NRDOs: theory meets practice - MWB Consulting

1 40 April 2005 NRDOs: theorymeets practiceThe rise of no research, development only firms hasbeen accompanied by accusations that they are new in name only. But the NRDO that stays faithful to the business model offers a vision of a more efficient clinicaldevelopment future, believes Dr Michael BowdenOf the many hundreds of biotechnologycompanies out there, it is estimatedthat less than 20 have a stand-alonefuture. Discovery-based small biotechs have,with few exceptions, become synonymouswith the consumption of cash rather than thegeneration of profits. These companies facethe full risks inherent in bringing newpharmaceutical products to the market. And,stung by the downside of the genomics-driven bubble leading up to the end of the lastmillennium, investors have become muchmore savvy with their investments and moredemanding, wanting more profits, and a result, no research, development only (NRDO) companies have becomeincreasingly attractive to firmsoffer to de-risk investment by participating inthe latter parts of the value chain.

2 NRDO scan bypass the risk and cost of discoveringmolecules, instead licensing-in later stagecompounds, mainly those already in clinicaldevelopment. They can then concentrate ondeveloping these assets through to the nextstages or even to in NRDOs, as an alternative tosmall biotechs, has led to a boom in thenumber of this type of company. There wereover 30 at the last count, mainly based in theUS. In 2002, almost a third of US-basedventure capital went into this sector and lastyear Jazz Pharmaceuticals raised a staggeringUS$250 million despite having no discernibleproduct are accused of merely putting anew face on the moretraditional, speciality pharmamodel - buying productsalready approved in othercountries or developing oldermolecules into newindications or even thelarge pharma model oflicensing-in molecules tobolster product pipelines.

3 Sowhat is new about NRDOs?If all that happens is thatthe management of NRDO saspire to become verticallyintegrated pharma companiesthen the answer is at best probably not a lot .Already some are beginning to looksuspiciously like development-based biotechsas they chase products at ever earlier see the integration of their in-licensingand development activities as an essentialcomponent of a sustainable seem to suggest that NRDO swill evolve into mini-pharma companiesdoing the same things as ever , the fundamental NRDO businessmodel is very attractive if companies can resistthe temptation to vertically integrate andremain tight and efficient value creators at theearly clinical development a sustainable modelThe current mantra says there is enormouscompetition for in-licensed products.

4 This istrue when seeking products to license-in atPhase II or Phase III, by which stage theproduct should have achieved proof-of-concept, have a satisfactory backgroundpackage of non-clinical studies and a GMPsupply of product. All this equals heftylicensing fees, milestone payments androyalties to reward the innovation andinvestment to one NRDO model currently beingdiscussed is based on leveraging both aportfolio and capital effect, ie, havingsufficient critical mass of products in thecompany at any one time to give a highprobability of at least one being successful(NRDOs are unlikely to buck the statistic thatfour in five products entering man fail inclinical development), and having sufficientcapital to develop those products withoutconstantly looking over the shoulder for thenext bit of development latter pointNRDOs are an attractive alternative to investment in small biotechsOUTSOURCING & April 2005is key to success.

5 We have seen promisingproducts fail because poor developmentdecisions have been made through lack ofmoney. Cheap development is a worthy aim,but when lack of funding means it becomescompany dogma then failure is the most sufficient products and money, thistype of NRDO will be free to construct thebest possible, lean, development strategy andimplement it in the most effective way. Nolonger will a product persist because thecompany has bet the farm on it instead aningrained philosophy centred around, weonly progress those products we fail to kill will ensure that at every stage of development,rigorous hurdles are set which the productmust clear in order to progress. To date therehave been very few companies that canremain this dispassionate about their productsand can remain sufficiently well funded toconcentrate purely on highly-efficientdevelopment processes.

