The Struggles Biotechs Face In Today's Pharma Climate

By Cindy Dubin

A hard-hit economy has made investors more cautious about financing small biotech companies.

Scientific advancements are expected to change the future of medicine and how those drugs are delivered. Some of the big discoveries are coming from the biotech sector. Yet, economic, regulatory, and financial implications can thwart those advancements.

Global sales of all biotechnology and pharmaceutical products reached $719 billion in 2008, reflecting growth of 5.4% over the previous year, states a new report from PricewaterhouseCoopers Pharmaceutical and Life Sciences Industry Group. Of that total, biologic products (e.g. vaccines, blood and blood components, gene therapy, tissues, monoclonal antibodies, and recombinant therapeutic proteins created by genetic engineering) accounted for $120 billion.

It’s clear to most healthcare investors and industry analysts that biotech drugs are the future of the pharmaceutical industry, but the small biotechs that seem promising need support from the government and venture capitalists. In the PwC report, Tracy Lefteroff, national life sciences partner for PwC, states that promising patterns are emerging in the form of public and private investments, tax credits, and incentives to fuel R&D.

ATTRACTING INVESTORS
Investment in biotech companies remained strong in early 2008, with the dampening effect of that year’s global credit crisis apparent by year end. In the last quarter of 2009, biotechnology investments totaled $1 billion for 108 deals. Biotechnology funding declined by 7% year over year, primarily due to a drop in deal activity.

The total U.S. venture capital investment in biotech reached $4.3 billion in 2008, marking an 18% decline from the previous year’s total, according to PwC. “The full effects of the damage became apparent in 2009 with the year-end total of $3.5 billion in biotech VC investment, down 19% from the 2008 level,” states PwC.

With less money to go around, VCs are making more concentrated investments in fewer, but bigger, deals. Aware of this new mindset, Hopkinton, MA-based Alseres Pharmaceuticals, expects to raise $34 million to take the company’s imaging agent to the finish line, which is about two years away. Alseres’ Altropane Molecular Imaging Agent will aid in the early diagnosis of Parkinson’s disease. While Alseres’ Chairman and CEO Peter Savas believes the imaging agent field is one that will bear fruit, he understands that investors need to see the potential ROI from the beginning. He estimates the product to achieve revenues between $500 million and $1 billion. The Alseres team has demonstrated to investors the success of another imaging agent in Europe that is working on gaining approval in the United States. The only difference is that the Alseres agent takes less than one hour to complete a neurological image compared to up to six hours with the other. “This is a time savings for the patient and the physician, which makes it a great tool,” Savas explains.

No matter how great a tool or drug a biotech thinks it has, attracting investors can be difficult, particularly when a company goes through several iterations in its lifetime. NPS Pharmaceuticals of Bedminster, NJ, has indeed evolved since its founding 22 years ago and has developed a variety of products and out-licensed them for royalties. Three years ago, the company began to focus on endocrinology and gastrointestinal therapeutics. Yet, Francois Nader, M.D., president and CEO of NPS, says the company’s focus on indications that have limited competition and huge patient benefit is compelling to investors. Over the years, the company has had no problem raising significant amounts of funding and actually ended 2009 with almost $75 million in the bank.

“It is important to maintain an adequate level of money at all times,” Nader says. “Ideally, we strive to have a 12- to 18-month reserve of money to execute our platforms without having to worry about finances from quarter to quarter.”

One way to do that is through royalties. Just recently, NPS sold royalty rights for sale of its hormone disorder drug, REGPARA, for $38.4 million. The company said it retains royalties for REGPARA in excess of cumulative royalties of $96 million. The proceeds of the sale will support NPS’ late-stage hypoparathyroidism and short bowel syndrome products, which are expected to reach peak sales of $300 million and $200 million, respectively.

ALTERNATIVE FUNDING OPTIONS
While private investors have typically been generous, small biotech firms realize that the VCs are more skeptical. As an alternative, many biotechs have turned to federal and state funding programs. CytoSolv, a biotech startup in Providence, RI, received $500,000 in seed-stage funding from the Slater Technology Fund, Rhode Island’s state-backed venture capital fund. Founded by Brown University researchers Moses Goddard, M.D., and Christopher Thanos, CytoSolv is developing proprietary technology to address wound healing, initially targeting diabetic ulcers. CytoSolv also is soliciting funding from the American Diabetes Foundation and a grant from the Small Business Innovation Research/Small Business Technology Transfer Program (SBIR/STTR), a highly competitive federal R&D funding program that encourages small businesses to explore their technological potential and provides the incentive to profit from commercializing new technology. By reserving a specific percentage of federal R&D funds for small business, SBIR enables these companies to compete on the same level as larger businesses. “If this were 10 or 20 years ago, we’d probably be talking to VCs,” says CEO Goddard. “Focusing on grant funding is going to drive us to our next phase.” At this point, two million patients in the United States receive treatment for skin ulcers related to diabetes each year, and the current annual world market for advanced formulation skin care products is valued at $5 billion.

