BC Business
Robert Butchofsky smiles a lot for a man trying to sell the hope that his company has fallen as low as it can go. “We’re not dead,” says the president and CEO of QLT Inc. (QLT-T) as he guides this reporter out of his sleek office on Vancouver’s Great Northern Way.
He laughs as he says it with the casual confidence of a man who believes his message. Indeed, his next appointment isn’t to kick off some frantic series of meetings to rescue his beleaguered company but for a spin class with one of his vice-presidents. But gloom weighs heavily on QLT. Sales of its cornerstone product, the anti-blindness drug Visudyne, have plummeted 40 per cent in the past year alone, as competition gouges into its market. The company continues to bleed millions in red ink – some $14.4 million in the first quarter of 2008 alone. Nearly half its staff has been laid off this year, and it sold its headquarters this spring to raise cash; a beverage company now occupies some of the building’s vacated space.
Things were so different only a few years back. QLT – the company that pioneered B.C.’s biotech industry when it formed in 1982, attracting a flood of talent and investment dollars to the province – wasn’t just a money-maker; it promised to lead B.C. into a bold new age. “QLT was so, so successful,” says BMO Capital Markets biotech analyst Christine Charette, who has followed the company since 1992. In the early part of the millennium, biotech was being touted as The Next Big Thing. Governments raced to turn their regions into leading biotech clusters, hoping to create Silicon Valleys of life sciences. There is still hope in B.C. that the industry will ease the economy’s reliance on primary resources. “It is so vitally important to diversify our economy if we’re going to have economic stability and growth in the decades ahead,” says finance minister Colin Hansen. QLT’s shares topped $127 in August 1999, but with shares now going for around $3 industry insiders are praying for a new saviour.
Sadly, few can say with confidence where – or if – the next champion will be found. Consider that only three of the 90-plus bio-pharmaceutical companies that dominate B.C.’s biotech/life sciences sector have ever posted a profit – with only QLT and Angiotech Pharmaceuticals Inc. developing their own drugs from scratch. Angiotech, indeed, is suffering fortunes similar to those of QLT, losing royalties from its Taxus stents after reports surfaced that the product showed little advantage over drug therapy in some patients. The company’s other potential new products have failed in clinical trials, and its share price has dropped from about $100 in March 2000 to about $2 this summer. Aspreva Pharmaceuticals Corp., the third member of this elite club, is still making profits but was sold off this year to the Swiss-based Galenica Group – good news if you’re an investor but leaving little in the way of homegrown companies to lead B.C.’s industry out of the woods.
What’s most troubling is that the conditions under which those three flourished have turned sour for the next generation of companies. The credit crunch and the failure of biotech firms industry-wide have choked off vital investment money. Meanwhile, the huge scientific challenges that make commercialization so difficult look to become more daunting than ever.
Biotech has come to mean many things to many people. For some it conjures up companies such as agriculture giant Monsanto Co., which genetically engineers crops; for others it’s about making biofuels or other industrial products. In the medical business, however, it describes small startup companies that develop new medicines. These are to pharmaceutical giants what little dot-coms were to the IBMs, Microsofts and HPs. Biotech used to be known for taking a more novel, biological approach than traditional chemistry-driven pharma; the smaller players could dance in ways the lumbering giants could not. But pharmaceutical firms have adopted biotech’s ways and vice versa, and in the crossover it’s the size of the companies that have become the distinguishing characteristic.
There are variations on the biotech model. Aspreva, for example, didn’t develop new drugs but found new uses for existing ones, while other companies develop medical devices. A typical biotech company, like QLT, is spun out of a university lab with the goal of creating a new drug or targeting some disease. It could be argued that this puts them closer to science’s cutting edge. They start small but spawn products that can bring sales worth billions of dollars, so the growth potential for investors – and profit potential for entrepreneurial scientists – is unparalleled. Lured by that promise, investors race to what seems a gold rush; universities and their scientists work to transform their discoveries into cash cows; big pharma turns to biotech to breathe life into its stagnating R&D pipeline; and governments forge plans to build thriving biotech clusters to drive their economies. And yet, 26 years after the industry launched in B.C., biotech companies burn cash by the millions or tens of millions of dollars a year – those that haven’t flamed out entirely.
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B.C.’s situation is not unique. The industry worldwide consists of a select group of giants that earn huge profits – but as an aggregate biotech loses money by the billions. Over the past decade, about $4 billion to $5 billion has been lost annually (the numbers are far more disastrous if you subtract the small handful of wildly successful giants such as Amgen Inc. and Genentech Inc. – Amgen alone made $3.7 billion in 2007). Of the 260 companies listed as biotechnology stocks on Yahoo Finance, only 40 even have price-to-earnings ratios. And these are publicly traded companies – supposed successes who have outgrown their reliance on venture capital; private companies, of which there are thousands, lose money almost without exception. The cheerleaders will tell you to be patient – that in time many of the losers will bloom into commercial viability. But the very model of the biotech industry, with the challenges it faces, suggests this day may never come.
