The drug discovery and development landscape has changed. The Pharmaceutical Industry has retreated from internal R&D programs. Venture Capital investment horizons are disconnected from therapeutic commercialization timelines. The environment that fostered vertically integrated biotech behemoths such as Genentech and Amgen has gone. However, the need for new drugs, diagnostics and devices to prevent and treat disease is greater than ever.
Fostering medical innovation today requires a new approach. In a series of posts under the banner of Biotech 2.0, new business models for Biotech will be discussed.
Biotech Business Model 1 – Less is More, More or Less
Elevation Pharmaceuticals was recently acquired by Sunovion Pharmaceuticals, a subsidiary of Dainippon Sumitomo, in a deal valued at up to $430 million. This transaction is the latest successful exit for a Biotech practicing the “less is more” business model, and follows the sale of other adherents to this philosophy: Stromedix acquired by Biogen at a cost of up to $562 million; and Calistoga purchased by Gilead in a deal worth up to $600 million. Investors are hailing these exits in a climate where Biotech IPOs are as rare as a victory for the Scottish football team (I now live and work in Canada – dual citizenship has many advantages, but not, it appears, increasing the chance of a trip to Rio for the World Cup in 2014).
But what are the fundamental tenets of “less is more”? And for an (aspiring) early-stage biotech entrepreneur is this business model viable?
Fewer assets under development. Each acquired company was focused on a single, or primary therapeutic asset. Elevation was developing EP-101 a drug/device product for the treatment of chronic obstructive pulmonary disease (COPD). Stromedix was focused on the development of STX-100 an antibody for the treatment of idiopathic pulmonary fibrosis (IPF). Calistoga was developing a small molecule PI3K inhibitor to treat lymphomas and leukemias.
Less capital required. Compared to the cost of over $1 billion per approved drug, the investments are much more modest. Elevation raised $44 million in a transaction lead by Canaan Partners and including Novo Ventures, TPG Biotech, Care Capital and Mesa Verde Venture Partners. Stromedix secured $38 million from Atlas Ventures, Frazier Healthcare, New Leaf, Bessemer and Red Abbey Ventures. Calistoga was funded by $90 million investment from Atlas, Amgen Ventures, Frazier, Three Arch Partners, Latterell Venture Partners and Quogue Capital.
Fewer employees. Elevation had 11 employees, Stromedix had a team of 6 and Calistoga had a mere 13 souls.
Less risk. Elevation’s EP-101 is an inhalable version of a FDA-approved generic drug (decreased risk) that uses their proprietary eFlow nebulizer system and is in Phase 2b clinical trials. Stromedix licensed the STX-100 technology from Biogen and developed a biomarker program to accelerate endpoint measurements in Phase 2a clinical trials. Calistoga’s small molecule inhibitor, CAL-101, specifically blocks the delta isoform of PI3 kinase and is in late-stage clinical trials for patients with chronic lymphocytic leukemia (CLL) and indolent non-Hodgkin’s lymphoma (NHL). The specificity of CAL-101 impacts its safety profile and enabled Phase 1 trials in healthy volunteers, a particularly unusual, but effective mechanism, to speed trial recruitment in cancer drug development.
Less time to liquidity. Elevation was founded in 2008 and sold in 2012. Stromedix was 5 years old when acquired by Biogen. Calistoga was spun-off from Icos in 2006 and acquired 5 years later in February 2011.
Less ROI. This “advantage” may appear contradictory when attracting investors, but the less refers to the guaranteed immediate ROI. Elevation’s investors received $100M in upfront payments (2 x ROI), which could increase to 10 x ROI if milestones are met (Brent Ahrens of Canaan Partners was quoted in Xconomy describing the $430 million buyout as representing over $430,000 dollars a day in value creation since investment). Similarly, the upfront payment for Stromedix represents a 2 x ROI and the potential to realize a 12 x ROI. Calistoga was acquired for an initial $375 million (4 x ROI). With milestones, CAL-101 could earn Calistoga’s investors 7 x ROI. The absolute value of a lower ROI over a shorter time frame has been discussed in a recent biotechstart.org post.
