US, EU seek to stifle biotech exits

A novel antitrust strategy by the Biden Administration’s Federal Trade Commission and the EU is seeking to end an acquisition by Illumina that would accelerate the availability of a cell free cancer screening. More seriously, if widely adopted, it would make it much harder for successful startups to exit — and thus for them to raise money and be formed in the first place.

Ironically, the government agencies are seeking to block Illumina from paying $8 billion to buy back  Grail, its own spinoff company. As the WSJ editorial board concluded Friday:

Government Race Against a Cure

In 2016 Illumina formed Grail with the goal of developing a blood test that could detect DNA from cancer cells before people show symptoms. A year later Illumina spun off Grail. This let Grail raise venture capital to finance large clinical trials while Illumina focused on building its other businesses.

Fast forward four years. Grail’s technology can now reliably detect 50 cancers at early stages with a simple blood draw. While the tests aren’t 100% accurate, the false positive rate is less than 1%, which is lower than for mammograms and PSA prostate tests. Grail’s technology can also detect the 12 most deadly cancers with 60% accuracy and has the potential to reduce false cancer diagnoses and invasive screenings while increasing early detection of aggressive cancers.

Grail was considering an IPO last fall to raise $100 million when Illumina made a more attractive offer. Illumina says its regulatory expertise can accelerate the commercialization of Grail’s technology. Biotech startups often struggle to obtain regulatory approval and insurance reimbursements.

The argument is virtually unprecedented: most mergers (since the Teddy Roosevelt days) have been fought based on horizontal combination in restraint of trade, while Illumina is a strategic supplier to Grail (and also supplies to other firms).

What seems particularly disreputable is that the FTC is seeking to kill the merger without allowing a court to rule on the merits of its arguments. Instead, the FTC is hoping to harass and stall the applicants until the Dec. 20 expiration of the agreement.

The reality is that little companies develop new technologies, but can never scale as quickly as a big company. The June 3 editorial suggests that Grail’s competitors are fighting the merger to slow Grail’s rollout and let them capture more market share.

Meanwhile, the EU is asserting authority over a transaction (between US firms) for which they have no jurisdiction because Grail has no operations there. As the WSJ wrote on May 29:

The change in European policy marks an effort by the commission to adapt its antitrust enforcement to a fast-changing marketplace where companies can expand with great speed, including through the acquisition of pivotal smaller businesses, the commission has said. Its March policy guidance changes nothing in the letter of the law but fundamentally changes how it is interpreted.

Potential red flags for merger review now include almost any deal done by a tech giant; almost any deal in a highly innovative sector, such as pharmaceuticals; a deal that might trigger complaints from third parties; and high-price acquisitions of companies with little revenue.

“It raises a lot of questions and uncertainty,” said Salomé Cisnal de Ugarte, a partner at law firm Hogan Lovells in Brussels. “It can affect every transaction.”

Finally, beyond the policy issues are the sheer scope of transactions on the global economy. Illumina is a $3.4 billion/year company, not even on the Fortune 500 (#687). Meanwhile, Amazon ($420b), Google ($182b) and Facebook ($86b) dominate their respective segments — in a way no oil or car company ever did — and continue to stifle competition at every opportunity. A decade from now, which intervention will make the most difference to society and the vibrancy of the economy?

The two experimental drugs that treat COVID-19

The FDA today announced it is working with private companies to bring two previously approved therapies to approval as treatments for #COVID19, the coronavirus first detected November 17 in Wuhan, China. Both are being tested for efficacy in humans, as part of the normal (but now highly expedited) process for seeking FDA approval.

One is remdesivir, the Gilead antiviral developed for use against Ebola and Marburg, both exotic filoviruses with case fatality rates of about 50% (vs. about 0.7% for COVID19). The National Institute of Allergy and Infectious Diseases (NIAID), the division of NIH that funds research on infectious diseases, is sponsoring its own randomized clinical trial using remdesivir against COVID-19 that has been given to 250 patients already.

