Investor Analysis - the Economics of the Blockbuster Drug

I am having an eye-opening experience representing a client that is introducing a technology designed to improve the economics of getting new drugs to market. Their platform is drug repurposing, so in order to compete, we must prove the wisdom of this approach versus the prevailing thinking in Big Pharma and Bio Tech - the quest for the next Blockbuster.  

Just for fun, I took the latest DDD metrics shown in the graphic below (courtesy of S.M. Paul's analysis $1.78 billion and 13.5 years) and translated that into an Internal Rate of Return calculation which theoretically will remove emotion and focus our analysis on the rigorous framework  that most of industry uses to allocate capital. I also ran the same model against the metrics for a repurposed drug.

To perform the analysis I used the cost and time metrics shown above and made the following assumptions:

1. We did, in fact, end up with a blockbuster drug, producing $1 billion in revenue in years  15 to 24 (the period of exclusivity for the intellectual capital). Note: this is a very generous benefit of the doubt position to assume that a blockbuster drug emerges.

2. The repositioned drug was a reasonably successful product, producing annual revenues of $300 million for its period of exclusivity, beginning in year 7 and continuing on through year 24.

3. The metrics we used for the repositioned drug were 6 years and $320 million in cost based on the compounds already existing and already approved for toxicity and safety.
 

What I found really surprised me. The IRR for the de novo process was 14% and the IRR for the repurposed process was 37% or 2.64 times the return of  a de novo success. If I do a net present value analysis and I enter a 30% cost of capital (appropriate risk adjusted rate for a venture capital investment), the NPV is actually negative. I might have been surprised, but industry executives have realized this for some time now which may explain why they are doing everything possible to outsource the risk associated with this process from universities' technology transfer offices to NCATS.

Weekly a new deal is announced of a small bio tech being acquired with a pre-Stage 3 clinical trials drug at what seems like an incredible valuation. But if you look at where it gets the buyer in the process and compare that to the costs they would have incurred internally,  the investment does not look out of line. It is too bad that their comparative metric is such an easy target to beat.

In studying the portfolios of the major large pharmaceutical companies' venture arms, I found a robust amount of investing in what I call the word jumble of new drug opportunity. You remember that game where you randomly put together a noun, verb, subject, and adverb and come up with some amusing sentences.  Well I did that with the descriptions of the investments that are being supported:

new class of|||  exquisitely selectively target|||  siRNA (DsiRNA) molecules |||    ALRN-6924|||  orphan ophthalmologic conditions ||| Phase 1b/2 |||    today announced the completion of a $45 million Series A financing

novel technology|||    potent inhibitors|||  calcium release-activated calcium (CRAC) channel|||  OC459   |||  moderate-to-severe plaque psoriasis |||  Phase 2  |||  announced the successful completion of an oversubscribed $43 million Series B financing

     

 breakthrough|||  selectively regulating translation|||  Cadherin 11, a surface protein|||  CM2489 ||| lymphoma and other malignancies|||  pre-clinical|||   Completion of $17 million Series A Financing

I am having a little fun here, but this does not fill me with a lot of confidence that these are high probability bets on bringing new effective treatments to markets in the near future and at a reasonable cost.

With our clear advantage in time, cost, and risk, why hasn't big pharma embraced the repurposing approach as another tool in replenishing their drug pipelines? What am I missing?

Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of healthcare companies. For more information about selling your healthcare company, visit our website MidMarket Capital

Bio Tech Venture Investing - Novel Drug Discovery Versus Repurposing and Reformulation

A recent study shows that for the past decade more than 80% of the venture capital invested in therapeutics went toward “novel drug R&D” as opposed to improvements on existing drugs (e.g., new formulations, repurposing, drug delivery, etc. This post questions the wisdom of that approach based on the time, risk, and cost of de novo drug discovery. After extensive research on the repurposing space, we will discuss our theory on why it hasn't attracted a greater percentage of the funding. We believe it is, more than anything else, based of 4 common misperceptions about the viability of drug repurposing. 

I recently reviewed a white paper by David Thomas, CFA and Chad Wessel of Bio Industry Analysis entitled Venture Funding of Therapeutic Innovation A Comprehensive Look at a Decade of Venture Funding of Drug R&D, published in February 2015 . In this excellent paper they covered a number of different topics and trends, but for this article, I would like to focus on one. They point out that over the past ten years, nearly 80% of venture capital for therapeutics went toward “novel drug R&D” as opposed to improvements on existing drugs (e.g., new formulations, repurposing, drug delivery, etc.