More focus. In a single asset company each employee is focused on their contribution to the shared objective of developing a new therapeutic option for a given patient population. Conflict is limited as the company as a whole has ownership over the therapeutic program.
More efficient use of capital. A virtual model is used to access technology and expertise from CROs, academia and consultants only when required.
More expertise. The required expertise often resides outside the company and is not necessarily required full-time. The low employee burn rate enables the company to engage with experts from a variety of disciplines on an ad hoc basis.
More flexibility. The lean operating model and the use of consultants, CROs, etc. can allow the company to pivot quicker compared to a traditional biotech. For example Stromedix was originally developing STX-100 to treat fibrosis in kidney transplant recipients, but was able to transfer the technology and pivot to IPF without a major internal reorganization that is typical when larger organizations change strategy.
More liquidity events. Whether this is true remains to be determined. However, the structure of the deals represents the convergence of Pharma seeking to acquire assets at a lower price (with-respect-to lower upfront payments) and Venture Capital’s desire to achieve a ROI in a shorter timeframe. Both parties then share the risk as the candidate progresses towards clinical approval.
Good news for investors, but what about (aspiring) biotech entrepreneurs?
Closer analysis of the Elevation, Stromedix and Calistoga deals reveals trends that may dishearten a young, aspiring biotech entrepreneur. Namely, the individuals and the therapeutic candidates involved in these companies can be considered “late-stage”. Mike Gilman, the founder of Stromedix is a Biogen alumni where the antibody technology originated. The principals at Elevation include Bill Gerhart (ex-CEO Mpex Pharmaceuticals) and Cam Garner (serial biotech entrepreneur). And industry veterans Carol Gallagher and Michael Gallatin lead Calistoga (Michael Gallatin was subsequently involved in Stromedix). If the trend is for “less is more” biotechs, how can a recent graduate translate their early-stage discovery into a new biotech company? First, this is not the only model that exists and will be successful in the future (we will look at other new business models in subsequent posts including those for platform technologies). Second, even if it was, the changing drug discovery and development landscape facilitates transition of an academic project into a single asset company, and third the “virtual” model of focusing on your core competencies and outsourcing the remainder of the development work mimics collaborative research in academia.
A good example that illustrates the second and third points above is the recently launched TVM Life Sciences Venture Fund. This $150 million fund based in Montreal is focused on virtual, single-product biotech companies with candidate molecules. A key partner in the fund is Eli Lily, which is not only contributing $40 million, but is also establishing a branch of Chorus, its autonomous early-phase drug development network. Chorus will act as a mentor to funded companies and draw on its expertise and drug development network to move new products towards clinical proof-of-concept. The work of Chorus is analogous to several academia-industry partnership initiatives that have been established to accelerate academic discoveries in the life sciences towards clinical proof-of-concept. Examples include the Centre for Drug Research and Development (CDRD) in Vancouver, Canada, the Drug Discovery Centre at Imperial College London and the Neurodiscovery Centre at Harvard (in a future post we will look at these and other organizations that serve this need).
These resources provide a platform for aspiring biotech entrepreneurs to bridge the gap between their promising research and a “less is more” biotech model.
Good news for investors, potentially good news for (aspiring) biotech entrepreneurs, but most importantly, what about the patients?
A recent Xconomy article questioned whether the “less is more” is an effective model for new drug approvals. It is too early to tell, but if these models are effective in providing VCs a more definitive path to an exit then this cannot be bad for investment in biotech, which in turn provides more opportunities for innovative new therapeutic products to improve the lives of patients and their families.
I would love to hear your thoughts on the “less is more” model, and if you have other examples of similar exits please provide the details in the comments section. Also, do you believe this model is the answer to dwindling pipelines and FDA approvals?