The other is chloroquine, used since 1949 as an anti-malarial. It has long been known to work against SARS coronavirus, the closest prior pathogen to COVID-19. It works against a wide range of viral and bacterial pathogens — including Ebola — by inhibiting cellular entry. With remdesivir, it has already been tested in China against COVID-19.

Mikhail Shilman, my coworker (at KGI) and cofounder (at our startup) issued a statement about these two approvals:

The FDA decision this morning to fast-track approval chloroquine for treatment of COVID-19 coronavirus shows the potential for previously approved drugs to be deployed quickly to treat emerging infectious diseases that can rapidly infect an entire community or nation.

Chloroquine, an anti-malarial, has been safely used for 70 years around the world. The FDA has policies to encourage the repurposing existing drugs because it is quicker and lowers the risk of unexpected adverse effects. It is also a drug that is already being mass produced and is simple to manufacture, and thus can be quickly scaled up unlike complex large-molecule therapies.

Coronaviruses attack epithelial cells within the lungs. It can be life threatening because once it is inhaled, the infection inflames and swells the lungs in a way that makes it increasingly hard to breath. We thus need an orally administered drug that can be distributed in our system to reach and protect organs like lungs.

As we showed in our 2015 paper in Nature Scientific Reports, chloroquine is one of only two quinoline drugs that protects cells against certain types of viral and bacterial pathogens. It blocks the entry of these pathogens into the cell, including Ebola and SARS coronavirus, by binding to and inhibiting the function of the host Cathepsin protein, which mediates the uptake of these pathogenic agents into human cells. While we have not tested COVID-19 coronavirus, it is believed to work the same way as SARS and MERS coronaviruses.

Of the two drugs, chloroquine is the weaker of the two, better tolerated and better suited for treatment for the several weeks necessary for the body’s immune system to clear a virus such as COVID-19. The other drug, amodiaquine, is much stronger and better for immediate threats but has the potential for side effects if taken for longer periods; that is why I’ve been working to develop amodiaquine for inhaled anthrax, which kills the majority of patients in a matter of days.

Recent research has shown that chloroquine is effective against COVID-19 samples in the lab. Bayer said today they are donating three million chloroquine tablets for use as a COVID-19 treatment. Given the urgency of the pandemic and the proven safety of this drug, it is now appropriate to test chloroquine as a way to protect or treat high-risk populations.

Market Realities

Some of the coverage of the COVID-19 crisis has asked why the US doesn’t have a treatment for this coronavirus and why the government is taking so long to bring one to market. The two reasons are the regulatory process, and the perception of market demand.

Well, the reason is that it typically 7-10 years after discovery of a drug to get it approved. DiMasi, Hansen, & Grabowski (2003) estimate the mean duration of a Phase 1 safety study as 1.8 years, a Phase 2 efficacy study as 2.1 years, and a larger scale Phase 3 study at 2.5 years. So that is 6.4 years, not counting the 2-3 years before that to justify getting into humans, and the 12-21 month delay (depending on therapeutic area) waiting for FDA approval (DiMasi, Grabowski & Vernon, 2004).

While the FDA allows off-label use of approved drugs, and compassionate use access when there is no standard of care, our society (like any other) expects a rigorous, multi-year process to prevent sale of unsafe or ineffective products.

The other issue is the commercial reality. The DiMasi et al (2004) study estimated that on average, clinical trials for an antiinfective drug took $362 million and lasted 10.3 years.

As the CEO of a (tiny) pharma company, it’s hard to make a case for pursuing a scientifically feasible drug unless a) it’s a big market or b) someone else (government, foundation) bears the risk.  I know for sure that I won’t get venture capital to fund my trials unless investors think there is a good chance of achieving sizable revenues — particularly given the 11% clinical success rate for all human therapeutics (DiMasi et al 2016).

So when there’s an epidemic, under normal circumstances firms will have something approved long after it’s over. If no one (or almost no one) is sick any more, there’s no market for treatment. However, insurers and public health authorities are willing to buy a vaccine so the disease doesn’t come back again.

Finally, even if approvals are accelerated, it takes time to be able to manufacture a drug at scale with FDA-approved quality standards. Repurposing existing drugs are the only ones likely to be ready for widespread usage this year. Thus, we should be excited by this good news, and the increased sense of urgency by the government to encourage further investment in deploying these therapies.

