Preserving the Promise: Improving the Culture of Biotech Investment

strategy.

Innovation Meets the Translation Gap

Outline

Chapter 1 Stop the Madness and Cure Something

Chapter 2 Into the Valley of Death

Chapter 3 Clinical Promise ≠ Investment Practice

Chapter 4 Velcade, a Biotech Success Story

Chapter 5 Biotechnology and the Future of Pharma

Chapter 6 Why Pharma Should Care About the Valley of Death

Chapter 7 Porter’s Five Forces and the Market for Angel Capital

Chapter 8 Out of the Frying Pan

Chapter 9 Getting to Australia

Chapter 1

Stop the Madness and Cure Something

Abstract

Most of the progress that scientists make in academia will never impact the lives of patients because the mechanisms for bringing their discoveries to the clinic are dysfunctional. Biotechnology commercialization is so high risk that it has been called the Valley of Death (VoD). We have identified three elements of the Translation Gap which inhibits the commercialization of academic discoveries as they enter the VoD. (1) Universities don’t make what companies need: Academic science is produced and evaluated by different standards than what is needed for commercialization, so it often enters the VoD before it is ready. (2) Good innovation is not always a good investment: The most transformative discoveries may never make it to the clinic because they do not make sense to investors. (3) Technology transfer wastes money and innovation: The process of transferring technologies from academia to the for-profit VoD is poorly conceived and wasteful, imposing a substantial financial burden on the system.

Keywords

Biotechnology; academia; commercialization; technology transfer; Angel investor; innovation; investing; science; drug development; Valley of Death; pharmaceutical industry; innovation; start-ups

You and thousands of runners have just finished a Mother’s Day 10K road race to support breast cancer research. You do so expecting that the money you’ve raised will ultimately lead to new treatments, for the benefit of people you love. And that is undoubtedly the intent of most fundraising efforts, and a reasonable expectation for the outcome. How, then, would you feel if we told you that the science supported by those funds, before it ever gets a shot at helping anybody, will need to enter a so-called Valley of Death (VoD) from which it is highly unlikely to emerge in the form of a new drug? What if we added that the likelihood of success is only tangentially a function of whether or not the science has tremendous promise for a cure? Or that the decisions around whether promising science makes it out of the VoD are made mostly by investors whose interest in financial return generally trumps the clinical implications, and for whom the discovery is simply one hand in a high-stakes gamble? Would you be worried about whether you had made a difference, or disappointed, scratching your head that all of that scientific effort might not help anyone … because of a financial objective? That seems probable. We share those frustrations, and set out a case here for making things better.

We are accustomed to a life dizzy with innovation, so we expect that raising money for a cure will make a difference. We believe in the mythology of the scientist, the immense power of the human mind to understand the smallest details of our genetic makeup, to wipe out an infectious disease, to engineer a magic bullet for our cancers, to figure out what has gone wrong with our bodies and make it better.

And the money we raise does go to the right places initially, to support the work of the scientists and physicians at our universities and nonprofit research institutes. The beating heart of the process, perpetually sought after yet rarely achieved, is a eureka moment. Teams of scientists find the reward for years of work in a unitary discovery: one true fact about nature, previously unknown, that suddenly crystallizes dozens of questions about a disease into a clear path to the clinic. Breaking nature’s code is an intricate process, driven by curiosity, informed by intuition and made real by brute force. The aphorism is true that Nature doesn’t give up her secrets easily.

We can cite a number of examples, probably familiar, where scientific breakthroughs translated into medicine that changed the world. One: the discovery that the poliomyelitis virus could be inactivated in a way that would make it safe to give to healthy children, but still induce a lifelong immunity to the virus. Eradication of the scourge of polio from industrialized society was rapidly achieved, and eradication of the virus from the planet may be in its final stages. Two: the discovery that during a heart attack, clots that form in the small blood vessels in the heart can be dissolved with a bacterial protein, clearing the channels for blood to return and preventing irreversible destruction of the heart muscle. Another: the discovery that AIDS is caused by a retrovirus, unlocking the identification of proteins that can be inhibited by a cocktail of anti-retroviral drugs for a lifetime. And more recently: the discovery that an immune cell can be programmed to kill tumor cells, so that a T cell could be taken from the blood of a young girl with leukemia, genetically modified, and given back, where it beat her cancer into a complete remission. The modern drug development paradigm rests squarely on the ability to capitalize on scientific discovery, to channel the Eureka moment into a life-saving product.

