Modular Biotech

29 March 04

Small biotechnology companies tend to be very specialized in a particular area of expertise. They source out all other areas of research and testing, creating a quasi-public drug development pipeline and an options market for venture investors.

We can see how this works by looking at Elixir Pharmaceuticals. Dr Carl Berke, a PhD chemist and a strategy consultant for Analysis Group Inc, responded to my last update by expanding on the Elixir example. He noted:

"Elixir is focused on the upstream biology of target identification for new drug therapies. That target may take many forms, such as a gene sequence, a cell receptor or an enzyme active site. The research hypothesis is that the identified target plays a critical role in the disease state mechanism and therefore provides an opportunity for intervention. With a target in hand, Elixir then contracts with Evotec to screen large sets of pre-made molecular compounds for activity against those targets.

"Elixir will license rights to these pre-made molecular compounds from specialized companies, like AMRI or Tripos, who supply ‘custom combinatorial libraries’ consisting of thousands of compounds roughly selected on the basis of educated guesses about their drug-like activity. This is like renting a mailing list. Evotec then tests these libraries against the Elixir supplied targets in search of ‘hits’ that can then be further refined into a family of related ‘lead compounds’ ultimately homing in on a candidate for animal testing.

"The libraries are solutions looking for problems, like wannabe starlets waiting to be discovered in Hollywood – many are called, few are chosen."

In this description, there are already three specialized companies working together to do what a big pharmaceutical company, like Pfizer or Glaxo, would do in-house. It gets even more specialized, however. As Dr Berke adds:

"Sometimes the library companies act as consolidators to collect related compounds from a variety of sources, not just their own labs."

Here’s what the structure of this approach looks like:

Each of the four rectangles in this diagram can be undertaken by an independent company, because inputs and outputs can be specified very precisely.

Elixir and many other biotechnology firms choose to operate in this fashion because it is capital efficient in a constrained investment market. Elixir doesn’t need to spend its attention and resources on synthesizing molecules or testing them for drug activity. It provides deep knowledge in the underlying biology of disease states. If Elixir uncovers a ‘hit,’ it may sell the target/compound combination to another firm for further development into a marketable product.

The uncertainty associated with each of these investments (in Elixir, Prolyxis or any of the other hundreds of small biotech firms) is quite high, but the bets can be relatively small. Elixir, for example, has generated promising leads in areas related to diabetes and longevity with less than $40M of venture capital money.

After the heady days of the late 1990s, venture capital firms are now much less willing to invest in a startup biotech firm whose new product will be ten or more years away. As Arthur Klausner, a general partner at VC Firm Domain Associates, recently told The New York Times:

"It's very hard to do a soup-to-nuts company anymore, or what we call molecule-to-market."

One result of this new conservatism is that venture capitalists are funding biotech firms that focus on reformulating and repurposing compounds that have already been approved for use in humans.

For example, a Boston-based start-up called CombinatoRx is using high throughput screening to test 2000 existing drug compounds, in combinations of two, against a variety of potential targets. In one instance, it found that the combination of two old drugs, a sedative and an antibiotic, showed unexpected effectiveness in treating tumors.

A number of investors worry that the trend towards reformulation and product lifecycle extension will reduce the number of new compounds discovered. As one venture capitalist, speaking anonymously, told The New York Times recently:

"We're [investing in] things like niche indications, new uses for old drugs, out-licensing of products. There's a fair question: Where's all the new stuff going on?"

The "new stuff" is going on at firms like Elixir. They can provide a rapid return to impatient investors by focusing on well-defined advances that they can feed into an emerging merchant drug development infrastructure.

If Elixir finds a druggable target, it may choose to sell this knowledge and lead compound to another firm rather than to develop it further. In doing so, Elixir generates a rapid return to its investors. These returns are smaller than they would be if Elixir continued to the next stage, but they are also more certain. And they come more quickly.

This emphasis on rapid returns results in a drug pipeline that is shared by a number of highly specialized companies. Each of these companies focuses at one stage of the development process – for example, developing a target or identifying lead compound families.

As a result, the scale required to make an impact in disease treatment becomes much smaller. And the stages of the drug development process become increasingly modular and dis-aggregated.

More Information:

Carl Berke can be reached at cberke@analysisgroup.com. Thanks to Carl for helping think this one through.

The New York Times published an article on 29 Feb 04 titled: "Is Biotech losing its nerve?" Here’s a link to that: http://query.nytimes.com/gst/abstract.html?res=F20D1EFE35580C7A8EDDAB0894DC404482
There have been two previous updates in this series. The first focused on the impact of combinatorial testing technologies on large pharma: http://www.biz-architect.com/depressing_innovation_in_pharma.htm
The second related update talked about the effect of these new technologies on industry structure: http://www.biz-architect.com/pharma_dis-integrating.htm
CombinatoRx web site is here: http://www.combinatorx.com/
Elixir’s web site is here: http://www.elixirpharm.com

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