Xcovery blog revisited (state of targeted Rx)

About five years ago I started a blog dedicated to targeted therapeutics, especially kinases inhibitors. The blog was an outgrowth of Xcovery, the kinase discovery spin-out from the Scripps Research Institute that I started and served as EVP of Business Development. 

I was already tracking developments in biopharm so the blog was an outlet for some of basic analysis and a fun way to share my opinion and connect with others in the industry. 

One of the regular bits of analysis was tracking the performance of FDA approved targeted drugs. Just for fun, here's a five year update, with some analysis:

 

Of note:

• The 17 approved molecularly targeted drugs accounted for $27B in global sales in 2011. Think about that for a second, then consider that most of these drugs have been on the market for only 5-6 years, and their approved indications are still growing. Consider too that most have not been applied as combination therapies.

• Even the senior citizen of the group (Herceptin, approved in 1998), has seen prolonged growth, averaging 36% per year over the last five years.

• With 8 blockbusters and several more close and still growing (Tasigna, Sprycel, etc), almost all of the targeted drugs are either blockbusters, or well on their way. So much for the concern that targeting drugs might limit the market potential.

• The top 4 (Avastin, Herceptin, Gleevec, and Lucentis) have made a mockery of their projected sales ceilings and are still growing strongly.

• On the other hand, the only assets that appear to be underperforming expectations are Amgen’s Vectibix, GSK’s Tykerb, and Pfizer’s Torisel (specific sales data isn’t available for 2011, as Torisel is listed under “other oncology,” totaling ~$130M across several drugs.)

• Vectibix is still playing catch up to Erbitux, and Tykerb hasn’t gained much traction against the Roche juggernaut.

• I wonder what Amgen’s new CEO will do about Vectibix. It seems that there’s 2 choices: go big (invest in expanding trials for more indications and in comparison with Erbitux) or go home (sell the product to another biopharm.)

• 4 of the top 6 are Roche drugs, which means that they were discovered by Genentech. Hats off again to the DNA team in South San Francisco for their amazing science and productivity. I wonder if we will ever see any other drug discovery effort be so inventive and productive for a prolonged period.

• Also: I don’t think anyone is doubting the wisdom of Roche buying the piece of DNA that Roche didn’t own. I haven’t run the numbers, but I’d be shocked if the DNA acquisition wasn’t a resounding financial win for Roche.

• Unfortunately, OSI’s acquisition of Macugen was a tremendous dud.

• I am encouraged by the progress since my last analysis in 2006 – an average of two new approvals each year, with most new products addressing new targets or diseases, in contrast to the incremental “me too-ism” in other pharma areas like ED or cholesterol drugs.

A few sweeping generalizations:

• FDA approval and sales success seem to be connected to corporate resources. Small to mid-cap biotechs have been chasing targeted therapies for ~15 years without much output. (I’m talking about companies such as Exelixis, Vertex (pre-HepC), Ariad, etc., though I don’t mean to pick on specific companies.) With three exceptions (Onyx’s Nexavar, OSI’s Tarceva, and the former ImClone’s Erbitux), the targeted therapies have largely been developed in-house by “old” companies with multi-billion dollar market caps and the resources to match. (You could make the case that Amgen’s Vectibix came from a small targeted effort at Abgenix, but I suspect that it was Amgen’s resources that got Vectibix through FDA approval. Similarly, Sutent started at Sugen, but Pharmacia and Pfizer seemed to have provided the big push.)

• A gross generalization: the small to mid-caps tend to lack broad biological or disease-specific expertise, instead investing in target-specific expertise, or platform-specific expertise, thinking that broad expertise (ancillary to their target or disease of interest) is expensive overhead. I wonder if the results to date argue for the big pharma discovery model, or just reinforces the need for a broad portfolio to be successful in drug discovery and development.

