Me­ga­fund­ing drug re­search

Financial Mirror (Cyprus) - - FRONT PAGE -

As price-goug­ing prac­tices by a hand­ful of drug com­pa­nies at­tract head­lines, one trou­bling as­pect of the story re­mains un­der­played. Ex­or­bi­tant in­creases in the prices of ex­ist­ing drugs, in­clud­ing gener­ics, are mo­ti­vated not just by crass prof­i­teer­ing but by a deep skep­ti­cism about the eco­nomic fea­si­bil­ity of de­vel­op­ing new drugs. That skep­ti­cism is jus­ti­fied.

Tra­di­tional mod­els for fund­ing drug de­vel­op­ment are fal­ter­ing. In the US and many other de­vel­oped coun­tries, the av­er­age cost of bring­ing a new drug to mar­ket has sky­rock­eted, even as patents on some of the in­dus­try’s most prof­itable drugs have ex­pired. Ven­ture cap­i­tal has pulled back from early-stage life-sci­ences com­pa­nies, and big phar­ma­ceu­ti­cal com­pa­nies have seen fewer drugs reach the mar­ket per dol­lar spent on re­search and de­vel­op­ment.

In­deed, on av­er­age, only one of ev­ery 10,000 com­pounds iden­ti­fied as po­ten­tially use­ful in early-stage re­search will ul­ti­mately win ap­proval from reg­u­la­tors. The ap­proval process can take as long as 15 years and errs on the side of cau­tion. Even among drugs that make it to hu­man clin­i­cal tri­als, only one in five will clear that fi­nal hur­dle.

The price tag for th­ese “slow fails” can be enor­mous. Pfizer, for ex­am­ple, spent a re­ported $800 mln on its choles­terol-low­er­ing drug, torce­trapib, be­fore pulling it from phase III clin­i­cal tri­als in 2006. That’s an un­ap­peal­ing prospect for most in­vestors. Be­cause the risk of back­ing any one com­pound, or even a par­tic­u­lar com­pany, is so high, vast pools of in­vest­ment cap­i­tal lie out of reach for drug de­vel­op­ers.

Spurred by th­ese pres­sures, fi­nance ex­perts have pro­posed sev­eral fund­ing al­ter­na­tives that re­duce the risk of bio­pharma in­vest­ments while im­prov­ing the ef­fi­ciency and pro­duc­tiv­ity of the R&D pipe­line. Al­though in­dus­try in­cum­bents may be slow to shift gears, de­vel­op­ing coun­tries cre­at­ing nextgen­er­a­tion bio­pharma hubs have a unique op­por­tu­nity to adopt and ben­e­fit from al­ter­na­tive mod­els.

Many of those mod­els build upon a com­mon strat­egy for de-risk­ing in­vest­ments: assem­bling a di­ver­si­fied port­fo­lio. Two decades ago, a com­pany called Roy­alty Pharma launched a di­ver­si­fied model, build­ing a fund of own­er­ship in­ter­ests in mul­ti­ple drug roy­alty streams. Roy­alty Pharma fo­cused on ap­proved drugs with block­buster po­ten­tial, cre­at­ing stable rev­enue streams and i mpres­sive eq­uity re­turns – even dur­ing pe­ri­ods of ex­treme stock-mar­ket volatil­ity. But Roy­alty Pharma’s model will not bridge the fund­ing gap be­tween the ba­sic re­search sup­ported by gov­ern­ment grants and the late-stage de­vel­op­ment of drugs that are in clin­i­cal tri­als. Be­cause the can­di­date drugs in this R&D “val­ley of death” are riskier than any­thing in which Roy­alty Pharma in­vests, an even larger port­fo­lio of com­pounds would be needed to yield lev­els of risk and rates of re­turn that are ac­cept­able to typ­i­cal in­vestors.

How large would that port­fo­lio have to be? One of us (Lo) has car­ried out sim­u­la­tions of di­ver­si­fied funds for early- and mid-stage can­cer drugs, which show that a so-called mega­fund of $5-30 bln, com­pris­ing 100-200 com­pounds, could suf­fi­ciently de-risk the in­vest­ment while gen­er­at­ing re­turns of be­tween 9-11%.

