State of the Economy

Normally, I don’t write much about the economy in general. But, recently, Larry was forwarded a link to the ADP National Employment Report®. We read the report and came away with a few observations.

While there wasn’t any specific information concerning the pharmaceutical industry, we noticed a couple of things that may be of potential impact. First, US employment declined by 65,000 positions in the month of July in the goods-producing sector where we figure the pharmaceutical industry is located. Certainly there have been numerous reports of continuing layoffs, restructurings and consolidations within the industry we follow which may reflect the macroeconomics cited in this study. The report goes on to say that the sectors hardest hit were those affected by recent difficulties experienced by the mortgage markets. (Do I have a knack for understatement or what?) So, even allowing for the mortgage mess, large employer payrolls still seem to struggling. Second, employment in small businesses defined as those with under fifty (50) employees actually increased by 50,000 during the same period, July.

Here’s what Larry and I came away with. We suspect that outsourcing and offshoring are continuing to eat away at jobs in the types of large companies defined by this study. Next, the growth in small businesses could be a resurgence in the type of small start-up’s which has fueled the start of growth in sectors as varied as technology and biotech in the past. Admittedly, Larry and I are going on a limb here but since we have over a half century of business experience between us, we don’t think that we’re too far off the mark. We hope to interview one of the economic advisers behind this study and test our ideas. Please keep an eye out for future updates on this blog.

The study itself can be found at http://www.adpemploymentreport.com/.

As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.

Contributed by Guy de Lastin

Insights from a Top Five Star Fund Manager on Drug Pipelines (Part III)

Recently, Larry and I met with an interesting person, Ken Kam. Ken manages the Masters 100 Fund (MOFQX) and is a Morningstar Five Star fund manager. He has been regularly beating the S&P 500 Composite Stock Price index. Ken believes that his approach to investments using virtual portfolios to derive real investment decisions will be the wave of the future. Ken’s approach can be checked out at www.marketocracy.com. Earlier in his career, he had managed a technology and healthcare fund and had also run a medical devices company. During our meeting, we learned about his current holdings and what he thinks about the future of the pharmaceutical industry. This is the third and final of three blogs based on that interview.


This is my third and final blog based on a meeting that Larry and I had with Ken Kam, the fund manager of the Marketocracy’s Masters 100 Fund (MOFQX). In my two earlier blogs, I reviewed Ken’s thinking on the current and future prospects for Elan Corporation PLC. When Ken began talking about the future of Elan, he was touching on some of the current issues in the drug industry. That’s when Larry and I started to ask him questions about the industry in general and its future prospects.

Ken said that the industry will respond as in the past but that it can’t shortcut research. The old hit or miss approach to drug research is dead. More specifics will be required. Ken says that Genomics will drive much change and that new drugs will have a Genomics element. Large drug companies will have to find early stage drug research and then purchase it.

When looking to make future investment decisions, Ken says that he considers two stages. First, the beginning when the drug is unknown and it’s not known yet whether it will work. It’s tough to invest until the clinical trials are done. Next, once the trials are successful, it’s the basic blocking and tackling to run the business that counts. He cites Amgen as an example of a company that had been here with its drug Epogen but had to bring in a partner that had a sales force with preexisting relationships with doctors. Ken says that it’s hard to get into doctors’ offices with only one product. But, it can be done as Amgen and Genentech have demonstrated.

Ken thinks that Elan may get there. Also, Ken notes that manufacturing drugs is tough, there aren’t that many people who know how to do it, and even the big players get it wrong once in a while. Start-up’s only have scientists and this second stage is equally as important as the first. Hot IPO markets sometimes let start up’s fund these activities. Other times, it’s the big companies that provide the funding. Ken thinks that we’re in these later times right now. Also, what the business model looks like becomes a factor in making an investment decision. Outsourcing services and support to gain a cost advantage become important considerations.

Both Larry and I enjoyed our meeting with Ken Kam and we would like to take this opportunity to thank him and his team for arranging this opportunity for us.

As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.


Contributed by Guy de Lastin

Insights from a Top Five Star Fund Manager on Drug Pipelines (Part II)

Recently, Larry and I met with an interesting person, Ken Kam. Ken manages the Masters 100 Fund (MOFQX) and is a Morningstar Five Star fund manager. He has been regularly beating the S&P 500 Composite Stock Price index. Ken believes that his approach to investments using virtual portfolios to derive real investment decisions will be the wave of the future. Ken’s approach can be checked out at www.marketocracy.com. Earlier in his career, he had managed a technology and healthcare fund and had also run a medical devices company. During our meeting, we learned about his current holdings and what he thinks about the future of the pharmaceutical industry. This is the second of three blogs based on that interview.

In my last blog, I introduced Ken Kam, the fund manager of the Marketocracy’s Masters 100 Fund (MOFQX) and reviewed his position in Elan Corporation PLC, his thoughts on its drug, Tysabri,(Bapinuezumab) and its current prospects. In this entry, I will go over Ken’s future prospects for Elan and Tysabri.

