Drug Hunters

On my way to Bio Asia 2008, in Tokyo for three days of partnering meetings.  Both previous times I have been in Japan I have had a consultant with me to get to my hotel - this time we’re going it alone.  Wish me luck.Japan Pharma is always very interesting in that there are number of very successful, reasonably global pharmaceutical companies in Japan.  Yet there is not much of a biotech/specialty pharma environment.  You would expect a number of spin-outs and other type of entrepreneurial ventures - but so far it has been relatively nascent.

That probably is due to some combination of culture and the financing environment.  The Japanese VC environment is relatively nascent. 

With Japanese Pharma now increasingly consolidating and global public pressures, you likely will start to see layoffs in ways that have not occurred in the past - the American way!  Actually, you’re already starting to see them.  Could this be an opportunity - maybe a pivotal inflection point for Japan Life Sciences.

What would happen if some financier hired packs of those laid off.  These are folks with a tremendous amount of drug development experience as well as knowledge of the assets within Japanese Pharma.  You would think that at least a couple of interesting companies would come out of it.  Previous employees licensing interesting technologies from their former companies.

With a working stock market, tremendous amounts of drug development experience, and substantially sized Japanese companies, there is no reason the environment couldn’t resemble something akin to at least Switzerland if not the United States in a decade or so.

Cadence Pharmaceuticals, a very promising young public company, announced that its product Acetavance failed a Phase III trial.  Well, Acetavance is IV Tylenol.  Yes - IV Tylenol.

            “SAN DIEGO, Jan 11, 2008 /PRNewswire-FirstCall via COMTEX News Network/ — Cadence Pharmaceuticals, Inc. (Nasdaq: CADX) today announced top line results of two of the company’s four pivotal, Phase III clinical trials of Acetavance(TM), a formulation of acetaminophen for intravenous use. One of these clinical trials did not meet its primary endpoint of demonstrating a statistically significant reduction in patients’ pain intensity levels over 48 hours compared to placebo, following abdominal gynecologic surgery…”

Not only is this just an intravenous form of Tylenol but this is a product that has been approved for years in Europe with rapidly growing sales.  The bottom line - it works!

So why did it fail?  We don’t have the data to know for sure but there are so many things that can go wrong in a clinical trial - patient population, entry criteria, trial execution, etc.  The molecule is one thing but proving it works is a completely different thing.

Now I know all that but thought this was as sure a thing that exists our industry. 

Anyone who has been through an advisory committee knows how grueling the process is.  It appear like we are going to see many more of them.  Although for sponsors this is generally considered bad, the upside of it is that with more advisory committees we will have a better idea of the actual views of the FDA on a more periodic basis.  The reason that there are more advisory committees appears to be amendments to the Food and Drug Act which have added language around the need for an FDA advisory committee meeting prior to approval of new drugs (new chemical entity) or an explicit discussion of the reasons a panel was not required.   

The full text from H.R. 3580 reads:

SEC 918.  REFERRAL TO ADVISORY COMMITTEE

Section 505 of the Federal Food, Drug, and Cosmetic Act, as amended by section 915, is further amended by adding at the end of the following:

“(s) REFERRAL TO ADVISORY COMMITTEE-Prior to the approval of a drug no active ingredient (including any ester or salt of the active ingredient) of which has been approved in any other application under this section or section 351 of the Public Health Services Act, the Secretary shall -

“(1) refer such drug to a Food and Drug Administration advisory committee prior to the approval of the drug, provide in the action letter on the application for a drug summary of the reasons why the Secretary did not refer the drug to an advisory committee prior to approval.”

I expect to be covering these advisory committees on this blog so stay tuned on www.drughunters.com

Doug Kass, a columnist for TheStreet.com, writes annually about potential surprises for the year.  Last year was his best year according to him with almost 50% of his surprises coming to fruition.  He calls his surprises “possible improbable” events.

This year one of his surprises is a bubble in biotech.  Here is a portion of surprise #11 (there are 20 in all). 

“Technology disappoints as it becomes clear by the beginning of the second quarter that “double ordering” inflated recent revenue gains as the weakening consumers’ appetite for electronics founders. Rapidly growing biotech names are embraced as their P/Es grow high into the sky and they become the New Big Thing, and market leaders. Housing-centric equities continue to deflate and mop up the rear.”

The last bubble was in 2000.  If you just chart out past major and minor bubbles in biotech, we are due for at least a minor one sometime soon.

Sorry for the hiatus - a particular perfect storm with two big deals.

 I’m hoping to be back to my desired publishing schedule of two-three posts a week.  There clearly has been no lack of drama in the industry.