When tech entrepreneurs attack science

One of the most remarkable trends in science-based entrepreneurship is the recent explosion of fake meat companies.

I saw my first fake meat company in 2015 at the graduation event for the first class of startups at the IndieBio accelerator in San Francisco, doing egg whites. Now leading companies like Impossible Foods and Beyond Meat have landed their fake hamburger in fast food chains.

At breakfast yesterday with my boss’s boss, he remarked that some of the burgers are actually quite good, and we agreed that (someday) it has the potential to be a trillion dollar business. This seems to be one of the rare examples where the outrageous predictions by tech entrepreneurs of creating a huge new market might actually be true.

Adoption Paths

The initial pioneers may grab decent exit values, and the long-term future of replacing meat seems compelling. California alone spends 6 trillion liters of water a year on alfalfa alone (feed for cattle and horses), not counting other states, and the water for pig slop and chicken feed. Meanwhile, cow farts play a non-neglgible role in increasing greenhouse gasses. And there is also a sizable niche of the populace that either refused to eat meat, or even wants to deny others the right to do so.

It’s not clear when it will become a trillion dollar market: as I showed in my 2014 paper in the Journal of Technology Transfer, California firms created the solar industry but flamed out because they got into the market 20-30 years too early. Competing with commodity electrons is a tough adoption curve: very few people voluntarily choose to pay 50% or 100% more than market prices for a commodity, although Germany and California show that politicians can force their voters to do so and (mostly) get away with it.

What I didn’t realize until I thought it through is that meat has an easier adoption curve, with a wide range of niche markets that can be sustained at premium prices. You have affluent people who don’t eat meat — or, even better, recently gave up meat — as well as environmentally conscious customers who would like to avoid meat. You have people who are willing to give it a try, out of curiosity. And — as the burger joints have demonstrated — the B2B customer (distribution) is willing to try a niche product to raise average selling prices.

Thus, as the product gets better and the prices get lower, these firms can establish and grow their beachhead in the food market, carving off ever-larger segments of the market. Funded by Sand Hill Road and led by ambitious entrepreneurs, some will hold off for Facebook-style IPOs, but many of the weaker players will be bought up by ADM, ConAgra, Hormel and the like — providing bottomless capital to spur innovation and adoption. (The entry barriers are low enough that Tyson Foods is launching its own product directly, rather than by acquisition).

We Need Science

However, to fully displace meat, there are major technical challenges to be overcome, both in quality and cost. I supervised a student project to research synthetic organs — a more demanding applications — but still getting the texture right will require both science (new insights) and engineering (new applications) to create a quality product at a competitive price.

Thus, I was struck by the decision of one fake meat company to attack GMOs to win market share. Yes, the CEO is a 24-year-old recent Berkeley grad who’s never worked in a company. Yes, her bachelor’s degrees are in toxicology and environmental studies rather than molecular biology or chemical engineering. But the company does have one PhD (food science) in its leadership, so they presumably are doing actual science.

It reminds me (and not in a good way) of the various surveys that showed the gap between what the public thinks and what scientists (writ large) think about GMOs, including a 2015 survey that said 37% of the public thought GMOs are safe vs. 88% of scientists.

More troubling is that the certainty of these opinions seems inversely proportional to actual knowledge. As the NY Times wrote on Monday:

In a paper published early this year in Nature Human Behavior, scientists asked 500 Americans what they thought about foods that contained genetically modified organisms.

The vast majority, more than 90 percent, opposed their use. This belief is in conflict with the consensus of scientists. Almost 90 percent of them believe G.M.O.s are safe — and can be of great benefit.

The second finding of the study was more eye-opening. Those who were most opposed to genetically modified foods believed they were the most knowledgeable about this issue, yet scored the lowest on actual tests of scientific knowledge.

In other words, those with the least understanding of science had the most science-opposed views, but thought they knew the most. Lest anyone think this is only an American phenomenon, the study was also conducted in France and Germany, with similar results.

