4
Diverse Funding Models

There are multiple potential approaches to funding the discovery and development of drugs to treat rare and neglected diseases. The four speakers in this workshop session described their organizations’ unique approaches to facilitating drug development for rare and neglected diseases: a not-for-profit pharmaceutical company model, a disease foundation that operates a virtual company linking investors with biopharmaceutical companies, a for-profit company with a vested interest in rare diseases, and a global private-equity fund dedicated to advancing drug discovery. Highlights of each of the four models are provided in Box 4-1.

INSTITUTE FOR ONEWORLD HEALTH: A NOT-FOR-PROFIT PHARMACEUTICAL COMPANY1

Ten million children around the world die every year. More than one-third of childhood deaths occur in the neonatal period. Children who survive past infancy succumb to a variety of diseases, including pneumonia, diarrhea, malaria, measles, and AIDS; malnutrition is an underlying contributor in more than half of these cases (Bryce et al., 2005). These statistics were striking and unacceptable to Dr. Hale, and inspired her to found the Institute for OneWorld Health, a not-for-profit pharmaceutical company focused on neglected diseases in the developing world. Such diseases are not

1

This section is based on the presentation of Victoria Hale, Ph.D., Founder and Chair of the Board of Directors, Institute for OneWorld Health.



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4 Diverse Funding Models There are multiple potential approaches to funding the discovery and development of drugs to treat rare and neglected diseases. The four speakers in this workshop session described their organizations’ unique approaches to facilitating drug development for rare and neglected diseases: a not-for- profit pharmaceutical company model, a disease foundation that operates a virtual company linking investors with biopharmaceutical companies, a for-profit company with a vested interest in rare diseases, and a global private-equity fund dedicated to advancing drug discovery. Highlights of each of the four models are provided in Box 4-1. INSTITuTE FOR ONEWORLD HEALTH: 1 A NOT-FOR-PROFIT PHARMACEuTICAL COMPANy Ten million children around the world die every year. More than one- third of childhood deaths occur in the neonatal period. Children who sur- vive past infancy succumb to a variety of diseases, including pneumonia, diarrhea, malaria, measles, and AIDS; malnutrition is an underlying con- tributor in more than half of these cases (Bryce et al., 2005). These statistics were striking and unacceptable to Dr. Hale, and inspired her to found the Institute for OneWorld Health, a not-for-profit pharmaceutical company focused on neglected diseases in the developing world. Such diseases are not 1 This section is based on the presentation of Victoria Hale, Ph.D., Founder and Chair of the Board of Directors, Institute for OneWorld Health. 

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0 BREAKTHROUGH BUSINESS MODELS BOX 4-1 Examples of Business Models for Funding the Development of Drugs to Treat Rare and Neglected Diseases INSTITUTE FOR ONEWORLD HEALTH (IOWH) Business Model Not-for-profit pharmaceutical company Structure A small team of pharmaceutical company experts, founded in 2000 with seed funding from the Bill and Melinda Gates Foundation. Approach Identify promising drug candidates, complete clinical trials, secure local manufac- turing and regulatory approval in countries in which target diseases are endemic, and form partnerships to ensure drug distribution. IOWH strives to be opportunis- tic and flexible, engage industry partners, bridge industry and the public sector, focus on development, not duplicate available global resources, and ensure local government support. Strategies • Find new approaches to old diseases. • Focus on high-risk, high-reward projects. • Start with parasitic diseases (for which there are no vaccines). • Seek to find new uses for older, off-patent drugs. Portfolio • Public health tools—for disease elimination programs (e.g., paromomycin, a cure for visceral leishmaniasis) • Consumer products—the mother as the decision maker and purchaser (e.g., antidiarrheal medication) • Prescription drugs—accessed through the formal health care system (e.g., Chagas drug) • Active pharmaceutical ingredients—supplier to industry (e.g., biosynthetic artemisinin analogues) CYSTIC FIBROSIS FOUNDATION THERAPEUTICS, INC. (CFFT) Business Model “Venture philanthropy” Structure Wholly owned, nonprofit drug discovery and development subsidiary of the Cystic Fibrosis Foundation with eight staff members.

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 DIVERSE FUNDING MODELS Approach Establishes business relationships with biotechnology and pharmaceutical com- panies and works with them to reduce the risk of their investment in cystic fibrosis treatments by providing financial support, access to leading cystic fibrosis experts and research tools, and access to the Cystic Fibrosis Therapeutic Development Network of Cystic Fibrosis Care Centers for facilitation of clinical trials. General Elements of Alliance Agreements • Funds are provided on a matching basis for preclinical and clinical development. • Awards are milestone driven. • A scientific advisory council oversees progress. • Upon approval of a drug, CFFT receives a multiple of its investment (or a royalty based on sales), which it can then reinvest in new products. GENZYME Business Model For-profit company Structure Biotechnology company founded in 1981. Currently more than 10,000 employees worldwide and annual revenues exceeding $3 billion. Approach A sustainable business model for drug development for rare and neglected dis- eases requires three basic elements: • The therapy must be effective and address an unmet medical need, presum- ably treatment for a disease that causes a life-threatening, severe morbidity. • There needs to be a global market. • The price must be sustainable. Research and Development Philosophy • Genzyme pursues areas in which there is a severe, unmet medical need. • The therapy must be disease modifying and/or lifesaving. • The therapy must be testable. • Post-approval, Genzyme is committed to optimizing patient care and access. CELTIC THERAPEUTICS, LLLP Business Model Global private equity firm Structure A “virtual pharmaceutical company” comprising a management company that runs a private equity fund and a biomedical development organization that devel- continued

