This article was originally published in LifeSciences Leader April 2011 by Rob Wright.
In February, Pfizer announced the closing of its R&D center in Sandwich, United Kingdom. Once the diamond of their drug development, the facility covered 80 acres, employed 2,400, and was known as “the home of Viagra.” This announcement is probably the most noticeable reflection of the R&D paradigm shift taking place in big pharma. The switch is on for pharmaceutical companies to move from the antiquated industrialized model of “in-house” drug discovery to more of a “satellite” outsourced approach. The popular phrase for outsourcing drug discovery nowadays is “virtual.”
This is not a new concept, though. G. Steven Burrill advocated a “virtual drug discovery” model in the early 1990s during the last “nuclear winter” for biotech funding. With the economy still languishing and the acquisition of venture capital at a premium, the concept of operating virtually has become quite appealing. Add the reality of the pending patent cliff and R&D spending surpassing $60 billion annually (without producing any appreciable results), and it is easy to see why virtual drug discovery is not only appealing, but necessary.
Virtual pharmaceutical/biotech companies are knowledge-based organizations. They typically consist of a core management team, often including a CEO, CFO, legal counsel, and a host of business development and project management specialists. These companies contract out nearly all of the services they need for drug discovery, development, manufacturing, and marketing. In this way, a virtual company can reduce its fixed costs to around 25%. A standard pharmaceutical company typically has a fixed cost basis of around 75%. To venture capitalists, companies with lower variable costs are appealing since they reduce risk, provide for a better chance of recouping the VC’s investment, and allow for a short time to exit. The virtual R&D drug development model allows for a high degree of flexibility in being able to respond rapidly to threats and opportunities. In addition, it allows for a small group of individuals to work on a larger number of projects simultaneously.
The key to making the virtual model a success is the caliber of the leadership team. You want the type of leaders who are not only good at picking compounds worth pursuing, but also excellent at attracting contract partners they can trust to deliver results with minimal supervision.
Think about it — 75% of today’s prescriptions are filled by yesterday’s innovations in the form of generics. Increased spending in R&D is not the answer. What’s needed is disruptive thinking. The kind that results in high-risk, unconventional, patient-oriented research leading to significant breakthroughs — not the next blockbuster. Jeff Evans and Joe Connell understand this concept.
Evans is CEO of Oncoholdings, Inc., a privately held virtual pharmaceutical company focused on acquiring and developing the most promising preclinical and early clinical anticancer agents. Connell is president of Regenicin, a publicly traded biotechnology company specializing in the development of regenerative cell therapies to restore the health of damaged tissues and organs. Both companies were founded during one of the worst recessions in U.S. history, and both men intend to shatter the conventional drug development discovery model via the virtual approach.
R&D Innovation, Virtually Impossible In Big Pharma
Evans, who has his Ph.D. in organic chemistry, previously served as president of Rondaxe, a pharmaceutical consultancy which he cofounded in 2003, and directed worldwide development sourcing and planning for Bristol-Myers Squibb. “One of the most compelling reasons I moved to a virtual small-company environment is the realization that R&D productivity is absolutely inversely related to R&D expenditure. The larger you get, the less productive your R&D organization becomes.” Evans founded Oncoholdings, a company focused on acquiring and developing treatments for cancer. Why oncology? “There’s quite a bit of developing opportunities with biomarkers, which provide a quick read in early clinical trials as to the relative effectiveness of your product.” He added, “Effective treatments for cancer are society’s biggest unmet medical need.”
In addition to the changing financial market, the pending patent cliff in big pharma, the U.S. government’s response to the healthcare crisis, and the lack of available venture capital made the timing ideal — according to Evans — to start a new company. “There was a lot of change going on,” he said. “It was really a prime opportunity to bring forward an enhanced business model in the pharma/biotech space, one more efficient and effective at drug development.”
Connell thought the timing was ideal as well. But, he did not start just one company — he started four. Connell has been involved in the launch of more than 25 major pharmaceutical products and devices during his 26-year career, which included stints at Roche and Boehringer Mannheim. He currently serves as president for his most recent virtual start-up, Regenicin [RGIN], which is currently developing a product called PermaDerm. According to Connell, “After many years of progressively increasing responsibilities in major pharmaceutical companies, I had gained the knowledge and skills necessary to run my own company, and then I grew restless.” Connell began looking for the right technology and the right partnership, which brought him to PermaDerm, tissue-engineered skin, prepared from a patient’s own skin cells.
At the age of 10, Connell had to endure excruciating treatments for burns he had suffered to his leg. Doctors at a small western Pennsylvania (Connellsville) hospital said that he would never walk again. Yet, before graduating from high school, not only did he walk again, he went on to set a state track record. Connell learned at an early age about perseverance. He also learned he wanted to make a difference in the lives of others.
