February 29, 2004
Is Biotechnology Losing Its Nerve?
S a founder of four biotechnology companies, Dennis A. Carson can practically write an encyclopedia entry on risk. After all, his first start-up, a gene therapy and vaccine company called Vical, still does not have a product on the market after 16 years and more than $100 million spent.
But now Dr. Carson, who is also the director of the cancer center at the University of California at San Diego, is playing it safe, or at least safer. Rather than develop radical new technology or invent new medicines, his latest venture, Salmedix, plans to sell drugs licensed from other companies - drugs that are already on the market or that have at least gone through some clinical trials.
"We sat back and said, 'We're not going to be successful starting another company if it's going to take 15 to 18 years,' " said David S. Kabakoff, the chief executive of Salmedix. "The only way to do it in half the time is you have to start somewhere in the middle."
Many other biotechnology companies also appear to be taking fewer chances lately - to the point that the industry seems to have lost its nerve, some experts say. The worry, of course, is that their increasingly chary approach to innovation will mean fewer breakthrough drugs.
Biotechnology companies were once known for going boldly where the big pharmaceutical companies would not, developing genetically engineered medicines like Avastin, the Genentech drug, approved on Thursday, that attacks cancer by a new method and prolongs the lives of patients. Biotech ventures also plunged into experimental areas, like gene therapy and stem cell research, that have not yet paid off and perhaps never will.
But more and more start-ups now seem focused on scrounging around for existing drugs to license, often castoffs from big pharmaceutical companies. In doing so, fledgling biotech companies avoid the toil and risk of trying to discover a new cause of disease or a new compound. Some of the newer biotech companies do not even have laboratories.
"I don't know of a venture capitalist today who is willing to put significant percentages of his fund's money into de novo discovery companies," said Roger Longman, co-publisher of the medical business magazines In Vivo and Start-Up. "Instead, the real model is, 'How can I get to a product quickly, without doing all of that early biology and chemistry?' "
Most drug development companies that are planning initial public offerings fit that mold. Of the 23 companies that filed late last year to go public, for instance, 14 licensed their lead product after it had been put into clinical trials by another company, and two licensed products already on the market, said Arthur J. Klausner, a general partner at Domain Associates, a venture capital fund for health care enterprises that is based in Princeton, N.J.
What is behind the shift? Mr. Klausner and others point to a change in the investment climate. It was once possible to raise money from public investors years before products were on the market, thus providing an early return to venture capitalists. But after biotech stocks peaked in 2000 and then receded, taking such early-stage companies public has been tough.
So venture capitalists, not wanting to wait 10 or more years for a return on their investments, are backing companies that can move products to market faster. That often means developing a drug neglected by another company or finding a new use for or a new way of delivering an existing drug. The industry buzzwords are no longer "monoclonal antibodies" and "genomics" but "reformulate" and "repurpose."
"It's very hard to do a soup-to-nuts company anymore, or what we call molecule-to-market," Mr. Klausner said.
A decade ago, for instance, his firm helped finance Trimeris, the company that tapped university research to develop Fuzeon, the first of a new class of AIDS drugs. Today, a more typical start-up backed by his firm is Somaxon Pharmaceuticals, a venture based in San Diego that hopes to market a sleeping pill that contains a low dose of an existing drug that has drowsiness as a side effect. "I hope we do something as exciting as Trimeris today," Mr. Klausner said, "but we do it on an exception basis."
NO one disputes that licensing can save time and money. Drugs that have already gone through clinical trials have at least been shown to be basically safe, so the preliminary stages of formulating a drug or testing it in animals can be skipped.
Consider Dr. Carson's company, Salmedix. Based in San Diego, it is less than three years old and has raised only $22 million, but it already has three drugs in clinical trials. One is a cancer drug, sold by a company in Germany, that must be tested before entering the United States market. Another, also a cancer drug, failed when tested by others - but Salmedix has a diagnostic test that its executives say will pinpoint which patients the drug will benefit. The third is derived from an existing anti-inflammatory drug that company scientists discovered serendipitously had an effect against cancer.
"Studies of older drugs in patients can give you information you can't get from studies in the mouse,'' Dr. Carson said.
But while retooling older drugs can result in useful products, some experts say the practice is not likely to produce home runs and could slow innovation. "We're really doing therapeutics around the edges" rather than attacking head on, said one venture capitalist, who spoke on condition he not be identified because he did not want to discourage entrepreneurs from approaching his firm.
"We're doing things like niche indications, new uses for old drugs, out-licensing of products," he said. "There's a fair question: Where's all the new stuff going on?"
Indeed, university officials say it is becoming harder to license their discoveries to young companies, or for professors to get backing to start new companies. Stanford and the University of California campuses in San Francisco and San Diego - which together gave birth to much of the state's biotechnology industry - have teamed up with SRI International, a research institute, to do early drug testing themselves, a move that would remove some risk from companies.
Mark G. Edwards, managing director of Recombinant Capital, a company that tracks drug licensing deals, said that biotech companies had licensed some 500 products from big pharmaceutical companies but that "none of the top 30 selling drugs of the biotech industry have come from that route."
The recycling trend could also hamper pharmaceutical giants. To fill their depleted product pipelines, large companies have increasingly turned to smaller ventures for drugs and research techniques. Now they often find themselves in competition with biotech companies, which are themselves looking for products to license from rivals. And the suppliers of research techniques have also shifted to developing drugs.