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 BREAKTHROUGH BUSINESS MODELS BOX 4-1 Continued ops the firm’s strategy and manages the outsourcing of all product development components. Approach The company seeks to acquire and invest in novel therapeutic drug candidates that can address unmet medical needs. It buys, licenses, or forms an alliance with a biotechnology company for one of its promising product candidates for a rare or neglected disease that is in Phase IIA, develops the product to the point at which a large pharmaceutical partner will be interested, and then sells it at auction to a pharmaceutical company. A key feature of a “virtual pharma” is that traditional fixed costs (e.g., human resources and facilities) are converted to variable costs (e.g., contract research organizations and consultants). The model can provide returns to investors following commercial distribution by a pharmaceutical partner, or can help fulfill the mission of a philanthropic organization by facilitating noncommercial distribution through a public–private partnership. necessarily rare in those areas of the world.2 Intestinal worms, for example, are rare in the United States but affect 3 billion people globally. Likewise, although almost unheard of in the United States, malaria affects 500 mil- lion people worldwide, lymphatic filariasis 90 million, and leishmaniasis 14 million. Research and discovery can occur in a variety of venues, but bring- ing a product to market requires the involvement of a biopharmaceutical company. Blockbuster drugs have made the industry highly profitable, but the business need to develop the next blockbuster means that few if any company resources are available for addressing global health inequities and diseases of the poor. The discoveries, technologies, and expertise exist, and there is a desire on the part of pharmaceutical professionals to address global health issues, but a new model is needed for the development of affordable drugs to treat infectious diseases in the developing world. Creative Funding and Social Enterprise OneWorld Health was launched in 2000 as an experiment, modeled after the pharmaceutical industry but eliminating the profit requirement 2 As noted by Coté in Chapter 3, “rare” is defined in the U.S. Orphan Drug Act as diseases that affect fewer than 200,000 people in the United States. “Neglected” and tropical diseases have significant impact in the developing world, but all are rare diseases as defined in the U.S. Orphan Drug Act.

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 DIVERSE FUNDING MODELS from the business plan. There is little venture capital interest in these mar- kets, and start-up activities were deliberately funded primarily through philanthropy. There are no shareholders or returns to be paid, and the company cannot be bought, merged, or acquired. The primary target is neglected diseases of the poor resulting from infectious agents or vectors that are not generally prevalent in the developed world. Initial program funding was provided by the Bill and Melinda Gates Foundation. OneWorld Health now has the task of convincing new funders that there are worthwhile investments to be made in research and product development addressing neglected diseases. The optimal business model would be self-sustaining and would not rely exclusively on philanthropy. Ultimately, Hale imagines a hybrid organization that would be socially driven and could support itself either wholly or in part with revenues. She would like to see the emergence of a not-for-profit pharmaceutical sector, and to that end, OneWorld Health has helped start nine nonprofit organiza- tions focused on the development of drugs, vaccines, and diagnostics. Hale suggested that somewhere between the not-for-profit and for- profit models lies a realm of new business model possibilities. Although philanthropy enables a significant amount of research and development in the global health sector, pharmaceutical partnerships are increasingly expected. One emerging funding source is social investors—people who have money to loan or invest and want to use it to drive social change, and who have a strong desire to be engaged and understand how their money is being used. Regardless of the funding source and whether a company is for-profit or not-for-profit, the key to a successful business model is sustainability. Funding from a single source does not result in a sustainable model. There- fore, having a diversity of funding sources is important, and organizations should strive to obtain loans and grants in addition to philanthropic funds. A principal strategy of OneWorld Health is varying its approach depending on the project and remaining flexible, nimble, and nonbureaucratic. The organization is opportunistic and pragmatic, and adapts as necessary to move a particular technology forward. Intellectual Property All intellectual property is potentially profitable. It is now generally accepted, however, that when it comes to global infectious disease tech- nology, intellectual property is royalty free for countries that rank in the bottom two-thirds of the World Bank’s ranking of countries by economic development (which often includes India and China). The movement to this end began with a few progressive investigators and universities, and others followed. Today under Gates Foundation leadership, neglected tropical dis-