Pursuing grants is the course that NPS is following as well. Nader says the company has partnered on more than one occasion with the National Institutes of Health. He adds that the company would have tapped into state tax incentives, but those do not apply to publicly traded companies like NPS.

Local government tax incentives do entice biotechs to set up shop and bring jobs to certain regions of the country. North Carolina, Florida, California, and Massachusetts tend to offer a steady stream of funding to the life sciences. Georgia is also stepping up its efforts to lure biotechs to the state, but its financing opportunities are dwarfed compared to the other states. Between 2006 and 2008, according to PwC, Georgia raised $148 million in biotech venture capital, money critical to turn inventions into profits. Georgia ranked number 14 in private funds; California, the number-one state, received $6 billion; and number-five ranking North Carolina, home to the Research Triangle Park, raised $564 million. And while most every other state allows a small portion of its pension fund to be used for venture capital, Georgia’s General Assembly continues to vote against this — a big disappointment for biotechs.

“The problem with tax advantages is that they are unclear about how they will actually drive anything, at least from Alseres’ perspective,” says Savas. “I don’t put much stock in them because I don’t think those incentives will get us where we need to go.”

WORKING WITH THE FDA
Focusing on funding requires an emphasis on business development. But Goddard says this cannot come at the detriment of the science that a biotech is pursuing. Scientific focus is what made CytoSolv’s interaction a positive one with the FDA’s Center for Biologics Evaluation & Research (CBER), the division that regulates biological products. “CBER is science-driven, and while it can ‘dig in its heels’ at times, as long as we do what is required of us, the process goes much more smoothly,” he says.

For instance, at this initial stage of development, CytoSolv’s technology involves a mixture of wound-healing factors derived from porcine choroid plexus (CP), a key component of the blood brain barrier, which naturally secretes a variety of proteins into the cerebrospinal fluid of pigs. CytoSolv has demonstrated that a topical gel based on a cocktail of these factors accelerates and improves the quality of healing of open skin wounds. “These are proteins, not living cells, which makes compliance with sterility regulations easier.”

Easy is not what one thinks of when it comes to GMP compliance of biotech products, which tend to be expensive and complex to manufacture. The FDA is so critical of the quality of the product that will be commercialized that recent nonapprovals for biotechs were related to GMP noncompliance, says Nader.

For NPS Pharmaceuticals, FDA compliance is essential for simultaneously pushing two lead products through Phase 3 trials and filing for an NDA (new drug application) next year. NPS is developing therapeutics for rare gastrointestinal and endocrine disorders with high-unmet medical needs. Teduglutide (GATTEX) is a proprietary analog of a glucagon-like peptide-2 for intestinal failure associated with short bowel syndrome and is in preclinical development for additional intestinal failure-related conditions. NPSP558 is a hormone therapy for hypoparathyroidism.

NPS has been working with the FDA’s Office of Orphan Products Development (OOPD), which, under the provisions of the Orphan Drug Act (ODA), promotes the development of products that demonstrate promise for diagnosing and treating rare diseases or conditions. “In the orphan drug environment, we learn as we go,” says Nader. “We consider the FDA as a partner in the process and actively engage in open and frequent communication with the agency to develop our products in the most efficient way. Orphan or not, there is no slack given by the FDA. However, compliance is rewarded with approval and seven years’ exclusivity, as long as the science is solid.”

Since ODA’s inception in 1983, more than 200 drugs and biological products for rare diseases have been brought to market compared to fewer than 10 in the decade before 1983. “The history of agents being approved is checkered because the agency has tightened the criteria to ensure meaningful clinical data is provided,” says Savas.

“When I joined Alseres, it was during a time when the company was being stalled by regulatory hurdles,” he continues. “The FDA wanted Alseres to develop its imaging agent as though it were a biologic, which posed some challenges.” Savas says the protocols that Alseres had in place at that time were not as rigorous as they had to be to get the product approved.

Savas revamped the Alseres development plan and worked to reach an agreement with the FDA to get the product through the clinic to Phase 3 trials and eventually file an NDA. This Special Protocol Assessment (SPA) is for the Phase 3 protocol of Alseres’ Altropane Molecular Imaging Agent. An SPA defines the size, design, and analysis of clinical trials that will form the primary basis of approval. “By meeting certain endpoints outlined in the SPA, we anticipate that our imaging agent will receive approval,” says Savas.

BIOTECHS’ PROMISING FUTURE
Receiving FDA approval is dependent upon all that comes before: securing funding, developing solid scientific data, and partnering with corporations that have similar long-term strategies. Additionally, the biotech industry will require plenty of nurturing in the coming years. Beyond funding, biotechs will need the government to provide tax incentives for innovation and hold off on corporate taxation, states the PwC Biomedical report. And, the FDA will have to continue its willingness to work through risk aversion when companies deliver clinical proof-of-concept reports. The PwC report portends: “If this perfect storm of government cooperation [and an influx of funding] can flourish, then the biotech sector is likely to have a strong, plentiful growth period once the economy recovers.”