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Innovation in Pharma Part III: Turning biotech relationships from zero-sum to win-win-win

Innovation in Pharma Part III: Turning biotech relationships from zero-sum to win-win-win

Mar 29, 2012

This is part III of a series of articles on innovation in Pharma based on an interview with Jose Carlos Gutierrez Ramos, the man in charge of revolutionizing drug discovery at Pfizer. In part I we establish the difficulties facing Big Pharma as brand name drugs go off patent and pipelines run dry. Pfizer is trying to rewire the relationships between pharma, biotech, and academia to align incentives and take advantage of the strengths of each player. In part II we explore new research initiatives between Pfizer and academia. In part III, below, we discuss a new paradigm for pharma-biotech collaboration. In part IV we observe the effect these initiatives are having on Pfizer and on other pharma companies, and what a new, more innovative pharma sector might look like.

Historically, the relationship between pharma and biotech is one of licensing, mergers and acquisitions. Big Pharma covets small biotechs not just for a single promising drug candidate, but often for their innovative spirit too, in hopes that it will rub off. As biotechs are consumed by pharmaceutical giants, however, their entrepreneurial essence is often consumed as well, digested into small corporate squares amenable to complex organizational charts.

The tale is a common and cautionary one. Ironically, my conversation with Jose Carlos about revamping the relationship between pharma and biotech is taking place in the former home of Genetics Institute, an early biotech company founded in 1980 by a pair of Harvard scientists. Known for applying brand new recombinant DNA technology to make protein therapeutics, Genetics Institute was the east coast version of Genentech. Along with Biogen and Genzyme, the company helped establish Boston as a life science hub.

Its history since then has mirrored most biotech-pharma interactions. In the mid 1990s Genetics Institute was acquired by American Home Products, which became Wyeth. Then, in 2009, Wyeth was acquired by Pfizer in a $68 billion whale-swallows-whale mega-merger. Nothing but the building is left of the once standard-bearing company. Of the big three biotech companies that sprung forth with Genetics Institute, only Biogen remains master of its domain. Both Genzyme and Genentech were recently acquired, by Sanofi-Aventis and Roche respectively, in high-profile deals.

Jose Carlos wants to reverse this unidirectional flow of ideas, molecules, and technology. He envisions a world of collaboration and bi-directional flow, in which pharma, biotech and venture capitalists work together to develop drugs.

It isn’t just a pleasant-sounding pipe dream. Much like in our previous discussion of pharma-sponsored academic research, Jose Carlos points out inefficiencies in the current model where players act in isolation. Pharma can be sluggish and bureaucratic. Biotech is bridled by short-term financial pressure. “If we have a gradient of risk and investment solutions, however, we can advance more programs the their next key inflection point and move more programs forward,” he says.

An example of a proposal that rebalances risk and aligns incentives is what Jose Carlos calls the “reverse biotech deal.” Rather than subsuming a biotech company with a promising pipeline or licensing a key drug candidate, Pfizer will instead spin out a drug development program into a new biotech entity. “The programs can bring short term value and long term value,” he explains. “We are more interested in the long term value of the drug, but the short term value is valuable to others. So let’s work together.”

Here’s what such a scenario would look like, and how it might be a win-win-win situation. Assume Pfizer has three programs in clinical development for chronic obstructive pulmonary disease (COPD), each studying a unique mechanism of action. A full development in COPD costs $400 million to get to market, but the market size does not justify Pfizer spending $1.2 billion to take all three candidates through phase III trials. At this early stage of pre-clinical or early clinical development, it is impossible to know which drug will work. Therefore, in the current go-it-alone world, Pfizer must a decision to pursue only one of the candidates, a single shot on goal, based on incomplete data.

The other players don’t have it much better. The $400 million price tag is too high for the VC-funded biotech and the path to market too tortuous, so perhaps they pursue a safer investment in idiopathic pulmonary fibrosis or another smaller indication rather than COPD. $400 million is also a non-trivial investment for the midsize pharma looking to commercialize a drug. That company may only have the resources to pursue one program, and failure poses a significant risk.

Now, instead of working in isolation, assume that Pfizer, the VC firm, and the midsize pharma company partner together. Let’s say they spin out a new biotech company, joint venture X, funded by the VC firm and consisting of the four COPD programs in early stage development. The objective of the company is to create short-term value: to carry the four programs through phase I and II trials of clinical development and figure out which has the highest likelihood of success in humans. The odds of any one program succeeding are much higher than the odds of one individual program succeeding.

At the conclusion of this very specific task, company X has a COPD lead that is proven safe and efficacious in humans. The VC backers have generated value and can sell their shares for a six-fold return, in keeping with the demands of their investors. Pfizer is willing to pay 6x because they have determined, in three years, which of the programs is most likely to work. Pfizer now purchases the drug from company X, sharing future profit 75%-25% with the midsize pharma. The midsize pharma has gotten a much safer investment. The $200-300 million cut of a $1 billion product is a lower reward, but comes with a much lower risk, and may be key to the valuation of their company.

This is the type of innovative thinking Jose Carlos is implementing. Drug development, in his view, should not be a zero-sum game. It is possible to align the incentives of the various players to overcome systemic inefficiencies so that everyone wins.

Jose Carlos is cautious about naming names because deals and details have not yet been finalized, but he has a history of making these collaborations work. Before joining Pfizer, he was head of the Center of Excellence in Drug Discovery in immunology and inflammation (iiCEDD) at GlaxoSmithKline. As part of their effort to externalize drug discovery through partnerships, etc., Jose Carlos spun out two companies. Tempero Pharmaceuticals in Cambridge is a majority-owned subsidiary of GSK focused on Th17 inflammation and autoimmune diseases. EpiNova is a “discovery performance unit” tasked with finding drugs for epigenetics.

Jose Carlos insists that the projects at Pfizer are more ambitious. It’s not simply about exporting companies, but about creating value in concert with midsize pharma, biotechs, and their venture capital backers.

“These are some of the things we’re cooking at the moment,” Jose Carlos says. “It all goes back to the fact that decisions to invest in programs should not be binary. Not for us, or for the other three legs of the stool. Let’s generate different solutions.”


Jordi is a PhD student in chemical engineering at MIT and a writer for the Entrepreneurship Review. His thesis research applies the tools of protein engineering to vaccine development. He is interested in biotech entrepreneurship, particularly as it applies to global health and neglected diseases.