It’s no secret that big pharma invests billions in R&D each year, despite recent headlines bemoaning the cuts companies have made to their research budgets in recent years. This investment in exploratory-stage compounds has resulted in a robust pipeline of promising new therapies across a number of disease areas, which could save and improve millions of lives the world over. However, how many of these potential new drugs are being shelved indefinitely because of a lack of resources to fund costly and time-intensive clinical trials?
US Department of Health and Human Services estimates suggest the cost of the clinical-trial process today is upwards of $100 million. Without the capital to invest in the complex and expensive drug development process for every new drug, companies are losing billions each year in potential revenue as promising new therapies sit on shelves waiting for their patents to expire.
The looming deadline of a patent expiration means lower-priority drugs may not make it to market, as any delay in getting them to clinical trials will mean delayed registration and ultimately lost revenue, because the period over which it can earn revenue before the patent expires has been shortened.
Of course, this challenge does not impact all companies equally, varying dramatically across geographies and therapeutic areas. Some companies can limit their losses by redesigning or accelerating the trial process, limited operationalisation, or securing co-development deals with third parties. However, for the most part these tweaks around the edges are not addressing the core issue: running more high-cost clinical trials with fewer resources. With more and more focus on the cost of drug development and the price of medicine, this challenge is only growing.
Recently, forward-thinking drug makers have been finding creative partnerships to address the reality that they do not have the resources to develop each asset in their overflowing pipelines in a timely manner, and are leaving too many of their lower-priority assets in stasis.
Working with CROs, universities, and patient-advocacy organisations, global drugmakers are finding interested investors who see their intellectual property as a valuable starting point for the drug development process. With financial backers willing to provide the capital and share the risk involved, companies can get promising new therapies through the development stage and regulatory approvals, and launched to market, without impacting their short-term profits or losing focus on their high-priority drug trials. When managed correctly, these new investment agreements have the potential to unlock significant revenue and bring important new treatments to market in high-need therapy areas.
For instance, respiratory treatments are a growing market globally, with the Global Asthma Network estimating 14 percent of the world’s children suffer from asthma or related obstruction to airways, and over 334 million people having been diagnosed with the disease. This number is growing as more sufferers are diagnosed and education around the condition expands into developing markets. Consider this case study, which demonstrates how a large, global biopharma company developed a persuasive business case and sought partners to help fund the trial and approval process for a series of new respiratory therapies in its R&D portfolio.
The company identified nearly three dozen clinical trials across six different therapeutic areas that were sitting dormant, while time ticked away awaiting patent expiration. The combined cost of conducting these trials would have been approximately $480 million, and the company simply did not have the resources to invest.
From this initial list, the company selected three promising development compounds and three different indications in the respiratory therapy area, and developed a clinical-trial roadmap to bring these to market. The clinical roadmap for these therapies was translated into a high-level financial model that showed potential investors the possible value of partnering to see these therapies trialled, approved, and brought to market.
The required total investment for the partnership to run the respiratory trials was $120 million. The drugmaker worked with financial modelling to agree a valuation of the asset, based on the current value of the new compounds and indications, and the probability of the trial’s success.
The projected increase in value was $500 million over three years. This valuation attracted investors who could clearly see the potential to double their investments over three years, assuming some of the trials had positive outcomes. For seasoned pharma-industry investors, the opportunity was especially attractive, as it compares very favourably to the return on an investment in big biopharma company shares in the same period.
Armed with such an attractive proposition, the drugmaker sought interest from a number of potential investors for a series of respiratory trials soon to be under way. The therapies in question, which may hold the key to improved quality of life for millions of asthma sufferers, are progressing in clinical trials. However, without the innovative investment model, these promising new respiratory treatments may never reach trial stage before their patents expire.
As more drugmakers consider exploring this model to fund low-priority drug trials, consider the following questions to assess the viability of this option and build the foundations to launch successful partnerships.
- Which trials are most attractive to investors and best suited for external investment? When reviewing their portfolios of new therapies, drugmakers must make tough choices about which clinical trials will attract external investors and be profitable once in market. Trials need to be relevant and complementary. The relevance of a trial is based on its potential impact on market demand, and will predict the value of the development asset if trials are successful and the therapy is approved by regulators. Packaging a number of trials for new drugs in the same therapy area is an attractive offer for investors, and will reduce upfront costs. Even trials in the same therapy areas need to be complementary – in the form of geography, indication, trial duration, patients, etc – to realise these operational advantages and identify the right CROs to execute them.
A real transfer of risk is required for the partnership to help the drugmaker develop its assets without adding development costs to its bottom line. However, that means actual risk needs to transfer from the biopharma company to other parties. A clinical trial with a 95 percent probability of success would not satisfy this requirement, as it would just be a financing arrangement camouflaged as an investment. - Which CROs and investors are right for our portfolio? Finding the right investors takes careful targeting and multiple approaches. These could be venture capitalists specialising in biopharma, non-profit organisations and patient groups with a focus on specific therapy areas, and other types of investors with interest in specific disease areas or public health issues.
- Which operating model and governance structure will deliver a successful partnership for all parties? Once partners are committed to the project, the next step is to develop a legal structure and financing arrangement. The new entity could be a joint venture or special-purpose entity, established solely to operationalise and manage the execution of the included trials, with governance by representatives from all of the partners. Setting clear goals for each partner and carrying out a full risk assessment are critical to setting the new organisation on a strong foundation.
- What processes and ways of working will ensure a successful partnership?For the next few years this new organisation will work toward completing development on the selected potential therapies. For the new entity to be successful, establish processes and roles upfront to ensure efficient and effective operations. Consider the following four areas before operations begin:
- Technical – have you established a protocol that can deliver the clinical data required to support an increase in product value?
- Commercial – has the new compound or treatment in question been valued accurately? Does the potential revenue make the investment proposition worthwhile for all parties?
- Operational – are the trials in question designed in such a way they can be executed efficiently and on time, to deliver the necessary cost savings? Are the proposed trials operationally complementary?
- Cultural – have all partners come together to develop shared norms and agreed ways of working that will ensure successful progress and a clear exit once the investment value has been realised?
- What is the exit strategy?The partnership must have a clear, well-established process for closing out of the relevant trials, realising value for each partner in line with the contract, and effectively dispersing or disposing of accrued assets. Forward-thinking pharmaceutical companies are employing new strategies to deal with the problem of funding clinical trials for lower-priority drugs, and in doing so expanding the number of new therapies that go through to the development stage and ultimately reach the market. Finding investors to fund low-priority therapies in high-demand therapy areas will enable biopharma companies to expand the number of new drugs going to market in an economically attractive way, with benefits for patients, investors, CROs and, of course, the company’s bottom line.
Ben van der Schaaf is a principal at Arthur D. Little