Since taking his first in Elan in June 2005, the stock has doubled several times. Ken thinks that it could double again. Larry and I queried him about this and he gave us his reasons. First, Elan is conducting trials for Tysabri for use with Alzheimer’s disease. Unlike the multiple sclerosis space where Tysabri has three other competitive drugs to go against there are no others in the Alzheimer’s space to contend with. For this reason alone, Ken thinks Elan could double. He likes the Alzheimer’s story and thinks that it could make Elan another Amgen.

Next, Ken is taking a longer view on Elan. It possesses nanocrystal technology which allows the manufacture of nano-sized versions of existing drugs. This increases the surface area of the drug permitting a more effective dosage with reduced side effects. This is fundamental technology that can be applied to many other drugs, that are coming off patent. Other companies would have to do the research to see of their drugs were effective. Elan could either acquire other drugs coming off patent and make nano-sized versions or license the technology to the other drug manufacturers. Manufacturers with drugs coming off patent are looking at ways to make their drugs more effective. Nanocrystal technology offers the chance to extend a patent for another ten years Ken explained to us. This is what Ken sees as the future pipeline for Elan and explains his optimistic future for the company.

In my next and final blog based on Larry’s and my meeting with Ken Kam, I’ll write about Ken’s thoughts on the drug industry and its future.

As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.


Contributed by Guy de Lastin

Insights from a Top Five Star Fund Manager on Drug Pipelines (Part I)

Recently, Larry and I met with an interesting person, Ken Kam. Ken manages the Masters 100 Fund (MOFQX) and is a Morningstar Five Star fund manager. He has been regularly beating the S&P 500 Composite Stock Price index. Ken believes that his approach to investments using virtual portfolios to derive real investment decisions will be the wave of the future. Ken’s approach can be checked out at www.marketocracy.com. Earlier in his career, he had managed a technology and healthcare fund and had also run a medical devices company. During our meeting, we learned about his current holdings and what he thinks about the future of the pharmaceutical industry. This is the first of three blogs based on that interview.
Ken Kam manages the Marketocracy Masters 100 Fund (MOFQX) that has a Morningstar Five Star for three year returns. The fund’s objective is to seek capital appreciation in common stocks of domestic and foreign companies of any size, seeking to outperform the S&P 500 Composite Stock Price index. What brought Larry and I to meet with Ken was his position in Elan Corporation PLC. Elan has been conducting clinical trials on a drug, bapineuzumab, for Alzheimers patients, and they currently market Tysabri, to treat multiple sclerosis. Elan represents the largest holding of MOFQX at about 9½ % of its entire portfolio. What had brought Elan to Ken’s attention was two of the virtual portfolio managers who use his website (www.marketocracy.com). In March 2005, these two virtual fund managers made Elan 25% of their test portfolios. They were betting their long term track records on this stock. (One had been running cash at 22% of his portfolio, a fairly conservative position.) In addition, 1,500 of 80,000 virtual investors at www.marketocracy.com had Elan in their portfolios. Elan’s clinical trials on their drug, Tysabri, for use with multiple sclerosis had been proving successful. However, because of a one in one thousand chance of a fatality, the FDA had ordered the drug withdrawn.
Ken decided to do more research on the drug. What separates Ken from other stock researchers is his use of the Internet. He e-mailed 1,500 people on the Internet to solicit their feedback. Approximately five hundred responded of whom, one hundred were MS patients and some had been participants in Tysabri’s clinical trials. All were waiting for their insurance companies to approve the drug for use despite the risk of fatality. Ken’s research approach took him in a different direction from other Wall Street analysts who normally talk with the neurologists. Being doctors, they reply that there isn’t information yet to give an opinion.
With this research behind him, Ken took his initial position two months after Elan first came to his attention. Since then the stock has doubled several times after the FDA ban was lifted and Ken is hopeful for the future.
Several things caught my attention during our meeting. First, the use of the Internet to bring together virtual investors to develop stock picks. Next, Ken’s use of the Internet to take advantage of his in depth understanding of clinical trials to conduct original patient research on Tysabri’s effectiveness. In the next several blogs, I will write about what Ken thinks about Elan’s future pipeline and the drug industry in general.
As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.


Contributed by Guy de Lastin

FDA Hurdles May Provide a Win-Win Opportunity for Industry and Its Service Providers

A most interesting discussion was just posted on The Motley Fool (http://www.fool.com/index.htm?ref=Yo), primarily aimed at amateur investors, but nevertheless, in my opinion highly relevant to some of the major challenges being confronted by the Pharmaceutical Industry. As the services industry serving the Pharmaceutical and Bio-Pharmaceutical sectors is part of our target readership, it strikes me that here is an area of win-win opportunity for both the industry and its service partners. To my thinking it may be a time for some “out of the box” rethinking about both the process and testing procedures in drug development. While this is an area that has been well plowed in the past, with lots of time, money and energy expended, this may well be the impetus for some new thinking. Your opinions are welcomed at larryrothmansblog@gmail.com.

To give you some detailed background, here is the text from The Motely Fool article:


"The most headache-inducing aspect of investing in the pharmaceutical sector is that the rules and requirements to bring a new drug onto market can change dramatically in a blink of the eye.

Last week, the FDA convened a meeting that likely will spell longer and larger clinical trials, and tougher approval hurdles, for future diabetes treatments. Any investor considering shares of drug makers with such compounds in late-stage testing, like MannKind (Nasdaq: MNKD), Eli Lilly (NYSE: LLY), or Sanofi-Aventis (NYSE: SNY) should take notice.

