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EmergingCo: a virtual "South-South" Biotech Model.

INTRODUCTION

The increasing pharmaceutical R&D cost pressures have led companies to seek innovative models for delivering drugs, including investments and partnerships in emerging markets. Previous studies have evaluated the strengthening biomedical innovation landscape, increasing number of biotech companies and the innovative biotech partnerships within the emerging markets. (1,2,3) This article proposes a virtual "south-south" model--a biotech that would perform the entire value chain of R&D through a network of collaborations and funding from the emerging markets--that can potentially deliver proof-of-concept (Phase II) drug candidates more cost effectively.

Key emerging markets have built strong expertise in specific areas of pharmaceutical R&D. (1) Israel has strengths in novel biology and targets and Israeli institutions have discovered several innovative drugs such as copaxone, azilect and doxil, apart from producing five Nobel laureates since 2000. China has built multiple bioclusters and fully integrated CRO platforms across chemistry, genomics, toxicology, biologics and manufacturing. (4,5) In contrast, Korea has built deep expertise in translational sciences, especially in oncology, producing early clinical data for industry drug development programs such as crizotinib. Russia has exceptional expertise in the area of computational biology and predictive sciences, and India leads in data management and analysis. Specific countries also have build therapy and disease area expertise; for example, China and Korea in oncology, S. Africa and Brazil in infectious disease and India in metabolic diseases. (6) China, Russia and Singapore based venture and sovereign funds are providing risk capital to early stage biotech companies, locally as well as globally. There is also an increasing intensity of deal making between emerging markets pharmaceutical firms to tap into such inter-country expertise (Table 1).

EMERCINCCO MODEL

A virtual "south-south" biotech--let's name it 'EmergingCo'--can tap into these specific expertises from key emerging markets and effectively build an end-to-end R&D capability (Figure 1). The EmergingCo could seek novel assets from Israel, leverage the service platforms of China, access translational sciences in Korea, and utilize the bioinformatics capabilities of Russia and India. Funding can be structured from Russian, Chinese, Middle Eastern or Singaporean investors.

The costs of progressing a molecule from discovery through Phase II for EmergingCo could be significantly lower as compared to an industry program. A recent Tufts study (7) calculated that the industry costs to deliver a drug from discovery stage through Phase II studies are ~$490 million over 8 years with a probability of success of ~7.5%. Using an average cost of capital of 11%, the risk-adjusted present value of these costs are ~$300 million. Assuming a comparable probability of success, timeline and cost of capital, EmergingCo costs for a similar program would be ~$120-150 million, almost 65-75% less expensive than the Tufts study, while the risk-adjusted present value of such costs would be ~$60-80 million (Box 1).

Two comparable data points, although less rigorously estimated than the Tufts study, are the research costs of novel molecules at Beta Pharma in China and Glenmark in India (Box 2). (8,9) These companies have advanced molecules through proof-of-concept studies in two contrasting emerging markets and provide a template for such an EmergingCo. Both Beta and Glenmark, on average, spent <$25 million for delivering a proof-of-concept molecule, and in the case of Beta successfully launched an oncology drug in China.

Post Phase II, the EmergingCo would ideally outlicense the molecule to big pharma to finance its early pipeline. The average upfront payment for a Phase III ready compound sold by a small-to-mid-sized biotech to big pharma is ~$40 million. (10) The upfront payment would help cover the costs of the early pipeline candidates while still allowing the EmergingCo to retain substantial downstream milestones and royalties. The returns can be further levered by accessing non-dilutive funding from public sources, such as the Office of Chief Scientist (OCS) in Israel, FAPESP in Brazil or Skolkovo in Russia, that match research funding for portions of work conducted in their respective countries. (1)

Box 1: Cost of progressing a molecule through Phase
II: Traditional vs. EmergingCo model

(i) Costs model for traditional development (a); The table
below adapted from Tufts center for the study of drug
development study for 2014. (7)

                             Discovery     Preclinical

Probability of success       50%           69%
Average costs ($Mn)          8             10
# of projects                13.4          6.7
Total costs                  107.4         67.1

Duration/phase (yrs)         2             1.5
Cost of capital              11%

Present value, costs ($Mn)   96.7          46.6

                             Phase I       Phase II

Probability of success       60%           36%
Average costs ($Mn)          20            80
# of projects                4.6           2.8
Total costs                  92.6          222.2

Duration/phase (yrs)         1.5           2.5
Cost of capital

Present value, costs ($Mn)   54.9          101.6

(ii) Cost model for traditional development (b); The table below
is adapted from Paul et al article. (14)

