Often heard advice for the entrepreneurial set is: “Be a credible threat.” That of course is a tall order. The odds and costs are stark. Historically, only 1 in 10 lead candidates make it through to approval, and this number is likely to be lower in 2010. If this weren’t daunting enough, the failure-inclusive cost of developing that one drug is thought to be a billion dollars.
When asked for his take on the hazards of funding these projects, Richard Anders, Founding Managing Director of Massachusetts Medical Angels, a seed stage investment group in Boston, had this to say, “You’ve got about five to six major risks there: manufacturing, target validation, clinical validation, etc. Come back to me when you’ve got one to two and when the funding I could provide would make significant progress against one.”
An unspoken aspect of this very sage advice is that after the risk is removed, the value of the opportunity should increase significantly, since our current system of funding start-ups relies on the wager that investors will be rewarded for investing in risk reduction.
There are always exceptions to requiring only one or two risks at initial investment. You may have completed your post-doc in the lab of the most celebrated entrepreneur at a certain technical college in the Northeast, have a team composed entirely of recent beneficiaries of a Big Pharma “refocusing”, or maybe you just lucked upon an entirely new chemical space. However for most of us, sheer faith in our own exceptionalism—which kept us in the lab until the wee hours during our PhD training—usually doesn’t translate well into a pre-money valuation. We must make our own luck.
So, how will you reduce the risks associated with your technology from five or six to one or two without significant funding? There is one way to de-risk your efforts from an experimental and clinical point of view, with very little cash outlay: proper disease indication selection.
Why does indication selection matter?
At Convergence West 2010, Bryan Roberts, partner at Venrock, a venture capital firm, laid it out succinctly: “No one mothballs their first program.” While some startups do find a path to bring an underperforming first indication to idle, it is certainly a painful road. I don’t know of any systematic review of the true impact of such events, but the outside speculation nearly always involves a post-hoc calculation of the development dollars “wasted” and the loss in market capitalization if the company is public. And, regardless of the transparency with which the decision is handled, there is always head shaking and a general sense from those on the outside that folks on the inside don’t know that they are those “for whom the bell tolls.”
In truth, it is often less a case of money being wasted than a company overwhelmed by the near impossible task of selecting the one indication out of approximately 15,000 that would be appropriate for their therapeutic modality, competitive landscape, and operational capabilities. In this light, it should not surprise anyone that the first guess turns out to be incorrect. Moreover, the deep understanding generated before the company walks away from after their first failed “at bat” is irreplaceable. However, that truth is of little solace when the NASDAQ threatens to de-list you based on a plummeting share price or when you find out your previous round of financing was your last.
From an investor’s point of view, public perception is the least important reason to select well. Rather, it is all about the exit. While there are still some companies banking on an evolution into a fully integrated life sciences company, and even some recent successes (Vertex Pharmaceuticals), most companies and most boards of directors are seeking a different exit for their efforts.
Viewed dispassionately—and without respect to the technical merits of a new drug class—early investors take enormous risks by investing those first dollars. While we may debate the magnitude of the return owed, most people would agree that it is fair to expect a significant upside for putting money to work prior to the many assurances that a new technology would be successful. Those early investors would like to recognize some part of that return in five to seven years. However, as the average time to market is 12 years, the unspoken assumption made is that there will be an exit [company sale or initial public offering (IPO)] prior to having a product. While an acquisition is usually based on the value of the lead program, IPOs theoretically allow the market to take a broader view of the value of a technology.
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At a recent Healthcare Businesswomen’s Association event, John Maraganore, Alnylam’s CEO, summed up the environment when that company went public in 2004: “You could either go public early or late, but not in the middle.” However a quick scan of the 2009/2010 offerings (see Figure 1) suggests that even those more permissive rules may no longer apply. In fact, most companies that went public recently, went public very late with either approved/near-approval products or had two parallel programs in advanced clinical trials. Without question, going public later means it is highly likely that your startup will not be judged on your broad IP and promise of your platform, but rather on the specific merits of your first asset(s). This means you need to choose your indications well.
Choosing well
Perhaps 166 years of baseball strategy and performance analysis can inform this decision-making. A great leadoff hitter has two key qualities. First, they have a “great eye” and swing only at real opportunities or strikes; as a result, they get on base frequently, thus giving the rest of the line up a chance to bat. Second, they are savvy base-runners who are able to steal bases.
However, recent sabermetric analysis shows that base-stealing isn’t actually important to their performance; rather a strong “on base percentage” is the conduit for players following the leadoff in the lineup to have their chance at bat and also perhaps some competitive intelligence about the pitcher’s style. A good first indication may be able to do the same for an emerging technology.
To extend our analogy, no major league baseball team would sign a leadoff hitter before seeing him bat against a range of pitching styles. The ball clubs do their homework, so that they know in what contexts that hitter might be most useful. Pharmaceutical companies can do the same before they select an indication. Postponing these studies is tantamount to failing to review batting practices for promising new recruits.
The first step is to assess the physical distribution (ADME) and activity (pharmacology) of your new molecular entity across a number of different dosing regimens—oral, intraperitoneal, topical, intravenous—in a broad set of tissues—gut, liver, kidney, brain, etc. These distribution studies will focus your efforts to select tissues that may be more accessible for various chemical reasons and away from tissues where availability is restricted without extreme formulation/delivery measures. Second, you’ll want to understand the pharmacokinetics (PK) of the chemistry. If the compound is rapidly cleared and would require six times-a-day dosing to achieve efficacious concentrations, it is probably better to avoid an indication with an existing once-a-day option (regardless of how efficacious) and instead focus on an unmet need as a first indication.
Of course, neither of these experiments should dissuade you from pursuing additional indications that would rely on formulation/delivery assistance to be successful as your second- or third-tier programs. More importantly, the results of these experiments are not the only criteria to consider. but with some creative planning, they may be the only experiments you need to invest in prior to selection.
With your PK and distribution data in hand, you can assess possible leadoff indications “virtually” across three key criteria: efficacy models, clinical and regulatory plan, and of course, competitive landscape. The efficacy model is a crucial hurdle. If this model is cannot be run reliably; is not trusted by pharma; or requires large numbers of rare, expensive, and/or weighty animals to be assessed for months on end, it may not be the correct leadoff for you.
However, the challenges don’t end there. An efficient animal model is an insignificant advantage if the indication doesn’t allow for a simple, meaningful proof of concept trial in affected individuals. So if there are no blood-based biomarkers, or if you have to screen 1,000 possible patients to enroll one patient, or the sole evaluable endpoint is three years from initiation of the trial, the path is very difficult. Moreover, if the cost per patient of the trial is greater than the average presumed by investors, you may find yourself without enough cash in the bank to continue. Even worse, you may find yourself in a situation you can’t “mothball” the trial, forcing you to divert funds away from more promising second- and third-tier programs.
Leadoff hitters rarely hit homeruns; that is not their role. But if they never advance to first base, they don’t advantage a broad portfolio of other hitters. So to ensure your technology gets its shot in the majors, you’ll want to consider fully your first program.
About the Author
Emily Walsh is a “recovering scientist”. Prior to Halloran, she held program management roles across a number of therapeutic areas at the Novartis Institutes for BioMedical Research and Alnylam. Most recently Emily spent four months assessing 15,000 disease indications for their preclinical and clinical ease of operational execution.
Filed Under: Drug Discovery