What's at stake?:

With $24 billion in worldwide sales last year, compounds to treat type 1 and type 2 diabetes are one of the top therapeutic classes of drugs, according to IMS Health. This figure will only grow, since the number of diabetics in the U.S. and worldwide is expected to soar to almost unfathomable levels in the coming years.

Diabetes compounds are many drug makers' most important drugs, and there are many such candidates in the pipeline. Here is how the sales of diabetes compounds for most of the market's top players fared last year:

Company Selected diabetes drug sales Selected diabetes drug sales growth

Eli Lilly $3.2 billion 9.3%

GlaxoSmithKline $2.4 billion (22)%*

Merck $754 million N/A**

Novo Nordisk $5.5 billion*** 9%*

Sanofi-Aventis $3.3 billion 14.5%*

*As reported.
** Januvia approved in late 2006.
***At at a krona-to-dollar exchange rate of 0.18.

If you strip out Glaxo's performance, nearly every large-cap pharma's diabetes-care units are growing rapidly.

Avandia adversity:

Glaxo's problems began last year, owing to safety concerns with its type 2 diabetes treatment Avandia. A New England Journal of Medicine article looking at a pooled set of data from Avandia studies showed that patients taking the drug may be at a higher risk of some heart-related ailments. Since diabetes drugs are supposed to reduce a patient's incidence of many long-term adverse events, these potential Avandia safety issues pushed the FDA to ask an advisory panel to debate whether new diabetes drugs should be subjected to much more testing for long-term and hard-to-see adverse events.

What's changing:

While the FDA often seems like a mercurial beast, approving and rejecting drugs at random, the agency does issue concrete guidelines on what drug candidates for the most common therapeutic categories, like cancer and diabetes, must demonstrate in clinical testing in order to win marketing approval.

In the case of new type 2 diabetes drugs (the most common type), the FDA generally requires drug makers to prove that their compound helps to lower a patient's blood sugar levels, and that the compound is tested in "at least" 2,500 patients in phase 3 studies. More than half of these patients must take the drug for one year or more, and 300 to 500 of these patients must take the drug at least 18 months.

Unfortunately for drug makers, testing a drug for cardiovascular-related safety issues, like whether it increases a patient's risk of a heart attack, usually requires several thousand more patients in clinical testing, not to mention longer clinical studies than even the above guidelines call for.

Therefore, if the FDA wants to spot more instances of rare adverse events, it needs to up the patient numbers and study length requirements for new diabetes drugs. That's where last week's advisory panel came in.

To help avoid another potential Avandia-type instance, the advisory panel recommended in a 14-2 vote that the FDA should require long-term safety studies of at least five years for all new potential diabetes drugs.

Fortunately, the advisory panel also threw drug makers a small bone. It recommended that the FDA require that these long-term studies (which will take longer than five years to complete under nearly any circumstance, accounting for the time it takes to set up the study and complete patient enrollment) simply be under way, not completed, when a new diabetes drug is up for approval. Had the panel recommended otherwise, it could have spelled disaster for most drug makers' pipelines.

Who is affected?

It's easiest to say that every potential diabetes treatment in development will be affected by the new guidelines, if the FDA adopts the panel's recommendations in their current form. These new guidelines could definitely cost many drug makers hundreds of millions of dollars more in clinical trial expenses.

The guidelines will also likely be the kiss of death for any diabetes drug that shows even small hints of cardiovascular-related side effects in clinical testing, unless it's also finished the sort of long-term safety study the FDA now demands. (The agency is understandably harder on compounds with potential safety issues than on those with no apparent risks.)

Like all things at the FDA, the agency is sure to treat some compounds in development differently, depending on a range of variables. Compounds from some classes of diabetes treatments, such as thiazolidinediones (Avandia's class of drug), where safety issues have been a problem in the past, will likely have these new guidelines applied more harshly. Some new and unproven classes of diabetes treatments under development from companies like Bristol-Myers Squibb (NYSE: BMY) could also face a harder path to FDA approval.

Companies with potential blockbuster drugs already deep into (or past) phase 3 testing could suffer most, though. Potential new diabetes drugs that these guidelines might hurt (or, in a few rare cases, help) include: CV Therapeutics' (Nasdaq: CVTX) Ranexa, scheduled for a July 27 PDUFA. Sanofi's Acomplia, for which the company hoped to file an FDA marketing application next year. It has a huge safety study under way, but the study covers only three years. Novo Nordisk's promising GLP-1 analogue liraglutide, currently under FDA review.

Changes to the FDA guidelines won't entirely quash the development of new diabetes drug candidates. But in many cases, they will raise the regulatory hurdles that new potential therapies must overcome to get approved, while making even approved diabetes and pre-diabetes drug candidates less profitable. Some less promising treatments will also likely have their testing discontinued, if drug makers don't see a large enough potential market for them. Stricter safety testing may ultimately benefit patients, but for now, it seems like bad news for everyone else."

What do you think-how do we solve this problem???