                             Target-       Hit-to-       Lead Op
                             to-hit        lead

Probability of success       80%           75%           85%
Average costs ($Mn)          1             2.5           10
# of projects                15.5          12.4          9.3
Total costs                  15.5          31.0          92.9
Duration/phase (yrs)         1.5           2             1
Cost of capital
Present value, costs ($Mn)   23.8          58.1          22.2

                             Preclinical   Phase I       Phase II

Probability of success       69%           54%           34%
Average costs ($Mn)          5             15            40
# of projects                7.9           5.4           2.9
Total costs                  39.5          81.7          117.6
Duration/phase (yrs)         1.5           2.5
Cost of capital
Present value, costs ($Mn)   39.4          43.7

(iii) Cost model for EmergingCo

The probabilities of success, duration per phase and cost of
capital for the EmergingCo cost model are assumed to be comparable
to estimates in the studies (i) and (ii) above. The EmergingCo
could potentially progress molecules through discovery and
preclinical faster than the industry norm, although a challenging
regulatory framework in key emerging markets may result in slower
clinical progress, hence a similar overall timeline was assumed for
the calculations.

The average costs per project for the cost model are based on
project quotes from a sample of CROs based in China, (5) Singapore,
Taiwan and Korea.

The costs range from:

* $3-8 Mn for discovery and preclinical;

* $1.5-5 Mn for a 50-patient, typical Phase I; and

* $5-10 Mn for a 100-150 patients, typical Phase II program per
indication.

Mid value of the ranges were used for the calculations
in the model below.

                  Target-       Hit-to-   Lead
                  to-hit        lead      Op

Probability       80%           75%       85%
  of success
Average           0.5           0.8       4.0
  costs ($Mn)
# of projects     15.5          12.4      9.3
Total costs       7.7           9.9       37.1

Duration/         1             1.5       2
  phase (yrs)
Cost of           11%
  capital

Present value,    7.0           7.6       23.2
  costs ($Mn)

                  Preclinical   Phase I   Phase II

Probability       69%           54%       34%
  of success
Average           1.5           3.5       7.5
  costs ($Mn)
# of projects     7.9           5.4       2.9
Total costs       11.8          19.1      22.1

Duration/         1             1.5       2.5
  phase (yrs)
Cost of
  capital

Present value,    6.7           9.2       8.2
  costs ($Mn)


IMPLEMENTATION CHALLENGES AND RISK MITIGATION

There would, no doubt, be significant operational and execution challenges of implementing such an EmergingCo. The sustainability of novel targets and molecules from the emerging markets is a key hurdle, given paucity of substrate originating from these markets to date. A key challenge would also be regulatory, especially for countries such as China and India where it can take several months to years to obtain clinical trial approvals for drugs not locally discovered or manufactured. The EmergingCo could run the early clinical studies in Taiwan, Korea or Israel, where the regulatory framework is more progressive, to overcome such hurdles. An additional challenge is the complexity of managing dispersed aspects of research work in a China and Israel lab simultaneously, for example, that often progress smoothly in an integrated in-house R&D organization. Finally, quality assurance at the clinical centers, CROs and manufacturing is another concern, and will need strong controls to maintain high standards.

Box 2: Case study for comparable R&D costs at Beta Pharma (China)
and Glenmark Pharma (India)

Beta Pharma:

Estimated total R&D investments during 2001-2011 period was
estimated at ~$50-60 Mn (non-capitalized).8 Additionally, Beta
Pharma costs are estimates based on presentations from Beta Pharma
management at conferences.

Drug candidate delivered during 2001-2011 period was 1 new chemical
entity (Icotinib) that entered the clinic and was subsequently
launched in China in 2011. The 2013 sales of Icotinib in China were
$100 Mn+.

Glenmark Pharma: Note that the numbers are estimates from publicly
disclosed information (9) and public filings, but may differ from
yearly accounting recognition of Glenmark. Further, R&D investment
data was only available from 2004 onwards, and data for 2001-2003
is assumed to be same as 2004.

The total R&D investments during 2001-2011 period were estimated to
be ~$120 Mn.

Drug candidates delivered during the 2001-2011 period were 6 new
chemical entities (NCEs) that entered clinic and 2 progressed to
Phase II. All 6 candidates were out-licensed to global
pharmaceutical companies such as Sanofi, Eli Lilly, Merck and
Forest Labs. None were successful in Phase II.