The percentage of de novo investments compared to repurposing or reformulations would not surprise me if the group the study was analyzing was the venture arm of large pharma. However, this is astounding to me when you think of the financial rigor normally associated with the venture community. De novo drug discovery is simply a bad bet. Here are the latest metrics - $1.7 billion cost, 12 to 15 years, 1 in 10,000 compounds makes it and only 1 in 3 compounds that are commercialized recover their original investment.

Compare that with the far superior metrics for repurposing. Because your universe of drug candidates is drugs already treating another disease in humans, you eliminate or greatly reduce the safety and toxicity component of the trial process. Since the drugs are already known you eliminate the 4.5 years and $674 million on average for the discovery process. Now if you can identify the best candidates with precision and supply the companion diagnostics for safety, toxicity, efficacy and patient stratification you can  remove several years and hundreds of $ millions compared to de novo.

There has got to be a reason that big pharma and this universe of very savvy investors have largely ignored this seemingly superior bet. In hearing the objections in the marketplace, my conclusion is that they are operating under four misperceptions.

1. We can only get method of use patents and that is not sufficient to provide us the period of exclusivity commensurate with this sizable investment. A: We can argue the composition of matter versus the method of use patent protection issue until the cows come home, but let's just let the numbers do the talking: 1/4 of the total drug marketplace is comprised of repurposed drugs.  Examples of Repurposed Blockbusters –include:

              -Tecfidera (Biogen)  - Multiple Sclerosis  $2.91 Billion  (2014)

              -Rituxan (Biogen ) – Rheumatoid Arthritis $1.2 Billion (2013)

              -Viagra (Pfizer) – Erectile Dysfunction  $2.05 Billion (2008)

2. Generics prescribed off-label will limit our pricing power and our market share potential. A: this is simply not supported by the facts. A simple reformulation of a repurposed drug will make it immune to  off-label prescribing. In the many examples of successful repurposed drugs, the availability of a generic has had very limited impact on its pricing or market share for the new indication. The pricing mechanisms in the market do not distinguish between a de novo drug and a repurposed drug. 

3. It costs “about the same” to take a repurposed drug through the commercialization process as it does a de novo discovery. As shown above, you simply eliminate much of the process (discovery, tox). Also the FDA has recently approved the use of remote monitoring in running clinical trials especially when it involves a repurposed drug. Estimates are as high as an 80% reduction in clinical trials cost by fully implementing this approach. The more precision you can provide in the areas of companion diagnostics for toxicity, efficacy, and patient stratification, the faster and cheaper you can bring a repurposed drug to market. 

4. The approaches used in drug repurposing do not provide enough precision and systematic repeatability in order for us to invest in this strategy. This was true until the introduction of a technique called high throughput knowledge screening. It is a Big Data play on researching the research pioneered by a company called CureHunter. By adding this final puzzle piece to the other advantages of repurposing, it makes the investment thesis for repurposing even more compelling.

The market is just beginning to embrace this considerable risk/reward advantage, but it is not the giant pharmaceutical or bio tech companies (although Celgene repositions their new drugs while still in the clinical trials process for the original indication). Rather it is the smaller nimble bio techs that develop a repurposed candidate, form a drug/disease specific subsidiary, move the drug through phase 1 and limited phase 2 trials, and then sell the subsidiary to a large pharmaceutical or bio tech company. It will probably take a series of small company successes before the big players start to pursue this strategy in earnest. Once that gate opens we will see a resounding level of drug pipeline growth, more rapid drug introduction, more favorable pricing and choices for the patients.

 



Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of healthcare companies. For more information about selling your healthcare company, visit our website MidMarket Capital

Generic Drug Manufacturer Unlocking the Hidden Value in Drug Portfolios

There is huge untapped potential in the pharma and Bio Tech industry in drug repositioning (identifying new uses for existing drugs). Up until now the process has been largely the result of serendipity or accidental discovery and therefore has not had much impact outside of a few success stories like Viagra. If you think about Aspirin, we have discovered 10 additional uses but it has taken mankind 89 years to do so. With the CureHunter discovery engine we have compressed that process down to a couple of weeks. We are looking for a few JV partners to unlock the hidden value in drug portfolios.



Dave Kauppi is a Merger and Acquisition Advisor and Managing Director of MidMarket Capital, providing business broker and investment banking services to owners in the sale of information technology companies. To view our lists of buyers and sellers click to visit our Web Site MidMarket Capital