Making a difference is one of the key criteria used by Evans in staffing Oncoholdings. During his consulting career, Evans had the opportunity to work with a wide variety of very talented people. By treating people well and maintaining relationships, he was able to identify talented people who “wanted to make a difference.” Further, “When I assembled my team, I brought in, by design, very diverse personalities. I don’t have a bunch of ‘bobbleheads’ around my table. Every individual in my company is better than I am, and I’m proud of that.” Evans has members on his team who will take a position very strongly and have a very productive discussion around “any decisions we’re making.”
Keys To A Successful Start-Up
I asked both Connell and Evans what advice they would give to someone starting a virtual pharmaceutical/biotech company. Connell would first recommend you not follow his example of trying to start four companies at once. “It dilutes your efforts. How could a person go to a networking meeting when they have four different business cards? It detracted from what I was trying to do and who I was. Don’t try to do too much.”
Evans would advise you to first set up a proper legal structure. “Don’t pinch too many pennies on your start-up — build the right legal structure first.” Connell agrees, “Document the ownership and responsibilities in contract form when you work with a partner. So often oral agreements are in place for years, and once you get funding, the money changes everything from the chemistry of the staff to the responsibilities initially decided upon.”
Other keys to the successful start-up include surrounding yourself with top talent, having access to top products, a thorough understanding of your competition, a key list of trusted vendors, a clearly mapped-out business plan, and a well-thought-out financial plan. Connell’s advice — “Secure financing and stability before you quit your day job. My partner and I went four years without giving ourselves a salary.” Securing adequate financing up front will provide you with the stability to see the project through to completion. In this same regard, Evans would advise avoidance of any investor not aligned with your end goals. “Don’t be afraid to walk away from a big money investor if their goals are not consistent with yours. I have lost months of time in developing my company trying to work with investors who had a different end game view, but had a large sum of money to invest. If you know it’s not right, drop it, and move on. Be true to yourself.”
Lessons Learned From Big Pharma/Biotech
Both Evans and Connell are thankful for the skills they learned while working in big pharma. The training and opportunities they received while working for their previous employers provided them with the skill set necessary to start their own organizations. However, they foresee the need for a major restructuring of large pharmaceutical and biotechs if these companies are to survive. For example, Evans enjoys the decision-making process in a small company. “I’ve gone back to big pharma and participated in the decision-making processes as a consultant, and I wanted to jump out of my skin. Decisions take so long. You’ll spend an entire day making a decision, which, as the operator of a virtual company, might take me three or four minutes.” Evans thinks big pharma should focus on what they do truly well. “These companies are very efficient at delivering approved drugs to patients,” he said. “Just about every major pharma company has been able to deliver lifesaving medications to patients within two weeks of approval. That’s fantastic.” He added that big pharma should scale back internal R&D efforts, pointing out that a few have begun to realize the benefits of embracing the virtual model and are creating mechanisms to help fund it. “The ones that have really figured it out don’t try to impose their management style on their business partner.” Big pharma’s past success in drug development no longer serves as a strategic advantage over the thousands of small R&D companies. For true innovation to happen, Evans advocates for innovation to run the process. “Any decision which hinders the evolution of innovation’s natural path makes us less productive and squanders valuable R&D resources.”
Connell and Evans think big pharma can serve as a tremendous asset to the virtual model by providing access to capital. Partnering with small drug development companies earlier should be viewed as an asset development program. For example, Connell had set up a business development meeting with a major pharmaceutical company. “I needed $1.5 million to do a proof-of-concept trial. This company would not invest. They told me if I proved it worked, they would be willing to buy the technology from me for around $600 million.” This mentality needs to change. In addition to greater outsourcing of R&D, Connell concludes big pharma and biotech could benefit from creating and supporting a more open-minded culture. “When I worked for a big pharma company, I was once told you can’t have that idea from the department you’re coming from. Unfortunately, in big pharma, you have to lead by following. If there is someone in a higher position, you give them the idea and act like it was theirs. If you don’t, you won’t get your ideas through.”
Past The Tipping Point
So, when will virtual drug discovery go past the tipping point and become the de facto paradigm for drug discovery? “I think we’re past it already. I think with every economic transition, you don’t know you’re past the tipping point until a couple of years down the road. I believe we’re there now,” says Evans.
Evans and Connell have developed business models to not only be successful in this new paradigm, but to thrive. Connell explains, “Regenicin will succeed. For us, the strength is the technology. There is nothing like it on the market. It’s a patient’s own skin, two layers thick, which grows with the patient.” Evans acknowledged there was a good bit of stability in his previous big pharma career, and stability is one thing you don’t have when you are starting a new company. But, the instability and accountability in exchange for the successful advancement of cancer research is the biggest thrill, according to Evans.
The virtual drug development model is not a passing fad. It is now the new norm and will serve as the driving force behind innovation in the pharma and biotech industries.
From LifeSciences Leader, April 2011 Link to orginal article