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 BREAKTHROUGH BUSINESS MODELS eases are generally acknowledged to be not-for-profit territory with respect to intellectual property. What Defines Success? In the short term, OneWorld Health has demonstrated that people can work together through a not-for-profit company to develop a medicine for a neglected disease. For example, OneWorld Heath developed a new use for paromomycin, an antibiotic already on the market for 30 years, as a lifelong cure for visceral leishmaniasis, a parasitic infection.3 While regulatory approval of a new product or a new use of an exist- ing product is necessary for success, it is not sufficient. To be successful in the medium term, the product must have impact, which means it must save lives. And to do that, the product has to reach those who need it, many of whom live in very rural areas. Accomplishing this requires partnerships with social entrepreneurs. For the long term, the mark of success will be a sector that is sustainable, with broad corporate and government engage- ment and acknowledgment that work on some diseases simply will not be profitable. Hale encouraged the orphan drug development community to be bold and disruptive with regard to both systems and people: engage the public; engage the government, including the Food and Drug Administration (FDA) and Congress; and challenge the current experts and leaders in the field to break existing boundaries. CySTIC FIBROSIS FOuNDATION THERAPEuTICS, INC. (CFFT): A vIRTuAL COMPANy FOR MANAGING DRuG DISCOvERy AND DEvELOPMENT ALLIANCES4 The Cystic Fibrosis Foundation was established in 1955 by a group of parents of children with cystic fibrosis seeking to ensure that their children would get the best of care. At the time, the mechanism of the disease was unknown. In 1989 a team of researchers, supported in part by funding from the foundation, identified the gene responsible for the disease. This gene normally produces a protein now known as the cystic fibrosis con- ductance transmembrane regulator, or CFTR. A defect in the CFTR gene leads to defective mucociliary clearance in the lung, setting up a cycle of 3Paromomycin was approved as a treatment for visceral leishmaniasis by the Drug-Controller General of India in September 2006. 4 This section is based on the presentation of Diana Wetmore, Ph.D., Vice President of Alli- ance Management, Cystic Fibrosis Foundation Therapeutics, Inc.

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 DIVERSE FUNDING MODELS mucus obstruction, infection, and inflammation that ultimately leads to lung destruction and death. Following elucidation of the pathogenesis of cystic fibrosis, Pulmozyme, an enzyme for thinning and clearing mucus and the first drug in 30 years to be developed specifically to treat cystic fibrosis, came to market in 1994. The anti-infectives tobramycin (TOBI) and azithromycin reached the market in 1998 and 2002, respectively, and in 2004, hypertonic saline became available to aid mucus clearance. Today there are three CFTR- targeted candidates currently in clinical trials (see Figure 4-1). The Cystic Fibrosis Foundation measures the success of research and development efforts by whether they translate to increased length of sur- vival or significantly enhanced quality of life for cystic fibrosis patients. Each year since 1985 has seen an increase in the expected life span of patients with the disease, and over the last several years the slope of that curve has increased. Although full statistics are not yet available, the foun- dation believes this is due in part to the use of TOBI, Pulmozyme, and hypertonic saline. Given the complexity of the disease, these drugs span a range of therapeutic targets. Disease-preventing therapies, introduced at a very early age to prevent damage to the lung, include gene therapy, CFTR protein modulation, and restoration of ion transport. At the other end of the spectrum are disease-modifying therapies that help manage the mani- festation and progression of the disease; they include drugs that thin and clear mucus, anti-inflammatory and anti-infective drugs, products that can increase the success of lung transplantation, and nutritional supplements. CFFT, established in 2000, is a wholly owned nonprofit drug discovery and development subsidiary of the main foundation. Its primary mission is to convince biopharmaceutical companies to develop drugs for a disease that affects only 30,000 people in the United States and 70,000 worldwide. The primary strategy involves reducing the risk to development partners of entering the cystic fibrosis field and making products more attractive from a business perspective. Keys to success include: understanding the basic defect, the underlying science, and the • pathophysiology of cystic fibrosis; establishing a business relationship with the partner; and • providing access to patient populations and information systems to • support clinical development. Risk is a combination of uncertainty, cost, and timing. CFFT works to reduce risk to partners by sharing the financial burden and by working with the cystic fibrosis research community to validate therapeutic targets, develop clinically relevant disease models, and validate assays and discovery tools. In addition, the organization understands the proof-of-concept pro-

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 PHASE III PHASE II PHASE I PRECLINICAL FIGuRE 4-1 Breadth and depth of the Cystic Fibrosis Foundation Therapeutics pipeline as of April 30, 2008. Three cystic fibrosis conductance transmembrane regulator (CFTR)–targeted candidates are in Phase III clinical trials. SOURCE: Wetmore, 2008. Figure 4-1, R01292 landscape

