VCs Must Get Back To Basics And Fund Innovation - MassBio Panel

Now that the "me too" era is over, venture capitalists should turn back to building innovative biotech companies, panelists at MassBio's annual meeting say.

As big pharma/biotech moves from internal R&D to "search and development" that brings in mid- and late-stage compounds to compensate for faltering in-house discovery engines, stakeholders in the pharmaceutical value chain are still wondering who will absorb the risk of getting those assets to the dealmaking stage.

Speaking during a panel discussion at MassBio's annual meeting in Boston March 31, Mark Goldsmith, president and CEO of Constellation Pharmaceuticals, made a pitch for the return of the biotech start-up as a solution to the problem.

The panel, headed up by Michael Lytton, Biogen Idec Exec VP of corporate business development, discussed the re-apportionment of risk among stakeholders in the pharmaceutical value chain.

Urging a return to the risky roots of the biotech industry, Goldsmith said investors must return to the realm of true innovation and to building "great companies that truly industrialize the science that comes out of an academic environment" instead of investing in me-too or late-stage quick turns.

The era of copycat drugs or drugs with incremental benefit is over, Goldsmith stressed. "Regulators won't approve those drugs, insurers won't pay for them and patients won't have access to them." Venture firms that have limited their investments to those kinds of products for a quick turnover are going to be forced to return to drugs that provide an improvement in safety or efficacy or both, as well as to the longer-term strategy they require, he predicted.

There is a place in the value chain for the investment community to be involved in late-stage, single-product attempts with a "sort of defined liquidity event," Goldsmith acknowledged. However, he expressed "substantial concerns" over that strategy being the industry's "main platform for drug development."

When "your whole future depends on keeping that one asset alive or obtaining a liquidity event," incentives are distorted, he said. "Clinical trials done in that context are inadequate or they're sub-par, designed to save money, not fully answer the question but to get a bite from a buyer."

"One of the activities of small biotech is to create true centers of excellence around a particular area, pathway or technology," Goldsmith stressed. That sort of "aggregate diversity" distributes the discovery effort - and the risk - across the biotech sector.

Goldsmith certainly is not alone in arguing that risk is inherent in scientific discovery and that it will be difficult if not impossible to innovate without a revived biotech sector. Pharma execs were calling for new ideas to drive innovation even in the early days of the finical crisis, during Windhover's 2008 Pharmaceutical Strategic Alliances gathering in New York (see 'PSA: What We Have Here Is A Failure To Innovate,' IN VIVO, Oct. 2008).

Venture-backed Constellation appears fairly risk-free for the time being. The epigenetics-focused start-up announced in August that it had completed the third tranche of its Series A financing and hired Goldsmith to lead the company, which specializes in histone methyl transferases and histone demethyltransferases (Also see "Financings Of The Fortnight: Follow-On Fever" - Pink Sheet, 13 Aug, 2009.).

The MassBio panelists also expressed concern over whether the economic climate of recent years has quelled innovation to the point where there will be a dearth of assets available down the line.

Though admittedly it's "not as exciting from an entrepreneurial point of view," there is a tremendous focus on project finance or early asset development among VCs right now, Tim Surgenor, managing partner at Red Sky Partners, said. "And there are a lot of assets around to be developed."

Goldsmith agreed, but added that "it's not clear that there are a lot of good assets to be developed." And "even if we start with the premise that there are a lot of good assets," he said, "those will quickly be exhausted through the current system."

"I would think that [five years] down the road, if you're [a big biotech or big pharma] you're going to be looking around and say, 'where's my pipeline'?" agreed Surgenor. In addition to the shortage of assets caused by the funding gap, FDA's concern about safety is an issue, he said. Surgenor predicted that in an environment with "fewer actual assets," patient groups will force the issue of new product development.

The assumption supports Goldsmith's argument for renewed support of biotech companies as a source of innovation. "I do suspect that the venture industry will swing," he said. "Those who have made the investment today in this environment will have assets to obtain liquidity on, and those who have not will be buying at a later stage at a much higher price."

License In An Asset, Then Outsource Its Development

This dearth of assets is likely to continue until VCs and licensors figure out ways to adequately share the development risk of early stage assets, whether it is through option-based deals or some other mechanism.

They could take a cue from pharmaceutical companies, which are increasingly outsourcing their own drug development, said panelist Neal Goodwin, founding director of the Jackson Laboratory's Cancer Services Laboratory.

Service providers take a risk investing in basic research tools that have commercial value, Goodwin said. When his division decided to develop its collection of human tumor mouse models, it engaged pharma early and sought direction on which models would be most useful, he said. "You can't just snap your fingers and get a thousand tumor models established. So we had to assume the risk, the time, the energy to establish these resources."

Goodwin established the lab in 2007 as a service for virtual biotechs, early stage companies that didn't want to invest in the infrastructure. However, he exclaimed, what he found was that practically overnight 90 percent of the clientele was large, established biotechs and pharmas.

Indeed, at Windhover's 2009 PSA meeting, much of pharma's debate over early-stage research centered on how much of it should be outsourced (see (Also see "At PSA, Executives Tout the Benefits of Scale" - In Vivo, 1 Oct, 2009.)).

Research directors and scientists in big pharma have become so risk averse, so cautious to the point of "almost shell shock" about how to move forward with their research that "they're absolutely focused on some kind of true translational indication of how their drug development programs will perform," Goodwin said.

Those companies are reaching out to institutions such as Jackson Laboratories and academic medical centers not just to externalize research, but to "really integrate with them and almost join them from early stage to co-clinical drug development," he explained.

In addition to outsourcing more for both pre-clinical and co-clinical development, industry also is reaching through contract research organizations to faculty in affiliated institutions for sponsored research, so there's a lot of outsourcing going on, he said (see 'Pharma And Academia: Finding New Ways To Join Hands For Mutual Benefit,' Start-UP, Nov. 2009).

-Shirley Haley ([email protected])