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Technology-Based Firms Define New Business Approach To Drug Development
• New generation of small companies uses biological and chemical technologies to directj speed discovery of small-molecule drugs
Ann M. Thayer, C&EN Northeast News Bureau
This month, Ligand Pharmaceuticals, San Diego, and Allergan, Irvine, Calif., are to complete a $100
million deal to create an R&D company, Allergan Ligand Retinoid Therapeutics. The deal—between Allergan with nearly $1 billion in annual sales and Ligand with 1994 research revenues of $13 million and net loss more than twice as large—exemplifies an increasingly popular approach to drug development. The strategy combines the discovery efforts of small, research-focused companies with the drug development, manufacturing, and marketing resources of large corporations.
Although the partnering of large pharmaceutical companies with small biotechnology-based firms certainly is not new, the number of collaborations has been multiplying. More important, however, is the changing nature of these alliances, and the business plans of the companies involved, to optimize their complementary capabilities.
One of the most significant changes is that many small companies seem satisfied, at least short term, to remain drug discovers rather than aspiring to become drug marketers. This attitude has shifted the balance in collaboration to what each partner does best. It also gives small companies the chance to develop broader, possibly less risky, and often attractive technology platforms with which to seek partners. Companies based on this model, like the eight-year-old Ligand, are considered to be the next generation of biotechnology companies.
But, this generation actually has moved away from biotechnology's protein-based drug development toward a fundamentally different approach. Skills developed within first-generation biotechnology companies are being combined with other biological and chemical tools—such as rapid screening, structure-based design, and combinatorial chemistry—for drug discovery. Discovery-oriented firms now are exploiting proteins as targets for small-molecule drugs, rather than as potential therapeutics.
Traditional trial-and-error approaches to drug discovery have a low success rate—averaging fewer than two products for every 10,000 compounds screened. Consequently, the development cost for a successful drug is very high—on average, $360 million. Thus, large pharmaceutical companies are
Researchers use high-throughput robotic screening to rapidly identify drug leads
(right) and X-ray crystallography to determine the molecular structure
of biological targets (below).
JUNE 5, 1995 C&EN 17
BUSINESS
Small research firms partner with big drug companies
Company
Allelix Biopharmaceuticals
Arris Pharmaceutical Cadus
Pharmaceutical ICOS
Ligand Pharmaceuticals
Millennium Pharmaceuticals
Oncogene Science
Onyx Pharmaceuticals
! Sugen Synaptic
Pharmaceutical
Vertex Pharmaceuticals
Value3
Partner ($ millions)
Hoechst Roussel
Bayer Bristol-Myers Squibb
Abbot Laboratories
Allergan
SmithKline Beecham American
Home Products Abbott Laboratories Glaxo
Pfizer Hoffmann-La Roche
Hoechst Roussel
American Home Products
Ciba-Geigy Hoechst
Marion Merrell Dow
Pfizer
Warner Lambert Eli Lilly Bayer Zeneca Eli Lilly
Ciba-Geigy
Merck Wellcome
Roussel Uclaf
$ 53
70 45b
na
100
22 44
26 20
17 70
na
na
na na
17
16
25 na
38.5b
17.5C
na
na
20 42
30
1 a Value of collaboration includes equity investment, research funding payments, but excludes any estimates of potential royalt
Start-up date
1/95
11/94 7/94
4/95
6/95 >
2/95 9/94
7/94 9/92
5/91 3/94
4/94
1/94
8/93 4/93
1/93
4/91
5/95 5/95 5/94 1/95 3/95
1994
1993 12/93
9/93
Term (years)
5
5 3-5
na
joint
Area of focus
Psychiatric disorders
Inflammation Proprietary
Cancer
Cancer ! /enture
3-5 3-5
3-5 5
5 5
na
3
na na
5
5
3 na 5 5 4
3
na 5
5
Hematopoiesis Women's health
Inflammation Cardiovascular
disease \ Osteoporosis Obesity, diabetes
Alzheimer's disease
Diabetes, asthma, immune system, I osteoporosis i
Wound healing Inflammation,
arthritis, metabolic disease
Cardiovascular disease
Cancer
Cancer | Cancer Cancer Cancer Nervous system
disorders Cardiovascular
disease Neuroreceptors AIDS
Inflammation
, cash, license fees, and potential milestone es or shared profits, b Excludes possible milestone
payments, c Excludes possible milestone payments and research fundinc ). na = not available. Source: Company data
seeking more directed, more rapid discovery methods, hoping to move away from traditional approaches. Small firms can have focus yet be flexible in new and quickly advancing areas of research.
