2
Current Model for Financing Drug Development: From Concept Through Approval1

The cost of developing a new drug has been estimated to be more than $1 billion. Development of this scale involves multiple financing mechanisms, as well as the involvement of numerous partners throughout the process. As background for the workshop discussions, Dr. Caskey provided an overview of the current financial landscape at various stages of drug development, including the investors at each stage and the current state of investments, and put forth several suggestions for ways to facilitate drug development.

INVESTORS IN DRUG DEVELOPMENT

The principal investors in drug development differ at each stage. While basic discovery research is funded primarily by government and by philanthropic organizations, late-stage development is funded mainly by pharmaceutical companies or venture capitalists. The period between discovery and proof of concept, however, is considered extremely risky and therefore has been difficult to fund. Several initiatives discussed below have been undertaken to overcome this funding gap.

1

This chapter is based on the presentation of C. Thomas Caskey, M.D., Director and Chief Executive Officer and Chief Operating Officer of the Brown Foundation Institute of Molecular Medicine for the Prevention of Human Diseases at the University of Texas Health Science Center.



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2 Current Model for Financing Drug Development: 1 From Concept Through Approval The cost of developing a new drug has been estimated to be more than $1 billion. Development of this scale involves multiple financing mechanisms, as well as the involvement of numerous partners throughout the process. As background for the workshop discussions, Dr. Caskey provided an overview of the current financial landscape at various stages of drug development, including the investors at each stage and the current state of investments, and put forth several suggestions for ways to facilitate drug development. INvESTORS IN DRuG DEvELOPMENT The principal investors in drug development differ at each stage. While basic discovery research is funded primarily by government and by phil- anthropic organizations, late-stage development is funded mainly by phar- maceutical companies or venture capitalists. The period between discovery and proof of concept, however, is considered extremely risky and therefore has been difficult to fund. Several initiatives discussed below have been undertaken to overcome this funding gap. 1This chapter is based on the presentation of C. Thomas Caskey, M.D., Director and Chief Executive Officer and Chief Operating Officer of the Brown Foundation Institute of Molecular Medicine for the Prevention of Human Diseases at the University of Texas Health Science Center. 

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 BREAKTHROUGH BUSINESS MODELS Early- and Late-Stage Development Historically, the largest government investments in basic drug discovery research have been made by the National Institutes of Health (NIH). The Defense Advanced Research Projects Agency (DARPA) has also contrib- uted to the discovery stage by taking on some relatively high-risk biologic projects. Moreover, in part as a result of the public’s impatience with the slow pace of the discovery process, state governments are increasingly taking the initiative in this area. One such example is the California Insti- tute for Regenerative Medicine, a state agency established in 2005 by the California Stem Cell Research and Cures Initiative, which provides grants and loans for stem cell research and facilities at California’s research insti- tutions and universities. Another example is the Texas Cancer Initiative, under which state funds are dedicated to cancer research conducted in Texas. Beyond these public investments, private foundations are also taking a significant financial interest in the discovery process, facilitating progress by funding research in their particular areas of interest. At the other end of the continuum is late-stage development, which is funded primarily by pharmaceutical companies or venture capitalists with some collaborative support from government sources, such as NIH. Such partnerships are critical in the transition from proof of concept to clinical development. Translational Research: Discovery Through Proof of Concept Between basic discovery research and late-stage development lies the critical step of proving the utility of a proposed drug. The funding gap that often occurs in this period has been referred to as the “valley of death.” The risks are great and may be considered as not worth taking for products designed to treat rare and neglected diseases, which may ultimately yield a very limited return on investment. To help fill this funding gap, U.S.-based foundations have increased their investments in discovery and development for new drugs specific to their diseases of interest. In 2007 such groups invested approximately $75 million in biopharmaceutical companies, a 10-fold increase since 2000 (Gambrill, 2007). At the government level, the Department of Health and Human Ser- vices’ Small Business Innovation Research and Small Business Technol- ogy Transfer programs provide financial assistance to small companies attempting to advance their initial discoveries to commercial development. In recent years, NIH has significantly increased its focus on translational research. For example, NIH’s National Center for Research Resources administers the Clinical and Translational Science Awards, which fund a national consortium of medical research centers that train physicians in

