Since the early 1990s, cancer immunotherapy has provided hope to patients, physicians, and investors as a new treatment modality with limited side effects and superior efficacy.  Cancer immunotherapy broadly includes passive immunization, active immunization, and immunostimulation [1]. 

Passive immunotherapy is the transfer of an exogenous therapeutic agent to a patient where the therapy has a direct pharmacological action on the desired target.  The best examples of passive immunotherapy are monoclonal antibodies [mAbs], which were hailed as “magic bullets” when they were developed in the 1970s.  

Clinical results with mAbs were largely disappointing for the first 10 years of development[2].  In fact, it wasn’t until November 1997 that the first mAb for cancer therapy, Rituxan® [rituximab], was approved by the U.S. Food and Drug Administration [FDA].  Developed by IDEC Pharmaceuticals, Rituxan® is a chimeric monoclonal antibody against the protein CD20 that is currently approved for the treatment of chronic lymphocytic leukemia [CLL], non-Hodgkin’s Lymphoma [NHL], and rheumatoid arthritis [RA][3].  

After reporting its first year of profitability in 1998, shares of IDEC Pharmaceuticals traded at a new all-time high of $140 with a market capitalization above $3.3 billion. Worldwide net sales of Rituxan® reached $1.5 billion in 2002 and the following summer IDEC Pharmaceuticals acquired Biogen, Inc. in a stock transaction valued at approximately $6.65 billion to create Biogen Idec, Inc. (BIIB). 

While the success of Rituxan® spurred the development of other anti-CD20 mAbs, it wasn’t until October 2009 that Arzerra® [ofatumumab] was approved by the FDA for the treatment of CLL.  Ofatumumab, which was developed by Genmab A/S (GNMSF.PK) and GlaxoSmithKline plc (GSK), is a human mAb that targets an epitope different from Rituxan® and other anti-CD20 mAbs[4]. 

Today, passive immunotherapies represent one of the most successful therapeutic classes and there are currently ten mAbs approved for cancer therapy [see Figure 1: FDA Approval of cancer mAbs from 1997-2010].  Three blockbuster products sold by the Roche Group (RHHBY) – Avastin® [bevacizumab], Rituxan®, and Herceptin® [trastuzumab] – collectively represented nearly US$17 billion in revenue for 2009[5].  As useful as many of these mAbs have become in cancer therapy, they often have the greatest efficacy impact when used in combination with other therapeutic modalities, particularly cytotoxic agents[6]. 

Figure 1: FDA Approval of cancer mAbs from 1997-2010

Similar to passive immunotherapy with mAbs, the early development of active immunotherapies has proven to be an enormous challenge[7].  In fact, we identified nearly a dozen product candidates that failed in Phase III trials.  Active immunotherapies are therapies that contain a specific antigen or set of antigens that are designed to activate the patient’s own immune system to seek out and destroy cells that carry the same antigen.  They have no direct therapeutic action, but rather rely on the patient’s immune system to recognize and destroy the intended target. 

While no active immunotherapeutics are currently approved for the treatment of cancer, the FDA has assigned a Prescription Drug User Fee Act [PDUFA]) date of May 1, 2010, by which time it will respond to Dendreon Corporation’s (DNDN) amended Biologics License Application [BLA] for Provenge® [sipuleucel-T].  Dendreon is seeking licensure for Provenge® for men with metastatic castrate-resistant prostate cancer [CRPC].  This event has reignited enthusiasm for the field of active immunotherapy and shares of Dendreon, which traded below $5 in March 2009, recently hit all-time highs above $40 and a market capitalization greater than $5 billion. 

As with any first-in-class product, regulatory delays are possible.  For example, the BLA for Rituxan® was originally submitted on February 28, 1997, and the FDA requested additional data on certain aspects of the production process related to the bulk drug manufacture on August 29, 1997, which delayed approval until later that year [November 26, 1997].  In view of the complexities of manufacturing and distributing an autologous cancer therapy, a similar request by FDA for Provenge® would not be unexpected and would likely occur around the PDUFA date using Rituxan®’s history as a guide. 

If approved by the FDA, Provenge® would represent the first active immunotherapy for the treatment of cancer.  However, unlike Rituxan®’s market monopoly that lasted for nearly 12-years, Provenge® could face competition in a relatively short period of time.  Numerous active immunotherapies are in late-stage clinical development for prostate cancer – including a promising off-the-shelf vaccine set to begin a pivotal Phase III trial in 2010.  In fact, nine product candidates are in clinical trials for the treatment of prostate cancer, representing the largest therapeutic area within the active immunotherapy market 

Beyond Provenge®, there are a number of additional catalysts in 2010 that could ignite further interest in the field of cancer immunotherapy.  Nearly 50 clinical programs involving active cancer immunotherapies are currently underway, including nearly a dozen that are in pivotal Phase III development with several BLAs planned in 2010. 