"After having spent 10 years at Ge-nentech, I became convinced that even though there will continue to be opportunities for proteins and maybe even peptides to be formulated into drugs, the biggest opportunity will continue to be the use of modern molecular biology tools to discover small-molecule pharmaceuticals," says Reinaldo F. Go
mez, president and chief executive officer of Terrapin Technologies, South San Francisco.
At nearby Genentech, Gomez had been vice president for discovery research; he also led the program to develop tissue plasminogen activator, a protein-based drug with annual sales of $280 million for Genentech. Like their predecessors in the biotechnology industry, young discovery companies are seeking experienced managers, now drawn from both the pharmaceutical and biotechnology industries.
Terrapin's molecular screening technology, which it calls "TRAP/' works by creating a database that characterizes the binding of compounds with respect to 20 "generic" proteins. Statistically, the database can be reduced to about 50 to 60 representative compounds that can be screened rapidly as leads.
"Using TRAP, we have been able to discover a small nonpeptide molecule, with a molecular weight under 1,000— which means it has real potential as a drug—that turns on the insulin receptor and causes the expected downstream biology," says Marvin I. Siegel, Terrapin's vice president for R&D. "Our actual time to get to that point and collect all the biological data was probably less than six months." The privately held company is in discussions with potential development partners.
"The next major opportunities in drug discovery involve using biotechnology, molecular cell biology, and other biological tools as means of defining and characterizing novel intracellular targets," says Harvey J. Berger, president and chief executive officer of Ariad Pharmaceuticals, in Cambridge, Mass. Berger left biopharmaceutical company Cento-cor to found Ariad. "Then [we] meld that information together with chemistry, pharmacology, structural analysis, and molecular modeling to create new small-molecule drugs."
Other structure-based drug design companies include Agouron Pharmaceuticals, La Jolla, Calif.; Vertex Pharmaceuticals, Cambridge, Mass.; Arris Pharmaceutical, South San Francisco; and BioCryst Pharmaceuticals, Birmingham, Ala. they have a common technical approach, often including the development of rapid screening methods, and there often is overlap in the disease areas of interest. Most are studying cellular components such as receptors, enzymes, and other proteins. Other companies concentrate less on structure, but are looking at these same targets to understand cell functions such as signal transduction and gene expression.
A rapidly expanding base of knowledge about the molecular origins of disease has opened up a wide range of potential targets for drug development. There are so many pathways and points of intervention in disease processes, say company executives, that the number of specific cellular or molecular targets is enormous. It is so large, they add, that not all are fully
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known, deciphered, or proven to be valuable.
Many intracellular disease targets will only be accessible to small-molecule drugs because large proteins cannot cross cell membranes. Leads for drug candidates frequently are found by screening chemical libraries from major pharmaceutical partners or are developed through combinatorial chemistry. Drug design refinements often are made through structure-based modeling or synthetic chemistry.
Small-molecule drugs are, in some respects, "easier" to develop than proteins or even peptides. They tend to be more stable, more easily administered, and less expensive to manufacture. As synthetic chemical entities rather than natural structures, patent protection is expected to be stronger. Gomez comments, "I doubt very much that in our lifetime a pill will be developed around a protein."
"Clearly, in the very early days of biotechnology, there were some pretty obvious product opportunities for proteins that had demonstrated roles [in disease] and therapeutic applications," notes Hollings C. Renton, president and CEO of Onyx Pharmaceuticals. Amgen, Genentech, Biogen, and other early companies identified and engineered the production of naturally occurring proteins such as erythropoietin, insulin, human growth hormone, and a-interferon. Biopharmaceutical drugs now have combined annual sales of more than $6 billion.
"It's not to say that there aren't other proteins [to be developed as drugs]," Renton explains, "but it's a natural extension that's been coming for some time to use these tools not just to produce rare proteins but also to understand what's going on among the various systems in the body and in cells and to identify important interactions of proteins and the functions of genes in disease processes."
After 10 years at Cetus, one of the first start-up biotechnology companies, Renton moved on to become president of Chiron when it acquired Cetus in 1991. In 1992, the privately held Onyx was spun-off from Chiron. Chiron itself has one of the largest combinatorial chemistry efforts among the established biopharmaceutical companies.
