Investing in fast-tracked therapeutics

January 2020 – An article by Xavier Luria and Daniel Oliver

 

To help you better understand the landscape and possibilities of investing in biomedical startups, we have put together a short overview of how regulators help companies accelerate new drug developments. As an investor, you should look out for those – a fast-tracked drug development can represent very significant savings of both time and money, and that usually will lead to a faster Exit for your capital. And a drug development company with a short Exit horizon is the most extraordinary capital investment: fabulous returns, fast money. Who doesn’t like that?

In general, pharmaceutical companies are very poor innovators. There are many reasons for this including not having entrepreneurial structures, and being too bureaucratic. This gave rise to the urban myth of the cost of developing a drug being a billion dollars. If that were true, the VC industry would not exist, nor would the thousands of SME drug companies who have innovated with tens of millions of dollars only.  

Instead, Big Pharma have generally adopted the strategy of wait-and-see, paying a premium for buying later stage assets from those innovative SMEs that have completed at least phase II human efficacy trials. This ecosystem rewards the SME and provides Pharma with a pipeline. And having the sales and marketing muscle, pharma can focus on what it does best: selling drugs.

For all these reasons, SMEs provide an interesting investment opportunity for smaller earlier investors. The multipliers can be very large, and the risks tend to be binary: the drug either works or it fails. Most SMEs have adopted the strategy that can be best described as “making good drugs better” rather than embarking in basic R&D to find novel molecules, which can take decades. 


The enclosed summary describes the most common of these strategies. 

 

Nigel Fleming

Serial Biotech Entrepreneur & Mentor

Orphan Drug Designation

 

 

Orphan or Rare diseases are those that affect only a small number of people. The drugs that are developed to treat diseases with this special designation gain access to multiple incentives, including reduced fees and regulatory assistance to improve the design of the clinical trials and streamline the development of the drug.

The exact requisites to qualify as a Rare Disease vary from region to region, but they are generally life-threatening or chronically debilitating diseases affecting less than 10 people out of every 10.000, with no existing cure or treatment. Since these are usually very rare, developing treatments for them could be economically non-viable, and to ensure that new treatments are indeed developed the regulatory agencies compensate by granting several advantages bundled under the Orphan Drug Designation.

Once a new treatment is thought to tackle a rare or orphan condition, the Orphan Drug Designation warrants many advantages, including:

1 – scientific advice from regulators focused on the clinical development at a reduced cost, allowing some of the clinical trials to be bypassed or carried out with very few patients (tens of patients instead of thousands, for example)

2 – extended market exclusivity for up to 10 years (7 in the US), even if the company has no patent over the product.

3 – easier access to grants, soft loans and other forms of financial help, including tax cuts that can amount to millions of dollars per year

4 – in the US, Orphan Drugs have a higher rate of go-to-market approval from the Health authorities

Of those, the most valued incentive for orphan drugs is, by far, the market exclusivity period (also known as orphan exclusivity), which is strictly enforced by the regulatory authorities.

In average, companies who receive an orphan drug designation increase their value by almost 4%, although in the case of smallvoncological Biopharmas (market value below 50M) the company value leaps up by an average of 10%. As of today, the general consensus is that developing an Orphan drug is more profitable than developing a non-orphan drug.

In the orphan drug landscape the most attractive companies for an investment are those with a clear development plan validated by discussions with regulators and clinical study designs supported by natural history data.

 

Marc Martinell

CEO @ Minoryx Therapeutics

Repositioning

 

When a drug reaches the market, it is approved for use for a particular disease or indication, although it may be effective for more than one. In those cases, it is possible to take an existing drug and redevelop it for a different purpose – it is the case with simple examples such as Dichloroacetate (used for Lactic Acidosis since 1962, but also researched as a treatment for Human Leishmaniosis or Cancer) or even Thalidomide (an infamous product used for anxiety that caused a plethora of birth defects in the 60’s, but now used to treat Myeloma and skin syndromes such as leprosy). This is called Repositioning.

The great advantage of repositioning is that some of the early-stage trials can be bypassed, since they have already been done – particularly those referring to toxicity. This, combined with the abundance of published data for the drug, makes repositioning developments shorter, cheaper and less risky.

This strategy decreases costs very significantly and exit times are in average much shorter.

