The industrialization of drug discovery: The increasing pace of drug discovery poses new risks and opportunities for health-care businesses.

The completion of the human genome project has done much to raise public awareness of biotechnology. There are great expectations for a new generation of drugs to address a variety of diseases that are still not adequately addressed by medicine.

"This is but a milestone, however, in an emerging sea of change that many within the health-care sector are now beginning to grapple with - the industrialization of the art of drug discovery," says Geoff Barth, a portfolio manager of a biotechnology fund at AIC Limited. "While our society will be the beneficiary of this transition, business managers affiliated with this sector who fail to understand this development put their companies and investors at great risk."

Barth likens drug discovery today to the oil and gas industry just before a number of technologies affected that sector, such as "3-D seismic."

"Oil drilling used to be a real black art - a hit-an 1-miss exercise," he explains. "Each find would last for about 10 years before the company would have to find a new deposit, not unlike pharma companies searching for their next blockbuster because of patent expiry." This changed in the oil d gas industry with seismic technology, which allowed a three dimensional characterization of deposits, and greatly reduced the risk associated with deposit discovery.

On a larger scale, changes in drug discovery today parallel those of the oil and gas industry several years ago, Barth points out. "It is becoming less of a hit-and-miss venture and more predictable - the art has become a science."

New drug technologies: pills and biologics

In the broadest possible sense, there are two drug technologies that are reshaping the competitive landscape in health care. The first category has been the bastion of large pharmaceutical companies - small molecule drugs ("chemotherapeutics") - which quite often can be taken orally n the form of a pill. Such drugs are relatively cheap and easy to manufacture. Historically, they have been found by examining the byproducts of microorganisms and high-throughput screening.

The second category is often identified with biotechnology companies -- "biologics." Biologics are large complex molecules that resemble a real protein used by organisms to modulate body function or fight disease. They are difficult to manufacture and store. Such drugs are typically given by an injection. Currently, these agents are discovered through recombinant DNA technology and bioinformatics.

Comparing chemotherapeutic drugs to biologic drugs is analagous to comparing a small plane to a jet airliner -- the differences in size and complexity are dramatic. Both drug technologies have a place today and tomorrow in medicine, as they are best suited for different diseases. And both large pharmaceutical companies and biotechnology companies now embrace both drug technologies.

Industrialization of drug discovery

As Joshua Boger, CEO and founder of global biotech company Vertex Pharmaceuticals, surmises, the industrialization of drug discovery means "better drugs faster." Vertex Pharmaceuticals is considered an icon of industrialized drug discovery. The company recently signed one of the most lucrative drug discovery alliances in the history of biotechnology with Novartis, resulting in $800 million in research funding. This will provide eight new drugs for Novartis, and drug royalties for Vertex.

"Too often, companies are concerned with the rate at which they screen small molecule drugs for their clinical relevance rather than focusing on the quality of the leads they generate and the validity of the biology behind the assays they use," explains Boger. He adds that the industry average for the generation of new small molecule drugs to reach the point of human testing takes about five years, but that Vertex is now able to do this in three-and-a-half years.

"We have combined a variety of techniques within our own research culture, which is the actual design of drugs to fit disease targets," Boger says. Vertex departs from many of its peers by coupling high-throughput screening of large libraries of compounds with the design of such candidates prior to screening.

Biologics have also recently undergone dramatic changes in drug development time. Antibodies are large molecules produced by the body's immune system to fight disease, and several antibody products are now marketed for various diseases such as cancer. Abgenix, a leading antibody company, uses their patented engineered mouse with a human immune system called the "Xenomouse," which plays a critical role in its research efforts to generate new clinically relevant antibodies.

"Within two to four months of immunizing with a therapeutic target, the Xenomouse produces multiple high-affinity antibodies from which to choose an optimal product for pre-clinical development," says Scott Greer, chairman and CEO of Abgenix, a biopharmaceutical company based in Freemont, California. "The speed and effectiveness with which we can generate new antibodies to novel disease targets is reflected in the fact that we have more than 30 corporate partnership agreements to date for this purpose. This is exactly the capability companies are looking for with the completion of the human genome project."

Thanks to industrialization, chemotherapeutic an biologic drugs are now produced at much faster rates than have historically been possible. While the enabling technologies behind this transformation may differ, the implication is the same -- the pace and reliability of drug discovery has accelerated fast enough to disrupt the competitive landscape of the health-care industry.

Possible displacement of patents and generics

In the past, managers of biotech companies without earnings defended the value of their companies by highlighting patent estates. While this may be laudable, industrialized drug discovery raises new issues.

"We often see companies allocating legal resource to patenting processes that in the end are not that defensible against imitation," Boger cautions. "They miss the point that the main defensible patent at the centre of a company's value proposition is a drug patent." With the pace of developing new drug accelerating, it is these products that command price premiums on the market, not the tools used to generate them.

Currently, companies are concerned about the patent life on their drugs, and about generic drug manufacturers producing essentially the same product at a cheaper price once the patent has expired. Companies will engage in a complex web of filings with the patent office to extend the life of their intellectual property estate.