That’s not ex­cit­ing ter­ri­tory for ven­ture cap­i­tal­ists and pri­vate-eq­uity in­vestors, but it is in keep­ing with the expectations of in­sti­tu­tional in­vestors, such as pen­sion funds, en­dow­ments, and sov­er­eign wealth funds. More­over, the risk re­duc­tion from di­ver­si­fi­ca­tion would al­low the mega­fund to is­sue large amounts of debt as well as eq­uity, fur­ther broad­en­ing the pool of po­ten­tial in­vestors.

To put th­ese num­bers in con­text, con­sider that the US Na­tional In­sti­tutes of Health funds just over $30 bln an­nu­ally in ba­sic med­i­cal re­search, and mem­bers of the Phar­ma­ceu­ti­cal Re­search and Man­u­fac­tur­ers of Amer­ica spent about $51 bln last year on R&D. A mega­fund ap­proach would help to make both in­vest­ments more pro­duc­tive by fill­ing the fund­ing gap be­tween them.

More­over, this model may work on a smaller scale. Fur­ther sim­u­la­tions sug­gest that funds spe­cial­is­ing in some drug classes, such as ther­a­pies for or­phan diseases, could achieve dou­ble-digit rates of re­turn with just $250-500 mln dol­lars and fewer com­pounds in the port­fo­lio.

Of course, this ap­proach faces chal­lenges. It won’t be easy to man­age a large pool of can­di­date com­pounds and dozens of si­mul­ta­ne­ous drug tri­als. Sim­u­la­tions show that mega­funds will not work for all classes of drugs in all ther­a­peu­tic ar­eas. De­vel­op­ment of Alzheimers’ ther­a­pies, for ex­am­ple, is un­likely to ben­e­fit from the mega­fund model.

But where they do work, mega­funds could make drug de­vel­op­ment vastly more ef­fi­cient, and there­fore less costly. No sin­gle com­pany pos­sesses the scale or fi­nances to de­ploy all the ad­vances in science and tech­nol­ogy since the ge­nomics revo­lu­tion, but a mega­fund-backed ef­fort could.

Re­searchers em­ployed by the fund could share knowl­edge, fa­cil­i­ties, and state-of-the-art equip­ment, data, and com­put­ing re­sources, spread over a wide ar­ray of projects. Fail­ures would be faster – and much cheaper – be­cause stake­hold­ers would be less de­pen­dent on any one project. Emerg­ing-mar­ket coun­tries should take note. Most are chas­ing the phar­ma­ceu­ti­cal and biotech­nol­ogy in­dus­tries. China has es­tab­lished hun­dreds of life-sci­ences re­search parks and com­mit­ted bil­lions of dol­lars in na­tional funds for drug de­vel­op­ment; com­pa­ra­ble pro­grammes are un­der way in In­dia, Sin­ga­pore, and South Korea.

For th­ese coun­tries, forming a mega­fund to test a few hun­dred com­pounds could be a much bet­ter bet than seed­ing biotech star­tups or offering in­cen­tives to big phar­ma­ceu­ti­cal firms. A bio­pharma mega­fund would of­fer a com­pet­i­tive edge in the in­dus­try, with lower de­vel­op­ment costs, a higher suc­cess rate, and faster time to mar­ket. Re­gional economies would ben­e­fit from the same net­works of high-pay­ing re­search jobs, en­trepreneurs, in­vestors, and ser­vice providers that tra­di­tional life-sci­ences in­no­va­tion hubs cre­ate.

Lon­don’s mayor re­cently em­braced this ap­proach, propos­ing a $15 bln mega­fund to help the United King­dom main­tain a lead­er­ship role in drug de­vel­op­ment. In ad­di­tion to direct in­vest­ment, gov­ern­ments can also cre­ate in­cen­tives for the for­ma­tion of th­ese kinds of funds – for ex­am­ple, by guar­an­tee­ing bonds is­sued for bio­pharma re­search.

Ush­er­ing a drug from lab bench to bed­side re­quires in­vest­ing vast sums of money over long hori­zons. That fund­ing must pay off for both so­ci­ety and in­vestors. Emerg­ing coun­tries can lead the world to bet­ter health and greater wealth by pi­o­neer­ing new ways to fi­nance drug de­vel­op­ment.

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