The milestone payments from pharma partners during 2001-2011 period
were estimated to be ~$180 Mn.

                     2001   2002   2003   2004   2005   2006   2007

R&D Investments      5.8    5.8    5.8    5.8    5.8    9.5    14.2
  ($Mn)
Upfront +            0      0      0      0      20     30     45
  Milestones
  from deals ($Mn)

                     2008   2009   2010   2011

R&D Investments      16.9   19.6   17.2   12.6
  ($Mn)
Upfront +            15     0      20     50
  Milestones
  from deals ($Mn)

The milestones payments are from Sanofi (2010 and 2011), Forest
(2005 and 2008), Eli Lilly (2007) and Merck (2006). Note that the
payment timing is assumed as per the press releases, and actual
cash payment timing may differ from the timeline assumptions in the
table above.

The figure above does not include any potential future milestone
payments and royalties from partners to Glenmark.


Nevertheless, such issues will largely be similar to any virtual biotech that outsources key aspects of drug discovery (11) or of structuring and running a large multiparty consortia. (12) Further, to manage such risks, an ideal model would be to structure the EmergingCo as a virtual unit within a big pharma that can pursue cost-effective innovation by leveraging the broader network of the parent company. If successful, it can provide an alternate vehicle for delivering mid-to late stage clinical candidates, similar to Lilly's Chorus model. (13)

INVESTOR STRATEGY

From a financing perspective, a potential challenge is the appetite of emerging markets domiciled investors to fund cross-border emerging markets firms rather than support "local heroes" within their own countries. There are, however, some recent examples that suggest investors are receptive to such transactions. Aslan Pharma, a virtual company based in Singapore, is backed by BioVeda Capital from Singapore, Morningside Group from Hong Kong and Cenova Ventures from China. The company is running clinical studies primarily in Taiwan and Korea, and most of the CRO work is conducted in China. One key difference between Aslan and the EmergingCo model, however, is that Aslan assets are still primarily sourced from US and Europe whereas

EmergingCo model proposes that these assets can be sourced from key emerging markets. Another example of investment firms partnering on such deals is the association of Integra Holdings in Israel and Guangxi Wuzhou Group in China to leverage the innovation (asset sourcing) from Israel and the CRO (execution) services from China. WuXi AppTec, the largest CRO in China, has also partnered with Pontifax, an Israeli investment fund, on similar lines. Russia and Middle East investors do favor the "local hero" transactions and groups such as Rosnano prefer to invest in companies that can build subsidiaries in Russia (i.e., their investment in BIND). It has been driven by their desire to also build local expertise and capabilities that have been lagging as compared to Israel, China, India or Korea. Such investors will, hopefully, find EmergingCo a much more encompassing model to explore, other than their favored "local hero" model.

REFERENCES:

(1.) Gautam, A. & Yang, S. (2014) A framework for biomedical innovation in emerging markets. Nature Rev. Drug Discov. 13: 646-647.

(2.) Chakma, J., Sammut, S.M. & Agrawal, A. (2013) Life sciences venture capital in emerging markets. Nature Biotech. 31: 195-201.

(3.) Thorsteinsdottir, H., Melon, C.C., Ray, M., Chakkalackal, S., Li, M., Cooper, J.E., Chadder, J., Saenz, T.W., de Souza Paula, M.C., Ke, W., Li, L., Madkour, M.A., Aly, S., El-Nikhely, N., Chaturvedi, S., Konde, V., Daar, A.S. & Singer. P.A. (2010) South-South entrepreneurial collaboration in health biotech. Nature Biotech. 28: 407-416.

(4.) Gautam, A. (2015) Evolution of Chinese bioclusters as a framework for investment policies in emerging markets. Nature Rev. Drug Discov. 14: 8.

(5.) Xia, C. & Gautam, A. (2015) Biopharma CRO industry in China: landscape and opportunities. Drug Disc. Today. 20(7): 794-798.

(6.) Gautam, A., Li, L. & Srinivasan, K. (2015) Therapy area 'heat map' for emerging markets. Nature Rev. Drug Discov. 14: 518-519.

(7.) Tufts center for the study of drug development. http:// csdd.tufts.edu/files/uploads/cost_study_backgrounder.pdf (2014).

(8.) Camidge, D.R. (2013) Icotinib: kick-starting the Chinese anticancer drug industry. Lancet Oncology. 14: 913-914.

(9.) http://www.forbes.com/2011/09/27/forbes-indiaglenmark-pharmaceutical-ceo-glenn-saldanha.html.

