Saturday, June 19, 2010

RNAi Therapeutics and Big Pharma: To Collaborate or to Integrate?

John Maraganore, the CEO of Alnylam, argued in a recent essay in the Xconomy that investing in innovation is a no-brainer now more than ever. However, with a few notable exceptions, judging from the actions of Big Pharma over the last two years in drug development in general, and in RNAi Therapeutics in particular, one would think that this must be an illusion. If anything, the mega-mergers and cutting of R&D indicates that Big Pharma apparently believes that the cure for its current ailments is to first of all slash innovation and focus instead on the marketing and distribution of ready-to-market products.

A related worrisome trend is that Big Pharma is shying away from acquiring small biotech companies building cutting-edge drug discovery platforms such as RNAi Therapeutics. Instead, a look-and-see, risk-sharing partnership structure is preferred, adversely affecting both the speed and quality of developing these technologies, ultimately to the detriment of all stakeholders, including Big Pharma.

My thesis is that this model cannot be sustainable. In a normal marketplace, the high margins in the drug business will eventually have to shift to coincide with where the highest technical barriers and value-adds are, and this is clearly in the discovery and initial development of viable drug candidates and the platform technologies on which they are built. In the age of the internet and the free flow of information and goods, I just cannot believe that distribution and very late-stage development can continue to command the premiums they still do.

When this happens, Big Pharma will find itself with nothing much left, and the business dynamics will change as it has completely lost its capacity to innovate from inside. This could be even further exacerbated in an improved economic environment where small biotech is no longer dependent on the typical late-stage deals with unfavorable terms of trade when there is again reasonable access to the capital markets.

One argument often cited for slashing innovation is that for some reason in-house R&D is not productive, and it is cheaper to buy it in. Flawed logic, of course, because prices should eventually go up to reflect the value biotech brings to Big Pharma. Some go even a step further and argue that innovation has just become too costly, full-stop. If that were the case, then Rome is about to become a village again and we are about to enter the Dark Ages II and investing in any part of drug development and also broader economy would be futile anyway.

Certainly, after living through the millennium bubble, one has to admit that small biotech has contributed considerably to the notion that drug discovery and investment in new technologies is wasteful. But then again, as funding has dried up, many of the get-rich-quick schemes have disappeared and biotech has become much more disciplined as a whole.

How then should Big Pharma become involved in RNAi Therapeutics? I agree here that early-stage collaborations are an important part of the process, as the predictability of discovering and developing new breakthrough and enabling technologies is simply too low and will have to typically first come out of academic laboratories and then be dynamically refined in a small biotech environment to a stage where the technology has very reasonable clinical and commercial potential. At this point it becomes important for Big Pharma to have the capability of evaluating what is real and what not, and laboratories within Big Pharma with a good working knowledge of RNAi Therapeutics should be able to accommodate this, as many of them already do. These can also come in the shape of an acquisition of one of the smaller and struggling pure-play RNAi Therapeutics companies.

After promising technologies have been identified, however, it makes sense to integrate them. This is because even if you can bring drug candidates based on these technologies into the clinic through licensing relationships, clinical development is still a dynamic process requiring quick thinking by those intimately familiar with the technology as the results come in. A case in point from the related gene silencing field of antisense is ISIS Pharmaceuticals’ obvious frustration with the speed and quality of some of its licensees so that it has decided to buy back the rights to a number of antisense drug candidates. The ISIS-GSK deal also partly reflects the realization that at least the early stages of development are better left in the hands of those familiar with the core technology.

SNALP technology is another example. There have been quite a few that claimed a few years ago that almost anybody can make liposomal delivery work. At the moment, however, it is only Tekmira Pharmaceuticals that can claim that. Even if you copy what is published in the scientific and patent literature, mass-spec the SNALP composition etc, you may erroneously believe to have caught up with the 10 year head-start that Tekmira had, but as soon as some minor unexpected problem arises, it immediately requires the deep know-how of those innovators intimately familiar with it to solve it. There is definitely more value to be gained from a platform if you understand and own it, especially early in the life of an emerging technology where the clinical learning curve can still be relatively steep. Once a technology is relatively well understood in humans, sure, more hands-off licensing becomes increasingly appropriate and is certainly an option for those in Big Pharma that are satisfied with accessing individual products instead of enjoying the full benefits from having in-house access to prolific new platform technologies for long-term growth.