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 DIVERSE FUNDING MODELS cess and has created a Therapeutics Development Network of cystic fibrosis clinical care centers with experience in the design and conduct of clinical trials for and access to patients, which can improve enrollment efficiency (see Figure 4-2). This infrastructure assures partners that if their products are ready for clinical development, CFFT will help streamline the clinical trial process. The clinical care centers in the network receive grant support from CFFT to ensure that they are not only providing excellent care, but also training their staff in the conduct of clinical trials. In addition, the net- work includes an independent data safety monitoring board whose mem- bers are familiar with the clinical development of drugs for cystic fibrosis. It is important to understand that, although CFFT is a virtual company and necessarily functions through the actions of others, it does not simply provide funding and expertise. The alliances formed are truly business relationships, and there is a peer-reviewed, milestone-driven mechanism to enable evaluation of promising therapies. CFFT agrees to provide funds on a matching basis for preclinical development and for initial clinical trials, and negotiated portions of the monetary awards are dependent on the achieve- ment of predetermined milestones. A scientific advisory council comprising CFFT and sponsor representatives provides oversight and progress reports. CFFT does expect a return on investment. The organization was designed to shoulder risk, and it is understood that there is no return on investment if a drug is not approved. If a drug makes it to market, however, CFFT expects its investment to be repaid so it can reinvest in the pipeline, and the agree- ments made ensure that CFFT receives a multiple of its original investment (or a royalty payment based on net sales). As an adjunct, CFFT has created a Technology Access Program that provides funding for the development and validation of new technology platforms. After the development agreement with a sponsor is in place, CFFT functions as an external expert advisor, enabling, facilitating, and trouble- shooting. For example, CFFT can save a business partner 6 months on the learning curve by having validated assays available at contract research organizations or by providing access to positive control compounds or cellular, antibody, or protein reagents. CFFT can also facilitate collabora- tions between a sponsor and academic partners, as well as access to intel- lectual property. And through regular advisory meetings, CFFT can assist in resolving issues and connect a sponsor with experts in pharmaceutical development. These elements of CFFT’s approach create an acceptable level of risk for industry partners, and help ensure that the pipeline of cystic fibrosis treatments remains full and that promising products eventually reach patients.

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 University of Harvard Case Western University of Washington Alabama University - Reserve University Ohio State North Carolina University Boston University NPD & IPFT Cytology (St. Louis) Children’s Interpretation Interpretation Harvard University University - of Utah Massachusetts CFFT General Support & Oversight University of Baylor Coordinating Center Washington University Seattle, WA Microbiology CF Data External Safety Advisory Monitoring Committee Board University of Stanford Pittsburgh University University University of University of University of Johns Hopkins University of of Colorado Cincinnati Minnesota University Iowa California, Inflammatory Imaging (HRCT) San Diego Mediators Interpretation FIGuRE 4-2 The Therapeutics Development Network of cystic fibrosis clinical care centers. Principal investigators and staff have experience in the design and conduct of clinical trials for cystic fibrosis and access to patients for trial enrollment. NOTE: CF = cystic fibrosis; CFFT = Cystic Fibrosis Foundation Therapeutics, Inc.; HRCT = high-resolution computed tomography; Figure 4-2, R01292 IPFT = infant pulmonary function testing; NPD = nasal potential difference test. SOURCE: Wetmore, 2008. converted to grayscale

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 DIVERSE FUNDING MODELS GENzyME: SuRvIvING AND THRIvING AS A FOR- 5 PROFIT COMPANy IN THE RARE DISEASE ARENA Gaucher disease affects fewer than 1 in 1,000 individuals of Ashkenazi Jewish descent and 1 in 100,000 of the larger population. Those affected are missing an enzyme without which lipid accumulates in the liver and the spleen, as well as the bone marrow, ultimately resulting in a crippling bone disease and early mortality. Cerezyme, an enzyme replacement therapy for Gaucher marketed by Genzyme, produced revenues in excess of $1 billion in 2007. In light of this remarkable success, Dr. Meeker raised two questions for consideration. First, is this a reproducible model? And second, is it necessarily a good thing that a product for an orphan disease can yield $1 billion in revenue? Genzyme was founded in 1981. In 1988 it was a small bulk manu- facturer of pharmaceuticals and also had a nascent cystic fibrosis research program. With survival of the company as the primary goal, its leadership made a decision to devote all resources to pursuing one therapy for one disease, and saw Gaucher disease as offering that opportunity. In 1991 Genzyme’s first Gaucher treatment, Ceredase, was approved on the basis of a 12-patient pivotal trial, with the dose and the total number of patients enrolled being chosen primarily on the basis of the amount of enzyme the company had available. At that time, the approach of investing all resources in one drug for one disease was regarded as unsustainable, and the company’s plan for the longer term was to pursue more conventional targets. In 1993, the CFTR gene had recently been cloned, and venture capitalists were willing to invest $85 million in a Genzyme cystic fibrosis program over a 5-year period. Part of the reason, Meeker believes, was recognition not only that the Orphan Drug Act had opened doors for drug approval, but also that the model for Gaucher disease had shown that a company could make a viable business out of treating a small population. Ceredase was a human-derived product; 22,000 human placentas were required to harvest enough enzyme to treat one patient for 1 year. Its approval coincided with the peak of the AIDS epidemic, and a manufactur- ing process requiring such a massive quantity of pooled placentas posed a significant safety and regulatory challenge. In 1994, a recombinant plant protein version of the product, called Cerezyme, was approved, eliminating the need for human tissue. Today, Gaucher patients treated early, before significant damage has occurred, have every prospect of living a normal life. 5 This section is based on the presentation of David Meeker, M.D., President, Lysosomal Storage Disorder Therapeutics, Genzyme.