Yet, these discoveries are usually a long way from being able to help patients. It is one thing to shrink a tumor in a mouse, it is another to translate that finding into a cure for human patients. Robert Weinberg and his colleagues first published the discovery of the HER2/neu protein, an important target for breast cancer therapy, in 1982, and the discovery that cancer cells in mice could be killed with a monoclonal antibody that binds HER2/neu in 1986. Yet it wasn’t until 12 years later, in 1998, that the drug targeting it, trastuzumab, was approved for use in breast cancer patients.

Another problem is that many seminal discoveries are platforms, new methods of finding something that could be a cure, that aren’t realized yet. They are literally hundreds of millions of dollars and years of work away from making a difference. Most of this work of converting a platform to a therapeutic cannot be done within the usual venue of discovery, a university lab. Academics are rewarded for the basic science of revealing nature’s secrets, not for the risky process of making a drug and testing it in patients. Public grants often support basic science but preclude commercial development, and funding is simply not available at the level required for noncommercial entities to make and market their own drugs. Thus, technologies need to exit the academic environment to begin clinical development.

At some point in their development, promising discoveries may be acquired by large pharmaceutical and biotechnology companies, which envelop them in enormous drug development ecosystems that push them toward the clinic. There’s a lot of noise about this, particularly of late, as biotech assets have been purchased from early stage companies at fairly staggering prices. This is the end game for most start-ups and the early investors who fund them. But, it’s almost always a long road to get to this kind of exit. The capacity and range of pharma interests is focused by economic rather than medical imperatives, and most of these discoveries have to make it on their own for a very long time, nurtured by a start-up that must continually seek additional investment. The most financially promising, and/or maybe those championed by the most influential and well-connected scientists, find support from venture capital, and consume tens of millions of dollars evolving the discovery into something that has enough scientific and clinical support to interest a big biotech or Big Pharma buyer.

The vast majority of discoveries, even some of those that make the headlines, do not leave the university with a silver spoon in their mouths. Shepherded by their founders, separated from their university homes, they enter the VoD. The purpose of the process that has come to be known as the VoD is to connect an invention with the requisite resources to move it along the development path. The process for how those resources are gathered and used, or misused, in nurturing these discoveries is the focus of this book.

We define the beginning of the VoD as the moment a provisional patent is filed for a discovery by a university, and the end as when the intellectual property identified in that patent has become a realized invention, an animal-tested molecule that can be submitted to the US Food and Drug Administration (FDA) for approval of testing in humans. At that point, money is much easier to come by and the technology will live or die on the basis of its merits: is it safe, does it work, does it produce outcomes better than existing alternatives, and most of all, is it a clinical proposition with the potential to generate substantial marketplace value?

A typical biotech start-up in the VoD is a semicohesive band that includes an inventor, an entrepreneur, and early advocates and financial supporters. There is a struggle to raise money to achieve scientific milestones. Scientific success enables additional money to be raised, which supports more discovery, in a leapfrog game of alternating scientific and financial risk. The most treacherous part of the VoD is the earliest, inhabited by companies that have reached their inception as commercial entities, but have yet to generate venture capital or pharma support. They may be funded by public money, such as grants from the National Institutes of Health, but these are often limited in scope and almost always hard to come by. The most important supporters of these early companies in the VoD are often Angel Investors, individuals with capital to deploy either individually or in groups. Angel investing is a high-risk proposition, sometimes capricious in its interests, and susceptible to investment fads and macroeconomic shifts. There are simply not enough of these people or groups to support all the potentially worthwhile discoveries in the VoD, and there is a formal and unforgiving winnowing process that inevitably results in the death of worthwhile innovations and, for reasons of financial rather than clinical potential, the progression of worthless ones.