Who is the Best Presidential Candidate for the Pharmaceutical-Life Sciences Industry-McCain or Obama?--Thoughts as the Summer Begins

We had discussed earlier whom would be the “best” presidential candidate for the Pharmaceutical-Life Sciences industry. With Obama and McCain as the presumptive candidates this Fall, we thought it useful to give our opinion on who would make more sense for our industry. Unfortunately, based on the rhetoric and their stated ;positions, we are dealing with the proverbial Hobson's choice.


Recently CNBC (http://www.cnbc.com/id/25370649/) noted that “both Barack Obama and John McCain promise substantial changes if they win. In fact, their agendas will likely affect a wide range of companies from Alcoa to Zygo Corp. But the companies that get hit hardest are probably in health care. Why? Both candidates promise a prescription for Uncle Sam's ailing health care system. McCain may allow foreign imports of drugs while Obama could allow Medicare to negotiate prices with the likes of Pfizer and Merck. That move could cost the industry $30 billion.”


One measure of how the industry feels is to look at their Political Action Committee (PAC) contribution—basically voting with their money. In a recent article, Bloomberg Business (http://www.bloomberg.com/apps/news?pid=20601087&sid=anDWekGuCW8E&refer=worldwide) talked about both candidates vis a vis the industry as follows: “Pharmaceutical industry employees and PACs contributed $516,839 to Bush in 2004, compared with $280,688 for Kerry, according to the Washington-based Center for Responsive Politics. This time around, they gave $339,729 to Obama, $262,870 to Clinton and only $74,850 to McCain through March.” They go on to say that McCain is

no friend of the industry: ``McCain has not characterized himself as a friend of the industry,'' said Dan Mendelson, president of Avalere Health LLC, a Washington research company. During a Jan. 5 debate in New Hampshire, McCain criticized the drug companies for high prices charged to the government's Medicare and Medicaid programs and said he backed importing cheaper drugs from Canada, a position also held by his Democratic opponents.” His position on re-importation has not softened and is the single policy point listed on his website:


“CHEAPER DRUGS: Lowering Drug Prices. John McCain will look to bring greater competition to our drug markets through safe re-importation of drugs and faster introduction of generic drugs.”

(Source: http://www.johnmccain.com/Informing/Issues/19ba2f1c-c03f-4ac2-8cd5-5cf2edb527cf.htm)


Bloomberg Business goes on further to quote: ``How could pharmaceutical companies be able to cover up the cost to the point where nobody knows? Why shouldn't we be able to re-import drugs from Canada?'' McCain asked. One of his former opponents, former Massachusetts Governor Mitt Romney, interjected, telling McCain not to paint drug companies as ``big bad guys.'' ``Well, they are,'' McCain responded.


If the above seems challenging, consider Barack Obama's positions (Source: http://www.barackobama.com/issues/health care/):



“Lower prescription drug costs. The second-fastest growing type of health expenses is prescription drugs. Pharmaceutical companies are selling the exact same drugs in Europe and Canada but charging Americans more than double the price. Obama will allow Americans to buy their medicines from other developed countries if the drugs are safe and prices are lower outside the U.S. Obama will also repeal the ban that prevents the government from negotiating with drug companies, which could result in savings as high as $30 billion. Finally, Obama will work to increase the use of generic drugs in Medicare, Medicaid, and FEHBP and prohibit big name drug companies from keeping generics out of markets.”


On the potential more positive front, “Obama strongly supports investments in biomedical research, as well as medical education and training in health-related fields, because it provides the foundation for new therapies and diagnostics. Obama has been a champion of research in cancer, mental health, health disparities, global health, women and children's health, and veterans' health. As president, Obama will strengthen funding for biomedical research, and better improve the efficiency of that research by improving coordination both within government and across government/private/non-profit partnerships. An Obama administration will ensure that we translate scientific progress into improved approaches to disease prevention, early detection and therapy that is available for all Americans.”


So there are “the facts” as we know them, what is clear is that if either candidate has their way, the Pharmaceutical industry can add even greater political pressure especially on pricing to its list of worry and challenges. By the narrowest of margins, we come down on the side of Obama—his approach to the industry seem a bit (very small bit) more balanced, he seems to recognize the need for R&D and to a degree the rewards that go with that success, he is more likely to extend health care coverage to a wider group of Americans and provide broader prescription coverage despite pricing pressure. What is clear to me is that one should not base their voting preference based on either candidates view on the industry.

An Interesting New Product

Occasionally, I receive word of a new product that catches my interest and I like to pass it along to my readers. I avoid the large, global product releases because everybody writes about them and even if they didn’t, enough money gets spent promoting them that half the Universe has probably been bombarded with information about them. So when, I received a copy of Spellex’s press release about their new medical and pharmaceutical spelling dictionaries, I was, to say the least, intrigued. While I love Microsoft’s spell check features, let’s face it, when you get too technical, too quickly, you outpace its abilities without too much difficulty. Now, Larry occasionally teases me, no, let me call it what it is, he roasts me by saying that my submissions have been limited by my ability to spell some of the words used in the life sciences sector. This is not true at all, however, trudging around the Web looking for the correct spelling does sometimes temper my enthusiasm for a topic. Spellex’s products give their users the ability to quickly get this information and for an additional fee there is an update service. They cover hundreds of thousands of words, including acronyms, Latin and Greek terms. OK, these guys are nothing if not thorough. I have received no compensation to write this blog entry and I haven’t used the product myself. But, I have not let things like that stop me from having an opinion. The products can be checked out at www.spellex.com and the site is definitely worth a visit if spelling is one of your weak points.
Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.


