EmergingCo: a virtual "South-South" Biotech Model.
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).
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)
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.
(1.) Gautam, A. & Yang, S. (2014) A framework for biomedical innovation in emerging markets. Nature Rev. Drug Discov. 13: 646-647.
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(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.
(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.
Ajay Gautam, Astrazeneca, China. E-mail: firstname.lastname@example.org
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|
|Publication:||Journal of Commercial Biotechnology|
|Date:||Nov 1, 2015|
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