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 DIVERSE FUNDING MODELS is understood, moreover, a proposed therapy must be testable. Cerezyme reverses the effect of Gaucher, but there are a number of diseases whose damage is not reversible, and the goal of a therapy is to slow the progres- sion of the disease. Demonstrating decreased progression is very different statistically from showing reversal. Another challenge, alluded to earlier, is the practicality of running a clinical trial when the patient population is extremely small. One example is Niemann-Pick B disease, a genetic condition, much like Gaucher, affect- ing 500 to 1,000 patients worldwide. Genzyme began a Phase I trial of a therapy for this condition in January 2007 at a single center in New York City. Patients are also being screened in the United Kingdom, Germany, Chile, Brazil, Saudi Arabia, and New Zealand. Only eight patients have been enrolled to date. Upon completion of Phase I, more patients will be needed for Phase II, and it is unclear whether gathering these subjects will even be possible. A third challenge can be manufacturing enough product, even for a small population. For example, the dose of Myozyme for Pompe disease is 20 mg/kg, an amount requiring significantly more protein production than is necessary for Genzyme’s other therapies, which are administered at doses of about 1 mg/kg. Genzyme knows this is a potentially lifesaving drug, and is in the process of scaling up production from 160 to 2,000 liters and ultimately to 4,000 liters. The company is providing the drug free in many places, including the United States, while it works through the process of scaling up production and meeting regulatory requirements. To date, Genzyme has invested more than $600 million in developing this drug. Indeed, cost and pricing represent a final, critical challenge for com- panies seeking to develop drugs to treat rare diseases. Given the success of Cerezyme, some might suppose that a company can develop a therapy for a rare disease, charge a high price, and be successful. However, this is a simplistic view. For many rare diseases, the total number of affected patients is unknown. Moreover, global access is uncertain, and while a company may receive broad approval of a drug, its business model will not be sustainable if the company is reimbursed in only one country. Ulti- mately, the reason Cerezyme revenues total $1 billion today, 15 years after the product’s launch, is not the price; it is the fact that Cerezyme is treating 5,000 patients in 90 countries around the world (1,500 within and 3,500 outside of the United States). With respect to pricing, the cost of production and the cost of devel- opment are factors, but the most important driver is rarity. In 2004, for example, 14 million individuals were prescribed Nexium, 8,000 were pre- scribed the orphan drug Gleevec, and approximately 1,500 were prescribed Cerezyme. If there were 100,000 patients with Gaucher disease, the cost of Cerezyme would be 1–10 percent of what it is today ($200,000 per year).

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 BREAKTHROUGH BUSINESS MODELS In the developing world, even for such a costly treatment, partnerships can facilitate access. The per-patient cost is extremely high, but the total cost for a country to treat its affected population is a negligible proportion of its overall health care budget. Sustainable pricing and a global market are key to the development of drugs for rare diseases. Another orphan disease therapy in the Genzyme portfolio is Aldurazyme, a treatment for mucopolysaccharidosis I (MPS I), which is even rarer than Gaucher disease. With CNS involvement, MPS I leads to death before age 5. A more intermediate phenotype with no CNS involve- ment leads to death by age 10. Aldurazyme does not treat the CNS aspects of the disease, but if patients are treated early, it can significantly prolong life by alleviating systemic manifestations. In developing Aldurazyme, Genzyme partnered with BioMarin; given the rarity of the disease, neither company alone could have developed the product. After 5 years on the market, Aldurazyme is expected to have grossed $140 million globally in 2007. The cost of maintaining production of a treatment for a rare disease is significant, so the profit derived from Aldurazyme is very small, but the costs are shared by the two companies. This arrangement works for a product that is part of a larger portfolio, but would not be suitable for a company producing a single product. Summary Whether a drug indication under study benefits a large or a small population, therapies must make a difference. A sustainable business model for the production of drugs to treat rare diseases is a shared responsibility between industry and the health care system. Pricing must be viewed as a function of rarity, and future investment depends on a viable market. While funding research is important, the real driver is at the other end of the con- tinuum, when there can be a guaranteed market for these drugs. Regardless of the size of the market, any product that is approvable, suggested Meeker, can become a valuable part of a company’s portfolio. CELTIC THERAPEuTICS, LLLP: A PRIvATE-EquITy MODEL FOR ADDRESSING GLOBAL HEALTH6 As discussed previously, along the drug development continuum between early discovery/early development and late-stage development/approval lies a substantial gap in which sufficient funding is lacking. Dr. Corr elaborated on this concept by discussing the imbalance of resources between drug 6 This section is based on the presentation of Peter Corr, Ph.D., Co-founder and General Partner, Celtic Therapeutics Management, LLLP.