The conventional mechanisms for investing in technology and new companies are incompatible, fundamentally, with the optimal means for financing early stage technologies and bringing them to the clinic. When biotechnology began in the 1980s and surged into the 1990s, money was flowing freely and inefficiencies in the business model could be easily rationalized since the output-to-input ratio appeared to reflect a limitless upward trend line. Unfortunately, since the economy tanked in 2008, the investors and strategic partners all abrogated their responsibilities for nurturing technologies to the false promise of de-risking and operational efficiency. Everyone adopted a silo mentality, and much of the capital—the wind in the sails of development—either disappeared from the system or became much more difficult to access.

There’s been another surge and (likely) bust cycle in the interim. The fundamental problems of financially-, rather than clinically driven, development, and the mismatch of available capital to potential opportunities persist. The result is that most biomedical innovations will never survive the journey from the laboratory bench to the patient bedside. The process for early stage financing and development, which has never worked very efficiently, is now worse than it has ever been, even as slashed pharmaceutical industry research investment has made it even more important that these early technologies survive. Biomedical science has yielded transformational discoveries: the complete human genome sequence, RNA interference, genome editing with CRISPR-Cas9, and the fields of genomics and proteomics, as well as enhanced tools for adapting the natural healing processes of stem cells and the immune system. What if these discoveries were to die in the VoD?

The problem implicit in this is what we call the Translation Gap, three systemic pitfalls that doom most of what we produce:

1. Universities don’t make what companies need. Science is produced to a different standard than is needed for commercialization. Its emphasis is on innovation rather than the rigorous validation and proof-of-concept needed for uptake by investors and pharma. Patenting early technologies forces them into the VoD before they are ready to support the commercialization process.

2. Good innovation is not always a good investment. The value of a discovery as an investment does not correlate with its level of innovation or clinical value. Many of our best technologies die because they don’t make sense as an investment to Angel and other early investors.

3. Technology transfer wastes money and innovation. The process of transferring technologies from non-profit research institutions to the for-profit VoD is poorly conceived and inconsistent. Confusion over conflict-of-interest policies, costly licensing practices, and difficulties collaborating after licenses have been executed all impose a substantial financial burden on the system that is essentially a tax on innovation. Time wasted by administrative process harms patients and reduces Return on Investment (ROI).

We considered whether our definition of the Translation Gap should include the fact that the system can only support a limited number of drugs, far fewer than the possibilities created by our university researchers, and that our lack of investment in them is wasted opportunity. This is certainly the case, but simply saying that the system needs more money is uncreative and likely doomed to fail, because without fixing the Translation Gap, much of the increased money would be wasted anyway. The challenge is to look within the Translation Gap to find solutions that can be implemented through better efficiency, collaboration, and synergistic activities. Understanding how the Translation Gap operates, and what frequently goes wrong, reveals solutions that will produce better results for everyone involved, from inventors, to universities, entrepreneurs, doctors, patients, and even to Wall Street.

Chapter 2

Into the Valley of Death

Abstract

Academic biotechnology start-ups face significant challenges in achieving venture capital funding and therefore need to rely on grants and Angel investors, despite recent increases in biotechnology funding and the fact that academic research is an important source of innovation for pharmaceutical companies. The history of the biotechnology company Human Genome Sciences illustrates the massive requirements of time and money that are required for biotechnology drug development. These are not compatible with support for development of important drugs that do not offer a significant return on investment. Examples include drugs that are given for short periods of time, such as antibiotics for bacterial infections, or drugs that have a long timeline to approval, such as treatments for pediatric brain tumors. Better allocation and use of resources may help align incentives to improve translation of academic discoveries into therapies that can solve important medical needs while providing attractive financial returns.

Keywords

Biotechnology commercialization; antibiotic research; pediatric research; Human Genome Sciences; FDA approved drugs; Angel investing; biotechnology start-ups; venture capital; academic medical research; SBIR/STTR grants

Nobody is fully auditing the entire scope of start-up activity in the Valley of Death (VoD), but it’s clearly extensive. Companies arrive there by something of a funnel, which for universities is mediated by Technology Transfer Officers. The Association of University Technology Managers (AUTM) is a nonprofit organization of these professionals, who essentially act as conduits between scientists/inventors and commercialization initiatives in the VoD. A recent AUTM survey of technology transfer by academic institutions reported 914 companies started in FY 2014, up from 818 started in FY 2013, and a total of 4688 start-ups in operation at the end of the year [1], reflecting a continuing upward trend [2]. Brady Hugett, the Business Editor at the industry journal Nature Biotechnology, surveyed top institutions and estimated that roughly 63% of academic start-ups are in the life sciences [3]. This would translate to about 1091 new biotechnology start-ups in the 2013–14 period for just the 191 institutions that responded to the AUTM survey (of 302 queried).