• With rare exception (as in Pfizer’s Xalkori and Novartis’ Gleevec), the path to FDA approval has been arduous for these drugs. There are a number of targeted drug developers who hold out hope that their P2 or P3 results will be so clear and strong that their clinical trials will be stopped early and approved quickly. That’s definitely the exception, unfortunately, and even in the positive trials for targeted drugs, the data has tended to be good, not great. I suspect that is a function of the requirements of clinical trial design and comparison to first-line chemotherapies. As a result the “new” drugs are posting smallish survival benefits when compared to the “old” therapies, with no accounting for how certain patient segments have had dramatic benefits. (Thus starting the vicious circular argument that targeted therapies ought to have stratified patient populations in clinical trials, but stratifying patients shrinks the market potential for such drugs, bring the business viability of the targeted therapy into question.) It seems that the FDA could take the Xalkori experience and develop a novel process for rapid approval based on patient stratification without derailing or obviating more broad approval for the drug.

The $27B in revenue in this segment (likely to grow past $50B in 2014) has hopefully served to further de-risk pharma R&D in molecularly targeted therapeutics. Coupled with advancements in medicinal chemistry, we will hopefully see more and better targeted therapies in the future. 

Werd!

Former FDA Commissioner and NCI director Andrew von Eschenbach has a good editorial in the WSJ about how the FDA needs to modernize to help patients and the medical industry.

I was particularly struck by his point that the FDA regulatory responsibility covers $.25 of every dollar in consumer spending - from tobacco products to vaccines. In essence, the FDA's mission applies as much to sprouts (which have been subject to e.coli breakouts) as stem cells.

von Eschenbach does't propose it, but what if the "D" part of the FDA was spun out into its' own agency? With an organization built specifically for regulating modern medicine, we might end up with regulations and processes optimized for 21st century medical innovation.

Great leap for DNA sequencing. Small step for early stage financing?

Wow. Just wow.

Oxford Nanopore went public last week with details of their DNA sequencing platform. It is a stunning advancement for sequencing in terms of access, cost, and performance, and represents some pretty amazing chemistry and engineering advancements.

(Great coverage of the science involved here and here and general coverage here.)

A decade ago, sequencing a single human genome cost a billion dollars and required a warehouse full of expensive machinery. Oxford Nanopore's new platform uses a handheld unit and about 5 machine-hours, at a total cost of ~$1,000 to generate a genome. Other technologies are may be capable of reaching the performance levels of Oxford Nanopore in one dimension (cost, read length, turnaround time, etc.), but no technology is as complete as what Oxford announced.

We will be sorting through the impact of the technology for a long time, but one business implication needs to be promoted in light of Oxford Nanopore's success: how a tiny financial brokerage company with a tiny amount of scientific expertise launched Oxford Nanopore.


University tech transfer offices have a thankless job - maximizing the return on young, immature IP, with little capital available for research to de-risk emerging technologies. This is especially true in the UK, where good science is abundant, but early capital is not.

In the early part of the last decade, Oxford University's tech transfer group struck an interesting deal: it sold a half-interest in all spin-outs from the chemistry department for a decade or so for £20M cash up front (~$37M).

The investor in this deal was a new entity (IP2IPO) founded by a small financial brokerage in London. IP2IPO (since renamed IP Group, and listed here) was a new fund dedicated to investing in university IP, and went public on the AIM on the basis of the Oxford agreement, and not much else. (Though after the Oxford deal, IP2IPO struck roughly similar deals with other UK universities.) IP Group is effectively a publicly traded VC firm.

In 2005, IP2IPO seeded what became Oxford Nanopore. (It is interesting to read the press release - there's zero mention of DNA sequencing, which means that either they were being coy, or weren't aware of the potential application for the chemistry technology.)

At the founding of Oxford Nanopore,  IP2IPO received a ~5% chunk of equity per their agreement with Oxford. They also injected start-up capital boosting their ownership interest. Seven years and a few more financing rounds, including a strategic investment by Illumina IP's share of Oxford Nanopore is still 21.5%.