Contributed by Guy de Lastin

Ten Reasons Why Drug Discovery Is So Hard

1 New drugs are new. To develop a drug from a newly discovered molecule for a hitherto untreated condition is exploring terra incognita. Creating a new drug can mean developing a new biological concept, a new manufacturing process, and a new way of measuring a clinical response. What worked last time may be irrelevant for a new therapy.

2 Men are not mice. Drug discovery usually starts in the laboratory, progresses to animal models, and ends in human trials. But, as an example, the arthritis created by injecting mice with collagen is not really rheumatoid arthritis. Translating what scientists observe in mice to what will actually happen in humans is difficult - and often disappointing.

3 People vary. Laboratory experiments pay great attention to uniformity and control. But the testing of new drugs in humans confronts the defining characteristic of people – their heterogeneity. Beyond differences in sex, age, ethnicity, and drug metabolism, disease itself varies according to severity, preexisting conditions, and the influence of other medications. A drug effect observed in the laboratory is often overwhelmed by the variability of real, living humans.

4 Nature is conservative. The approval rate for new drugs that make it to clinical trials is around 20%, suggesting that something is working actively against new compounds. Human bodies expel foreign molecules, drugs included.

5 Manufacturing drugs is expensive. A new drug needs to be manufactured by new methods, often in a new plant that must pass inspection by regulatory authorities. The investment in such manufacturing facilities and processes must be made years before regulatory approval. Only the drugs most likely to succeed will ever justify this risky investment.

6 Ars longa, vita brevis. Most drugs take around ten years to develop. Human attention is weak over such a long period; markets change, companies run out of cash, and things go wrong.

7 Almost no one knows how to develop drugs. A project may take ten years or more; few people stay in one job for more than about three years. For all these reasons, few researchers have seen the development from beginning to end. There is no academic discipline that prepares people for careers in drug development. Everyone learns as they go. And no one shares what they have learned outside the company.

8 There are no shortcuts. Many assume that opaque regulatory requirements are the main reason it takes so long and costs so much to develop a drug. Not so. Agencies explain clearly what they want to know about toxicology, efficacy, safety, and standards for new drugs. But it simply takes time to accumulate the requisite knowledge about a novel substance.

9 It doesn’t get any easier. As science develops better, more-effective therapeutics, the bar gets higher for the next generation of drugs. When one drug becomes a standard, its successor will likely take longer to develop and cost more.

10 There are no revolutions. Now, as ever, progress in drug discovery is incremental. Understanding the molecular basis of disease will allow the development of specific and more-predictable treatments. Better information systems will help to order the immense amount of data now generated in the laboratory. But neither genomics nor bioinformatics will magically transform drug discovery.

Contributed by Barry Sherman and Philip Ross. Originally published by them in The Acumen Journal of Sciences, Volume I and reprinted with their permission.

The Failure of Industrialized Research (Part 3)

Drug discovery is unpredictable and unmanageable. So why do large pharmaceutical companies spend so much money on it?

The glimmerings of the approach were visible in the development of captopril. Squibb’s chemists made systematic alterations in organic molecules that were then tested for activity against a targeted enzyme. A new route was added in the 80’s, when the nascent techniques of recombinant DNA allowed a protein of interest to be traced to its gene, the gene inserted into a cell, the cell bred in the billions, and the protein extracted. Among the first proteins so manufactured was human insulin, a predictable success given that the role of insulin in treating diabetes was already understood.

The drug industry expected its biologists to discover, in short order, a host of protein therapeutics, ushering in an era of discovery based on biology, rather than chemistry. Indeed, several blockbuster protein drugs were produced, almost all conforming to the model of human insulin: scientists knew ahead of time that the drugs would work, if only the protein could be made economically. But for each success, there were a great number of costly failures.

The 90’s saw an immense increase in spending on industrialized research in chemical approaches. Generally, new technologies employed robotic systems to process large numbers of drug candidates in a blind search for a desired biological activity. Combinatorial chemistry starts with a molecule of interest, then adds to it randomly to form a burgeoning family of molecules. The technique formed the basis of biotech startups, like Darwin Molecular (now Chiroscience R&D), AXYS Pharmaceuticals (since acquired by the Celera Genomics Group), and Affymax. To manage the plethora of resulting molecules, other firms used technologies pioneered in Silicon Valley to build expertise in high-throughput screening.

Also in the 90’s, robotics was combined with the polymerase chain reaction, an established technique that quickly and reliably copies selected sections of DNA, to create machines capable of mass-sequencing genes. This effort produced a wealth of raw data that promises to yield new drug targets for both biological and chemical approaches. A number of companies besides Celera, including Millennium Pharmaceuticals and Human Genome Sciences, are mining data for new targets, hoping either to develop drugs themselves or sell the information to pharmaceutical firms.