6 To be brutally frank,despite the advent of biotechs and virtualdevelopment companies, as well as the massiveefforts made by medium to large pharma withtheir internal organisations, there has with afew notable exceptions been littlediscernible benefit to development can do better, not by producingsome magic solution but by doing the basicswell in the highly-focussed early NRDO operating structureTraditionally, there have been two choices build internally, or outsource to contractresearch organisations (CROs). It is unlikelythat many NRDOs will want to incur thelarge overhead of a development structure thatis globally capable (nowadays, a pre-requisitefor accelerated development). Instead, theywill remain relatively small and dependent onoutsourcing. For example, AlgoRx conductedhalf a dozen clinical trials in 2004 despite onlyhaving 14 people in the the people employed by a successfulNRDO will be will combine agreat deal of experience, not just in theirrespective disciplines but in the wider contextof drug development.

7 Put simply, they willhave a clear understanding, if not at thedetailed level of a specialist, of where all thebits of the development jigsaw fit history of pharma companies has been toavoid these generalists putting promisingstaff through accelerated management careerpaths creates an entirely different animal butthey do exist, often in smaller organisations towhich they tend to gravitate. Empowermentand accountability will be the company sphilosophy; enjoying new challenges andmaximally exerting their professionalism tolead success will be the philosophy of thepeople. A common pitfall to be avoided is theoccurrence of the silo mentality that createsinternal barriers to change and quickdecision-making. In part it is the veryexistence of this mentality in other pharmabusiness models that will provide the NRDO with its start-up companies begin as greatideas centred on a small group of NRDOs are founded byexceptionally skilled financiers, lawyers andsenior management to this theindividual with a sound senior scientific trackrecord and one cannot but bet on success.

8 Butthe reality of drug development is rates in these companies can be high,as there are insufficient people working at the coal face and grinding out the successes. Atthe outset a clear operational plan must bedesigned and implemented, because in acapital shortage the tide goes out for everyone even the good science suffers and thewhole point of NRDOs is not to waste capitalon poorly-performing operations. NRDO smust only invest capital in functions in whichthey have capability from day one, and not fallinto the trap of attempting to develop skills inthe hope they will pay off at some point in thefuture. This means not indulging inspeculative activities outside the only key areaof focus for an NRDO finding anddeveloping molecules which are will be achieved by assigningthe product to a dedicated productdevelopment team (PDT) under the directionof a product leader.

9 As each product sdevelopment strategy demands, the PDT willdraw on team members from the NRDO sinternal experts (eg, project management,statistics, regulatory) and external providers(see Figure 1).PDTs will be tasked with producing leandevelopment strategies, efficiently executed inthe shortest time possible. This level ofdevelopment efficiency will be critical to theNRDO s commercial success, as shown by theanalysis conducted by the Tufts Center for theStudy of Drug Development in their 2002 IMPACT report (see box).However, no matter what internal skills ithas the NRDO will be highly dependent onoutsourcing. This presents an opportunity tothe new generation of on thinking CROsAssuming the NRDO sets an internal rateof return (IRR) of 25% per annum and a ten-year investment horizon, then it must produceThe financial impact ofimproving R&D efficiency Boosting clinical success rates from 1:5 to 1:3reduces capitalised total cost per approveddrug by US$250 million.

10 Shifting 5% of clinical failures from Phase III toPhase I reduces out-of-pocket expenses by upto US$20 million. A reduction in time per clinical phase of 41%gives a US$200 million reduction in totaldevelopment : Tufts Center for the Study of Drug DevelopmentFigure 1 NRDO development modelLicensingAdvisory/guidanceStrategy developmentProject managementBusiness growthOperationsService agreements Marketing Finance Legal IT OthersSource: MWB Consulting , 2005 NRDOB iopharmaceutical partnersAdvisoryboardsAdvisoryboardsOthe rsNRDO boardPre-IND(investigationalnew drug)POC(proof ofconcept)Partner functions, eg CMC(chemistry, manufacturing and controls)OUTSOURCING & TECHNOLOGY42 April 2005 at least an 8-fold increase in value over thatperiod. Any corporate activity that does notyield a 25% IRR will be highlighted foroutsourcing.