For example, Bristol-Myers Squibb Company (BMY) has announced its intent to potentially file for regulatory approval for ipilimumab [with or without vaccine therapy] in metastatic melanoma in 2010 and has submitted Phase III data for presentation at the American Society for Clinical Oncology [ASCO] annual meeting held June 4-8, 2010.  In addition, GlaxoSmithKline plc (GSK) is conducting the largest ever Phase III clinical trial in lung cancer treatment with its investigational MAGE-A3 ASCI immunotherapy, with the possibility for data presentation at ASCO 2010.  Lastly, following the presentation of positive Phase III trial results at ASCO 2009, Biovest International, Inc. (BVTI.PK) expects to file a BLA for BiovaxID in NHL in 2010. 

Accordingly, in our latest industry report titled “Cancer Vaccine Therapies: Failures and Future Opportunities,” we provide an overview of the cancer immunotherapy market, feature profiles of nearly 40 companies, include interviews with several key opinion leaders, and review some of the scientific, medical, clinical, and financial aspects of the major industry participants.  For more information regarding the report, please click here or send an email to: info@mdbpartners.com

Objectives of the Report

Some of the objectives of this report are to:

• Provide an overview of the cancer immunotherapy market
• Identify disease indications currently being studied with cancer immunotherapy
• Identify the companies currently involved in cancer immunotherapy development
• Identify specific product candidates that offer the greatest market opportunities
• Assess the risks of cancer immunotherapy development and commercialization

Research Methodology

MD Becker Partners adopted a three-fold approach for this study:

• Primary research focused on interviews with key opinion leaders involved in the field of cancer immunotherapy
• Secondary research focusing on utilizing information from peer-reviewed journal articles and reports on cancer immunotherapy
• Quantitative and qualitative analysis of the primary and secondary data using our industry experience and knowledge of the marketplace 

References:  

1. Rüttinger, D. et al. Oncologist. 15(1): 112-8 (2010). 
2. Ritz, J. et al. Blood. 59:1-11 (1982). 
3. Rituxan® (rituximab) prescribing information (www.rituxan.com) 
4. Teeling, JL. et al. J Immunol. 177(1): 362-71 (2006). 
5. Roche Annual Report 2009 (www.roche.com/gb09e.pdf) 
6. Goldenberg, DM. Cancer. 116(4): 1011-2 (2010). 
7. Rescigno, M. et al. Biochim Biophys Acta. 1776(1): 108-23 (2007).

* MD Becker Partners reporting live from the JP Morgan Healthcare Conference

This week, nearly 6,500 registrants gathered in San Francisco, California for the JP Morgan Healthcare Conference to hear 25-minute presentations from 338 life science companies.  For industry executives and investors, the annual event serves as a good barometer for the rest of the year.

We roamed the familiar halls of the Westin St. Francis Hotel to assess the mood among participants and also monitored online media commentaries throughout the event.  In general, there was a flurry of activity, the plane flights and networking receptions were crowded as usual, and several industry observers “Tweeted” a sense of optimism for 2010.  However, we sought to construct a less subjective assessment by analyzing year-over-year statistics from the conference.

Accordingly, we extensively reviewed company press releases issued during the JP Morgan Healthcare Conference in both 2009 and 2010, with a particular focus on identifying the number of merger & acquisitions, licensing & partnering transactions, and financing deals announced each year during the four day event.

Merger and Acquisitions

In contrast to the absence of any significant M&A deals announced during the JP Morgan Healthcare Conference in 2010, several large M&A transactions with an aggregate value of $702 million were disclosed during the first two days of the event in 2009 [January 12-15, 2009].  The largest deal went to Cephalon, Inc. (CEPH), which announced an agreement providing the company with an option to purchase all outstanding capital stock of Ception Therapeutics, Inc., a privately held biopharmaceutical company.  Under the terms of the option agreement, Cephalon paid Ception $100 million upfront for the option.  If Cephalon exercises its option, the company will purchase all of the outstanding capital stock of Ception for $250 million along with additional payments related to clinical and regulatory milestones.  Other transactions announced that year included:

