Praveen Tipirneni, a corporate development manager at Deltagen, received a bachelor’s degree in mechanical engineering with molecular biology from MIT, an MD from McGill University, and his MBA in healthcare finance from the University of Pennsylvania’s Wharton School of Business. He can be reached at [email protected]
Though financing of the biotechnology industry has decreased from the record $33 billion raised in 2000, it is still significant. However, with over $200 million needed to bring a single drug to market, the industry will need even more capital just to finance the 350 drugs currently in clinical trials.
Fortunately, there is a way of attracting the necessary capital. Economist Hernando de Soto wrote in The Mystery of Capital that the great practitioners of capitalism, such as the creators of integrated title systems and corporate stock, were able “to reveal and extract capital where others saw only junk by devising new ways to represent the invisible potential that is locked up in the assets we accumulate.” This industry has excelled at developing “novel” drug candidates; it must now develop innovative ways to represent the potential inherent in these drug candidates.
The structure of innovation in biotechnology has enabled investors to bear huge amounts of risk by diversifying their systemic “compound-level” risk over time. The industry’s structure of innovation is a Modified Technology-Push, a term coined by Robert Carr in his book, From Lab to Market: Commercialization of Public Sector Technology.
Technology Push implies that technology is first developed and then pushed out into the commercial sector broadly in search of applications. A Modified Technology-Push, in contrast, implies that technologies are developed knowing that commercial markets already exist: there will always be a market for a cancer cure. Since demand is well known, investors only need to figure out if the technology works. They look at the product of each company as a probability function.
During preclinical and Phase I trials, the probability is low. As compounds move through clinical trials, the probability increases. By knowing the odds at different stages of clinical trials — 18 percent at Phase I, 35 percent at Phase II, and 70 percent at Phase III by one estimate — investors can optimize their portfolios. Investors can diversify risk by holding a portfolio of companies consisting of different compounds in different stages of clinical trials.
The opportunity is that the clinical trials stage is not the only way to represent a drug’s potential. There are different classes of drugs in each of these stages, and each class has its own associated probabilities. In the late 1990s, investors poured money into anti-infective agents. Companies such as Intrabiotics and Versicor raised substantial amounts of capital as their compounds moved into clinical trials.
What made these companies so attractive? Kevin Kelly, CEO of Intrabiotics, explained in an industry newsletter that “more than 50 percent of products entering Phase II testing and over 80 percent of products entering Phase III trials ultimately reach the market.” By classifying and understanding the probability distributions of compounds based on their therapeutic class, anti-infective companies were able to raise a large amount of capital.
With the rapid advances in genomics and proteomics, classifications can go even deeper. Diseases are being redefined based on the underlying biological mechanisms. Various cancers such as lymphomas, typically lumped together, are now known to represent distinct diseases. Other diseases, while phenotypically dissimilar, may be classified together based on their biological mechanisms.
In the same way, compounds can be classified in a number of different ways. They can be organized by their structure, by their targets (GPCRs or ion-channels), by their pathways, by their gene expression profiles or absorption mechanisms — to name just a few possibilities. These classifications can then be tied to probability distributions representing their chances of FDA approval, creating effective proxy measures of value.
Creating and popularizing these proxy measures of value will allow investors to create a number of portfolios and diversify them more effectively. Further, this type of transparency would enable Wall Street to securitize compound portfolios, potentially creating efficient primary and secondary markets. History tells us that these types of changes expand the financing pool and ultimately will let the industry reach its potential.
Opposite Strand is a forum for readers to express opinions and ideas about trends and issues in genomics. Submissions should be kept to 550 words and may be submitted to [email protected]