More advanced drug discovery tools appear every year. Proteomics companies like CuraGen, Myriad Genetics, and ProteoMetrics were founded to categorize the blizzard of proteins synthesized in human cells, a far greater challenge than transcribing the human genome. Functional genomics, another buzz phrase, has been seized upon as the “the next big thing” by companies like Affymetrix, Celera, and Human Genome Sciences, all of which are trying to link raw genetic data to their precise physiological function in the cell. To accelerate, and thus cheapen, the multifarious chemical analyses, other startups hope to integrate them all into “labs on a chip,” in which tiny, etched channels pipe droplets of reagents from one reaction chamber to another. Still more high-tech is “virtual screening,” the plan to replace actual laboratories – even those reduced to a chip – with computer simulations.

It is impossible to measure the success of these technologies against the sums spent on them. Private investment in genomics alone came to $1 billion in 1996 and $2 billion in 1997, rising in multiples every year thereafter until the bubble burst in 2000. It is not unreasonable to conclude that for genomics alone, some $15 billion in funds were raised. Meanwhile, proponents of industrialized research cannot yet point to astounding drug discoveries their ideas have engendered.

The failure of industrialized research to produce blockbuster results for pharmaceutical companies suggests several conclusions. The billions of dollars spent in pursuit of innovator molecules has (largely) been wasted or will be rewarded over a much longer time frame than desired. Drug discovery is neither predictable nor inherently manageable. Serendipity remains the most obvious explanation for the majority of new discoveries.

At university laboratories, where serendipity is understood, creativity is valued, and researchers are not subject to corporate management. Moreover, these labs are more numerous than industrial labs, and remain the most productive source of genuinely new ideas. Small, single-minded biotechnology firms are best suited to the early development of NMEs and biologics. As these firms become larger and more successful, they become turgid, less able to develop new ideas. And pharmaceutical companies are the organizations that can most effectively validate new research, shepherd novel drugs through the later stages of development, manage their regulation, and commercialize and market new therapeutics. To that end – and in the hope of a lucky break in discovery – it is reasonable for them to invest in large staffs of researchers.

But the scale and unrestrained growth of the pharmaceutical industry’s investment in research is irrational. Such investment will not produce the wealth of new drugs for which the industry longs. The unclogging of the drug pipeline will come from intelligent investment in biotech firms and academia. To prescribe how much money large pharmaceutical companies should spend on R&D would be a speculative exercise at best. However, if the real function of pharmaceutical R&D is not discovery, but rather the validation, development, and reformulation of existing molecules, then much of what is currently spent on discovery would be better spent on licensing, venture investment, and acquisitions – as well as in development itself.

Pharmaceutical companies will always have discovery research labs. They will never exactly resemble high-technology businesses (where networking companies like Cisco Systems effectively outsource all of their science to startups and universities), but they will look more like high-tech firms than the ossified institutions they are now.

Part 3 of 3.

Contributed by Barry Sherman and Philip Ross. Originally published by them in The Acumen Journal of Sciences, Volume I and reprinted with their permission.

The Failure of Industrialized Research (Part 2)

Drug discovery is unpredictable and unmanageable. So why do large pharmaceutical companies spend so much money on it?

Screening was begun early in the 20th century by such pioneers as the German microbiologist Paul Ehrlich. Having learned that a compound of arsenic killed the microbe responsible for sleeping sickness, Ehrlich sought a related compound that would also not poison the patient. He tried some 900 compounds in mice, to little avail. Then his colleague Sahachiro Hata tested one on the microbe that causes syphilis. This compound killed the microbe, but not the experimental animals. A year later, in 1910, Ehrlich released salvarsan, the first synthesized drug to cure a disease.

How the drug worked played no role in its discovery. Why a compound killed germs without harming patients overmuch; what the microbes for two quite different diseases had in common – these puzzles went unexplained. The breakthrough – the idea that arsenic could kill germs – came from inspired observation; applying that discovery entailed laborious screening. No one dreamed that inspiration could be made routine or that works of genius could be produced on a corporate schedule.

Around the time salvarsan hit the market, European scientists were inferring a relationship between diabetes and the pancreas. After a decade of fruitless efforts, the Canadian physician Frederick Banting had the critical insight: if a pancreas is ground up, its digestive secretions destroy its diabetes-moderating secretions. Banting and his colleague Charles Best found a way to isolate the latter and successfully treated diabetes in dogs. Soon afterward, in 9122, they gave the world insulin – the first treatment for diabetes. No step in this process would have lent itself to industrialization; if we had to discover insulin and other hormones all over again, we might very well have followed similar paths.

Beginning in the 70’s, as knowledge of the molecular basis of disease increased, the pharmaceutical industry began to hope for steady discoveries based on a different model. Instead of searching for a compound that would simply, say, lower blood pressure in model organisms, pharmacologists could target specific enzymes, like the angiotensin 2 converting enzyme (ACE). In fact, the first such ACE inhibitor was discovered as the result of just such a request, by scientists at Squibb in 1977.

But even the roots of this discovery lie in serendipity. A doctor noticed that deaths from snakebite in the banana plantations of Brazil involved catastrophic declines in blood pressure. Researchers in London isolated the causative peptides and the search for the drug was taken up by two chemists at Squibb, David Cushman and Miguel Ondetti, who synthesized one and showed that injections of it lowered blood pressure. Squibb saw no market for an injectable antihypertensive and shelved the project. Then, in 1974, research in a related enzyme system – again, by academics – showed how molecules small enough to be effective if taken orally might do the job, and the Squibb team developed captopril. It gained FDA approval in 1981, starting an avalanche of development at other companies that has led to more than ACE inhibitors.