So I get that trust in authority has been declining since the 1970s. I get that we have many people who don’t understand — or have the time to personally verify — scientific research. And, as Orwell predicted (and Goebbels proved), people are easily persuaded to believe lies if they are repeated often enough in the mass media.

Still, why would companies that depend on scientists to create their products help promote such lies? Isn’t the benefit of saving the planet enough, without having to rely on junk science for the purpose of virtue signaling? And if companies that depend on science attack science, what are the implications for K-12 and university science indication, science policy and the idea of using facts — rather than emotion - as the basis for making science policy?

Complexity, risk and uncertainty

We unexpectedly lost a close family member over the weekend, who was in the ER and then had such a massive internal hemorrhage that they couldn’t save him. The ER doctor said it wouldn’t have been as severe — and implied that he might not have died — if he hadn't been on warfarin.

All weekend I have been thinking that while the risk of bleeding is a well known side effect — one he and his doctor willingly accepted — if only he hadn’t taken this medication we would still have him with us.

But then this morning I realized I had it all wrong. As an economist, I should know better — this is just another version of Bastiat’s broken window fallacy. We can see the death by internal bleeding at age 86; we can’t see the heart attack or (worse yet) disabling stroke that might have been prevented at 80 or 84.

This highlights the hubris of mankind’s attempts to understand the most complex organisms in creation – ourselves. Yes researchers try and should continue to try to do better, to extend life and continue to reduce the mortality and morbidity of major illnesses. But nonprofits using marketing slogans like “abolish cancer” are dishonest at best and fraudulent at worst, following in the footsteps of the politician who 45 years ago promised to win a “war on cancer” to distract from his losing a war overseas.

The reality is that we are generations if not centuries away from really understanding how it all works and how to prevent or repair many common fatal or disabling diseases. The doctors on the front lines— like 18-year veteran I met in the ER Saturday night — are painfully aware as to the limitations of what we know. In the meantime, there are trade-offs and risks in life — in clinical trials, with new drugs, with old drugs — and all we can do is improve the odds rather than hope to know what is “best” in any given situation.

Pricing is only a symptom of drug company woes

Drug companies have been in the news a lot this year. Valeant and Mylan (with the EpiPen) made themselves whipping boys (or girls) through their self-inflicted PR debacles. Next Tuesday, California citizens will vote on an initiative by anti-pharma activists (aided by a failed presidential candidate) who seek price controls for 12% of the drug purchases in the state.

This morning’s WSJ reminds us that none of this controversy changes the stark reality of the drug business: since the Hatch-Waxman Act was passed in 1984, most* drugs have a narrow window to generate profits from their R&D before they lose their pricing power due to a flood of generic competition — and for the largest product categories, they will face competition prior to patent expiration.

Heard on the Street

Big Pharma Sales Need a Booster Shot​

By CHARLEY GRANT

Wall Street Journal, November 2, 2016, C14

The coming election has pharmaceutical investors feeling anxious. But this earnings season has highlighted a more solid reason for worry about the sector: Sales of key blockbuster drugs are slowing down.

This year has been one to forget for the industry. Political risk surrounding the high cost of health care has contributed to the trouble: The Nasdaq Biotechnology Index is down nearly 30% since a furor erupted over high drug prices in September of last year.

Price pressure has been among the reasons sales are weaker.

The article lists a number of examples of such competition:

• More products (and thus greater price competition) for hepatitis C treatments
• Disappointing revenue growth for Ibrance (breast cancer) and the Humira and Enbrell anti-inflammatories
• Slowdown in diabetes sales
• Price resistance for new cardiovascular drugs

It then concludes:

A basic truth of drug development is the nature and timing of economically significant breakthroughs can be hard to predict. Today’s slow patch doesn’t mean that the industry has become worse at developing blockbuster drugs.

But investors tend to prefer companies with easily predictable growth prospects. And it isn’t clear what new drugs can generate growth in the near future.

Even in areas where there have been discoveries, the outlook may not be great. A number of companies have developed impressive immunotherapy drugs to treat cancer, but that is a crowded field with lots of competition. And since these drugs are new, just how many cancer patients this class of drugs can help isn’t yet known.

