Magazine Article | May 1, 2016

An Entrepreneurial Approach To Funding Drug Development

Source: Life Science Leader

By Dan Schell, Editorial Director, Life Science Leader

The tech world is filled with stories of companies that grew from modest beginnings with minimal capital: Steve Wozniak and Steve Jobs tinkering in Jobs’ garage; Michael Dell scraping together $1,000 to buy parts and build personal computers in his dorm room at the University of Texas.

The biotech world also boasts inspirational tales of success, but few with such humble beginnings. One reason for the disparity is that tech startups can get by with minimal investment in computers and space to house them, but biotechs typically need lots of equipment, lab space, and chemicals. In addition, tech startups don’t have the regulatory requirements that biopharma startups do (e.g., the strict U.S. FDA rules for manufacturing drugs and for undertaking the safety studies necessary to start clinical trials).

Nonetheless, entrepreneurs set on turning new compounds into meaningful drugs are finding innovative funding solutions that give them a shot at becoming the next great biotech success story. One such pathway to growth relies on a combination of grants, partnerships with leading academic institutions, and small amounts of equity.

A case in point is Oncoceutics, now a clinical-stage oncology company that recently completed a Phase 1 and has multiple Phase 2 trials ongoing for ONC201, a novel oral cancer drug that works differently from other cancer drugs on the market. Founded by a renowned oncology researcher, Wafik El-Deiry, and two veteran life science industry executives and investors, Wolfgang Oster and Lee Schalop, Oncoceutics aimed from the start to advance its lead cancer drug from the laboratory to the clinic in as cost-efficient a way as possible.

The company operated on a virtual basis for its first two years following its founding in 2012. There was no pricey office space, no proprietary labs, and no expensive contracts with consultants or CROs. During this initial growth phase, the company operated with a staff of just four, all of whom had multiple responsibilities, drew modest salaries, traveled frugally, and focused on maximizing the impact for every dollar spent. Indeed, they got things done mostly by getting their hands dirty themselves. For example, Lee Schalop, M.D., chief business officer and cofounder of Oncoceutics, explains, “Our Chief Development Officer designed the drug synthesis method. I served as bookkeeper and configured the e-mail system, and the CEO wrote the copy for the website which the Associate of Research designed and took live.” In short, the company, with a burn rate of less than $1 million per year, operated like a typical tech startup rather than a typical biotech startup.

Despite limited financial resources, Oncoceutics, operating in startup mode, was able to satisfy the requirements necessary to open an IND (Investigational New Drug) during these first two years. The company oversaw the manufacture of the drug substance (to required standards) by Chemspec-API and capsules by Frontage Laboratories, both in local facilities licensed by the FDA. It also worked with academic partners who undertook preclinical testing. In addition, it finished the standard safety-testing regimen by partnering with Calvert Laboratories, another local company that took equity in partial payment for toxicology studies.

In its third year of operation as Oncoceutics entered clinical trials, it stepped up its spending but stayed true to its founding philosophy of careful financial stewardship. “We leased an actual office, but it was a single room in incubator space at Philadelphia’s University City Science Center,” Schalop says. “There we knew we would benefit from being part of a biotech ecosystem — and do so at a low cost.” Salaries increased to reflect a heavier workload and the travel that comes with implementing multiple clinical trials simultaneously, but the emphasis remained on compensation driven by stock ownership rather than cash.

Running such a low-cost operation has had its challenges. Aside from keeping everyone motivated with the limited funds available to accomplish multiple tasks, the company needed to generate funding from nontraditional sources, primarily grants and payment-in-kind from collaboration agreements, which were not easy to design or manage.

"By carefully selecting grant opportunities and working with collaborators to draft applications that met the requirements outlined in RFPs, we achieved a success rate of greater than 75 percent and landed multiple high-value grants."

Lee Schalop, M.D.
Chief business officer and cofounder, Oncoceutics

“Obtaining grant funding required the completion of numerous long and complex applications because the success rate is low, even for the best of proposals,” says Schalop. “By carefully selecting grant opportunities and working with collaborators to draft applications that met the requirements outlined in the grant applications, we achieved a success rate of greater than 75 percent and landed multiple high-value grants.” Those included difficult-to-get grants like a $1.4 million CURE grant from the Pennsylvania Department of Health and a $1.7 million Fast-Track Small Business Innovation Research (SBIR) grant from the National Cancer Institute (NCI).

Collaboration agreements are often even more tricky and time consuming. Oncoceutics leveraged the relationships of Wolfgang Oster, one of its founders, to identify academic medical centers willing to carry out the necessary lab work because they were focused on publishing their findings, not maximizing profit. Centers including Fox Chase Cancer Center in Philadelphia, Rutgers Cancer Institute of New Jersey in New Brunswick, Dana-Farber Cancer Institute in Boston, and University of Texas MD Anderson Cancer Center in Houston all entered into agreements with the company. While each arrangement is different, all of these centers have agreed to cost-saving structures, such as investigator-initiated trials, to minimize the cost to Oncoceutics. As a result, even with multiple Phase 2 trials underway, the company’s corporate overhead remains less than $2 million per year.

A unique collaboration agreement with the University of Texas MD Anderson Cancer Center is a case in point. The agreement covers clinical trials of Oncoceutics’ lead drug ONC201 in specific types of blood cancer. Under the nontraditional alliance, Oncoceutics and MD Anderson shared the risk and potential commercialization of ONC201, with MD Anderson receiving a royalty on any eventual sales in lieu of the usual payments for conducting clinical trials.

This was far from easy. Executing the complex agreement with a large institution like MD Anderson Cancer Center took Oncoceutics almost a full year. “The agreement also made the operating procedures for clinical trials much more complicated than usual, which took us off guard,” Schalop explains. “For example, obtaining approval from the IRB (Institutional Review Board) took longer than usual because MD Anderson wanted an outside group to review the clinical trial in order to ensure patients’ interests were protected.” Despite the delays, Oncoceutics felt the outcome was worth the wait. This unique deal, the first of its kind for MD Anderson, provided Oncoceutics with an ONC201 clinical trial led by a world-renowned cancer center without the use of investor cash. In addition, this alternate funding model provided the company with invaluable external validation.

In contrast to the model of low costs and emphasizing grants and partnerships in lieu of equity, the typical venture-backed, early-stage biotech company builds an organization with separate scientific, laboratory, medical, intellectual property, regulatory, legal, business development, finance, and administrative functions. Such a company’s standard approach would be to lease office space as well as laboratory space and spend at least $20 million for a staff of 12 to 15 people in order to complete an IND application. A fully-staffed company using this traditional business model typically has a burn rate of more than $10 million a year.

While the Oncoceutics’ model remains uncommon in the biotech space, similar companies are increasingly funding themselves primarily through grants and partnerships. An example is Integral Molecular, which is also located in the University City Science Center, next door to Oncoceutics. Founded by a University of Pennsylvania scientist who licensed technology from the university, the company, which is developing a pipeline of therapeutic antibodies for under-exploited membrane protein targets, recently received $9 million in NIH funding and works with over 100 different pharmaceutical and biotechnology customers and partners, which has allowed it to grow and operate without outside investment.

According to Schalop, “Obtaining selective grants and forging partnerships with academic institutions have allowed us to advance our lead compound toward commercialization with a remarkably small amount of equity.” Going forward, it is likely that more and more early and mid-stage companies in the biotech space will choose to do the same and avoid the limitations of the traditional venture-backed model by combining grant funding, creative partnerships, and limited amounts of equity to fund their growth.