Part of the problem is that biotech is fundamentally different from other kinds of business, even other high-tech ventures. There’s a far higher rate of failure for startups and established companies alike. It can take more than a decade and anywhere between half a billion dollars to $2 billion to bring a single new product to market. That’s because biotech firms need to clear extraordinary scientific hurdles that other technologies don’t face. “I draw a very sharp distinction between science-based business and engineering-oriented high tech,” says Harvard University business professor Gary Pisano, a leading expert in the field and author of the book, Science Business: The Promise, the Reality, and the Future of Biotech. “A lot of what we think of as high tech is not science-based. It’s engineering: it’s very sophisticated, it’s very complex and it draws on science. But the companies aren’t inventing new science.”
J.P. Heale, associate director of UBC’s University-Industry Liaison Office, helps fledgling spinoffs navigate their way out of academia and into commercial success. He has seen first-hand the hardships biotech firms face. “Intuitively, you’d think if a bunch of software developers got together and put out a decent piece of software, it would have a pretty decent chance at success,” he says. “Obviously, it’s not perfect or everybody would be software designers.” But there’s so much uncertainty with medical science that far more companies fail. “We don’t know what a cell is going to do because we only know the tip of the iceberg,” he says.
Software creators know that the programs they create will at least work – although not necessarily if there’s a market for them. They also know exactly what kind of environment – the type of computer, the operating system – the program will enter. But a drug is designed to enter a landscape – the human body – for which our primitive maps offer only faint clues. We keep learning exponentially more about genetics, protein structure, synthetic chemistry and systems biology, and each one of those paths offers us new opportunities to cure disease. Yet with each new path comes countless dead ends and more opportunities for failure.
Drug discovery is ultimately a game of forging keys, with the hope that one of them will hit a biological target in the body and unlock it. Since modern drug research began 125 years ago, all the drugs ever made have only interacted with about 500 targets. The total number of potentially “drugable” targets is estimated to be between 6,000 and 10,000. Pisano says that for all the scientific progress we have made, we have not yet learned nearly enough, and that lack of knowledge makes drug exploration uncertain. A software application may be plagued by glitches, but unless it’s flying a plane, it’s unlikely to kill anyone. What gives medicine the near-miraculous power to cure disease also puts us at risk of great harm.
[pagebreak] Neuromed Pharmaceuticals Ltd., a startup spun out of a UBC lab, is the very model of biotech’s long-touted promise. It does not yet have a drug on the market, but it has already raised $125 million for research and development. Unlike many biotech firms that specialize in niche rare diseases that pharmaceutical giants neglect, Neuromed is seeking new treatments for a very common affliction: pain. This gives the company the very rare potential to produce a blockbuster. Venture capital funds have taken notice, pouring more than $53 million into the company last year alone.
Neuromed’s expansion is evident as you walk through its labs on the UBC campus. The paint on the walls is a hodgepodge of mismatched colours, the detritus of dead or departed companies whose space Neuromed has grown into. Seventy-two staff work for the company, with scientists spread out in labs over two floors. Science is no longer a craft business, with chemists painstakingly creating new molecules one by one. It’s a game of logarithmic numbers and terabytes of data. Gabe Hum jokes that his job at the company is “comic relief,” but the synthetic chemist creates new molecules that may one day earn billions for the company. Neuromed is targeting specific calcium ion channels in cells of the nervous system. Hum helps create molecules that could potentially block a type called N-type calcium channels as part of a partnership Neuromed has with global giant Merck Pharmaceuticals. The company is also pursuing two different projects on its own: an opioid pain reliever called OROS hydromorphone and blockers of T-type calcium channels in other cells. Hum’s group is capable of making up to 300 unique compounds a week to put into what it calls a “focused library” of compounds that may have potential (Neuromed has also bought an additional library of tens of thousands of compounds from various companies).
To appreciate the scientific challenges faced by biotech companies, one only has to observe the odyssey Neuromed undergoes to see if any of its tens of thousands of compounds may, one day, become a drug. In the first stage, chemicals are run through the FLIPR – a half-million-dollar machine that, with its grey metal and tinted glass, looks like a modernist china cabinet. The chemicals get combined with modified kidney cells created by the company, followed by a fluorescent dye. The FLIPR looks for the dyes to see which compounds block channels, at a rate of 384 compounds every three minutes. Perhaps one out of 10,000 compounds shows signs it might work; so far, Neuromed has screened about 80,000 compounds. “Truthfully, a lot of it is just luck,” says lab operations manager Diana Janke.