• Medtronic, Inc.’s (MDT) acquisition of privately held Ablation Frontiers, Inc. for an initial payment of $225 million plus potential additional payments contingent upon achievement of certain clinical milestones
• The Medicines Company’s (MDCO) merger agreement with Targanta Therapeutics Corporation for $42 million in cash and additional regulatory and commercial milestone payments
• NuVasive, Inc.’s (NUVA) option to acquire Progentix Orthobiology BV, a Netherlands based company focused on developing novel orthobiologics, consisting of an upfront investment of $15 million along with the obligation to purchase the remaining equity of Progentix for $45 million upon accomplishment of certain development milestones [with additional potential payments of up to $25 million upon the achievement of additional milestones and based upon NuVasive's sales success]

Licensing and Partnering

Kicking off the JP Morgan Healthcare Conference in 2010, privately held KaloBios Pharmaceuticals, Inc. announced a $290 million agreement with Sanofi Pasteur, the vaccines division of the sanofi-aventis Group (SNY), for the development and commercialization of KB001, an investigational new biologic for the treatment or prevention of Pseudomonas aeruginosa [Pa] infections.  KaloBios, which is developing first-in-class human antibody therapeutics that offer advantages over other methods of human antibody creation in terms of immunogenicity, potency, and manufacturing yields, will receive an upfront payment of $35 million, plus development, regulatory and commercial milestones for a potential further $255 million, as well as royalties on eventual product sales.

While other licensing and partnering transactions were announced during the JP Morgan Healthcare Conference in 2010, they were substantially smaller or specific financial terms were not disclosed.  These include:

• Proteus Biomedical Inc. announced an exclusive worldwide license and collaboration agreement with Novartis AG (NVS) to develop and commercialize pharmaceutical products that incorporate Proteus’ novel sensor-based technologies in the field of organ transplantation along with certain option rights in cardiovascular and oncology product applications.  Under the terms of the agreement, Novartis will make upfront cash and equity investments in Proteus totaling $24 million and Proteus will also receive royalties on worldwide net sales of any Novartis products incorporating its sensor-based technology.
• Trillium Therapeutics, Inc., a biopharmaceutical company developing innovative immune-based biologics, announced that it has entered into a definitive license agreement with Biogen Idec, Inc. (BIIB), granting the latter exclusive worldwide rights to one of Trillium’s development programs.  Under the terms of the agreement, Trillium will receive an upfront payment and is eligible to receive milestone payments based on achievements of specified clinical, regulatory and commercial accomplishments.  Trillium will also receive royalties on global product sales.  Biogen Idec will be solely responsible for clinical development, regulatory approvals, manufacturing and commercialization.
• MedGenesis Therapeutix Inc., a biopharmaceutical company developing and commercializing innovative treatments for patients with serious central nervous system [CNS] diseases, announced an agreement with Amgen, Inc. (AMGN) that provides MedGenesis with an exclusive, worldwide license for glial cell line-derived neurotrophic factor [GDNF] protein in CNS and non-CNS indications.  As part of the license agreement, Amgen now holds a small equity stake in MedGenesis.  In parallel, Biovail Corporation (BVF) and MedGenesis concluded an agreement to collaborate on the development of GDNF in Parkinson’s disease and potentially other CNS indications.  GDNF is a naturally-occurring growth factor capable of protecting and promoting the survival of dopamine producing nerve cells.
• AstraZeneca Plc (AZN) and CrystalGenomics announced a research collaboration to discover and develop a novel anti-infective for use as a potential antibacterial agent.  Under the terms of this agreement, Korea-based CrystalGenomics will receive research funding from AstraZeneca for two years.  CrystalGenomics will also be eligible to receive future milestones and royalty payments associated with development and commercialisation of a drug candidate.
• AnaptysBio, Inc., a privately-held therapeutic antibody platform and product company, announced it has signed an agreement with Roche (RHHBY) for the development of novel antibody therapeutics.  Under the terms of the agreement, AnaptysBio will be responsible for generating novel antibodies using its proprietary somatic hypermutation platform and Roche will receive a worldwide license to develop and commercialize antibodies optimized by AnaptysBio.  In addition to a signing fee paid by Roche, AnaptysBio will be eligible to receive milestone payments and royalties upon product sales.

