By Steven Hutchins
Discovering and developing new drugs is a high-risk, high-cost, and only occasionally high-reward enterprise. Industry data suggests that for every 10,000 new molecular entities prepared, only 1 will make it to market, and the process from concept to market often takes in excess of 10 years. Moreover, very few marketed drugs ever recoup the significant R&D investment required to bring them to patients, which today, by conservative estimates, can exceed $800 million.
These issues, coupled with a general decline in R&D productivity (as measured by the number of NDAs [new drug applications] granted per year versus industry expenditures) and the loss of exclusivity on high-revenue marketed products, explain the distress currently felt within the pharmaceutical industry. The consequences are all too apparent — megamergers, rationalization, and resulting significant reductions in R&D head count.
Despite this, global R&D budgets remain largely unaffected, and the proportion of global R&D expenditure dedicated to outsourcing has continued to increase over the past few years, particularly in the exploratory phase of drug discovery, which remains relatively low when compared to preclinical and clinical outsourcing. This latter point highlights a growing trend of pharmaceutical and biotech organizations to use external research solutions earlier in the drug discovery process. The relationship between the sponsor and the external provider is also evolving as the focus moves from functional to integrated collaborations. To understand these trends further, let’s discuss drug discovery outsourcing in more detail.
The Solution To The Innovation Gap?
There are several options the pharmaceutical industry has adopted to help address the innovation gap. They include:
- breaking up their internal R&D groups into smaller units to help reproduce the biotech entrepreneurial atmosphere
- mergers and acquisitions between themselves and with smaller companies
- inlicensing of clinical-stage compounds.
- strategic alliances, including those related to R&D and marketing, between themselves and with smaller biotech partners.
The benefits of strategic alliances within the drug discovery process are many. First, there is the obvious benefit of providing a more flexible business model by eliminating fixed costs and accessing expertise and different approaches to a scientific problem that might not be available internally. In addition, there is the opportunity to outsource complete programs, thus balancing the risk associated with the sponsor’s pipeline.
In pursuing such alliances, many external partners are using the term “integrated drug discovery” to describe the research solutions they provide. What does this mean, or rather, what should this mean?
At the very least, all of the critical disciplines and technologies required to advance a drug discovery program need to reside with the partner and be freely available. This involves the successful integration of disciplines such as high-throughput screening, medicinal chemistry, in vitro and in vivo pharmacology, and structural biology, driven by the experience, proven track record, and disease area expertise of industry-seasoned drug hunters. It is critical the partner has experience in all phases of the discovery and early development process, as this provides the insight needed to place each piece of the puzzle into context. In addition to this technical expertise, the partner’s scientists must have a thorough awareness of the importance of intellectual property in their work. This includes the ability to establish and evolve patent strategy as well as a sound knowledge of the level of information required to patent a novel compound or methodology.
However, it is not necessary that everything is available at the partner. Indeed, a more pragmatic and more cost-effective approach can be to seek one-off, specialist services and technologies through extended networks. The ideal partner will bring a host of existing, tried-and-tested academic and commercial relationships and will manage these as part of the alliance. In addition, a partner should bring a different approach and perspective as well as access to enabling technologies.
However, truly integrated drug discovery is much more than the coming together of technical experts and the use of a partner’s external capacities. For an alliance to succeed and prosper, the partners need to work together to leverage respective strengths — providing opportunities for gains in productivity above and beyond traditional outsourcing. This fundamentally requires the fostering of an environment which places a high value on close and open communication and project teams, which are aligned around the same strategic goal — to bring innovative, efficacious, and cost-effective treatments to patients.
Because of this close relationship, the longer term associated with an alliance, and the opportunity to typically work on multiple targets, integrated drug discovery alliances have been structured in many different ways. Now let’s look at at the current trend in deal structure.
Integrated Deal Structures
As the industry shifts from functional outsourcing to innovative and integrated drug discovery projects, we believe that the traditional business model needs to be reevaluated. The same CRO base is involved in both functional and integrated projects; however, different business models are required. Indeed, the reason integrated projects are being partnered is to gain access to different points of view on how to tackle these programs, and the client is looking for companies that can bring innovation to the collaboration and not just capacity, as is the case with functional outsourcing. This will mean additional collaborations for the client to manage, but as the CRO moves further down the innovative path, this will also mean it will require less oversight as it becomes more independent.
Around the year 2000, as we saw the peak of functional synthetic chemistry outsourcing in the West, CROs began setting up shop in India and China with a focus on synthetic chemistry services. The strengths of the CROs in China and India were their synthetic chemistry abilities and access to a large talent pool of trained synthetic organic chemists available in these regions. Other functional outsourcing in different disciplines has followed a similar path. As work has shifted from the West to the East, the CRO base has not been as mature, and clients have invested a lot of time and effort in training the CROs on how to perform the projects their way. This type of functional work is prescriptive and amenable to this modus operandi as the training is relatively straightforward. As the complexity of the work increases within the functional areas, and the projects move further down the innovative and integrated path, this model begins to break down as the training requirements increase, and nothing replaces a decade’s worth of drug discovery experience. Now that we are moving toward more innovation required to successfully execute on complex integrated drug discovery projects, we are beginning to see a shift of this business from East to West. This is, in part, driven by the fact that pharmaceutical scientific knowledge is being redistributed as pharmaceutical companies are downsizing, and a highly experienced talent pool is becoming employed by CROs. Most of these scientists are joining CROs in the West as they are located close to where the pharmaceutical companies are. That being said, there are some cases where this talent is returning to the East.
Increasingly, deals are structured to mirror this approach where research funding is provided to meet the running costs of the alliance partner (CRO), and success is rewarded in the form of milestones. While the fully funded FTE (full-time employee) model is still being utilized, this new model provides additional incentive to the alliance partner to drive the project to a successful end point, which is typically a preclinical candidate.
The key question remains. Is this new model delivering to expectations? Evotec has established science-driven discovery alliances with pharmaceutical and biotechnology companies in all of its key therapeutic areas including pain and inflammation, CNS, oncology, and metabolic disorders. These collaborations are based on flexible business models where risk can be shared and success can be rewarded. As just one example, a long-term collaboration with Boehringer Ingelheim (see case study) has proven that these externalized drug discovery programs can deliver success to both the pharmaceutical partner as well as the CRO.
The pharmaceutical industry will continue to evolve its business model and the CRO industry will match this direction. The business models are beginning to evolve from the traditional functional-based sourcing to the more risk-sharing model. The pools of CROs that are utilized for functional versus integrated sourcing will more and more diverge with a larger pool of partners being called upon for the innovative, integrated drug discovery projects.
Project started in 2004
Integrated Evotec chemistry and biology team
- Long-term innovation project covering many therapeutic areas, including inflammation, pain, immunology, oncology, and metabolic disease
- Combines Boehringer Ingelheim‘s long-standing experience and expertise in drug discovery and development across multiple therapeutic areas with Evotec’s science and technology
- Success-based business model incorporating research funding, milestones, and royalties
- Ten milestones achieved to date; project extended to 2013
- Eight compounds advanced into predevelopment profiling, two of which were identified as development candidates, and one is in the clinic
- Sixteen PCT patent applications have been filed, of which eight have published to date
- Five papers published and nine talks/posters presented at conferences
About The Author
Steven Hutchins is senior VP of global key accounts at Evotec. He has over 20 years’ experience in the pharma and CRO industries as both a buyer and seller of pharma research and development services. He spent over 16 years at Merck in progressively responsible positions, 12 of which were managing outsourcing in support of basic research and preclinical development.