In other words, pharma faces the same challenges they have always faced: attractive markets attract competition, buyers exploit competition to reduce pricing power, and then they have to develop new compounds to replace those going off patent. If a firm doesn’t address such problems year in and year out, its revenues, profits and market cap will collapse. We needn’t cry for Big Pharma, but neither should we underestimate the magnitude and complexity of their challenges.

In many ways, the free market works better for expensive drugs than for healthcare services. Payers and providers are organized enough to bargain for better prices from manufacturers, and the overhang of generics (the “Better than the Beatles” syndrome) forces manufacturers to produce markedly better outcomes to justify proprietary prices.

Meanwhile, in the U.S. our third party payer system (a side-effect of WW II wage controls), provider networks and high switching costs mean that patients rarely have pricing information, quality information or purchase alternatives to bargain based on price or quality. In single-payer countries, patients have less choice than public school students (who at least have charter, private or home school alternatives).

*PS: For technical and regulatory reasons, large molecules do not yet face generic competition because biosimilars are not generics. It seems likely that this will eventually change, but for now an expired patent on a biologic is worth a lot more than an expired patent on a small-molecule drug.

UC's biggest drug bonanza - ever?

On Friday, UCLA announced it had sold rights to the prostate drug Xtandi (enzalutamide). The sale could make the drug University of California’s most valuable biomedical patent family — ever.

UCLA, the inventors and its partners will receive $1.14 billion cash (plus future payments) for the drug from Royalty Pharma. This IP investment company owns stakes in various blockbuster drugs, including Humira, Remicade and Lyrica. It is Royalty’s biggest deal since the $3.3 billion it agreed to pay in November 2014 for royalties on Kalydeco.

In August 2005, San Francisco-based Medivation licensed Xtandi from UCLA and received US regulatory approval in September 2012. Medivation relies on Japanese pharmaceutical giant Astellas Pharma to distribute the drug worldwide. Its 2015 10-K states

Under our collaboration agreement with Astellas, we share equally with Astellas all profits (losses) related to U.S. net sales of XTANDI. We also receive royalties ranging from the low teens to the low twenties as a percentage of ex-U.S. XTANDI net sales. 

The drug has generated more than $3.4 billion in sales through December 2015. According to the 10-K statements, the global sales totaled $1.9 billion in 2015 and $1.06 billion in 2014. Its US sales were $392.4 million in 2013, and its US (i.e. only) sales in 2012 were $71.5 million.

Medivation’s 10-K states

We are required to pay UCLA (a) an annual maintenance fee, (b) $2.8 million in aggregate milestone payments upon achievement of certain development and regulatory milestone events with respect to XTANDI (all of which has been paid as of December 31, 2015), (c) ten percent of all Sublicensing Income, as defined in the agreement, which we earn under the Astellas Collaboration Agreement, and (d) a four percent royalty on global net sales of XTANDI, as defined. Under the terms of the Astellas Collaboration Agreement, we share this royalty obligation equally with Astellas with respect to sales in the United States, and Astellas is responsible for this entire royalty obligation with respect to sales outside of the United States.

UCLA and Medivation have had at least two lawsuits over the terms of this agreement. According to the 10-K, UCLA has accused it of not paying the 10% sublicensing royalty. Earlier, Medivation sued (unsuccessfully) to block UCLA’s licensing of a related compound to Aragon Pharmaceuticals.

UCLA received $33 million for multiple prostate cancer patents in FY 2013-2014 — the highest in the University of California that year. But 4% of $3.4 billion thus far should be worth about $136 million beyond the $1.14 billion for a total of $1.275m. This would not include “potential additional payments” from Royal Pharma, or revenues from the Aragon license.

As best I can tell, the most lucrative patent in University of California history. Many of us assumed that the previous winner was the family of three Cohen-Boyer patents, which created the biotechnology revolution through recombinant DNA, and allowed Herb Boyer to co-found Genentech. These patents expired in 1997; the best estimate I’ve seen (Feldman et al 2007) places the total licensing revenues from those patents at $255 million, split between Stanford (Cohen) and UCSF (Boyer). This total does not include the $300 million that Genentech paid (after years of litigation) to City of Hope — a LA-area cancer research hospital — for related discoveries.