The six transactions announced during the JP Morgan Healthcare Conference in 2010 with reported financial terms totaling $314 million pale in comparison to the ten deals reported at the meeting during 2009 worth more than $2.4 billion in aggregate value.  These included a $1.1 billion deal between ZymoGenetics, Inc. (ZGEN) and Bristol-Myers Squibb Company (BMY), a $500 million deal between Peptimmune, Inc. and Novartis AG, a $396 million deal between Micromet, Inc. (MITI) and Bayer AG (BAYZF.PK), and a $200 million deal between FORMA Therapeutics the Novartis Option Fund to develop inhibitors for an undisclosed protein-protein interaction target in the field of oncology, among others.

Financing

The quantity and aggregate dollar value of public and private financing transactions announced during the JP Morgan Healthcare Conference were essentially flat in 2010 compared with the prior year as reflected in the table below.

Outlook

At the start of 2009, we provided a positive outlook for biotechnology, citing the sector’s defensive characteristics, favorable technical aspects, and improving fundamentals, such as the number of new product approvals, products in clinical trials and the brisk pace of industry consolidation and licensing transactions.  The latter was quickly reinforced by M&A transactions with an aggregate value of $702 million and licensing & partnering deals worth more than $2.4 billion in aggregate value announced January 12-15, 2009, during the JP Morgan Healthcare Conference. 

While we believe that a positive outlook for 2010 is once again warranted, and the first two weeks of the year don’t necessary indicate a trend, hopefully the paucity of M&A activity coupled with the decline in both the quantity and value of licensing & partnering transactions announced during the JP Morgan Healthcare Conference in 2010 is simply the pause that refreshes and the action improves throughout the year.

With 2009 officially on the books, it appears an appropriate time to review the sector’s performance along with some of the themes highlighted in our previous articles.

Big Versus Small

The twenty-member NYSE Arca Biotechnology Index (BTK) was up 46% in 2009, while the broader NASDAQ Biotech Index (NBI) was only up 16%, underperforming the Dow Jones Industrial Average (INDU), S&P 500 (SPX), and NASDAQ Composite (COMP), which were up 19%, 24%, and 44%, respectively.  Why the huge discrepancy in returns between these two major biotechnology indices?  Unlike the equal-weighted NYSE Arca Biotechnology Index, the NASDAQ Biotech Index is market value-weighted, taking into account the total market capitalization of the companies it tracks and not just their share prices.  Accordingly, companies with the largest market capitalizations, or the greatest values, will have the highest weighting in the index.

During 2009, large capitalization biotechnology companies [greater than $10 billion] dramatically underperformed their smaller peers.  For example, Celgene Corporation (CELG) was essentially flat, Amgen, Inc. (AMGN) was down 2%, Gilead Sciences, Inc. (GILD) declined by 15%, and Genzyme Corporation (GENZ) dropped 26% [earning Henri Termeer the coveted Nance Trophy for worst biotech CEO of 2009 by TheStreet.com’s Adam Feuerstein].  Some of the reasons for this poor performance include concerns over generic competition and pipeline progress – ironically some of the same issues that have plagued big pharma.

Accordingly, the relative underperformance of large capitalization biotechnology companies in 2009 masked the fact that many smaller, innovative companies performed well, with 20 of the 125 companies comprising the NASDAQ Biotech Index producing triple-digit returns during the period.  In fact, two biotechnology companies were among the largest percentage gainers in the NASDAQ Composite with their staggering quadruple-digit returns: Vanda Pharmaceuticals, Inc. (VNDA) +2,150% and Human Genome Sciences, Inc. (HGSI) +1,342%.  See Table 1 for a list of the top ten gainers from the NASDAQ Biotech Index in 2009.

Table 1. Top ten gainers from NASDAQ Biotech Index (NBI) in 2009

Oncology: Prostate Cancer Spotlight

Driven by positive Phase 3 results from Dendreon Corporation (DNDN) regarding its prostate cancer vaccine study, investors gravitated towards biotechnology companies working in the field of prostate cancer treatment as noted in our May 2009 article.  This enthusiasm only increased when Johnson & Johnson (JNJ) announced in May 2009 that it would acquire Cougar Biotechnology, Inc., a development stage company with an oral prostate cancer treatment being studied in two Phase 3 clinical trials, for approximately $1 billion. 

While not a member of either major biotechnology index, shares of Oncogenex Pharmaceuticals, Inc. (OGXI) started the year around $3.00 and ended above $22 for a 643% return.  Oncogenex is developing OGX-011, which is designed to inhibit the production of clusterin, a protein that is associated with cancer treatment resistance, and has completed Phase 2 clinical trials in prostate, lung and breast cancer.  OGX-011 received Fast Track designation from the FDA for the treatment of progressive metastatic prostate cancer in combination with docetaxel.  Shares of Oncogenex had traded higher than $42 in August 2009, but the stock price declined following a license agreement with Teva Pharmaceutical Industries (TEVA) for OGX-011 that apparently did not meet investor’s expectations.

