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Finding the right balance
July 2013
by Arthur J. Hiller, SciFluor  |  Email the author

If you've ever met with a financial planner or investment advisor, then you know that one of the first rules of investing is diversification, an important risk management technique that ensures there are a variety of assets within a portfolio. The rationale behind this technique portends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than an investment portfolio that is singularly focused.
Similarly, as biopharmaceutical organizations, it is important that we recognize the dire consequences that may result if we ignore this proven strategy. Consider the high-failure, low-approval percentages for new drugs across the entire industry. The numbers demonstrating diminished productivity in drug discovery have been replayed using many statistics quoted in the media, including the fact that Phase II success rates for new development projects fell from 28 percent in the 2006-2007 period to 18 percent in 2008-2009 (P. Mansell, PharmaTimes).  
A relatively unknown fact in our industry is that all of the nearly 25,000 marketed drugs today have evolved from modulation of just 324 molecular targets (J.P. Overington, Nature Reviews Drug Discovery). This statistic implies that much of the progress in patient care is the result of improvements of existing drugs, and not from advances against a novel disease target or mechanism of action. To address the challenges in industry productivity, companies have begun to apply two distinct drug discovery and development strategies.
For Big Pharma, blockbuster drugs of the past may no longer meet their commercial hurdles because they risk not meeting payer reimbursement and medical society care pathway guidelines. The path to meeting those hurdles requires expensive health outcomes research fraught with risk and extended development timelines. With costly investments in new genetic sequencing and data-mining technologies, they instead focus their budgets on novel mechanisms of action, including rare or orphan diseases, which either ensure a market position with no comparators, or where pricing is defensible based on proprietary status and smaller patient populations.
The other group at the commercialization table is focused on simple improvements that can drive short-term revenues using a 505 (b)2 regulatory approval strategy. Using this strategy, a product may have the same active ingredient as a previously approved product, but is formulated in a different delivery system or is developed for a different indication. This approach lowers risk because the applicant can rely on studies from the original drug and simply demonstrate efficacy and safety with the new dose form or in the new area of use. Pricing may be the same or less than the innovator drug, but the superiority of the new delivery form will drive prescribing from the older drug to the newer drug, which is allowed a patent-protected exclusivity position for three or five years, depending on regulatory criteria that the new compound meets. Examples are the development of thalidomide in cancer by Celgene, or Zyrtec D as a decongestant line extension to the antihistamine Zyrtec by Pfizer.
Unfortunately, what's missing in this bifurcated mix is the development of drugs from first in class to best in class. Indeed, over the last 50 years, this strategic approach has played a major role in moving care forward incrementally, and represents the place where the industry has classically generated its greatest share of revenues and profits. Sir James Black, the Nobel prize- winning Scottish doctor and pharmacologist credited with the discoveries of beta-blockers and H2 antagonists, and perhaps singly responsible for more drug revenues (calculated at dollar values today) than any other individual in the 20th century, has said that "the most fruitful basis for the development of a new drug is to start with an old drug."  
A recent study by Accenture and CMR found that the probability of a new drug project reaching preclinical development was only 3 percent for novel targets. This is in contrast to historical data from McKinsey and others that show follow-on drugs are inherently less risky. About 1 in 123 of them makes it from earliest discovery all the way to market, which is a rate almost double that of drugs based on novel approaches.
Over the past 20 years, the highest value has come from drugs that entered the market two to five years after a comparable novel one. One needn't look far, with Pfizer's Lipitor as the highest revenue- grossing drug of all time, and a successor from statins that began with Merck's Mevacor and Zocor. The introduction of Tenormin as a selective beta- blocker instead of the non-selective Inderal provided patients with a major difference in their ability to tolerate beta-blocker therapy. This data forecasts that a company pursuing only novel targets in its quest for new drug discovery would spend more money and reap lower rewards over the long term.
In the push by the industry to identify compounds with novel molecular mechanisms of action and, in the case of 505(b)2 strategists, find assets that offer a short-term proprietary position along with speed to market, the potential opportunities to move first-in-class agents to best-in-class has been marginalized to the detriment of patients.  
The challenge for the industry is in recognizing the scientific and commercial hurdles that must be met to demonstrate improved outcomes. Companies taking this approach need to develop target product profiles that outline the minimal requirements to support further development, and should adhere strictly to the selection menu once established. By establishing criteria around the compound's pharmacokinetic properties, in-vitro and in-vivo data hurdles, side effect and dosing profile and other key attributes, the company can ensure the drug profile is one that will be safe and effective. And by closely analyzing the current and future competitive landscape and market considerations, a company can be more confident that a drug will be commercially accepted by patients, payers and physicians. Companies that ensure these hurdles are met can be assured that their best-in-class compounds will not be considered "me-too" agents, and that chemistry advances will demonstrate the health outcomes advance that change care pathways and help patients.
Outside the biopharmaceutical industry, Apple is a perfect example of this approach in action. As John Moltz recently pointed out in an editorial in Macworld, Apple has a lot of patents (more than 4,100 in the last decade, according to some sources) but they're not around the invention of the mobile phone or the personal computer or the tablet. If you look at the boilerplate text on an Apple press release, it says, "Apple re-invented the mobile phone with its revolutionary iPhone and App store."  
The best way to evaluate whether Apple would enter a market is to ask whether people are satisfied with the current user experience. Apple has reinvented existing markets by making the user experience richer, easier and more pleasant, which is Apple's signature competency. The biopharma industry has lost touch with the importance of improving the user experience because of its concerns about reimbursement, but these user experiences often impact outcomes and where the two intersect, there are many opportunities for new discoveries that can improve quality of life and lower health-related costs.  
Just as any financial planner stresses portfolio diversification as the best strategy to balance risk and reward, companies should focus on building a diversified portfolio of projects that balances both novel approaches and incremental improvements to demonstrate innovation and value. We need to balance the allure of discovering novel molecular pathways and Wall Street's desire for short-term revenues with the lower risk and achievability of new best-in- class agents that can help achieve the goals of lowering health-related costs, while also enhancing the quality of patient care.  
Arthur Hiller is the CEO of SciFluor Life Sciences, a drug discovery company applying expertise in fluorine chemistry to create a portfolio of differentiated best-in-class therapeutics. Based in Cambridge, Mass, SciFluor was established in 2011 in part by the Harvard University Biomedical Accelerator Fund and a Series A investment from Allied Minds. Prior to joining SciFluor, Hiller served as CEO of Heartscape Technologies Inc., where he built a team that raised $22 million in B-round venture financing, achieved placement and sales growth across 30 prestigious institutions nationwide and ultimately reached an exit for sale of the company to a medical device subsidiary of a $5-billion Fortune 1000 company.



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