Richmond, Calif.-based Onyx focuses on finding small-molecule drugs to control cell growth and differentiation; its
targets are the ras superfamily of proteins and tumor suppressor genes. With corporate partners, the company is looking for treatment opportunities in areas such as cancer and inflammation. Re-ceptagen, in Edmonds, Wash., also focuses on cell growth, trying to regulate apoptosis or programmed cell death.
Renton's experience in biopharmaceu-ticals gives him insight into how companies and collaborations have changed. Although pharmaceutical firms partnered with early biotechnology companies to develop and market protein-based drugs, the synergies between small and large companies are greater now. Major pharmaceutical firms have more experience in developing, testing, manufacturing, and marketing small-molecule drugs than they ever had with handling proteins.
In the early stages of biopharmaceutical development, "the big pharmaceutical companies did not necessarily bring all of the scale-up expertise for proteins," says Renton, which "therefore created a vacuum of sorts for the first generation of biotechnology companies. [These companies] had to put in place some of the manufacturing assets, which moved them down a path toward [vertical] integration."
Now, explains Renton, small companies can focus on innovation and rely on pharmaceutical partners to apply their strengths in medicinal chemistry and pharmacology, as well as in preclinical and clinical development—a strategy coined "virtual" integration. "We don't see a need, assuming that we can continue to [set up] good partnerships, to put those resources in place at Onyx because they already exist in a very capable fashion in the pharmaceutical sector."
"There's quite an obvious shift in the big companies relying much more on partners like [us] to do drug discovery," says Gary E. Frashier, CEO of Oncogene Science, Uniondale, N.Y. Oncogene has developed a high-throughput robotic screening technology to look at gene transcription targets in genetically engineered live-cell assays. Millennium Pharmaceuticals, Cambridge, Mass., which has signed one of the largest collaborative deals with Hoffmann-La Roche also is looking at gene activity.
The success of partnerships hinges on each side's bringing its skills to bear at the appropriate time. "We need their marketing and distribution [strengths].
Continued on page 21
BUSINESS
Continued from page 20 It doesn't make sense for a small specialty company to try to do and finance all that/ ' says Frashier. It not only doesn't make sense, it also is difficult to find the money to do it. The ability for small drug discovery companies to raise money has been negatively affected by a downturn in biotechnology stocks, a sector in which drug discovery companies are lumped.
Although more than 20 different protein-based drugs have made it to market, many recent setbacks and even fewer new product marketing approvals have made investors wary. However, in a period of severe cost pressures on drugs, shorter product lives, and waning pipelines, pharmaceutical firms have a need for innovative new products. Investing in small drug discovery companies is one way to leverage research dollars and reduce product development risks.
The pharmaceutical industry replaced the investment community as the primary source of financing for bio
technology companies during the first quarter of 1995, according the Cambridge, Mass.-based consulting firm Feinstein Partners. The value of pharmaceutical investments, including collaborations and acquisitions, was more than $1.4 billion, compared with $147 million in deals during the first quarter of 1994. In contrast, only $207 million was raised through public and private financings in first-quarter 1995, down from $692 million in the same quarter in 1994.
Of the nearly 40 corporate agreements in the first quarter, more than half were valued at more than $20 million. In contrast, of 16 first-quarter agreements in 1994, only two were valued at more than $20 million. At the same time, the number of stock offerings fell from 42 in 1994 to 24 in 1995, and the average amount of money raised per offering dropped from $16 million to only $9 million.
'The surge in corporate agreements is unambiguous proof that the entrepreneurial application of molecular biology can still create tremendous value," says Peter Feinstein, president of
Feinstein Partners. "Underlying the restructuring occurring in the pharmaceutical industry is a lack of distinctive new products in pharmaceutical company pipelines that can command high margins while providing major, cost-effective advances in treatment.
"Increasingly, these companies, which have long-time horizons and a thorough understanding of risk, are making huge wagers that such products will emerge from technology generated at biotechnology companies." Large companies are placing their bets through multiple agreements on a wide variety of disease areas with many different small companies.
The value of technology to large companies is clear in the prices paid to acquire small firms. For example, Glaxo paid $533 million to buy structure-based drug design company Affymax in March 1995. In smaller deals, Marion Merrell Dow paid $58 million in January to acquire Selectide, a combinatorial chemistry company, and Eli Lilly spent $80 million in 1994 for Sphinx Pharma-
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ceuticals, which links combinatorial chemistry and signal transduction targets.
Drug discovery companies are likely to be acquired or to consolidate. The old paradigm in which small companies aspired to be fully integrated pharmaceutical companies, or FIPCOs, has gone out the window for many companies. Some say they will remain fully integrated discovery organizations, or FIDOs, whereas others initially will follow that model and move toward becoming a FIPCO only when, and if, it becomes financially possible.