Not all biotechnology companies working in the area of prostate cancer were as fortunate as Dendreon, Cougar, and Oncogenex.  Shares of GTx, Inc. (GTXI) were the second largest industry decliner for 2009 due to a complete response letter from the Food and Drug Administration [FDA] that cited clinical deficiencies regarding the company’s New Drug Application [NDA] for toremifene 80 mg to reduce fractures in men with prostate cancer receiving androgen deprivation therapy.  See Table 2 for a list of the top ten decliners from the NASDAQ Biotech Index in 2009.

Shareholder Activist Wins

In view of past major coups with MedImmune and ImClone, in August 2009 we reviewed Carl Icahn’s biotechnology holdings as reported in SEC filings and identified three companies that significantly underperformed the NASDAQ Biotechnology Index over the past five years, but with recent successful shareholder activist outcomes that could positively impact future performance.  In particular, we noted that Alexander Denner, who has served as Managing Director of entities affiliated with Carl Icahn and as a director of ImClone, had recently been elected as a director at each company.

During 2009, those three companies, Biogen Idec, Inc. (BIIB), Amylin Pharmaceuticals, Inc. (AMLN), and Enzon Pharmaceuticals, Inc. (ENZN) produced positive returns of 12%, 31% and 81%, respectively.  While Biogen Idec underperformed the sector, it notched the highest return among large capitalization biotechnology companies.

In other shareholder activist news, holders of Vanda Pharmaceuticals (VNDA) are likely pleased that the company’s Board of Directors spurned a request by Tang Capital Partners, LP to liquidate the company in February 2009.  Shares of Vanda were up 2,150% for the year [see Table 1] following FDA approval in May 2009 to market the company’s Fanapt™ [iloperidone], a novel antipsychotic for the acute treatment of adult patients with schizophrenia, and a subsequent marketing agreement for the product with Novartis AG (NVS).

CNS: Developments for Parkinson’s Disease

Vanda Pharmaceuticals wasn’t the only company working in the area of central nervous system [CNS] disorders to make news.  Shares of Impax Laboratories, Inc. (IPXL), which were trading around $7.50 at the time we published our August 2009 article titled “Treating Parkinson’s Disease: Investment Opportunities and Challenges,” continued to reach new 52-week highs and ended up 172% for the year [see Table 1].  Impax recently initiated the second of two Phase 3 studies designed to support marketing approval of its IPX066 product candidate for the treatment of Parkinson’s disease.  IPX066 is an investigational extended release carbidopa-levodopa product intended to rapidly achieve and then sustain effective blood concentrations of levodopa, potentially improving clinical symptom management.

Gastrointestinal Disease: 3 Hits, 3 Misses

First, the good:

Both Salix Pharmaceuticals, Inc. (SLXP) and Santarus, Inc. (SNTS) appear in the list of top ten biotechnology gainers for 2009 with triple-digit returns due to favorable regulatory progress reported during the year [see Table 1].  In September, Salix announced the successful outcome of two Phase 3 trials to evaluate the efficacy and safety of Xifaxan® [rifaximin] for the treatment of non-constipation irritable bowel syndrome.  Salix is planning an NDA submission for the first half of 2010.  In December, Santarus announced that the FDA approved the company’s New Drug Application [NDA] for its prescription tablet product for all of the indications being sought, including for the treatment of heartburn and other symptoms associated with gastroesophageal reflux disease. 

While not a member of either major biotechnology index, shares of Soligenix, Inc. (SNGX.OB) increased 317% during 2009.  In January, the company reached agreement with the FDA on the design of a confirmatory, pivotal Phase 3 clinical trial evaluating its lead product orBec® for the treatment of acute gastrointestinal Graft-versus-Host Disease [GVHD].  The following month, Soligenix announced a potential $30 million North American partnership agreement with Sigma-Tau Pharmaceuticals for orBec and in October 2009 initiated patient enrollment in the confirmatory Phase 3 trial that is expected to complete with clinical data available in the first half of 2011.

Next, the bad:

As discussed in our December 2009 article “Graft Versus Host Disease: Failures and Future Opportunities,” Osiris Therapeutics, Inc. (OSIR) recently reported preliminary results from two Phase 3 trials evaluating its Prochymal product candidate for the treatment of acute GVHD.  Unfortunately, neither trial reached its primary endpoint, sending shares from $14 to a 52-week low of $5.35 by November 2009, earning the company a spot in the top ten decliners for the year [see Table 2]. 