The saga of captopril shows the pharmaceutical industry at its very best, developing a drug that was at once a success for science, for patients, and for a company’s bottom line. Yet it hardly promised the industry what it yearned for: a regular supply of bankable discoveries. Since then, the bar has risen: demand for new ideas has increased as the number of important diseases lacking a treatment has dwindled.

The traditional, itinerant investigator, as in the Ehrlich example; the hypothesis-driven project, as in the insulin story; or applied research, as in case of ACE inhibitors – all relied on luck and brilliance to find new drugs. In its search for an alternative to these methods, the industry fell in love with a new approach to research that promised to minimize serendipity and maximize predictability: the industrialization of scientific research.


Part 2 of 3. Part 3 to follow shortly.

Contributed by Barry Sherman and Philip Ross. Originally published by them in The Acumen Journal of Sciences, Volume I and reprinted with their permission.

The Failure of Industrialized Research (Part 1)

Drug discovery is unpredictable and unmanageable. So why do large pharmaceutical companies spend so much money on it?


Observing the pharmaceutical industry from a prudent distance, one might wonder at its apparent confidence in it ability to discover new drugs. Pharmaceutical companies maintain great staffs of scientists and spend increased sums of money on technologies meant to increase the chance discovering new medicines. Their research-and-development budgets surpass that of the National Institutes of Health. And this investment is only growing: global expenditures on R&D has doubled over the past 11 years, from $22.2 billion in 1991 to $44.5 billion in 2001. If the investment by pharmaceutical companies continues to grow at this pace, R&D spending could reach $57 billion in 2006. [1]

But closer inspection reveals a contradiction: in most cases, these large corporations purchase seminal drug ideas from smaller, entrepreneurial biotechnology companies and university research laboratories. In 2001, the 14 major pharmaceutical companies were responsible for discovering merely 26% of the 32 biologics and new molecular entities (NMEs, defined by the Food and Drug Administration as active therapeutic ingredients that have never been marketed in the United States), while being responsible for 65% of global R&D spending. Biotech and academic labs produced the remainder. [2] Furthermore, the productivity of pharmaceutical companies is decreasing: the number of medicines in the early stages of development (preclinical and clinical Phase I and II) dropped by more than 20% from 1999 to 2001. [3]

Finally, consider this: most of the NMEs that big pharmaceutical companies do develop are not focused on new targets; they do not create entirely new medicines or open up new markets. Of the 32 FDA-approved medicines that came to market in 2001, only 5 were novel therapeutics or were directed against new targets. [4] None have their roots in large pharmaceutical companies (see “FDA Novel Therapeutics or New Targets, 2001,” page 49).

A critical assessment of these products reveals that many are me-too drugs, that is, they are structurally similar to and affect the same targets as drugs already on the market. What pharmaceutical companies call NMEs ver often aren’t new at all: of the 13 new drug applications (NDAs) approved thus far by the FDA in 2003, 8 are reformulations or combinations of drugs that have already been approved. [5] Xanax, in a new extended-release formula, makes the list. Another, Cardizem, was first approved in 1999. [6]

“A company with a research budget of $4 billion should be turning out five new drugs a year, and they’re not,” says Charles Grudzinskas, an industry consultant and professor of pharmacology at Georgetown University Medical Center.

What, then, do those armies of corporate scientists do? Do pharmaceutical companies accumulate them as tokens of prestige? Or is this merely a fossilized behavior that once made economic sense?

For large pharmaceutical companies, the issue is, predictably, a sensitive one. Most of the senior executives we contacted for this essay declined to be quoted on the record. But one put it this way: “Oh, we do it for a variety of reasons. Because revenues permit it; research is only a fraction of out total budget. Because it only takes one success to win big; it’s a venture mentality. Because consolidation is inevitable, and bigger looks better. And finally, because management has a vested interest in wasting money. Our stock price is supported by the appearance of large-scale research and a full drug pipeline.”

The executive was, perhaps, being excessively cynical. His reasons, while partly true, are subsidiary: the best explanation of why pharmaceutical companies invest in early-stage discovery is that they have their reasons (even if, as will be discussed later in this essay, the scale of their investment is irrational). According to UBS Warburg, only 20% to 25% of the R&D spending by pharmaceutical companies is for drug discovery itself; the great majority is spent on development. Research is thus a sunk cost of being in the drug busniness: since the best, most innovative ideas are purchased from others, big companies need scientists to validate outside discoveries and to develop those discoveries once they have been purchased. Industry-based scientists analyze drug candidates for toxicity and other risks in cell cultures, animals, and people. Finally, they optimize molecules and create variations on known themes. In other words, pharmaceutical companies need experts to validate potential acquisitions and for drug development; therefore, they must invest in both.

