their time on the conventional approaches, smaller biotechnology companies have the opportunity to develop unconventional approaches.
SPIRALLING COSTS
While output in the pharma companies has stalled, the cost of producing new medicines has risen. Last year, the industry spent $44 billion on R&D. Analysis from the Tufts Centre for the Study of Drug Development suggests that it now costs an average of $800 million to get a drug to market, more than twice as much as in 1987.
Much of this spending goes on clinical trials, the last stage of drug development. A decade ago, testing a drug on 1,000 patients was enough to prove its safety and efficacy. Now regulators demand trials on 4,000 or more patients and an array of biochemical and clinical tests, all of which add to the expense and duration of a trial.
But according to Martyn Postle of Cambridge Pharma Consultancy, up to 70% of the total development cost is taken up by drugs that do not even make it to market. For every 10,000 molecules screened in a given programme in the laboratory, only one will make it through to launch.
Many biotechnology companies have noted this problem and have already devised ways of narrowing down the list of molecules to be screened. Oxagen, an Abingdon, UKbased company, for instance, has a huge database of DNA samples from families with hereditary diseases that it uses to find genetic targets. It then finds which drugs can affect those targets.
“We’re seeing a lot of attrition in the pharma industry, where companies reach phase II of a trial and find that a drug doesn’t work because it targets something that has nothing to do with the disease,” says Oxagen CEO Mark Payton. “We’re only attacking validated targets: we think that’s the way the pharma industry is going.”
InPharmatica, also based in London, takes the approach one step further by looking for targets it can affect first, then seeing whether there are any associated diseases. “Companies can spend millions of dollars identifying targets that end up not being druggable,” says CFO Patrick Banks. “Our approach can narrow down the candidates for successful treatments.”
TRIALS AND TRIBULATIONS
The most public failures are those drugs that make it into clinical trials, and then stumble. According to the CMR, the success rate of drugs going from large phase III trials to market has fallen by almost 30% in recent years. Roughly three-fifths of drugs in clinical development falter because of toxic effects, other safety issues or their failure to do what they are supposed to. Companies such as Arakis, based in Saffron Walden in the UK, Combinature Biopharm, based in Berlin, and Paion, based in Aachen, Germany, try to avoid this unexpected toxicity from the outset.
Arakis develops drugs based on existing drugs that have passed toxicity tests to minimise the chance of their own drugs having side effects. Combinature Biopharm develops natural compounds by substituting genes into micro-organisms. And Paion uses drugs based on naturally occurring chemicals found in specialised animal organs. “This methodology does not require extensive and error-prone target validation,” explains joint MD Mariola Söhngen. “It leads directly to plausible protein drug candidates or drug targets as the functionality of the selected proteins was optimised by evolution in the respective tissues and organisms.”
With big pharma companies looking to biotechnology companies to bail them out, either through acquisition, partnering or licensing deals, it is up to the biotechs to use this new-found interest wisely. Then, perhaps, they will become the big pharma companies of tomorrow.
Certainly, says Norris of Coprindm, the smaller companies are forcing the broader biotechnology industry to review its business practices. “It used to be the case that there was enough money out there that companies could be highly inefficient and still make plenty of profit. But because there are smaller, much more efficient companies competing in the industry now, that is no longer possible,” he says. “Small, technology focused companies are driving the industry to become much more efficient.”
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