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 DIVERSE FUNDING MODELS candidates in small biotechnology companies and the resources allocated to research and development by large biotech and pharma companies. He then discussed approaches to bridging this gap, including that taken by his company, Celtic Therapeutics, LLLP. Opportunities in the Gap Venture capitalists tend to support emerging companies through initial proof-of-concept, but the price of development increases after that stage and continues to do so through advanced development to approval. Phar- maceutical companies do consider early-stage licensing but are often on a fixed budget for early-stage research, and bringing in products from the outside can mean eliminating an existing program. Furthermore, in Phase II many questions about compounds remain, and only 30–40 percent make it to the next phase, a fact that discourages many companies from investing in compounds that are in early development. Generally, a smaller biotech- nology company that cannot afford to move forward with a compound on its own may discuss an agreement with a large pharmaceutical company, but such discussions may extend for up to 18 months, during which time the biotechnology company must continue to spend money and consume critical patent life of a potential product. One method of bridging the funding gap during this period is by form- ing precompetitive alliances with organizations such as the Critical Path Institute (C-Path), the Genetic Association Information Network (GAIN), and the Biomarkers Consortium. C-Path, which was created to support FDA in implementing the Critical Path Initiative, facilitates collabora- tive projects among FDA, academia, and industry that accelerate product development. GAIN brings together corporate partners and the National Institutes of Health (NIH), in association with the Foundation for the NIH, to fund the genetic analysis of thousands of patients and allow researchers to identify genetic causes for the 20 most common diseases in the United States. The Biomarkers Consortium is a collaboration among FDA, indus- try, NIH, and the Foundation for the NIH aimed at identifying quantitative biological markers that aid researchers and regulators in developing and assessing treatments. Pharmaceutical companies also form alliances with biotechnology com- panies. Examples are the Wyeth–Elan collaboration on an Alzheimer’s vaccine; the Merck–GTx alliance on selective androgen receptor molecules (SARMs) to treat muscle loss; and the Pfizer Incubator in La Jolla, which provides resources and support to promising entrepreneurs and facilitates the commercialization of innovative products. Thus a number of models for successful alliances exist. Corr suggested,

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 BREAKTHROUGH BUSINESS MODELS however, that new models are needed, particularly for rare diseases, for which the markets are small. The Celtic Therapeutics “virtual Pharma” Model Corr and colleagues founded the global private equity firm Celtic Therapeutics to bridge the gap between discovery/preclinical development and late-stage clinical trials and approval (see Figure 4-3). To this end, the firm will function as a virtual pharmaceutical company, acquiring or investing in novel therapeutic candidates. A compound should not proceed to Phase III clinical trials unless there is a clear understanding of the dose, the right formulation, and the basic safety profile. CelticTherapeutics plans to fund the development of promising candidates that are in Phase II to the point at which a large pharmaceutical partner will be interested, often at the end of Phase III. The Celtic Therapeutics “virtual pharma” comprises a management company that runs a private equity fund and a biomedical development organization that manages the outsourcing of all components of product development. The development organization consists of a small core of very experienced drug development professionals who develop the firm’s strat- egy for each product, and a small group of experts that manages product development execution through outside vendors and consultants, such as contract research organizations (CROs). There is also a Celtic Therapeutics employee acting as a full-time project leader. Celtic Therpeutics’ strategy is to buy, license, or form an alliance with a biotechnology company for one of its products; develop the product; and then sell it at auction to a pharmaceutical company. A key feature of the Celtic model is that traditional fixed costs, such as employees, human resources, and facilities, can be converted to variable costs, such as CROs, consultants, chief medical officers, and key opinion leaders. This approach provides several advantages. Costs associated with human resources and facilities are significantly reduced. Project-specific experts are engaged as needed, in lieu of a large cadre of highly paid experts maintained on staff in case they are needed. Decisions are based on the science and outcomes, and because the organization is structurally flat, can be made quickly by the core team. And cash can be moved rapidly for acquisition of a potential product or acceleration of development of a potential product already acquired. Based on the results with Celtic Therapeutics’ predecessor firm, Celtic Pharma, the model has already been validated, and the next step is to take the company to a new level and verify whether this model is applicable to a large portfolio. Traditionally, investors participate for the returns and royalties that result from commercial distribution through a pharmaceuti-

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IND POC NDA Basic Research Therapeutic Preclinical Exploratory Advanced Approval and Discovery Development Development Development Phase IV Initial – Robust “The Idea” “The Compound” “The Medicine” “Proof of “Regulatory “Medical Concept” Proof” Marketing” Biotechs and • Universities The Gap Emerging • Institutes Pharma • Governments Institutes • Foundations • Companies • Associations Universities Academic Medical Centers, Hospitals, Clinics Venture Capital Support 10 to 14 years FIGuRE 4-3 Defining the gap in biomedical research, from idea to patent expiration. Celtic Therapeutics funds and facilitates the development of promising product candidates to the point of submission of an NDA or a major increase in value of the potential product. NOTE: IND = initial new drug; NDA = New Drug Application; POC = proof of concept.  Figure 4-3, R01292 SOURCE: Corr, 2008. grayscale, landscape fully editable