Praveen

One of the great things about working in biotechnology is the diversity of scientific discipines under one roof.  A typical biopharmaceutical company will have departments ranging from drug evaluation, formulation, medicinal chemistry, analytical, molecular genetics, biostats, clinical operations, clinical, tech operations, etc.  You get the picture. 

Thus almost any decision that is required is at the intersection of a number of different disciplines and requires input from folks who generally do not speak the same language - so called experts.  These comprise those within a company’s borders (functional experts) and external experts.  To survive in this environment, you have to become a student of interpreting and digesting expert opinion.  There are many pitfalls you need to be aware of and I’m going to write more about this in future posts. 

For this post, I will focus on one aspect of expertise - it’s generally limited to a particular field.  True expertise requires many years of study and experience.  Recent studies suggest that it takes about 10 years.  However, experts often provide opinion and judgement on many things outside their expertise.  An informed consumer of expert opinion has to be able to recognize the bounds of a particular expert’s competency domain.  Opinion outside of that domain should be viewed skeptically.

One recent example that played itself out on the web is an MSN columnist’s endoresement of Nastech.

Bill Fleckenstein writes the Contrarian Chronicles for MSN Money.  This is not my expertise but he seems to be an expert on macroeconomics related issues.  However, in mid-2006, he wrote with extreme endorsement about a little company named Nastech in this column entitled, “Biotech: Analyzing the unanalyzable.”

When I saw this column, I immediately thought what was this guy who for the most part knows nothing about biotech endorsing a single small cap biotech.  His logic was fine and he had plenty of disclaimers as evidenced even by the title above.  However, a true consumer of expert opinion can easily read the article and realize that Fleckenstein has no expertise in this area.  There are so many industry specific and domain specific issues that he just glosses over.

 Not surprisingly, just about everything has gone wrong.  The stock price now is a 1/3 of the price when it was first recommended.  Fleckenstein provides an Update on Nastech  - the link is here.

 Go to Fleckenstein’s website and use username/password: nstk

It is the 11/14/2007 Fleckenstein Column

By someone attuned to critically evaluating expert opinion, you can easily see the layman explanations of company events. 

This happens every day.  Once someone gains expertise in an area, it is very easy to convince yourself that the boundaries of your expertise are much larger than the dimensions truly are.  Consumers of that opinion develop a halo effect and often don’t think critically about the expert’s evaluation.

Rule #1: Understand carefully the bounds of an expert’s competency.  Outside of those bounds competency is limited and should be viewed skeptically.

Approximately a week ago, the New York Times reported on Colonel Holcomb - an impressive Army surgeon.  Here’s the link. 

What caught my eye was a quote at the end of the article:

 Dr. Stephen Wolf quoted Dr. Holcomb’s philosophy - “Why answer a question with another question? Just do the experiment.”

 With so little known about human biology, that philosophy would serve you well in this industry.

Two generic Indian companies, Ranbaxy and Dr. Reddy’s, have announced plans to spin out their proprietary drug development units.   The rationale according to Ranbaxy is that a standalone research company would “unlock value” by creating an “independent pathway for drug discovery research with dedicated resources.”  The media has portrayed the spin outs as a move by Indian companies to get serious about proprietary medicines.  The above reasons are valid but I don’t think they represent the whole story.  The story is more about the difficulty in changing or evolving a company’s culture.

Michael Moritz, the legendary venture capitalist behind Yahoo, Google and others, says a company’s culture is set in the first 90 days.  The cultural differences between a generic company and a proprietary drug developer are vast.  Generic drug developers are very process oriented.  There is generally stability and clear cause and effect relationships.  Harvard Business Review characterized this type of environment as “the Domain of Best Practice.”

“Directives are straight forward, decisions can be easily delegated, and functions are automated.  Adhering to best practices or process reengineering makes sense.”  Generally, revenues, investments, and earnings can be predicted with some certainty.

Proprietary drug discovery and development is a whole different animal.  This area is much less predictable.  Drugs that are expected to have high market potential fall significantly short.  Drugs expected to work fail spectacularly and others thought to have little potential often find new uses and become commercial successes.  Often people rely on simple rules of thumb to help navigate the complexity.

• Take as many “shots on goal” as possible
• “Fail fast”

The outcome of most all successful drugs can be attributed to a single individual evangelist, often labeled a drug hunter.  This is a person who believes in a drug and champions it often in the face of significant management and organizational headwinds.  This is an infrastructure and culture that needs to be able to tolerate a ton of volatility.  Little predictability; spectacular successes; and spectacular failures.

It is very difficult for a zebra to change its stripes.  This may have more to do with these spin outs than almost anything else.