In the year 2000, it is expected that pharmaceutical and biotechnology companies will pay $18.6 billion to third parties in order to outsource various phases of the lengthy drug discovery, development and marketing process.
A few aspects of this phenomenon have been widely publicized; most of the biotech initial public offerings in 2000 were by "platform" or "tool" companies which accelerate the drug discovery process by providing access to new technologies such as bioinformatics, proteomics, and in-silico high-throughput screening of potential drug candidates.
Much less well recognized is the recent emergence of "virtual" drug development companies, which claim that they can shorten the time and reduce the costs and risks associated with obtaining regulatory approvals for, and launching, new products.
The growth of this new category of companies makes sense from multiple standpoints. Most major pharmaceutical companies have undergone at least one merger in the last two years, forcing decisions concerning the prioritization of drug development projects. While it may once have been completely acceptable to shelve a development project that didn't meet marketplace financial hurdles, it is now far more common for a drug company to shop this otherwise wasting asset to a buyer.
Pharma company merger mania has also prompted the Federal Trade Commission to require companies to divest some products or technologies or at least out-license them.
The financial hurdle rate for a pharma company to undertake a drug development project has risen to $250 million in projected annual sales. It has therefore become increasingly attractive for pharma companies to out-license marginal projects that are soaking up research and development funding, or at least to allocate a portion of the development risk associated with these projects to a third party.
Virtual drug development companies such as Massachusetts-based The Medicines Co. and North Carolina-based Pozen completed successful initial public offerings in August and October, respectively, based on the premise that they can reduce the risk of product failure and shorten the time to market of drugs that someone else discovered.
In-licensing is, in part, a game of arbitrage: an effort to buy drugs at a relatively low price and then sell them, usually to another drug company, at a relatively high price. The contribution by the new in-licensors is speed and cost efficiency, largely a function of these companies' minimal infrastructure and the expertise of their personnel.
These new drug development companies are comprised of teams of seasoned drug development professionals, with the regulatory expertise necessary to take advantage of the recent global harmonization of regulatory requirements.
There is reason to believe the claims of these new companies. A few biotech and pharmaceutical companies have benefited from similar insights. In November 1997, Massachusetts-based Cubist Pharmaceuticals licensed from Eli Lilly a compound, Daptomycin, which Lilly had shelved in 1991 on account of a failure to appreciate the then nascent problem of microbial resistance to established antibiotic therapy.
Cubist repositioned and restarted development of the product, which resulted in Cubist's growth from a company valued at approximately $100 million to a company with a valuation in excess of $1 billion, and with a Phase III product.
But locating promising drug candidates which companies wish to out-license is no easy matter. Until recently, no organized mechanism existed other than word-of-mouth among business development personnel.
Another Massachusetts-based company, ActiveCyte, is solving this problem with the launch of a compound and technology database which will allow licensors to list compounds for potential in-licensees to peruse. This is not simply a crude, Web-based dating service. Listings will be organized in accordance with a taxonomy designed to facilitate rapid searching by disease indication, stage of development, and other metrics.
The listings will be supplemented by market research data provided by IMS Health, one of the industry's leading market research organizations. Potential in-licensors will be able to learn more about a compound of interest by executing, over the Internet, a confidential disclosure agreement permitting access to more detailed information. In-licensors will also be able to post their needs within a separate segment of the database, allowing for further matching of licensors and licensees.
ActiveCyte recently closed on a $10 million financing by Internet HealthCare Group; the company was incubated by The Boston Consulting Group, which also holds an equity stake, and has provided interim management since its inception.
ActiveCyte will earn money by collecting subscription fees from in-licensors, as well as transaction-based success fees based on the value of completed compound licensing deals. ActiveCyte expects to launch its database in the first quarter of 2001.
Just as the computer industry has recognized the value of outsourcing through the formation of application service providers, the pharmaceutical and biotech industries have begun to recognize that many aspects of drug development can be viewed simply as a challenge of organizing and automating various distributed data gathering tasks, which can be contracted out to multiple companies that can contribute finely-tuned expertise to improve success rates and throughput. The consolidation trend among pharmaceutical and biotech companies has accelerated this trend and provided an economic rationale for the formation of ActiveCyte and the growth of the new in-licensing organizations.
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