"We are simply coping with the severe financial constraints laid on by the current environment/' explains Jeremy M. Levin, president and CEO of Cadus Pharmaceutical, Tarrytown, N.Y. "Cadus7 intention is to be a discovery company until such time as we believe there are deeply compelling reasons to pursue any one of our particular programs or financially we are able to support the next phase of development."
Cadus7 drug discovery work focuses on deciphering the entire G-protein signaling pathway, a process by which messages are transmitted into cells to regulate physiological behavior. In collaboration with Bristol-Myers Squibb, the company's yeast-based screening technology is being used to study 15 proprietary disease targets. Bristol-Myers has a 15% stake in the three-year-old private company, which also is 42% owned by industrialist Carl C. Icahn.
Cadus' business plan "is very simple," says Levin. "Our early agreements with corporate partners will be around the technology of basic drug discovery. The next phase will be around not only that, but also the code-velopment of compounds, and, finally, as we mature, I envision our taking compounds . . . all the way through. But for any company today to say, even at the end of that process, that it will be a fully integrated company is terribly unwise at this stage."
Stephen Evans-Freke, chairman and CEO of Sugen, says "We see ourselves as a drug discovery company first and foremost, a drug development company secondarily." Privately held Sugen, based in Redwood City, Calif, is looking for small-molecule drugs that interact with tyrosine kinase and tyrosine phosphatase receptors. These signal transduction molecules are believed to play roles in diabetes and cancer as well as other disorders. It is working
with Zeneca, which holds a nearly 20% stake in the company.
Sugen's and similar companies' business models address two issues, according to Evans-Freke: where a company uniquely adds value and economics. "Broadly applicable discovery platforms are going to have a remarkable value within the context of the pharmaceutical industry," says Evans-Freke. "So it's important that we concentrate our resources on building the depth and breadth of our discovery platform rather than putting all our eggs into one basket and trying to take forward individual product development programs.
"Hypothetically, if I can raise $100 million over a few years, do I want to bet that $100 million on getting a single product all the way through, or do I want to spread my risk over a lot of different programs and have partners taking the burden of clinical development and getting them to market?" asks Evans-Freke.
Because large companies are looking to "buy into" core technologies and find innovative new products through mergers and alliances, technology-based companies may have the leverage to strike good deals. Levin defines these core technologies specifically as gene therapy, rapid drug screening, genomics, and combinatorial chemistry. Because of the current environment, executives at small companies say they can capture a far larger percentage of the end sales dollar than they could a few years ago.
However, when Synaptic Pharmaceutical first began looking for potential partners, many companies were initially skeptical of the company's receptor-based drug discovery and instead were more comfortable with more traditional drug screening methods, explains Kathleen P. Mullinix, president and CEO of Paramus, N.J.-based Synaptic. Founded in 1987, the privately held company focuses on identifying neuroreceptors and neurotransmitters such as serotonin.
Other companies focusing on receptor-based drug discovery include Li-gand, as well as Bothell, Wash.-based ICOS and Ontario-based Allelix Bio-pharmaceuticals. In Ligand's joint venture with Allergan, the two companies will continue to develop retinoid-based small-molecule drugs such as 9-ds-reti-noic acid for cancer.
"Virtually nobody wanted to pay royalties," says Mullinix, who empha-
JUNE 5,1995 C&EN 23
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BUSINESS
sizes that the company did not want to be viewed as a contract research firm. "We just held on, and as what we had became more and more obviously valuable, people decided that they had better think about providing the kinds of terms that we needed. All of our collaborations have an upside in terms of milestone and royalty payments that support research here."
Although companies approach Oncogene Science to screen drugs for them, Frashier says the company won't do contract work. Instead, in all of its six major collaborations looking at 19 product candidates, a joint management committee reviews programs, sets plans and budgets, and makes decisions. Both partners are kept "completely in the loop," he says, even during periods in which the burden falls largely on only one partner—such as early discovery versus late-stage development. And the companies will share in the success of products, with Oncogene to get average royalties of about 25% of net profits, he says.
The FIDO strategy is viable, say company executives, but success depends on having a broad enabling technology base, building a range of different programs using that technology to lower risk, and effectively partnering those programs. "You must have a platform technology that allows you to deal with multiple targets, otherwise you will give away your shop on day one to your first partner," notes Levin.