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 CURRENT MODEL FOR FINANCING DRUG DEVELOPMENT the drug development process. Likewise, the Food and Drug Administra- tion (FDA) encourages the use of Cooperative Research and Development Agreements (CRADAs) to foster public–private partnerships in targeted areas of interest to the agency. Initiatives are taking place at the state level as well. The Texas Emerging Technology Fund, for example, is designed specifically to help companies finance proof-of-concept research. The fund invests in biologic sciences and biotechnology, as well as engineering, mate- rials science, and information technology, and has committed funding to individual companies ranging from $500,000 to $10 million. The afore- mentioned Texas Cancer Initiative and California Stem Cell Research and Cures Initiative support research through this phase as well. In addition to government programs and philanthropy- and state-funded initiatives, many start-up companies, launched to develop discoveries emerging from academic laboratories, are being supported initially by venture capitalists and “angel investors.” CuRRENT STATuS OF INvESTMENTS Inhibitors of Development Caskey argued that, despite the desire for development of new thera- pies, several environmental factors negatively affect new investments in drug development. Examples include decreased funding for basic research, regulatory barriers, and problems with drug safety that lead to product withdrawals. Elaborating on these points, Caskey emphasized first that the investment in basic research has been essentially flat in recent years. NIH funding has not increased significantly since its budget doubled from $13 billion in 1998 to $26 billion in 2003, and given inflation, its invest- ment power has actually diminished over the last 5 years, in effect reducing the dollars available for funding new research. Fewer investments in basic research can result in fewer new drug therapy candidates, which in turn can result in fewer investments by private industry to advance promising candidates. Second, navigating novel products or technologies through the exist- ing regulatory pathways is challenging as scientific advances are made and regulations continue to evolve. In light of the increasing uncertainty of the regulatory process and possible increases in regulatory requirements throughout the development process, investors may shy away from invest- ing in a product before there is clear evidence of its safety and effectiveness. An example is FDA’s initiative to address biomarker evaluation. Although FDA currently allows the use of biomarkers as surrogate end points in some cases, evaluation of biomarkers is difficult, and the agency is working to

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0 BREAKTHROUGH BUSINESS MODELS determine the best approach to the regulatory assessment of biomarker data. Finally, Caskey argued that lawsuits following product withdrawals greatly affect new investments in development. For example, individual and class-action lawsuits following the withdrawal of Fen-Phen led to settlements of $20–30 billion (Caskey, 2007). This amount of money could potentially have funded the development of 30 to 40 new drugs. Opportunities to Improve the Financial Landscape When a program fails in Phase III clinical trials because of either a lack of efficacy or problems with safety, a great amount of money and time that have already been spent go to waste. Thorough identification and valida- tion of drug targets is a critical step in early discovery research that can drastically reduce late-stage drug failures. However, even though a target may be validated and a drug may appear to have an acceptable safety pro- file, one can never know all of the safety issues that may arise when a new therapeutic is introduced into broad use in the market. In addition to funding for the discovery and development of drug can- didates, funding is needed for research on new technology platforms for validating targets and therapeutics. Recently, venture capitalists have taken an interest in companies developing new platforms. These new technologies can play a significant role in facilitating drug discovery and enhancing drug safety.2 High-throughput screening platforms that evaluate DNA, RNA, or proteins have already advanced the art of drug discovery. One example is mRNA expression profiling, a powerful micro-array technology plat- form that was discovered by an academic laboratory, received additional research funding from NIH, and was then commercialized by industry. Profiling of mRNA expression can indicate the phenotype of cells and be used to characterize cancers, but has also been employed successfully in the drug discovery process to identify and validate new targets and measure the responsiveness of a target to a drug. Another platform example is bio- chemical pathway analysis using mass spectrometry to measure analytes, rather than nucleic acid methods or proteomics. Such a high-throughput method for assessing numerous markers and pathways associated with a disease or drug action can contribute to efficacy and safety analysis prior to clinical use of a drug. 2 For more detailed discussion of technologies that are improving the efficiency of drug development and the safety of new products, see Caskey, 2007.

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 CURRENT MODEL FOR FINANCING DRUG DEVELOPMENT WAyS TO FACILITATE DRuG DEvELOPMENT Caskey put forth a number of suggestions for overcoming the impedi- ments to new drug discovery and development: Academic initiatives • – The academic research community needs to increase invest- ments in technology that can improve target validation and drug safety. Government initiatives • – Government research funding aimed at addressing health chal- lenges needs to be more focused on forecast morbidity and the cost of care in the United States. – FDA needs to be adequately funded so it can partner with drug developers and direct the research being performed toward answering important regulatory questions. Private initiatives • – Small Business Innovation Research and Small Business Tech- nology Transfer regulations need to be revisited and revised to allow for greater investment. – New incentives for high-risk investors need to be created, per- haps through tax law. – Private disease foundations’ provision of support to the aca- demic community for discovery and to industry for develop- ment is beneficial and should be embraced. – Experienced investors need to be brought into the innovation process earlier. – The pharmaceutical industry and academia need to work together to build a stronger U.S. industry.