The zero person biotech company

Comparing the founding of two virtual drug development companies, Funxional Therapeutics in 2006 and XO1 earlier in 2013 proves at least one thing: in just seven years it has become dramatically easier and quicker to create a virtual drug development company.  Today it is even possible to take virtual to its logical extreme: a zero person biotech company.

Given there is nothing inside a virtual company except for an asset, how can setting up and running an empty husk have changed so dramatically in under a decade?

The answer lies in what’s outside, not inside, the virtual development company.  Today, a whole ecosystem of service providers exist to facilitate every facet of virtual drug development.  And these providers have evolved and optimized their services to such an extent that they are barely recognizable.

In 2006, the service ecosystem consisted almost exclusively of Contract Research Organisations (CROs).  Large or small, these CROs tend to be very good at what they do and very poor at everything else.  Hence, when a project demands real innovation it is almost impossible to deliver in virtual mode with only CROs to help.

But by 2013, the emergence of true Out-Sourced Drug Developers (ODDs) have changed the equation firmly in favour of virtual development for almost every kind of drug candidate.  Virtual no longer implies a lack of quality, nor a lack of scalability.

Drug development in complicated.  Despite regulatory frameworks, there is still a huge degree of freedom in how to develop each drug candidate, with dozens of choices to be made that are unique to the particular project.   Except perhaps in late stage development, imagination and flair and as important as experience and knowledge.

Slavish following of recipes (doing drug development ‘by the book’) leads to far more failures.  It is at least as important to make sure that a study is fit for purpose as it is familiar and comfortable.  That’s not to say that change is desirable for its own sake – consistency has its benefits, by ensuring that different studies are comparable, for example, but that should not be an excuse for following an inferior path for the particular asset in your hands.

This flexibility, innovation and flair is the fairy dust of success

And – until recently – it has been devilishly difficult to out-source.  Indeed, it is in short supply both inside and outside companies.   The problem is that in large companies (where, even today, a majority of drug development is performed) individuals become specialized, and too few have the opportunity to genuinely gain an overview of the whole process end to end for multiple projects.  Corporate memory then plays an increasingly dominant role in decision-making (along with the conservative attitude that often pervades large organizations – no-one got fired for choosing IBM).  The default soon becomes doing the same thing as last time.

Drug developers brought up in such an environment are strong on experience and knowledge, but have often lost their propensity for innovation and imagination.

This conservative, by-the-book approach to drug development is further buttressed by a pervasive view of regulators as inflexible and rules-based.  Such an assessment is manifestly unfair – while the standards required to demonstrate efficacy in a pivotal trial are indeed set in hard-dried mud if not stone, and the bar for safety of study participants is rightly very high throughout development, in other respects regulatory agencies are prepared to listen to well-made arguments and innovation.  Particularly in early development, where pharma R&D most needs to improve its success per dollar, innovative study designs are readily accepted by regulators as long as safety is not an issue – too bad, they say, that they don’t see more of them.

All these drivers to conservative behavior mean that those few that do have the blend of experience, knowledge, flexibility and flair that success demands are consequently hot property.  At Index Ventures, it is the supply of such individuals (the Index Drug Developers, or IDDs), and not the availability of worthwhile assets (or indeed availability of capital), that limits the scalability of the asset-centric investment model.

With so little supply, and increasing demand, it is no surprise that CROs fail to attract these innovative types.  A decade ago, it was the security and salary advantage of large pharma that drew them in.

But the power of the corporate culture stifled the creativity of those potential stars.  The very same culture that is essential to keep the lesser mortals that make up the bulk of such large companies going in roughly the right direction was a straight-jacket for the genuinely gifted and innovative.  By the middle of the naughties, the brightest thinkers in drug development lacked any kind of spiritual homes.

So they created them.

In the latter half of the last decade, a new kind of service provider began to populate the drug development space – not an CRO but a provider of out-sourced drug development innovation.