The other two casualties working in the area of gastrointestinal disease and appearing in the top ten decliners for 2009 are:

• Progenics Pharmaceuticals, Inc. (PGNX), which announced in October 2009 that the company regained worldwide rights to Relistor® [methylnaltrexone bromide] for the treatment of opioid-induced constipation from Wyeth Pharmaceuticals.  Global net sales of Relistor for the third quarter of 2009 were a mere $3.3 million, as compared to $3.2 million in sales for the previous quarter.
• In the absence of any negative clinical or regulatory news, NPS Pharmaceuticals, Inc. (NPSP) stated it remains on track to reach full patient enrollment before the end of the first quarter of 2010 for a confirmatory Phase 3 trial with Gattex™ (teduglutide), the company’s proprietary analog of naturally occurring human glucagon-like peptide 2 [GLP-2], for the treatment of short bowel syndrome [SBS].  NPS believes that positive results from the trial, expected to complete in October 2010 according to ClinicalTrials.gov, will enable the company to seek U.S. marketing approval for Gattex.

Table 2. Top ten decliners from NASDAQ Biotech Index (NBI) in 2009

2010 Outlook

The capital markets remain turbulent and there may be casualties along the way among undercapitalized companies, but many of the biotechnology industry’s fundamentals, such as the number of products in clinical trials, new product approvals, profitable biotech companies and industry mergers & acquisitions remain favorable for 2010. Similar to 2009, small capitalization companies with clinical or regulatory catalysts should continue to outperform their larger industry peers in the year ahead.

What is your outlook for the biotechnology industry in 2010?  Take a moment to complete our survey, which is only ten questions long and will take just minutes to complete.  The results of this important survey along with our industry outlook will be communicated in early 2010 through a future article.  Take the survey now by clicking here.

Currently, the strengths [e.g. innovation, quality of care] and weaknesses [e.g. gaps in healthcare coverage, high costs and inefficiencies] of the US healthcare system are the subject of great debate.  During this period, it is essential for all parties involved to place the importance of medical and scientific innovation at the forefront of the conversation.  New medicines should be viewed as investments in the future, not only in patient health – but also in economic recovery and growth.

For example, in 2006, University of Chicago economists Kevin Murphy and Robert Topel reported that from 1970 to 2000, gains in life expectancy added about $3.2 trillion per year to national wealth, with half of these gains due to progress against heart disease alone [1].  Looking ahead, they estimated that even modest progress against major diseases would be extremely valuable.  A permanent one percent reduction in mortality from cancer alone has a present value to current and future generations of Americans of nearly $500 billion and a cure would be worth about $50 trillion.

Drug manufacturers and patents

While the cost of prescription medicines is one of the centerpieces of the ongoing healthcare reform debate, according to the Pharmaceutical Research and Manufacturers of America, or PhRMA, they represent only 10 percent of the total healthcare costs [2].  Further, PhRMA cites a study that predicted how improving the use of blood pressure-lowering medicines would result in 89,000 fewer deaths and 420,000 fewer hospitalizations annually – saving more than $15 billion a year in health care costs.  As such, discussions should focus less on the costs of prescription medicines and more on inefficiencies in the remaining 90% of the healthcare system.

When a new life science product reaches the market, it is patent protected for a defined number of years based on the type of drug, disease indication, and medical need.  During the period of patent protection, drugs can be sold at an appropriate price where the life sciences company hopes to:

1. Recover its significant initial investment
2. Reinvest in new drug discovery and development
3. Provide adequate returns for its stakeholders

The originator’s ability to accomplish these three objectives is largely dependent upon sufficient patent protection.  When the patent protection of a branded drug expires and generic versions enter the market, the profits for the branded drug are eliminated.  This puts pressure on the originator to maintain a robust pipeline of new product candidates, which supports a continual cycle of selling new, innovating medicines and replacing less effective ones.  Accordingly, healthcare policy must continue to reward scientific innovation instead of decreasing patent life on new technologies – especially biologics.

Patent protected?