Finally, what is often not remarked is that at most US universities, royalties are shared with the inventors. The inventors in this case Michael Jung of UCLA,  Charles Sawyers (then a Howard Hughes Medical Institute researcher at UCLA, now at Sloan Kettering). The USPTO lists 8 granted patents jointly authored by the two men, including two (8,445,507 and 8,802,689) explicitly about prostate cancer therapy.

According to the UCLA patent policies, UCLA keeps 50% of patent royalties, 35% goes to the inventor and 15% goes to the inventor’s lab (which for Jung is the chemistry department). The Royalty Pharma press release says:

By virtue of patent and licensing agreements administered by UCLA, the campus, the researchers and Howard Hughes Medical Institute shared a royalty interest in worldwide net sales of Xtandi. UCLA owns 43.875 percent of the royalty interest.

Using the math, 43.875% of $1.14 billion is $500 million, but UCLA says it will receive $520 million. (I contacted UCLA PR reps to clarify but so far haven't heard back). It may be that the $520 million includes both the $500 million and about $17 million (15% of $1.14 billion) for its chemistry department.

Still, this implies that Howard Hughes will receive about $70 million but the institute has not posted any mention on its media web page. And this leaves over $500 million to be split by the two lead inventors, other named inventors and possibly (as provided by UCLA policies) non-inventors who contributed towards development of the invention.

Preparing the 21st century healthcare industry

Bob Curry, Ph.D.

As KGI prepares the strategic plan that will take it to its 25th anniversary, the members of the KGI community are being challenged to imagine where we need to be 2022 to continue to prepare cutting-edge graduates who will work across the healthcare value chain.

During a post-dinner exercise Wednesday night, we were encouraged to consider a map of imminent changes in healthcare suggested by Bob Curry, who is chairman of our Board of Trustees, a veteran VC, and now CEO of Perceptimed.

Based on this experience, Bob suggested four megatrends that KGI should consider:

1. Growth in the science of diagnostic, prognostic, and monitoring tools will be explosive and be increasing paired with drug and procedure usage.
2. Drugs will become every more customized to treat highly defined cohorts as characterized in the discussion point above. This will change both the nature of drug discovery and of clinical trail design.
3. Healthcare will be delivered by a broader, integrated team of professionals than has been the traditional norm. Pharmacists and clinical diagnosticians will be teamed with physicians and nurses in staffing the healthcare system.
4. Hospital systems and health insurance companies, as we currently recognize them, will disappear and will be replaced by 50-100 integrated care organizations to cover the entire U.S. (e.g. 50-100 Kaiser-like organizations).

The first two points appealed to our scientists in the room, who (since our 1997 founding) have been thinking about genomic and personalized medicine. The third point relates to those interested in clinical care delivery, particularly our pharmacy school which trains its PharmD students to work in teams with MDs and RNs. The final point ties to the business side — our group within KGI — and the changes brought by ACA (Obamacare), both pushed by the strong patient incentives for adverse selection and pulled by incentives for Affordable Care Organizations.

Based on this, the 70+ trustees, faculty, staff and students at nine tables generated a series of ideas. From their ideas — and my own observations — I see four important trends:

• The importance of big data and data analytics. This is not just for analyzing genomic data for personalized medicine, but for patterns of clinical and other bioinformatic data for efficacy, drug-drug interactions, and other healthcare outcomes.
• New types of healthcare providers and business models for funding them. 
• Increasing importance of healthcare economics. Whether it’s HMOs, ACOs, capitation models, bundled pricing, or other approaches, we are moving away from a fee-for-service and dollars-per-pill model toward outcomes-based compensation.
• New regulatory approaches to deal with these changes.

Some of these trends were building and accelerating over the past two decades. (I've been with one HMO for 30 years). Others were accelerated by the ACA. Still others (the destruction of insurance companies) were not among the announced goals of the ACA, but may be its inevitable outcome.