Alan Brown, a portfolio manager for a biotechnology fund at AIC Limited, says, "In the near future, this will change; drugs will be displaced from the market by new and better drugs long before their patents expire. The threat currently posed by generic companies will increasingly be replaced by drug-discovery companies."

Reducing drug development risk in cLinical trials: predictive medicine

San Francisco, California-based Genentech has mad remarkable progress in translating genetic information into tangible, practical information to change drug development. The biotech company markets a drug called "Herceptin" for breast cancer. Early on in its development, Genentech discovered that about 25 per cent of breast cancer patients with a certain genetic background would respond strongly to the drug. This information was used to screen patients based on their genetics, focusing clinical testing

On the patient population predicted most likely to benefit.

This is a remarkable and unique example today of predictive medicine -- using genomic information to focus a new drug treatment on the relevant patient population. It increases the success rate of clinical development and reduces side effects. It also lowers the costs of clinical development resulting from failure, and accelerates the acceptance of the drug upon approval. Examples like this will move from the unique to the commonplace by making drug discovery more predictable.

The bureaucracy of drug discovery

Industrialization of drug discovery has more than its scientific dimensions; it also has its regulatory and political facets. While biotechnology companies can no longer be defined by their focus on biologics, since many focus on chemotherapeutics, they can be defined by their small size, entrepreneurship and appetite for risk. These qualities may explain the versatility and productivity of these firms scientifically, but they may also be important politically.

Biotech companies generally develop ambitious drug programs for tough diseases that have little or no available treatments. For example, Imclone

Systems has developed a biologic drug for refractory colorectal cancer in late-stage clinical testing. The life expectancy of a patient diagnosed with this disease is generally less than 12 months. Clearly responding to a market of unmet medical need, the Food and Drug Administration (FDA) allowed this firm to file for drug approval with their phase II data rather than their phase III data, which would normally be the case. This will cut as much as three years off the development time if the FDA ultimately approves the drug.

Industrializing drug discovery reflects not just the science, but the aggressive pursuit of diseases unchallenged by medicine today. Agencies like the FDA respond in turn by expediting the development of these drugs, considering the magnitude of human suffering in such instances.

Big pharma: pressure for change

At this point, it appears that the companies successful in embracing and implementing industrialized drug discovery are biotech companies, not large pharmaceutical companies. While they may deny this, big pharmaceutical companies are consistently and increasingly outsourcing their discovery programs to small biotech companies. For example, Bristol Myers Squibb's top three best-selling drugs, each a blockbuster with more than $1 billion in sales, have been in-licensed or acquired from other players.

At the time of writing, Bristol Myers Squibb announced a license of Imclone's lead drug for refractory colorectal cancer, not yet approved by the FDA, for more money than Hoffman La Roche paid for Genentech (now a $40 billion company) in 1990. Many in the industry feel that Bristol overpaid for Imclone's drug and may have done so to protect their oncology franchise. Whatever the case, this may portend a new level of monetary value assigned to drug discovery companies and their products.

Big pharma has some tough choices to make. Jack W. Reich, PhD, CEO of Collateral Therapeutics, is of the opinion that most of the big pharma companies cannot compete with biotech in bringing innovation to the negotiation table anymore. "In considering their roles, big pharma is increasingly leveraging their value-added abilities in product development, marketing and distribution by soliciting the drug discovery abilities of biotech companies." Reich's company has a gene therapy product in late-stage clinical trials for the treatment of coronary artery disease, which is fully funded by the pharmaceutical company Schering AG.

This realization adds a new dimension to what may be important for the competitive advantage of large pharmaceutical companies as they move forward. "Given that industrialized drug discovery tends to be domiciled in biotechnology companies, we select large pharmaceutical companies based in part on their attractiveness to biotechnology companies as a drug development partner," Barth says.

The qualities that make for a good drug development partner may be debatable, but polling the views of biotechnology companies on this issue can help. Brown says that an informal survey of senior managers of biotechnology companies conducted by his team at AIC found that Pfizer was unanimously the number-one preferred drug development partner." "In an age of industrialized drug discovery, we believe big pharma would serve its interests better by spending less on internal research and development and more on the qualities of a good drug development partner," says Brown.

Changing business models

The industrialization of drug discovery will continue to grow as a force in the industry. This may demand a reassessment among large pharmaceutical companies of their core competencies and the areas where they should compete, by focusing more on being effective drug partners and less on internal drug development programs. Ironically, this transformation a so suggests that generic drug companies may see their markets captured by drug-discovery companies that will increasingly displace drugs still protected by patents with more efficacious agents.

As the number of new drugs continues to grow, the largest risk for drug-discovery companies over the next few years appears to be securing commercial scale manufacturing other risk is that the industrialization of drug discovery is driven by the pursuit of difficult diseases, which allows the FDA to participate in the process by accelerating approval within the context of unmet medical need.

The Rubicon we are now crossing in health care is not e completion of the human genome project or its successor projects; it's the role this information plays in the larger scheme of industrializing drug discovery, which presents as many opportunities as it does risks for managers in the health-care industry.

Jayson L Parker, PhD, MBA is vice-president of biotechnology at AIC Limited and co-manages their Global Medical Science mutual fund. He is also an adjunct professor at the University of Toronto with the Faculty of Medicine and teaches a graduate course n Trends in Medical Biotechnology.