The recent sharp decline in venture capital funding for new drug discovery (as reported in GEN’s online feature “More VC But Fewer Deals Signal That Investors Are Becoming Even More Risk Averse”) should be disconcerting to everyone in the pharmaceutical industry. For the past few years we have seen large pharma reduce its internal discovery efforts and shift toward filling pipelines through in-licensing and acquisitions. To a large degree, those compounds came from small pharma that received early venture capital funding.
Much can be said about why large pharma has reduced its discovery efforts. While there is agreement that the fundamental cause is lower productivity—an ever-increasing spiral of increased costs to get to market against a whirlpool of declining chances of success—the causes of this lower productivity are regularly debated and often ascribed to factors such as being too big and too political.
For the past decade or so, investment patterns indicate that the venture capital community has bought the argument that large pharma has become inefficient at discovery. But with venture capital’s recent retreat from funding new drug discovery companies, the community is voting with its dollars that the problems are more than just about company size. On one hand are the ever-increasing scientific and regulatory difficulties of bringing new drugs to market. On the other hand are problems with the small-pharma business model. The good news is that these problems can all be addressed.
Venture capital firms have now been presented with a rare opportunity. With the current paucity of competing early-stage investors, VC firms can have their pick of the best early-stage programs. The current crop of programs may even be unusually large, due to the economic stimulus spending on R&D implemented a couple of years ago to combat the recession.
The Technology of Change
In the past decade the causes of clinical trial failure have changed dramatically. Back in 1995, 40% of drugs failed in Phase I because of pharmacokinetic issues. Today, due to the success of in vitro and in silico ADME, this figure has been reduced to under 10%. The bad news is that those 30 percentage points of failure have been re-allocated to other, thornier causes of failure, most particularly toxicity, which is showing up not only very late in development but, even worse, after commercialization.
Help, however, is on the way from the same in vitro and in silico technologies that were so successful in addressing the pharmacokinetics problems. New assays, techniques, and models are blossoming, allowing the identification of toxicity not only much earlier and at lower cost than via traditional models, but also more accurately.
Until very recently the pharmaceutical industry has had to rely mostly on preclinical animal models for predicting toxicity. Regulatory agencies continue to rely heavily on such models. The inefficiencies associated with traditional toxicity models are huge, in terms of both out-of-pocket and opportunity costs. These models are time-consuming and expensive to execute, and they are insufficiently predictive of human mechanisms of toxicity.
In the 1980s there were no major withdrawals of pharmaceuticals from the market due to toxicity. In the 2000s, there were over a dozen.
Technological progress is now responsible for faster, cheaper, and more accurate alternatives to animal models. Many new models have recently been developed and validated. Far more are soon to come. Yet, despite strong peer reviews and validation and acceptance in the scientific community, these new models have yet to be widely adopted in the industry.
Many compounds are now entering regulatory preclinical safety testing and clinical trials even though the latest in vitro toxicity testing tools are able to predict that these compounds will fail due to toxicity. If these new cutting-edge technologies were used more widely, the percentage of compounds failing in clinical trials due to toxicity would fall immediately, eliminating huge amounts of wasted investment in drug development, commercialization, litigation, and injury claims.
On the other side of the risk equation, each year many potentially successful compounds are scuttled because they’re toxic to rats and other species used for testing, but those compounds would not necessarily be toxic to humans. For now this is a known unknown. But in a few years we can expect to have technology that will make these evaluations.
As animal toxicity is weeding out 10–20% of all compounds prior to clinical trials, this means that there’s a sizable potential to increase the number of drug approvals from existing pipelines once our technology sufficiently advances. It also means that decades of compounds that failed for reasons of animal toxicity could be revisited, with the potential that a large number of new drugs could come to market as a result of such endeavors.
The Culture of Change
One reason venture capital firms may be disillusioned in investing in early-stage companies is that such companies have a bias that large pharma has learned how to escape. Small companies with narrow therapeutic technologies have a strong survival instinct to keep research going. Relative to small pharma, large pharma is adept at killing unpromising programs early, because with many programs in the pipeline, such decisions can be made in a relatively objective and routine way.
With small pharma, it’s a different story, as such decisions are usually fatal to the company. Many such companies, when faced with likely terminal bad news, lose objectivity. I’ve seen them do everything from misinterpreting or second-guessing the data to accusing their research partners of unacceptable work standards. This happens all too often. The investors are the victims.
The cure is for investors to change how they work with early-stage companies. Investors need to be closely involved in reviewing the data, have their own internal experts, or work with trusted third parties. They also need to keep a tight grip on the purse strings and avoid sunk costs.
The lower the sunk costs, the easier it is to terminate programs based on bad news. At present, far too few early-stage companies are being funded because too few mid-stage companies that can be predicted to fail are still receiving funding.
The solutions to the productivity problems associated with early-stage drug discovery investment are entirely within the grasp of venture capital firms that are detail oriented. Like hiring a security guard, it’s an ongoing cost that can have huge, albeit not immediately visible, rewards.