A new way to fund drug discovery?

In the past decade, two failings of the modern drug discovery have become apparent. First, the major pharma companies are unable to develop new drugs as successful as the ones going off patent.

This has been a major theme of Derek Lowe in various posts in his blog “In the Pipeline”. For example, in a November 2010 posting, he lists the commonly know problems: “lower rates of success in discovery, higher costs, patent expirations, etc.”

The other is that the biotech startup model is beginning to fizzle out. Whether or not the current science will make commercially successful biologics, the idea of creating a new company to develop a few compounds — ending with a successful IPO — hasn’t worked for many years. (It doesn’t help that the IPO market has closed overall for bio and non-bio startups alike.)

Into the breach steps Duane Roth, onetime industry executive and entrepreneur who now heads San Diego-based Connect. Roth gave a webinar April 27 where he discussed the problem and some ideas of how to solve it.

Roth’s suggestions were based on a paper he did with former Warner Lambert executive Pedro Cuatrecasas that was sponsored by the Kauffman Foundation and summarized in Roth’s op-ed last year in Xconomy San Diego.

Roth was pessimistic about the prospects for both traditional pharma and the newer biotech model. He said that the IPO market “is never coming back for pre-revenue companies,” stretching out the return for startups and their investors. Today, only one major biotech startup remains independent — Amgen — while both Genentech and Genzyme have become subsidiaries of big pharma.

Instead of the traditional vertically integrated model, Roth argues that the industry needs to separate out a new role in the value chain: a product definition company. In this model, the federally funded research institute (i.e. a university) would license discoveries to the PDC, which would prescreen these for the product development companies (which might also have the distribution channels to bring these products to market).
In this division of labor, the product definition company spends $3-5 million per discovery to characterize it and attempt to develop a prototype. The drug development companies are the ones that do the clinical trial and hope to bring it to market.

The difference in this new model is that the PDC quickly studies the possible compounds and then sells them. There are no 10 year waits for IPOs — quick exits for the winners and returning the compounds to the universities for the losers.

From his vantage point at Connect, he’s watched the mobile industry (led by Qualcomm) make a similar dis-integration between chip designers, contract fabricators and handset makers.

As a longtime strategy professor, I can think of few examples where industries naturally changed themselves and many where industry inertia prevent long-needed reforms. (Think of the record industry.) Thus my question to Roth was: how do we get there from here?

Roth thinks big pharma will invest in and support such companies. He also hopes that angels could fund some companies, given the relatively small capital needs and quick returns.

I feel more pessimistic. This sort of model requires creating a market — buyers, sellers, price and quality measures — and it seems like today’s market is spotty at best. I can imagine that CROs could try to do this product definition, but be unable to get a fair price from potential buyers. Or they might get to greedy, hoping for a later sale at a higher price rather than handing off the compound to a firm that can bear the cost and risk of clinical trials.

Still, there’s no denying the cracks in the current model. During its heyday, US firms were the winners in both big pharma and most notably for biotech startups. The industry — and universities and the country — need to find a 21st century model that will take advantage of our home court advantages: university science, risk capital, and a large affluent domestic market.