Megafund versus Megalosaurus: Funding Drug Development

This new 10-minute TEDMED talk is getting quite a bit of attention:


 (if embedded video does not work, try the TED site itself.)

In it, Roger Stein claims to have created an approach to advancing drugs through clinical trials that will "fundamentally change the way research for cancer and lots of other things gets done".

Because the costs of bringing a drug to market are so high, time from discovery to marketing is so long, and the chances of success of any individual drug are so grim, betting on any individual drug is foolish, according to Stein. Instead, risks for a large number of potential assets should be pooled, with the eventual winners paying for the losers.

To do this, Stein proposes what he calls a "megafund" - a large collection of assets (candidate therapies). Through some modeling and simulations, Stein suggests some of the qualities of an ideal megafund: it would need in the neighborhood of $3-15 billion to acquire and manage 80-150 drugs. A fund of this size and with these assets would be able to provide an equity yield of about 12%, which would be "right in the investment sweet spot of pension funds and 401(k) plans".

Here's what I find striking about those numbers: let's compare Stein's Megafund to everyone's favorite Megalosaurus, the old-fashioned Big Pharma dinosaur sometimes known as Pfizer:

	Megafund (Stein)	Megalosaurus (Pfizer)
Funding	$3-15 billion	$9 billion estimated 2013 R&D spend
Assets	80-150	81 (in pipeline, plus many more in preclinical)
Return on Equity	12% (estimated)	9.2% (last 10 years) to 13.2% (last 5)

Since Pfizer's a dinosaur, it can't possibly compete with
the sleek, modern Megafund, right? Right?

These numbers look remarkably similar. Pfizer - and a number of its peers - are spending Megafund-sized budget each year to shepherd through a Megafund-sized number of compounds. (Note many of Pfizer's peers have substantially fewer drugs in their published pipelines, but they own many times more compounds - the pipeline is just the drugs what they've elected to file an IND on.)

What am I missing here? I understand that a fund is not a company, and there may be some benefits to decoupling asset management decisions from actual operations, but this won't be a tremendous gain, and would presumably be at least partially offset by increased transaction costs (Megafund has to source, contract, manage, and audit vendors to design and run all its trials, after all, and I don't know why I'd think it could do that any more cheaply than Big Pharma can). And having a giant drug pipeline's go/no go decisions made by "financial engineers" rather than pharma industry folks would seem like a scenario that's only really seen as an upgrade by the financial engineers themselves.

A tweet from V.S. Schulz pointed me to a post on Derek Lowe's In the Pipeline blog. which lead to a link to this paper by Stein and 2 others in Nature Biotechnology from a year and a half ago. The authors spend most of their time differentiating themselves from other structures in the technical, financial details rather than explaining why megafund would work better at finding new drugs. However, they definitely think this is qualitatively different from existing pharma companies, and offer a couple reasons. First,

[D]ebt financing can be structured to be more “patient” than private or public equity by specifying longer maturities; 10- to 20-year maturities are not atypical for corporate bonds. ... Such long horizons contrast sharply with the considerably shorter horizons of venture capitalists, and the even shorter quarterly earnings cycle and intra-daily price fluctuations faced by public companies.

I'm not sure where this line of though is coming from. Certainly all big pharma companies' plans extend decades into the future - there may be quarterly earnings reports to file, but that's a force exerted far more on sales and marketing teams than on drug development. The financing of pharmaceutical development is already extremely long term.

Even in the venture-backed world, Stein and team are wrong if they believe there is pervasive pressure to magically deliver drugs in record time. Investors and biotech management are both keenly aware of the tradeoffs between speed and regulatory success. Even this week's came-from-nowhere Cinderella story, Intercept Pharmaceuticals, was founded with venture money over a decade ago - these "longer maturities" are standard issue in biotech. We aren't making iPhone apps here, guys.

Second,

Although big pharma companies are central to the later stages of drug development and the marketing and distributing of approved drugs, they do not currently play as active a role at the riskier preclinical and early stages of development

Again, I'm unsure why this is supposed to be so. Of Pfizer's 81 pipeline compounds, 55 are in Phase 1 or 2 - a ratio that's pretty heavy on early, risky project, and that's not too different from industry as a whole. Pfizer does not publish data on the number of compounds it currently has undergoing preclinical testing, but there's no clear reason I can think of to assume it's a small number.

So, is Megafund truly a revolutionary idea, or is it basically a mathematical deck-chair-rearrangement for the "efficiencies of scale" behemoths we've already got?

[Image: the world's first known dino, Megalosaurus, via Wikipedia.]

Brave New Biopharm Blogging

Although a few articles on this site are older, I really only began blogging in earnest about 15 months ago. However, I suppose that's long enough that I can count myself as at least somewhat established, and take a moment to welcome and encourage some interesting newcomers to the scene.

 

Bloggers in dank basements their natural habitat.

There are 3 relative newcomers that I've found really interesting, all with very different perspectives on drug development and clinical research:

Pharmagellan 

The Big Pharma insider.

With the exception of John LaMattina (the former Pfizer exec who regularly provides seriously thought provoking ideas over on Forbes), I don’t know of anyone from the ranks of Big Pharma who writes both consistently and well. Which is a shame, given how many major past, current, and future therapies pass through those halls.

Enter Frank David, the Director of Strategy at AstraZeneca's Oncology Innovative Medicines unit. Frank started his Pharmagellan blog this April, and has been putting out a couple thoughtful perspective pieces a month since then.

Frank also gets my vote for most under-followed Twitter account in the industry, as he’s putting out a steady stream of interesting material.

ClinOps Toolkit

Getting trials done.

Clinical operations – the actual execution of the clinical trials we all talk about – is seriously underrepresented in the blogosphere. There are a number of industry blogs, but none that aren’t trying first and foremost to sell you something.

I met Nadia Bracken on my last trip out to the San Francisco bay area. To say Nadia is driven is to make a rather silly understatement. Nadia is driven. She thinks fast and she talks fast. ClinOps Toolkit is a blog (or resource? or community?) that is still very much in development, but I think it holds a tremendous amount of potential. People working in ClinOps should be embracing her, and those of us who depend on operations teams getting the job done should keep a close eye on the website.

Other Secrets of the Buy Side

Watching the money.

I am not a stock trader. I am a data person, and data says trust big sample sizes. And, honestly, I just don't have the time.

But that doesn't stop me from realizing that a lot of great insight about drug development – especially when it concerns small biotechs – is coming from the investment community. So I tend to follow a number of financial writers, as I've found that they do a much better job of digging through the hype than can ever be expected of the mainstream media.

One stock writer who I've been following for a while is Andrew Goodwin, who maintains the Biotech Due Diligence website and blog. Andrew clearly has a great grasp on a number of topics, so when he described a new blog as a “must-have addition” to one's reading list, I had to take a look.

And the brand-new-this-month blog, by David Sable at Special Situations Fund, does seem like a great read. David looks both at the corporate dynamics and scientific stories of biotechs with a firmly skeptical view. I know most blogs this new will not be around 6 months from now (and David admits as much in his opening post), but I’m hoping this one lasts.

. . . . .

So, I encourage you to take a look at the above 3 blogs. I'm happy to see more and diverse perspectives on the drug development process starting to emerge, and hope that all 3 of these authors stick around for quite a while – we need their ideas.

[Bloggerhole photo courtesy of Flikr user second_mouse.]