It is, of course, important that, once acquired, the innovative culture of the target is not suffocated by the bureaucracy of large organizations. Roche Kulmbach appears to be a good example of the Big Pharma model whereby, instead of slashing R&D, innovation is transferred to semi-independent Centers of Excellence where failure and risk-taking is tolerated and encouraged. In my opinion, the reason why Sirna Therapeutics/Merck has not been successful is because they are their own biggest enemy by having soon adopted a Big Pharma mindset, being afraid to take risks with new technologies and instead hide behind inflexible rules (not guidelines) for what characteristics a technology has to fulfill before even being looked at by the company.

Within the next 4 months, possibly set in motion by the upcoming $100M Novartis decision, we should get some revealing insights into the current thinking of Big Pharma on RNAi Therapeutics. My hope, of course, is that the above was an overly pessimistic assessment of the Big Pharma mindset and that they also differentiate between certain areas in drug development that may well be outsourced and others, innovative platform technologies with reasonable clinical visibility, for which outsourcing and even partnerships alone are not optimal.


Anonymous said...

you are being overly pessimistic as you state in your last paragraph. stay tumed and i think you will begin to see more innovative deals signed.

Anonymous said...


Thank you for your thoughtful insight, once again.

I am hoping can you elaborate and on the potential Novartis $100 million investment in Alnylam. We value your scientific and business accumen. Perhaps you can provide some colour for your less-technical followers, and provide the context behind the pending decision for investors.



Anonymous said...

I also think you are being overly pessimistic. Innovation is badly needed at this point in history as medical costs are soaring out of control in the U.S. This problem will eventually occur in other countries as citizens enter the middle class and demand better health care.

The potential benefits of promising drug development technologies such as siRNA and microRNA will always be able to find capital due to the tremendous potential financial rewards.

The desire to advance innovations is difficult to hold back.

Anonymous said...

I agree that companies with the most experience with a technology develop internal know-how and processes that provide it with a competitive advantage that is difficult to imitate. Assuming these early leaders continue working in their area of expertise, their learning and knowledge just continue to grow, producing more competitive advantage.

Dirk Haussecker said...

Thank you for the encouragement, and there are definitely differences between Big Pharma players in their openness towards supporting innovation.

About the upcoming Novartis decision… Under the 2005 Alnylam-Novartis platform agreement, Novartis has the option, for additional $100M, to non-exclusively license pretty much all of Alnylam’s fundamental RNAi trigger IP. The latest date it can do so is around October 2010. $100M flowing into RNAi Therapeutics would be another major statement that Big Pharma is very excited about the potential of this platform.

Based on Novartis’ body language (share purchases in Alnylam up to the maxima allowed; recent RNAi Therapeutics hiring spree based on job advertisements), everything points towards the Swiss Giant to exercise its right. This would also make sense considering what Roche and Takeda got for much less. Well, we can argue here about the Tuschl issue, but since the decision on Tuschl is getting delayed, this actually now forces the hand of Novartis even more so. But still, $100M is a lot of money, and Roche-Takeda got access to RNAi delivery (I believe that SNALP was a major factor for the upfronts that Alnylam was able to command in those deals), while Novartis won’t automatically get delivery access even with the $100M.

If I were Novartis, I’d make sure that I have some clinical visibility, and this means access to the leading RNAi delivery technologies- preferably before committing the $100M or at the very least concomitant with it (maybe more than $100M for Alnylam if they grant Novartis access to SNALP?). Since there are not that many sources for relevant delivery technologies that are available for licensing or purchase, other Big Pharma companies should be concerned that Novartis’ RNAi shopping spree could complicate their efforts of building a clinical RNAi Therapeutics pipeline. Pfizer may want to avoid a repeat when Roche acquired Mirus Bio for their DPC siRNA conjugate delivery technology after Pfizer had had an initial non-exclusive collaboration with Mirus.

The bottom line is that I expect the $100M, or possibly $100M+ move by Novartis in RNAi Therapeutics to force other Big Pharma players to act as well.

Anonymous said...

Thank you for your timely response to our questions...

I have a follow-on, straight-up question. Given the universe of companies developing RNAi technologies and therapeutics, if you could only invest in one company and had to make a call, which company would you invest in?

Dirk Haussecker said...

Investments in RNAi Therapeutics come at a considerable risk. Even more so if you invest in only one company, and a company that is suitable for one investor, is not suitable for another one.

Alnylam is a great position to start from and learn about the RNAi space with 'relatively' little risk at current valuations. However, because I live and breathe RNAi Therapeutics, over the last 2 years, Tekmira has personally been the one company in which I have concentrated the great majority of my RNAi Therapeutics investments. This is because of the quality of their science, financial efficiency, and the importance of SNALP for the near-to-midterm value creation in the entire space. The next 12-18 months should be quite interesting. Of course, if events unfold as I speculate, it may be worth to look ahead and formulate a game-plan now.

By Dirk Haussecker. All rights reserved.

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