(10.) O'Connell, K.E., Frie, P. & Dev, K.K. (2014) The premium of a big pharma license deal. Nature Biotech. 32: 617-619.

(11.) Chakma, J., Calcagno, J., Behbahani, A. & Mojtahedian, S. (2009) Is it virtuous to be virtual? The VC view point. Nature Biotech. 27: 886-888.

(12.) Mittleman, B., Neil, G. & Cutcher-Gershenfeld. J. (2013) Pre-competitive consortia in biomedicine-how are we doing? Nature Biotech. 31: 979-985.

(13.) Owens, P.K., Raddad, E., Miller, J.W., Stille, J.R., Olovich, K.G., Smith, N.V., Jones, R.S. & Scherer, J.C. (2015) A decade of innovation in pharmaceutical R&D: the Chorus model. Nature Rev. Drug Discov. 14: 17-28.

(14.) Paul, S.M., Mytelka, D.S., Dunwiddie, C.T., Persinger, C.C., Munos, B.H., Lindborg, S.R. & Schacht, A.L. (2010) How to improve R&D productivity: the pharmaceutical industry's grand challenge. Nature Rev. Drug Discov. 9: 203-214.

Ajay Gautam is Executive Director & Head of Collaborations, Asia Pacific & Emerging Markets at AstraZeneca based in Shanghai, China. Ajay has a deep and broad transactional and operational experience across the US, Asia, Latin America, Russia and the Middle- East/Africa region. Prior to joining AstraZeneca, Ajay was co-founder and Managing Director of Bio-nAbler, a healthcare investment firm based in Dubai focused on the Middle-East/Northern Africa region. He has also served as VP Corporate & Business Development for moksha8, a Latin America-focused specialty pharmaceutical company that was formed out of the private equity firm TPG. Previously, he was with the worldwide business development group at Pfizer in New York. Ajay has a PhD in Biomedical Sciences, an MBA in Finance and a Bachelor of Technology in Biotechnology & Biochemical Engineering, and he also attended executive management programs at MIT and Harvard.

Correspondence:

Ajay Gautam, Astrazeneca, China. E-mail: ajay.gautam@astrazeneca.com

Table 1: The data for biotech investments and collaborative
deals between emerging markets companies was gathered from
various country-specific public sources such as ChinaBio
(China), Globes (Israel), International Finance Corporation
(IFC), PharmAsia and financial intermediaries such as
Barclays Asian Healthcare Reports. The dataset was further
supplemented by internet keyword search for emerging markets
pharmaceutical and biotech deals. Proprietary databases such
as BiotechGate, Citeline[R], IMS Health and Decision Resources
were also screened to search for various emerging markets
deals. A few representative transactions are shown

Year   Acquirer          Innovator         Deal structure

2014   Guangxi Wuzhou    Hebrew            $3 Mn
       (China)           Univ.--Integra    investment into
                         Holdings          Integra to
                         (Israel)          develop and
                                           commercialize
                                           Hebrew
                                           technology in
                                           China

2014   WuXi AppTec       Pontifax          Pontifax and
       (China)           (Israel)          WuXi to
                                           co-invest in
                                           Israeli
                                           technology and
                                           products

2014   Guangxi Wuzhou    Oramed (Israel)   $5 Mn
       (China)                             investment into
                                           Oramed for
                                           developing
                                           diabetes drugs

2014   3SBio (China)     PharmAbcine       In-licensing of
                         (Korea)           Tanibirumab, a
                                           cancer antibody

2014   Harbin Gloria     Boryung Pharma    $5 Mn for China
       (China)           (Korea)           rights to
                                           hypertension
                                           drug

2013   Chia-tai          BioLineRx         In-licensing of
       Tianqing          (Israel)          HCV drug
       Pharma (China)                      candidate for
                                           China;
                                           potential deal
                                           value $30 Mn

2013   Tecpar (Brazil)   Biocad (Russia)   Development and
                                           manufacturing
                                           of biosimilars
                                           for Brazil
                                           market

2013   Fosun (China)     Alma Lasers       $240 Mn
                         (Israel)          acquisition of
                                           medical
                                           aesthetics
                                           device company

2011   Hikma             Celltrion         Commercialization
       (Middle-East)     (Korea)           rights for
                                           biosimilars in
                                           Middle East and
                                           Northern Africa
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Title Annotation:From the BoardRoom
Author:Gautam, Ajay
Publication:Journal of Commercial Biotechnology
Article Type:Essay
Date:Nov 1, 2015
Words:2736
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