Perhaps a more comprehensive view is held by Dr. Jeffrey Sohl, who has directed the Center for Venture Research (CVR) at University of New Hampshire for over 20 years. The CVR was founded by Dr. William Wetzel, the first person to use the term Angel to describe investors in early stage companies. The 2014 CVR report estimated that 7780 biotechnology ventures received Angel funding in 2013 [4]. This is a substantial underestimate according to Dr. Sohl, as only 29% of the Angels and Angel groups responded to his request for information: Nobody has [a clear sense] about what is going on. I’m sure we’re way under [5].

Each of these ventures carries the creativity, aspirations, and labor of academic scientists, and most ride on a discovery powerful enough to find advocates to carry it toward, if not into, the VoD. But what do they face?

In the 1990s through the early 2000s, the best of these companies could have had a reasonable chance of coming into the VoD with the support of Venture Capital firms (VCs), which amass large funds of institutional money that they invest in early stage companies. In biotechnology, these funds are typically used to create a lead drug and test it in patients. VCs get their money back when the company they support is acquired by a pharmaceutical company (Big Pharma) or sells shares on the stock market in an Initial Public Offering (IPO). Many of the early investments made by VCs in the heady early years of biotechnology did not pay off, and the economic crash in 2008 sent investors running for shelter—and rather definitively in directions other than healthcare. Biotechnology VC activity has seen a dramatic upsurge in the past 24–36 months, but that’s the tail end of development efforts that started a decade or more ago, not the result of an improved VoD.

Don Drakeman is a cofounder and former CEO of Medarex, a monoclonal antibody (mAb) company that was sold to Bristol Myers Squibb in 2009 for $2.1 billion. Under Drakeman’s leadership, Medarex created the breakthrough immunotherapy drug for melanoma, called ipilimumab, which was launched in 2011 and had 1-year sales of $706 million, as well as nivolumab, the ground-breaking immunomodulator drug which, at the time of writing, has received Food and Drug Administration (FDA) approval for treatment of melanoma, non small cell lung cancer, and kidney cancer. He joined the top-tier international VC firm, Advent Venture Partners a year before the biotechnology bust in 2008. According to Drakeman, about one-third of the VCs left in the crash of 2008 and money for biotech investment became a dry well [6]. He observed that in the 3 years after the crash his firm had looked at 1000 investments. Only 100 were junk. 900 were deals that all made good arguments. Advent funded three of these deals. Drakeman said that most of the other big firms he was familiar with were funding at about the same rate. Between 2009 and 2013, only 495 start-up/seed-stage companies received VC funding in all of the biosciences [7]. The number and dollar volume of VC investments in the life sciences has surged in the most recent period, which we’ll look at more closely in later chapters, but the structure and particularly the timing of these investments—later rather than earlier in the development cycle—and investors’ expectations and timeline for return, remain heavily stacked against early stage companies.

According to data from PricewaterhouseCoopers and the National Venture Capital Association, 2015 was an historic year for VC funding in biotech sector, with over $7.4 billion invested [8]. This sounds great, until you get a bit more granular about the funding of start-ups seeking to cross from early Angel financing into the VC space. The increase in money invested did not budge the rate of start-up support by VCs, which remained near its 15 year average; rather, it increased the amount of funding for each start-up, which ranged 2–3 times higher than the historic average.

Even these positive trends are not likely to be permanent, and early signals suggest that the supply of money for biotech investing may be contracting, even as the investment business model changes. Bruce Booth of the early stage-focused Atlas Venture (blogging as Life Sci VC) and many other sources reported the markets got jittery in the third quarter of 2015, with crossover investors pulling back from biotech syndicates. This resulted in a drop of nearly $700 million (−32%) invested in the fourth quarter of 2015, compared to the second and third quarters of the same year, which corresponded to a contraction in the biotech IPO market. Booth further describes four likely shifts that he sees changing the VC model, but not necessarily in ways that are likely to increase the opportunities for VoD companies to achieve VC support