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 BREAKTHROUGH BUSINESS MODELS cal partner. But Corr believes a development organization that is making a profit for its investors can also develop a product on behalf of a philan- thropic organization and facilitate noncommercial distribution through a public–private partnership, or return the product to the originator. Once Celtic’s infrastructure and staff have been established, plans are to allow their use by developers of drugs for neglected diseases at cost plus 10 per- cent. Celtic has several major funders who are very interested in this aspect of the firm’s model. Addressing Neglected Diseases The global burden of disease is on the rise, and diseases of the devel- oped and developing worlds are converging. For example, as countries develop and economies improve, cardiovascular disease rises. And infec- tious diseases that were isolated 15 years ago have become global as a result of air travel. Drugs to treat neglected diseases are therefore a global need. What are the truly neglected diseases? With 127 compounds in devel- opment, HIV/AIDS is not a neglected disease. For malaria there are only 30 drugs in development, many of which are in the early stages and have a high risk of failure. For tuberculosis (TB), and particularly drug-resistant TB, only 22 candidate drugs are in the pipeline. For truly neglected diseases, such as human African trypanosomiasis, Chagas disease, and dengue fever, the pipeline is very limited, including 5, 7, and 8 compounds, respectively. To deliver new therapies for neglected diseases, Corr recommended the following: Explore new business models and new sources of capital. • Establish public–private partnerships to build and maintain a medi- • cal infrastructure. Create new incentives to train and retain health care professionals • in developing countries in performing clinical trials at a level that is acceptable for regulatory approval. Utilize the most advanced distribution systems. • Ensure political will and a global community to deal with cor- • ruption in the developing world and enforce intellectual property rights. Advocate for policies that sustain and stimulate innovation. • In conclusion, Corr suggested that, through collaboration across sec- tors and through new and innovative business models, it will be possible to address not only the issues related to rare and neglected diseases, but also global disparities in health.

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 DIVERSE FUNDING MODELS 7 PANEL DISCuSSION Following the presentation of the above four models, an expert panel provided additional perspective on funding for research and development on drugs to treat rare and neglected diseases. Mr. Onsi described the approach of HealthCare Ventures, an early- stage venture capital firm that has been investing since 1985, participating in the start-ups of Human Genome Sciences, MedImmune, Leukosite, and FoldRx. The firm looks for a combination of strong science, key talent, and a business plan that makes sense—defined as a reasonable probability that a company can achieve milestones that will result in someone’s investing in or buying the company later at a higher valuation. Onsi stressed three points regarding working with venture capitalists: Institutions and patient foundations have an important role to • play in helping venture organizations understand the probability of technical success of a particular therapeutic candidate and how patients for trials can be found. As a result, venture investors can make better decisions about such investments. Venture capitalists have varying interests. To be successful in attract- • ing a venture capitalist to an organization’s cause, it is important to match the interests of the two. Some investors, for example, may be interested in early-stage development and wish to be involved in building a company, while others may be seeking later-stage product opportunities and want clinical proof of concept. Venture organizations encounter many more opportunities than • they can assess. Those that arise through existing relationships generally receive more attention. Fundamentally, however, it is critical to help the venture organization understand clearly the opportunity, the management, and the people who are going to do the work. Dr. Khosla described how his effort to develop therapies for celiac dis- ease (for which no medicines currently exist) through a nonprofit charity failed in its primary goal because of an inability to bridge a different gap from that previously described. The costs of the chemistry, manufacturing, 7This section is based on the remarks of Doug Onsi, J.D., Venture Partner, HealthCare Ventures; Chaitan Khosla, Ph.D., Professor, Departments of Chemistry, Chemical Engineer- ing, and Biochemistry, Stanford University; Mark Batshaw, M.D., Chief Academic Officer, Children’s National Medical Center; Marleen Haffner, M.D., Ph.D., Executive Director, Global Regulatory Intelligence and Policy, Amgen; and Gail Cassell, Ph.D., Vice President, Scientific Affairs and Distinguished Lilly Research Scholar for Infectious Diseases, Eli Lilly and Company.

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 BREAKTHROUGH BUSINESS MODELS and controls (CMC); toxicology; and regulatory activities necessary to bring these molecules to human trials were insurmountable for a philanthropic organization. The project was eventually taken on by a venture-backed company. Within the first year of formation, that company was able to raise more than 10-fold what the charity was able to raise through donations and completed the necessary preclinical activities. Technically, the charity was successful as it helped identify a drug that is currently in clinical trials, and it also aided research on two biomarkers that could be used in those trials. Khosla cautioned that without the development of new business models for preclinical and early clinical drug development, the rare and neglected disease community will have difficulty developing new molecular entities, and will be limited to evaluating old entities with existing CMC capabilities and toxicology profiles. Dr. Batshaw described one way in which NIH, philanthropic organiza- tions, and pharmaceutical companies can come together to bring rare dis- ease treatments to the market. Under the authority of the Rare Disease Act of 2002, the Office of Rare Diseases at NIH administers a grant program that supports collaborative clinical research in rare diseases and training of clinical investigators in rare disease research. The funding and time to con- duct the studies are limited, and to enhance its chance of success, Batshaw’s rare disease center turned to philanthropy. Many donors that support rare disease research have family members who are affected, and they look to NIH as the gold standard of medical research. At Batshaw’s center, which focuses on urea cycle disorders, three families committed to matching the amount of money awarded to the center by the NIH grant program. The additional funding and the alliance with the families allowed the center to expand its network so that in the 2-year period during which the study was open, it was able to capture about 20 percent of all patients in the United States currently being treated for these disorders. This capability also makes the center attractive to pharmaceutical companies because it allows them access to enough patients with these rare diseases to conduct trials rapidly. Dr. Haffner made several observations based on her 20 years of expe- rience running the Office of Orphan Products Development (OOPD) at FDA. First, a drug that works well, has clear-cut results, and truly makes a difference in treating a disease and consequently in patients’ lives can be developed and approved even with very few patients. She gave an example of one drug that was approved to treat a disease that affected only 12 patients in the United States and 54 worldwide based on a pivotal trial of 6 patients. Second, personalized medicine will result in significant changes in dis- ease paradigms as the human genome continues to be deciphered. As this information allows for better targeting of therapies, many diseases are likely