Skill, flair and innovation in drug development  is now widely available on a pay-to-play basis – if you know where to look

Developing a novel drug candidate is rather like building a house – it’s a long, complex task with lots of component steps.  Faced with an empty plot, few would consider just employing a builder and asking them to build a house.  Instead, they would first engage an architect to design the building, and to oversee the division of labour into manageable tasks.   For sure, a high quality builder is necessary to deliver a good home, but it is not sufficient.

Out-sourced drug developers, then, are the pharma equivalent of architects (just as CROs are the equivalent of builders).  They design a bespoke development plan ideal for each new drug candidate, based on experience but not inflexibly following past examples.  They divide up the whole complex development plan into manageable chunks, which can in turn be out-sourced to conventional CROs.

Most do not offer truly an end-to-end service from early discovery to post-marketing trials, but specialize in particular areas of the development timeline.  In the UK ecosystem, for example, Nottingham-based Sygnature focus on discovery, and particularly medicinal chemistry; RxCelerate in Cambridge focus on preclinical development; Total Scientific on early stage clinical development.  A few, such as Aptiv Solutions (formally Fulcrum) cover the whole spectrum.

It is these exciting, rapidly-growing companies that are the home, today, of many of the most exciting, innovative drug developers.  And they are an important step in rediscovering economic returns from drug discovery and development.  The out-sourcing model lets the best brains work on several projects in parallel, leveraging their flair over more assets that would be the case if they were locked inside conventional biotech companies.

Out-sourced drug development firms also deliver cost savings.  Firstly, they enable virtual biotech companies to progress their assets without material overheads (either financial or emotional).  As a result, as soon as a drug candidate loses its sparkle, it can be killed, with no fixed cost base or infrastructure to consider.

Second, and perhaps even more importantly, the out-sourced drug development paradigm makes transparent the cost of every constituent process.  One problem with internal drug development using owned infrastructure is the considerable difficulty in accurately costing each task.  Once you are paying fixed costs for infrastructure, the actual cost of using that capability is blurred.  But faced with a quotation for the execution of a particular well-defined task it is straightforward to decide if the information it returns will be worth that cost.

Out-sourced Drug Developers (ODDs) are the pharma equivalent of architects

It is amazing how, faced with such stark decisions, individuals balk at the cost of various processes that they would have simply consumed without question if it were part of their internal infrastructure.  With a limited budget and prices for a range of different component processes, drug developers become quite flexible in differentiating what they need from what they want – with a substantial corresponding saving in cost.

In 2006, when Funxional Therapeutics was launched as a virtual company, out-sourced drug development was an emerging concept.  In most cases, virtual was just a euphemism for un-funded, and CROs pretended to offer a fully integrated development solution while lacking the individuals who could really deliver it.  Though small, the ‘virtual’ company still had to have its development stars inside the company because there was no means to access them outside.

But founding XO1 in 2013 was a very different story.  Every aspect from company creation to development planning, accounting to antibody manufacturing was out-sourced at the touch of a keyboard.   Some of the service providers, such as Lonza who will manufacture the XO1 antibody drug candidate, have been in existence for many years, but others such as the back-office administration function tailored for virtual biotech companies at The Cambridge Partnership, had not even been imagined back in 2006.

The brightest thinkers in drug development lacked any kind of spiritual homes – so they created them

But the biggest difference is the level of skill, flair and innovation in drug development that is now available on a pay-to-play basis.  The toolkit is there for the complete virtualization of biotech – the company without any employees or consultants is, at last, feasible: the company becomes a shell to hold the IP and accumulating value, an instrument of financial engineering to ensure that the value associated with the asset is distributed to the asset owners and capital providers.

The challenge now is to demonstrate the power of such a model.  Out-sourced drug developers have, for the first time, made true virtualization fully scalable.  In a handful of years we will see the impact on R&D productivity in drug development.  The early signs are that it will be revolutionary.