Today IP Group's market cap is £413M or $654M (US), having jumped 12% (+$70M market cap) following the Oxford Nanopore (ONP) news. (IP Group has ~$30M in cash on hand, so EV= $624M).

Unpacking this for a second: Ion Torrent - a DNA sequencing firm with a very cool platform - was sold last year to Life Technologies for $725M. Given this comparable, plus inflation and ONP's advantages, ONP is probably worth $1B today, making IP Group's interest worth $215M, and suggesting that the OTHER 59 companies in IP Group's portfolio are worth $409M in aggregate.)


I am happy to see that such long-term investing has paid off for IP Group, but I would be curious to know today if IP2IPO, its' investors, or the universities would redo the arrangements if given the opportunity. I think if you could reliably find investors with 10+ year time horizons that the IP2IPO model would work on a greater scale, but a look at IP Group's stock chart (with a stock price about even since its' 2003 debut) suggests that the market is not a fan of the IP Group model, even with the Oxford Nanopore development.

(You also need access to stellar tech centers. It is a low risk bet that Oxford's chemistry department will invent something world-changing over the 10-12 years covered by the IP & Oxford agreement. But how many schools and departments can you say that about?)

For the IP2IPO model to work, the investors' value of the university technology should roughly match the university's determination of the value of cash in the present. But there is an inherent disconnect between the high-beta present value of a long term technology and the certain value of short term cash. Blanket agreements like IP2IPO's reduces risk slightly by spreading the risk across multiple spin-outs across multiple sectors.

Still, there seems to be an oversupply of high-risk capital, at least in the US, when including IT/internet investments. Perhaps the IP Group "product" will take off now that there is an obvious big win in ONP to sell to investors.



One other thought on Oxford Nanopore's news: if the disposable USB MinIon unit really does sell for $900, I can see myself buying one this year just to try it out AT HOME. I can't say that about a MiSeq.

Who wins from DNA sequencing? (Multi-target drugs)

First came the notion of specific inhibitors of kinase signaling, and Gleevec was originally the embodiment of the idea of inhibiting just a single gene fusion - BCR-ABL. With the fine targeting came low financial expectations - I recall NVS predicting that Gleevec could have annual revenues of as much as $200M. (Actually Gleevec annual revenues for NVS are ~$4B, both because they had most expectations of the market, and because Gleevec isn't so specific, which is a good thing.)

Then, Exelixis introduced the idea of intentional multi-kinase inhibition, though some wondered if this was less of a design intention, and more of a tolerance of the notion that complete specificity may be impossible.

Last year saw the introduction of FDA approval of inhibitors not just for a single gene target, but a specific mutation of a specific gene (e.g. Zelboraf for BRAF V600E, though it comes with certain problems.)

It appears that the next wave is being unleashed by Foundation Medicine - DNA sequencing to match drug to cancer and suggest mixes of drugs, where appropriate.

The conclusions put forward by Foundation Med are not novel in theory, but a very exciting in practice.

What is also exciting is how use of DNA sequencing may unlock new markets for existing drugs. Big Pharma, I think, has generally worried that personalized medicine may result in lower revenue ceilings for new drugs, thus tilting the economics of drug discovery out of favor. (Because it generally costs about the same to develop a blockbuster as it does a niche drug.)

But if the Foundation Med results are indicative of future broader results, the economics may become even more favorable. Case in point is Pfizer's Sutent, FDA approved in 2006, and a $1B blockbuster as of 2010, based on its' application in renal cell carcinoma and GIST (specific stomach tumors).

Foundation Med's research is suggesting that Sutent could be very effective in about 2% of all lung cancer patients. What's that means to Pfizer?

US annual lung cancer incidences: ~225,000
Worldwide (rough): 675,000
Sutent-beneficial lung cancers: 13,500 (worldwide)
Sutent treatment cost (rough): $40,000 per patient
Sutent lung cancer "niche" market potential: $540,000,000.
Pfizer price/sales ratio: 2.43x
Implied increase in Pfizer's stock value from the new lung cancer "niche:" $1.3B or a stock price about $.17 higher.