Repositioning is very often used in combination with Orphan Drug developments; due to the financial advantages in developing Orphan Drugs, companies will develop a treatment for an Orphan disease first, and then reposition it for wider uses. A well-known example would be Astra Zeneca’s cholesterol drug Crestor (the company’s top seller for many years), originally developed as an orphan drug against family hypercholesterolemia, and later repositioned as a drug to treat cholesterol in diabetics, a non-orphaned condition.

One of the main problems with repositioned drugs is the off-label use – i.e., drugs that are prescribed for something they were not commercialized for. Since generic versions of the repurposed drug are already on the market, health care professionals can easily prescribe the generic products for the repurposed indication, even if that use is not reflected on the product’s label. The best way to tackle this threat is to include an innovative element on the development of the repositioned drug, such as a new dosage regime or drug formulation.

Derivative drug

 

A major driver in the commercialization of a new drug is whether it can be covered by a patent or not. And not everything can be patented: you cannot apply for a patent to cover a known or naturally occurring product, such as sodium hydroxide or glucose, for instance. It is also impossible, obviously, to patent an existing drug.

But adding a few atoms to a molecule might make it sufficiently different to make it a whole new product, at least from an Intellectual Property perspective, and if these few changes do not decrease the efficacy nor the safety of the product then you may have a whole new drug on your hands. It can be patented as a new product and, if you’re smart enough, the modifications to the molecule may even have improved its performance. This is called a derivative drug.

Although derivative drugs require a whole new development process (unlike repositioned drugs), they have the advantage of being very similar to an existing molecule and thus their development doesn’t exactly start from scratch, since their toxicity and efficacy profiles are usually well-known.

This can make developments faster and cheaper, but above all a derivative drug presents a very powerful market opportunity since it is (generally) imitating and aiming to replace an already successful product.

An example of derivative drug would be Esketamine, a Johnson & Johnson product approved in March 2019 for treatment of depression, which is almost the same molecule as the illegal drug Ketamine.

Derivative products’ development entails a low risk investment, since safety and efficacy has already been proven by the market-established drug. At the same time, once approved, such drugs will benefit for all the protection benefits associated with a new drug. This gives the drug a really good position in the market, with significant competitive advantages over existing products.

Priority Review Voucher

There are a lot of deadly diseases that affect children in a lower proportion than they affect adults: cancer, diabetes, and a host of other incurable conditions.

While it certainly is good news that kids are less prone to these life-threatening diseases, sadly, that also means that developing pediatric treatments is not as profitable as developing adult treatments. For purely economical reasons, then, very few drugs are developed to treat these diseases in children – a reality that reflects poorly on the financial paradigms around medicine, perhaps.

To compensate for this, though, regulatory bodies encourage the development of pediatric versions of existing drugs by granting advantages including shorter development times, faster approvals, etc… (a bit like for Orphan Diseases).

One of these advantages (in the US) is something called “Priority Review Voucher”; any company having a rare pediatric disease designation for their drug can receive a priority pass to accelerate the development of another drug, rare or not. This voucher can be bought and sold, which makes it possible to have a Pediatric development business model and still make a nice dollar by selling the voucher to another company.

And the sale price for these vouchers is not small: so far, they have ranged from 60 up to 350 million dollars, making it a profitable line of business in and of itself.

For new drugs, pediatric development plans must be agreed with the competent authority even if the drug’s intended target population is only adults – an agreed pediatric plan is a mandatory requirement for the approval of a new drug. Nonetheless, regulatory agencies can agree on a pediatric waiver based on safety concerns, among others. The pediatric waiver exempts the sponsor from conducting pediatric clinical studies, which adds a substantial cost on the drug’s development. This would reduce the development costs and expedite the new drug’s approval when intended for adult population.

 

 

Companies pursuing pediatric priority review vouchers can deliver higher ROI to investors.

First, the regulatory bar is often lower for pediatric rare disease indications because the unmet medical need is often extremely high. The diseases are often devastating, and the patients are children. This often leads the regulatory agencies to accept very small data sets, with less rigorous endpoints, and lower study design requirements.

For example, the study may include only a couple dozen patients, and not even have a placebo cohort. This means that 1) the cost of the development programs can be lower, 2) timeline for development may be shorter, 3) the probability of regulatory success and ultimate approval may be higher. All of these can amplify returns.