Aside from patent length, the Federal Circuit’s In re Bilski standard for patentable subject matter could also have widespread negative implications for life sciences companies that rely on patent protection for biological, diagnostic, and personalized medicine methods that utilize biomarkers or other correlations between a genetic or physiological predisposition and disease-susceptibility or likelihood of treatment success.  If the Supreme Court fails to overturn the decision of the U.S. Court of Appeals for the Federal Circuit in Bilski v. Doll, uncertainty over existing and future patents will stifle investment in these areas and cause significant volatility in the stock prices of affected public companies.

As leaders of medical innovation, newly formed, pre-revenue stage life science companies are an integral and often undervalued aspect of bringing new medicines to the market.  As such, any changes in patent law, healthcare policy and health economics should carefully consider the ramifications on this fragile segment of the life science industry.

Life Sciences industry a job creator

Beyond better patient outcomes, improved quality of care, and increased life expectancy, emerging life sciences companies play a vital role in job creation.  In a recent Wall Street Journal [WSJ] report, 14% of total new hires between 1993 and 2008 were from newly formed businesses [3].  Life sciences start-ups require highly skilled positions with advanced degrees and often offer higher salaries.  A report from Ben Franklin Technology Partners, a state-backed venture capital firm, indicated that high technology investments [including life sciences] from 2002-2006 created 32,800 jobs that would otherwise not have existed and with salaries 33% higher than other industries [4].

Some lawmakers have acknowledged the importance of these emerging life sciences companies and their impact on the US economy and medical innovation.   For example, the Biotechnology Industry Organization [BIO] reported that the Therapeutic Project Tax Credit Amendment was recently added to “America’s Healthy Future Act of 2009.”  The amendment, offered by Senator Robert Menendez [D-NJ], would reimburse small biotechnology companies with 250 employees or less for a portion of their therapeutic development activities, including hiring scientists and conducting clinical studies.

Raising capital

Creative solutions, such as the Therapeutic Project Tax Credit Amendment, are critical in view of the fact that research-intensive life sciences companies must raise hundreds of millions of dollars during a decade-long period to bring new products to market.  The costs to develop a drug are continuing to increase at a tremendous rate, reaching about $1.4 billion in 2006 [5].  Accordingly, any discussion about reducing the cost of prescription drugs must start with ways to decrease the financial burden and amount of time required to bring new products to the market.

As costs continue to increase, life sciences companies require access to larger amounts of capital to fund drug development.  This reduces the number of venture capital [VC] transactions, while increasing the requisite size of each one.  To illustrate, a total of $361 million was invested by VCs in Series A life science transactions during the second quarter of 2009, up slightly from $345 million in the comparable period of 2008.  However, the total number of Series A deals was down from 31 deals in the second quarter of 2008 to 22 in the comparable period of 2009 [6].

Industry investment in doubt

The complexities of early stage life science companies coupled with uncertainties in the future healthcare landscape are proving difficult for VCs and other life science investors.  As an investor in risky, high-tech opportunities, financiers must be able to achieve a significant return on those companies that do succeed to be able to account for the high number of failures and high costs of development.  The successful exit of these companies is largely dependent upon the size of the market opportunity and the length of patent exclusivity.

If the valuation of early stage life sciences companies is decreased through pricing pressure, changes to patent protection, more rigorous FDA requirements [larger and longer clinical trial requirements for approval and post marketing surveillance], or overall uncertainty, the model of life sciences investing will not be sustainable. Together, decreased company formation and reduced access to capital for life science companies will lead to fewer new and improved medicines of the future.

America must understand that innovative new medicines are priced according to their scientific complexity, significant development timelines and costs, and the need for stakeholders to realize a return from their investments.  In an environment where innovation is expected to lead economic recovery, the leaders in healthcare policy must find the right balance between continuing medical innovation and reducing healthcare costs.

1. Murphy, Kevin and Topel, Robert (2006). “The Value of Health and Longevity.” The Journal of Political Economy, 2006, 114(5), pp. 871.
2. Pharmaceutical Research and Manufacturers of America [PhRMA]. “Platform for a Healthy America: Why Health Care Reform? Why Now?”
3. Wall Street Journal article by Tuna, Cari (September 29, 2009). “Sharp Drop in Start-Ups Bodes Ill for Jobs, Growth Outlook”
4. Pennsylvania Economy League (January 2009). “A Continuing Record of Achievement: The Economic Impact of Ben Franklin Technology Partners 2002-2006”
5. Pharmaceutical Research and Manufacturers of America [PhRMA]. “Profile 2008 Pharmaceutical Industry”
6. OnBioVC.  “Trend Analysis – 2Q09”