Realistically, Pfizer & Sutent can't capture all of that market, but finding another half-a-billion dollar market - with the hope for more - has got to be exciting to Pfizer. It should also be exciting to other targeted drug makers and researchers.

Also exciting is the notion that Foundation's research results are the tip of the iceberg - we can expect tumor DNA sequencing research to reveal more mutations and drug gable opportunities. Let's just hope that the FDA becomes much more flexible in approving novel sequence-specific applications (or at least tolerating widespread off-label use).

R&D efficiency

Forbes' Matt Herper takes a look at the cost to develop a new drug, and now current estimates put that figure at $1B-$4B.

While the current estimate is newsworthy, folks at places like Tufts have been conducting this exercise for years, and the numbers are always eye-popping (and debatable.)

What makes this particular article interesting is how you can also use the analysis conducted by Herper to compare pharma productivity over the last 15 years. Take a look at the R&D productivity of the top 12 pharmas:

Here's my takeaways:

-There's two tiers of productivity in the analysis: the "productive" cluster (AMGN, NVS, BMS, MRK, ABT, and LLY) all cluster between $3.7B and $4.6B in cost per new drug, while the "less productive" ranged from $5.9B to 11.8B per drug. While half of the companies studied, the "productives" account for 66 of the 135 drugs (49%) these 12 companies introduced in the last 15 years. So you can't say that higher R&D productivity is also a factor of scale - the productive and less-productive companies produced roughly the same number of drugs. 

-The "less-productive" companies tend to be the product of mega-mergers. Each of these companies has done deals to one extent or another, but think of the "biggies" and you're generally thinking of the "less productive" group. Careful, though, when thinking about the time element here - MRK, for example, only did their big SGP acquisition in late 2009. This brings up the question: do mergers depress R&D productivity, or is it mostly companies with declining R&D productivity that have the urge to merge? (My guess: a bit of both, but considering that the 6 most productive companies are generally considered the least involved in the M&A game due to a bias towards internal efforts, it may be a moot point. M&A either distracts from focus, or results in sub-efficient R&D orgs.

(I'm being charitable to NVS, which is a product of a mega-merger (Sandoz and Ciba-Geigy), but that occurred in 1996 - prior to the analysis period. Either NVS did a much better job of integrating R&D, or it takes 15 years to overcome the M&A inefficiencies.)

-I think it would be appropriate to believe that these results also project future R&D efficiency and likely future stock performance.  (e.g. over the next 15 years, AMGN is likely to be much more productive than AZN.) The 15 year period (and $75B in R&D spend) should account for short-term spikes and likely demonstrates which companies have the best R&D people and organizations. I am especially impressed with Novartis (21 products over 15 years) and most disappointed by AstraZeneca (5 products over the same period.) Perhaps this reflects one company choosing easier/harder targets, but I think it more likely reflects capabilities.

-For all of the news and criticism, Pfizer's R&D isn't too bad. The criticism that failures like torcetrapib reflect diminished R&D productivity due to repeated mergers seems misplaced, as Pfizer was almost middle-of-the-pack in R&D efficiency over the last 15 years.

-You might expect that the broadest R&D portfolios would have the smoothest results (success in one area, say cancer, making up for failures in another, say neuroscience.) However, the more productive companies are to me the least broad. Rightly or wrongly, I think of BMS & AMGN biased towards cancer research, while GSK and JNJ are the most diversified. Does this mean that there is R&D value in specialization?

Any other insights to be gleaned from the Forbes analysis?

A couple of caveats to the analysis: 

-The best analysis would weight productivity with resulting product sales. (In other words: you'd accept lower R&D spending efficiency if the output were blockbusters.)

- I can't tell from the Forbes analysis exactly what is included in the figures. I suspect that Roche data includes historical Genentech R&D spending and output. I think DNA has been one of the most efficient AND effective R&D organizations, so I would be very curious to see DNA split out from pre-merger Roche.