The FIPCO model, used by many first-generation biotechnology companies, requires a great deal of cash to forward integrate operations. Renton, who saw Cetus stake everything on the less than blockbuster interleukin-2, says that Onyx will develop as a FIDO. "The FIPCO model basically forced even the most capital-rich companies to focus their bets down to one or two products," he adds. "And, obviously, in a numbers game, the odds are against you that you're going to end up with a product."
Although breadth of technology can
be a strength, it also can be a weakness. A risk for any drug discovery effort is following the wrong path or too many paths. There are many pathways to be looked at in signal transduction. "To use the word signal transduction and focus in the same sentence is an oxymoron," quips Terrapin's Gomez. But not all paths are drug discovery opportunities; the key, say executives, is having a "demonstrably valuable" target.
Molecular biology is moving at a blinding pace and targets will continue to emerge especially as the Human Genome Project progresses. "Actually, one of the real critical needs in this whole discovery process is to validate the increasing amount of information," says Renton. "More specifically, determine which [target] proteins are implicated in pathways important in diseases. Then [it's critical to validate] that if you either antagonize or agonize those targets you would actually have an [impact] in treating disease."
"The key is being able to identify . . . a therapeutic intervention point," Sug-
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en's Evans-Freke echoes, "so you can actually show that if you block [the action] of a target, you block the disease cascade." Existing pharmacology data can help provide rationales for choosing specific targets. Then studying selected molecular targets in the right model system also is crucial.
Most of the small drug discovery companies have moved to live-cell assays for their drug screening. Molecular targets—enzymes, receptors, or other proteins—can be genetically engineered to be produced in cells. The cells may also be engineered to show some functional response—even literally lighting up—when the desired pathway or gene transcription is triggered.
These live-cell assays, particularly those using human cells, can be difficult to develop and variable. However, they are the only ones that give physiologically appropriate leads and also involve upstream and downstream pathways rather than just measuring affinity for a fixed target. Most companies say they have found that biochemical assays give false positives and artifacts from nonspecific binding. Live-cell assays also give some measure of a drug's potency and toxicity.
Proteins, such as membrane-bound receptors, do not behave naturally outside a live-cell construct. For the same reason, structure-based drug design that depends on a fixed crystallographic structure may not be appropriate for free-floating or membrane-bound proteins.
Ariad combines its structure-based drug design technologies such as X-ray crystallography and NMR spectroscopy with molecular cell biology and genetics. The company is looking at mast cells and the target Syk protein involved in allergy and asthma. In immune-related diseases, the company is looking at the Zap protein in T-cells and the Src protein involved in the breakdown of bone in osteoporosis.
Another side of the company focuses on gene therapy, the use of engineered cells with genes inserted to produce missing or therapeutic proteins. In a unique twist, the company hopes to control protein production through genetic switches, turned on and off by administering small-molecule drugs. The company is working to demonstrate its technology in animal models.
Oncogene Science, which at 12 years old is among the older drug discovery companies, spent at least six years devel
oping its human-cell assays and high-throughput robotic screening technology. According to Frashier, developing an assay, whether it is a transcription, enzyme inhibition, or immunoassay, can be done within a six-month period and screening and evaluation of lead compounds takes about a year. Through its collaborations, the company has access to more than 1.5 million compounds from the chemical libraries of major pharmaceutical companies.
In addition to partners' or their own libraries, some companies such as Ariad, Synaptic, and Arris are developing in-house libraries using combinatorial chemistry. Rapid screening has expanded the need for and utility of looking at new chemical libraries. Although many industry executives believe that combinatorial chemistry is a powerful resource, Evans-Freke, himself a founder of Selectide, demurs. In a collaboration with Selectide, Sugen probably screened "upward of 10 million compounds," he notes.
"Combinatorial chemistry is extraor
dinarily exciting and actually going to be a necessary technology for screening by the end of this decade. But right now it's not sufficiently advanced to be applied in a systematic fashion using synthetic chemical building blocks," he says. "It started with peptides and is expanding rapidly into small molecules, but the technology is going to take a few more years to get to the point of robustness that you can really use it systematically for synthetic small-molecule screening." However, companies like ArQule, Medford, Mass., are developing combinatorial nonpep-tide, nonnucleotide organic chemical libraries.
In the meantime, "There is such a rich field to be plowed here that there is plenty of room for a number of different players," says Cadus' Levin. But with "capital less and less available, young companies developing in this area will fold into the stronger players. There is just not sufficient capital for them all; the field is too broad. Its breadth is its strength and its weakness." •
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