"All of these heretofore distinct needs can't be met anymore because everyone's chasing the same products," said Ginny E. Llobell, vice president of Defined Health, a pharmaceutical consulting company in Millburn, N.J. "The whole complex of everyone running to the same side of the boat is not sustainable."
With thousands of biotech companies out there, no one is suggesting the end of innovation. For instance, several companies were formed recently to pursue RNA interference, a promising new method of treating diseases by turning off genes.
Mr. Longman, the magazine publisher, said that many of the companies working with existing drugs were innovating, though not in the traditional sense of finding a molecule in the body that could serve as a target for a drug, or designing a drug to hit that target. "It's expanding the definition of innovation to what it should be," he said, "not limiting yourself to the belief that innovation is merely a new target, new compound, new medicine."
Consider Hypnion, whose innovation is a new way to test whether a drug is good at inducing sleep. But rather than screening new compounds, the company is testing existing drugs that it can tweak. "Take a drug that has a sleep side effect and is used for some other disease,'' said Dale M. Edgar, chief scientist and co-founder. "That's your starting point.'' Hypnion, based in Worcester, Mass., put a drug into a clinical trial in 18 months, rather than the usual three or four years.
THEN there is CombinatoRx, a start-up in Boston. The company is pursuing the possibility that existing drugs, used in combination, are effective in a way that the single drugs are not. It has set up a robotic system that systematically tests all 2,000 existing chemical drugs in combinations of two. The company, now four years old, has already started clinical trials of three combinations. It found, for instance, that a sedative and an antibiotic - both of which have been around since the end of World War II - showed, in combination, some effectiveness against cancer.
"Those things have been around for two generations, but no one's ever used them together to treat cancer," said Alexis Borisy, co-founder and chief executive. "How is that not innovation?"
Specialty pharmaceutical companies, like Forest Laboratories and King Pharmaceuticals, have long licensed drugs from pharmaceutical giants that had decided not to develop them. Such companies were largely considered separate from the biotechnology industry, but now the distinction is blurring as venture capitalists who back biotech companies invest in this licensing approach. "I see one or two business plans a week" from companies seeking to license someone else's drug, said Brian G. Atwood, a managing director at Versant Ventures in Menlo Park, Calif.
Several factors are pushing the trend. As big pharmaceutical companies have become even larger, they have concentrated on drugs with blockbuster potential rather than devote time to drugs with smaller markets. But for a small company, a crumb from a pharmaceutical giant can look like a feast.
Moreover, as big companies have merged, overlapping projects have been cut. Some companies have decided it is better to get a return on these redundant or minor drugs by letting someone else sell them in exchange for a payment or royalties.
Also fueling the recycling trend are the problems of companies involved in genomics, the technology that prompted an investor frenzy four years ago. Genomics companies were formed to find disease-related genes or to provide services and technology to drug companies.
But investors did not buy in as expected, and major pharmaceutical companies have found the payoff from genomics to be slow. "There was a clear message from Big Pharma that they did not want to buy research assets anymore," said Charles M. Hartman, general partner of CW Ventures in New York.
As a result, virtually every service and tool company is shifting to developing or licensing drugs. Millennium Pharmaceuticals, a leader in genomics, has no drugs in clinical trials resulting from its own gene hunting. Neither do big drug companies like Bayer and Abbott Laboratories, which paid hundreds of millions of dollars to tap into Millennium's expertise. A payoff may still come, but in the meantime Millennium is using the money from the deals to buy a pipeline of products. Its two drugs on the market, and all the ones in clinical trials, have come through acquisitions or licensing.
Even companies trying to discover new drugs have felt pressure to license products that are already on the market, or close to it. While those products generate revenue, the company can go about the longer process of developing novel products. For instance, Exelixis provided some of its genomics expertise to Bristol-Myers Squibb and, in return, got a cancer drug already in clinical trials. That drug has become its lead product.
Other companies have successfully licensed and then resurrected drugs that other companies passed up. Sales of Angiomax, a cardiovascular drug, are increasing at the Medicines Company, which picked up the product after it was dropped by Biogen and then passed over by many other companies.
INDEED, some drugs initially dropped by one big pharmaceutical company can end up at another after going through a smaller company. Indiplon, a sleeping pill that is now in the final stages of clinical trials, was licensed by the company now known as Wyeth to Dov Pharmaceutical, which then sublicensed it to Neurocrine Biosciences. Neurocrine in turn sold the marketing rights to Pfizer for $100 million up front, and possibly much more later.
Some analysts and executives, however, say the specialty pharmaceutical business has limits. For Big Pharma, licensing a neglected drug to a smaller company may produce only modest royalties. And biotech companies that find new uses for old drugs may have trouble protecting themselves from competition, particularly from generic versions. Moreover, the specialty pharmaceutical business is becoming mighty crowded. Some experts say that there are just not enough compounds to go around.
For that reason, some venture capitalists say investment in companies that recycle drugs will eventually wane. In a sense, it has to. Unless new drugs are invented, there won't be any to recycle.
As Drew Senyei, general partner of Enterprise Partners in San Diego, said, "At some point you are going to run out of late-stage companies, and the question is, who will fund the discovery companies?"