Figure 1: A history of NDAs relative to the NIH budget. The NIH budget has grown steadily from 1980 through 2000 at which time the budget has remained flat until 2008. The number of NDAs has remained around 100 annually despite increased federal spending on academic research through the 80s and 90s. Data source: NIH website (http://www.nih.gov/about/budget.htm) and FDA website (www.fda.gov)

Despite the fact that the NIH budget has increased from a little less than $4B in 1980 to about $25B in 2008, the number of New Drug Applications (NDAs) to the FDA has remained somewhat constant, indicating that there remains a gap between NIH funded academic discoveries and translating the ideas into FDA approved products. Accordingly, it is unlikely that in its current form, increasing NIH funding will lead to a proportional increase in NDAs. The primary source of the bottle neck may begin with the challenges associated with starting, running and funding an early-stage biopharmaceutical company.

Starting a biopharmaceutical company based on academic discoveries takes a great scientific mind, yet relatively few top academic scientists accept this challenge. One reason is the funding “trap” associated with running an NIH sponsored academic lab. Principal Investigators (PIs) spend a great percentage of their time writing grants, which is the primary source of funding for their labs. Once a grant is received, their time is spent training new scientists and generating preliminary data needed for the next grant. It is simply not feasible, especially for some of the less-funded labs, to allocate resources to start a spin-off company. Small Business Innovation Research (SBIR) grants are available to some PIs, yet these are only a small fraction of the money needed to start and run a successful biopharmaceutical company. Incidentally, the NIH SBIR budget was not increased in NIH stimulus bill. Thus, the risks of starting a new company, while potentially losing NIH funding, are simply too high for many PIs to undertake.

If the technology is licensed out of an academic institution, a life-science entrepreneur is faced with arguable the most difficult aspect of starting a company: fund-raising. Sources of early-stage funding for start-up biopharmaceutical companies is primarily venture capital, angel investors, or other sources of private equity. With the current economic conditions, these sources of investments are decreasing and there is more competition for what remains. On a local level, even Ben Franklin Technology Partners (BFTP), a proven job-generator that has contributed substantially to Pennsylvania’s overall gross state product, is at risk for reduced funding according to a May 20, 2009, opinion editorial by Terry Singer, Director of Statewide Affairs for BFTP.

About half of the biotech companies on the NASDAQ, many of which have promising long-term pipelines, have less than six months of cash remaining. As a result, they are either reducing their investment in drug discovery and development or closing their doors completely. As discussed at our recent roundtable event, this type of “financial” failure is unique for biotech companies compared to traditional failures that are based on poor clinical trial data. Since investors do not have the ability to determine in advance if a drug is slow to develop for scientific reasons or destined to fail because it is a bad drug, many potential drugs may be abandoned due to these financial shortfalls.

Small biopharmaceutical company executives need to find ways to act lean, keep focused, and effectively communicate their merits to investors in order to remain competitive and survive. Additionally, CEOs need to adapt to changing market conditions and technologies by understanding their product relative to these outside forces and positioning them accordingly. CEO leadership and decision making is critical to the success of the company at this stage of development as they look to partner for a successful exit.

Despite the adversities discussed above, life science financings are still happening, such as the recent series A financings of Sagent Pharmaceuticals and Aragon Pharmaceuticals and $34.5 million series D financing for Avid Radiopharmaceuticals. The challenge for early stage companies is to find ways to distinguish their products, technology, and team from the many other companies in a similar position. Unfortunately, many scientific entrepreneurs are either strong in terms of scientific knowledge or business skills, but it is the rare exception that master both. A broader vision of all aspects of a life science company is needed to compete for the limited resources. Many of the important issues were recently discussed at the MD Becker Partners round-table event titled “Successful Strategies for Raising Visibility and Capital.” A full transcript of the event can be obtained by contacting MD Becker Partners.

The difficulties associated with the development of a drug from academic discovery through NDA approval are vast in a good economy, but are amplified in today’s volatile economy. There is no one single solution and the creativity of our researches, entrepreneurs, and investors will be challenged as new collaborations emerge. Still, there remains a significant desire to find new medicines to treat many of our unmet medical needs. A review of the data indicates that the problem is not a lack of scientific ideas developed in academic institutions but rather early stage company development and funding. More funding should be focused on helping early stage companies with preclinical studies allowing them to de-risk so that they are more attractive for private equity financing in these difficult economic times. In this regard, government-funded agencies exist that support early stage life science companies, such as Ben Franklin Technology Partners. While their model has proven highly successful, their greatest challenge in the years ahead will be limited capital resources due to proposed budget cuts.