Increasingly, the secret ecology of the big pharmaceutical industry is to outsource drug discovery. In 2000, 55% of big pharmaceutical companies’ approved products were “in-licensed,” in the jargon of the trade. In 2002, this fell to 36%, and increased mergers and acquisitions suggest a growing reliance on external discoveries: deals and alliances for preclinical and discovery products increased by 85% between 2000 and 2002. [7]

Consider the case study of Bristol-Myers Squibb and ImClone. After spending $14 billion in current dollars on research over the course of a decade, Bristol-Myers Squibb felt it necessary to spend another $2 billion to acquire the rights to Erbitux, the anticancer drug candidate from ImClone (see “imClone Systems,” page 26). Amgen, whose first two blockbuster drugs trace back to before the company’s founding, has spent $1 billion a year – 25% of its sales – on research, yet it, too, has gone to outside sources, notably spending $9.6 billion to acquire Immunex and, and, with it, the arthritis drug Enbrel. Even Human Genome Sciences, which has defined itself by its powers in drug discovery, has resorted to outsourcing, paying $120 million to acquire Principia, mainly for its long-acting growth hormone technology.

How did this happen? By now, the industry had expected to be feasting on the fruits of a revolution in fundamental research technology. Genomics and proteomics were to have produced vast quantities of molecular targets in the body (and in the organisms that infect it). Combinatorial chemistry was to have made a blizzard of arrows, some of which would surely hit those targets. High-throughput screening was to have shot those arrows at myriad targets to see which ones stuck. The resulting plethora of new ideas was forecast to be almost more than the development side of the industry would be able to exploit. But for all their sophistication and promise, these tools have as yet contributed few new product ideas.

Traditionally, companies have made substantial investments for research by their own scientists into the types of drugs they already market. Several other approaches to drug discovery have been tried. Some companies have even freed their scientists to do pure research, without corporate interference, at entities like the Merck Genome Research Institute, the Bristol-Myers Squibb Pharmaceutical Research Institute, the Pfizer Technology Discover Center, and DNAX, which was purchased by Schering-Plough to carry out basic research in immunology. Some companies have outsourced their research by sponsoring academic research in return for first dibs on the commercial rights to any discoveries. As far back as 1980, Germany’s Hoechst entered into such an agreement with Massachusetts General Hospital (but got little out of it).

None of these strategies, individually or in combination, has provided the predictable flow of promising new therapeutics that the industry requires to maintain its profitability. Disenchantment with the unpredictability and unmanageability of a discovery model driven by investigators’ curiosity and instinct has propelled the movement toward an industrialized model of research with large-scale screening as its foundation.

Part 1 of 3. Part 2 to follow shortly.

Contributed by Barry Sherman and Philip Ross. Originally published by them in The Acumen Journal of Sciences, Volume I and reprinted with their permission.

_______________________________________________
1 Centre for Medicines Research International Pharmaceutical R&D Expenditure and Sales 2001: Pharmaceutical Investment and Output Survey 2001: Data Report I.
2 Ibid.
3 Ibid.
4 Zambrowicz, B., A.T. Sands (2003) Knockouts model the 100 best-selling drugs – will they model the next 100? Nature Reviews: Drug Discovery 2(1) 38-51.
5 FDA (2003) New Drug Approvals for Calendar Year 2003, www.fda.gov/cder/rdmt/ndaapso3cy.htm#top.
6 FDA/Center for Drug Evaluation and Research. Reports to the Nation 1993 – 2001 and Drug Topic Archives New Drug Approvals 1995 – 2001.
7 Burrill & Company (2003) Biotech 2003: The 17th Annual Report on the Industry.

A BONANZA FOR PHARMACEUTICAL INDUSTRY

A BONANZA FOR PHARMACEUTICAL INDUSTRY BASED ON A
NOVEL APPROACH TO HEALTHCARE IN NEW YORK CITY


If the Pharmaceutical Industry's life blood is demand generation, prescription compliance and a robust pipeline, two of the (former) three are being pumped up by a novel program in New York City. As discussed in The New York Times on February 26, 2008, Page B3 (http://www.nytimes.com/2008/02/26/nyregion/26health.html?em&ex=1204174800&en=f310ed051efabd9a&ei=5087%0A#, ) Mayor Michael Bloomberg announced that after a 2 year development effort and more than $60 million of public funding that the city was ready to equip any or all doctors with computer software (from eClinicalWorks) that can track patients records in order to provide better patient care. They project 1,000,000 patients on this system by year end!

I can only imagine what a bonanza this could be for the Pharmaceutical Industry! Assuming the system is successful and it is likely to be successful (this is my optimism at work as public funded systems projects are rarely viable on initial rollout and the complexity of the various stakeholders only exacerbates the problem) , the potential benefits for the patient and supplier are enormous There could be tightly integrated and compliance monitoring capability easily added so that it would be easy to inform/remind patients about their scripts; on line adjudication could be another step away and electronic script writing fused together to make for a far more effective and efficient health care delivery system.

The value to the industry suggests to me that the business, commercial and market development organization should start understanding and promptly backing such a system on a nationwide basis. Mayor Bloomberg suggests that “This can do for health what the Bloomberg terminal did for finance” (and by the way made the mayor a multi-billionaire). If he is even partially correct, the payback for all is monumental.

What do you think??

Send comments to larryrothmansblog@gmail.com

Contributed by: Lawrence J. Rothman, PhD