The pharmaceutical industry is in the midst of a severe innovation crisis, where more R&D money results in less approved drugs. In parallel, sales of most traditional blockbusters are being cannibalized by generic competition, forcing the big pharmas to exploit new concepts and rush new drug candidates to their pipelines. Nearly half of all drugs that are expected to enter the clinic in the coming years will be aimed at the oncology market. Consequently, early stage drug development for cancer is going to be the most active area in the industry, with an abundance of investment opportunities, particularly in small and medium companies. Many investors prefer to stay away from oncology drug development, where success rates are at a worrying low, hovering around 5% compared to 10% for the whole industry. Nevertheless, among the hundreds of publicly traded companies which are engaged in oncology, there may be a group of companies which have better chances of succeeding in such a monumental task. These companies are what I like to call platform companies.
In this article, I will try to explain what makes a good platform company and why Exelixis (EXEL) can be regarded as a good (yet not a perfect) example. For the sake of clarification, I certainly do not claim that platform companies are the only investment worthy biotech companies, however, when it comes to early stage drug development, platform companies are an excellent place to start.
In general, platform companies can be evaluated based on five criteria:
1) A validated platform
Having a validated drug discovery platform is the first and most important criterion for defining a good platform company. The platform is typically comprised of a combination of technology, experienced personnel and intellectual property that can generate a stream of drug candidates. Most importantly, investing should be done only after a product of the platform demonstrates activity in clinical trials. Having a clinically validated product is not a guarantee for future success of the platform nor does it mean that the specific agent will reach the market, but it does imply that one or more of the platform’s products stand a reasonable chance of becoming a commercial drug. A validated platform may increase overall success rates, yet the odds of a particular drug candidate to make it all the way to approval are still low.
It is hard to define exactly what “clinical validation” means, but there should be a clear response in the form of disease control, tumor shrinkage or side effects, preferably with more than one candidate, in patients with limited treatment options. A good example for a platform validation may be Immunogen’s (IMGN) antibody-drug conjugation platform, which empowers antibodies by conjugating them to toxic drug payloads. T-DM1 is comprised of the blockbuster antibody, Herceptin, empowered by Immunogen’s technology. It had remarkable activity in two clinical trials in patients who had progressed while receiving Herceptin, and therefore can be regarded as a good clinical validation of Immunogen’s technology.
2) Specialization and Differentiation
The field of drug development is becoming more rich and versatile on the one hand, but also more complex and competitive on the other. Instead of relying on traditional trial and error and serendipity for discovering drugs, the industry is now moving to rational design and computerized tools which require a great deal of expertise. This is why small companies must not spread their resources too thinly but instead focus on one field. By specializing in a certain area, and developing a deep understanding of the underlying science that stands at the basis of development, even a small company can achieve a competitive edge over the rest of the market. The ability to block new entrants to the field by means of intellectual property is always an advantage, as clearly demonstrated in the case of Alnylam (ALNY) and Isis Pharmaceuticals (ISIS), which became the gate-keepers of their fields with the help of a draconian patent portfolio. Timing is also a crucial issue in finding a niche to specialize in, and since the process of developing a drug is a linear and lengthy one, a several years head start is needed in most cases.
3) Multiple shots on goal
A good platform company always has multiple agents in active development simultaneously, preferably from the same validated platform. No matter how promising a particular compound looks, it is imperative to remember that most drugs fail, including such that demonstrate spectacular results in early clinical trials, thus, banking on one or two early stage compounds is statistically futile. Just to make it clear, active development does not include just having the compounds listed on the pipeline chart, waiting to fill the gap created by discontinuation of programs, but a constant pursue of the compound’s development with the ultimate goal of advancing it into multiple clinical trials. Due to the enormous costs associated with drug development, small and medium companies cannot finance more than a handful of programs, which leads us to the next point.
4) Deep Pocketed Partners
Partnership deals with large pharmaceutical companies are the only viable option for a small company to obtain a broad pipeline. Collaborating with large partners serves two prime purposes. First, it allows small players to survive the time needed to develop drugs without infinite dilution. In addition, any partnership deal is perceived as a vote of confidence for the technology from a savvy player in the industry, which bodes well for investors’ confidence and valuation. The dark side of partnership deals is that if the drug hits the market, the large partner enjoys most of the gains, but in most cases the risks and dilution accompanied with developing the drug independently are far graver. Trying to keep all the promising candidates in-house can turn them these assets into a huge liability.
Small biotechs must realize what they are good at, feeding the industry with a large number of candidates, while letting the big pharmas do what they are best at, commercializing products. The most elegant illustration of this approach is Isis, which declares itself as a “fully disintegrated” company that does not intend to be involved in late stage trials and marketing. Although Isis still hasn’t enjoyed meaningful sales of its products, the number of programs it has and its pipeline diversification are overwhelming. Isis, a $1.5B company with thirteen drugs in the clinic and an expected operating loss of only $25 million in 2008, is also one of the few development stage companies that may reach profitability without actual royalties on sales.
5) Field Of Activity
Evaluating the field in which a company operates is somewhat trickier than the other criteria, as it is hard to define the different parameters and the balance between them. These parameters include validation and prior success rates of the mechanism of action and the target, the competitive landscape, entry barriers and intellectual property. Because a validated field usually comes with plenty of competition (from drugs in the market and in the clinic), it is very hard to find a platform company that is optimally positioned.
Companies with a good blend can typically be divided into pioneers like Isis and Alnylam, whose technologies are still not commercialized and “next-generation” companies such as Immunogen and Seattle Genetics (SGEN) that improve a validated class of drugs. Isis and Alnylam are high risk companies because of the lack of complete validation of their fields, but they have a considerable gap over the rest of the market. Immunogen’s and Seattle Genetics’ markets are more mature and proven, but the companies are facing more competition.
It is plain to see that the five criteria are intertwined in a way that forces companies to combine them. It is impossible to have multiple candidates in the clinic without multiple collaboration deals, which are hard to strike without a good platform that can produce multiple promising candidates.