Second, the PRV is awarded upon approval. This means that the company can monetize the PRV soon after approval, rather than waiting until the revenues climb toward peak sales. The time value of PRV is very high and amplifies the returns. A PRV that is sold for $200M immediately after approval is worth considerably more than $200M in net profits 5 or 6 years after launch.

Third, there is typically less competition for pediatric rare diseases. Unlike larger indications, drugs for rare pediatric diseases often don’t face competition. Furthermore, there is usually regulatory protection from competition for orphan diseases for a period of time.

 

Counterbalancing the above, there are some potential disadvantages and risks associated with pediatric PRV approach.

 First, the clinical trials may be difficult to enroll because of the rarity of the disease and because trials in children are more difficult to conduct. Second, PRV legislation can expire or be rescinded, posing some regulatory risk. Third, the commercial market may be much smaller than for other diseases.

However, with the current pricing trends for rare diseases, with some drugs being priced at hundreds of thousands of dollars, the commercial potential for many of the rare pediatric diseases may be larger than might be initially imagined. Furthermore, a drug that can be used for both pediatric and adult diseases can often qualify for pediatric PRVs, so long as there is a legitimate need in the pediatric population. In other words, the PRV is not restricted to drugs that can only be used in children.

 So while the investment thesis should be evaluated on a case by case basis, the pediatric PRV program can offer investors an opportunity to amplify returns in many instances.

 

Richard Chin

CEO at KindredBio

Reformulations

 

In short, reformulating an existing drug means presenting it in a sufficiently different way that it can be covered by a new patent, without actually having to undergo new toxicological and efficay studies. This has traditionally been used by Pharmas to stretch the value of their products: once a drug is close to the end of its patent, it is often redeveloped and presented in a different format or for a different indication.

A classic case would be the old-and-good ibuprofen, who has gone from the simple tablet to sustained-release presentations for chronic pain, softgels for acute pain, fast-melt tablets, pediatric versions, etc…

But reformulation isn’t just a trick used by Pharmas to extend their IP’s life cycle; through the application of new drug-delivery technologies, for example, old drugs can be reformulated into new and more useful products, a strategy that can be used by small biotech companies as a potential way to give quicker returns to investors.

A good example is G2B Pharma, a US-based company which is developing a nasally-delivered epinephrine (adrenaline) product for life-threatening anaphylaxis (i.e. from peanut allergy), which is usually given by injection (EpiPen). The patient association groups and physicians have long been asking the pharmaceutical industry for alternative routes of administration, such as oral, nasal, etc, but nobody stepped up to the challenge. G2B cracked the pharmacological challenge to deliver it nasally. It has completed monkey studies and is looking to hit the market in the coming years.

Other expedited development programmes

 

There is a rather large amount of other fast-track regulatory pathways. Worldwide, regulatory agencies provide special attention to drugs addressing unmet medical needs for serious conditions with the aim to expedite their development and make them available to patients as soon as possible. The list of programs is pretty extensive, and the following are but a few of them.

PRIME

Scheme designed to expedite and optimize the development of priority medicines (ie, addressing unmet medical needs) in the EU. The EMA PRIME appoints an Agency’s rapporteur who provides continuous support during the whole development. The valuable regulatory support provides certainty to the development, securing the approval of the concerned drug.

Breakthrough Therapy Designation

 This is the equivalent US scheme of the EU PRIME scheme. Similarly, the scheme secures intensive FDA guidance on the development program of the drug and, thus, ensuring regulatory compliance at the time of the registration.

Fast Track Designation

 Only available in the US, this designation allows for an expedite review at the time of the registration. Companies in the US usually request this designation at stages closer to registration since it brings together a set of actions to expedite the product’s review.

Our conclusion

 

These (and a few other) regulatory helps are transitioning the biomedical sector into a new paradigm of startup investment, and the combination of accelerated reviews and more widely accessible technologies are firmly pushing the Pharmaceutical industry away from the traditional “internal R&D” and into a “buy startups” innovation model.

This is a great time to move into this sector, and, sure enough, Biopharma investment is hitting impressive numbers every year. It has overtaken investment in digital/tech startups in several key metrics – lower Exit times, higher valuations and better success rates – and it keeps attracting more and more money from both institutional and private investors. Interesting times ahead.

Sources for all claims and facts are not featured in the article, but will be gladly produced upon request.

Many thanks to Nigel, Richard and Marc for their time and insight