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 DIVERSE FUNDING MODELS to meet the criterion of fewer than 200,000 cases in the United States, and companies will be able to profit from producing products that successfully treat those diseases. Third, the new Food and Drug Administration Amendments Act of 2007 rewards a sponsor for developing a drug for a neglected tropical disease with a transferable priority review voucher that can be applied to any drug (see Chapter 3). Haffner explained that while this voucher may encourage sponsors to develop drugs that are expected to yield a small return on investment, more will need to be done. Haffner also raised the issue of funding for the OOPD grants program, stressing that at $14 million it is very small, and the need is much greater than the program can meet. Dr. Cassell suggested that the United States cannot afford to be invest- ing $29 billion in federal funds in biomedical research without fostering partnerships to develop drugs for rare diseases. She encouraged the rare disease community to think about how best to involve government—both intramural NIH scientists and NIH-funded investigators. Cassell described such a partnership, whereby Eli Lilly worked with the National Institute of Allergy and Infectious Diseases (NIAID) to establish a not-for-profit orga- nization for the discovery of early-phase TB drugs. FDA provided several of its most experienced staff to serve on the advisory board, and Eli Lilly and Merck allowed the nonprofit to use its compound libraries and its senior toxicology chemists. The organization provides no funds for licensing, but instead adds value to the compounds others have developed by identifying new indications. OPEN DISCuSSION The open discussion that followed the presentations and panel discus- sion raised additional points regarding sustainability, as well as two other issues relevant to all models: publications and patents, and concerns about counterfeit products and reimportation into primary markets of donated or reduced-cost products intended for developing countries. Sustainability Several workshop participants suggested ways in which companies interested in the development of drugs for rare and neglected diseases can enhance the sustainability of their efforts. Forum member Les Benet noted that patents can be a source not of income, but of the involvement of col- laborators or an industry partner. The Institute for OneWorld Health, for example, is not making any money from its patents, but has been able to attract pharmaceutical companies as partners because they can realize ben- efits from access to the patents.

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0 BREAKTHROUGH BUSINESS MODELS Cassell noted that in some cases, income can be generated in the developed world for a product that is used to treat a tropical disease in the developing world. She cited antibiotics as an example, which may have applicability for diarrheal diseases. Meeker pointed out that there is increasing incentive in the developed world to ensure that the health care problems of the developing world are addressed. This incentive increases the possibility that a market could be created in developing countries. Finally, Hale drew attention to the fact that some neglected diseases are more neglected than others. African sleeping sickness and visceral leishmaniasis, for example, are at the bottom of the list when it comes to drug development efforts. In the drive to be self-sustaining, there is a temptation not to address diseases affecting the poorest of the poor, and it is important to resist that temptation when working to achieve sustainability. Publications and Patents Sharon Hesterlee of the Muscular Dystrophy Association noted that, in the association’s experience, securing funding from nonprofit partners through grants or other mechanisms often requires that research be pub- lished. Under marketing or licensing arrangements with companies, how- ever, there may be a restriction on publishing. Hale agreed that there is need for academicians to publish to advance their careers or for funders to see publications that serve as evidence of their investment in action, but intellectual property and marketing issues also need to be considered. Corr observed that if a company is supporting research in an academic laboratory or clinical trial, the contract usually gives the company a 30-day period to review any manuscript and determine whether it raises critical intellectual property issues and if so, to initiate a patent application. Doing so gener- ally requires the involvement of patent attorneys, which can be expensive, but it may be possible to find attorneys willing to work pro bono given the nature of the work. Hale agreed, noting that OneWorld Health has worked with pro bono patent attorneys. Khosla suggested that misconceptions often exist about the cost of filing an initial patent application, explaining that he has been helping people file provisional patent applications for $250 (although subsequent revisions do add to the cost). Counterfeiting and Reimportation Richard Rogers of FDA stated that counterfeiting of pharmaceuticals is increasingly prevalent in the developing world, and undercuts the build- ing of global markets and robust health care delivery systems. Cassell sec-

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 DIVERSE FUNDING MODELS onded the need for reliable authentication methods for pharmaceuticals. She noted that some of the countries most affected by the problem are beginning to address counterfeiting and are placing greater emphasis on drug quality. Hale has observed that when poor people are very sick and fear they may die, they ask for injections instead of oral products because in their experience, oral products are of poor quality. This is why OneWorld Health developed an injectable intramuscular paromomycin for visceral leishmaniasis. Corr cited two approaches to the problems of counterfeit- ing and reimportation currently being used by pharmaceutical companies: manufacturing pills that are shipped to developing countries in a different color, which decreases the pills’ reimportation into the developed world, and radiofrequency identification tagging, which can now be done on a capsule or ampule.