The chemicals that pass this first screen still face extraordinary odds on the long path that precedes human clinical trials. Each step further eliminates more candidates. Electrophysiologists take a closer examination, screening about two chemicals a day. A formulations department must turn the surviving chemical into some form that can be tested both in vitro (in petri dishes) and in vivo (in animals). The analytical lab checks for quality control and further test to see if the potential drug can survive a biological environment. How the drug is delivered makes a big difference; some are injected into the blood, while others are injected directly into affected organs. “We’re going for the hardest of the hard,” says Janke. “We want to make something you can swallow in a pill.”
So Neuromed’s product must be stable on the shelf, survive the stomach and be absorbed through digestion. It must pass through the liver, which acts as the body’s detox centre. Then comes the barrier that protects the brain from blood and its composites. A dose must be determined to keep it effective after it survives everything the body throws at it, and the drug must not cause damage. Animal trials must show the drug is both safe and effective, and only then can it qualify for the three phases of human clinical testing.
And still, almost 90 per cent of drugs that reach human clinical trials will fail. Just as test tube experiments can’t adequately predict how chemicals behave in mice, animals don’t tell us all we need to know about our own bodies. Until then – until Gabe Hum and his colleagues find that one elusive compound that is safe enough to sell – Neuromed will continue to be little more than a promise, and a $125-million biochemistry experiment.
There’s no shortage of desire for biotech to succeed. Investors, universities, the medical community and governments are all mesmerized by its potential. Governments worldwide spend billions to foster biotech, and the B.C. government is among the most committed. “We recognize that the knowledge industries are going to be such an important part of the new economy,” says Hansen, who returned this summer to his old job as finance minister after a stint as minister of economic development.
Hansen, along with Premier Gordon Campbell, regularly leads industry delegations to major biotechnology conventions to build opportunities for B.C. Campbell travelled to India in November 2007 to talk up B.C.’s sector to a World Economic Forum summit. The biggest biotech conferences are ones put on by the Biotechnology Industry Organization (BIO); Campbell spoke at BIO 2005 in Philadelphia and partied at former QLT CEO Paul Hastings’s San Francisco house at BIO 2004. In 2007 the government invested $90 million in the B.C. Renaissance Capital Fund, which it created to provide venture capital to biotech firms and other high-tech companies. Biotech firms also receive generous tax credits for their R&D and get provincial research funding, including B.C.’s $100-million contribution to the Michael Smith Foundation for Health Research and $200-million boost to Genome B.C. The feds heap cash onto B.C. research foundations too.
But perhaps more desperate than government for biotech to deliver is the pharmaceutical industry. The big drug companies are quickly approaching an abyss: investment bank Goldman Sachs Group Inc. predicts that between 2010 and 2011, drug patent expiries will lead to a 28 per cent decline in big pharma’s sales. The “black hole,” as it’s called, is the biggest in history. As multibillion-dollar products such as Pfizer Inc.’s $12-billion-a-year anti-cholesterol drug Lipitor come off patent protection, generic manufacturers gain licence to make and sell such drugs at bargain rates.
The problem is that there aren’t enough new drugs in big pharma’s development pipeline to replace those lost billions. The companies continue to pour money into R&D, but with shrinking results. The U.S. Food and Drug Administration (FDA) approved only 17 new drugs last year, the least since 1983; a decade ago, the FDA approved up to 53 drugs in a year. This void should provide opportunities for smaller biotech companies as pharma looks to them to fill its pipeline. Indeed, many have suggested for some time that pharmaceutical companies should farm out their R&D to biotech and focus on marketing instead.
But according to Gary Pisano’s research, biotech is no more productive, in terms of R&D dollars spent per new drug, than big pharma – and it’s drastically less productive in terms of revenues. For each dollar spent on R&D, pharmaceutical companies earn about three times as much in revenue as do biotech firms. This has much to do with the fact that bigger companies tend to focus on bigger markets, making drugs for cholesterol, hypertension and pain, while smaller companies often focus on rare diseases and other small niches. But if a company like Pfizer is to replace the $12-billion-a-year hole a blockbuster like Lipitor will leave, it can’t do so by acquiring a $200-million-a-year product from a biotech pipsqueak. Biotech firms, even bigger ones such as QLT, almost invariably live or die on the performance of a single product, and as pharma pares down its interest in developing niche products, small biotech firms like those that populate B.C. will find it tougher to locate a deep-pocketed partner to fund their discoveries. This could spell doom for many.
So why is it getting harder to discover new drugs and bring them to market? One reason is that the FDA has become more vigilant about ensuring consumer safety after numerous drug recalls. It’s tougher to get regulatory approval – and because our market is so puny compared to that of the U.S. or Europe, the dictates of the FDA are what matter (no biotech would bother with a drug approved only in Canada). Another factor is that the giddiness surrounding biotech in the early part of this decade drew too many bad players to the industry. “When you get these waves of success, everything rises, so everyone can raise money very easily, and they think it’s going to be like that forever,” says biotech analyst Christine Charette. The success of companies such as QLT spurred investors to throw money at companies they thought would replicate its success. Unfortunately, many of the companies had poor or inexperienced management or had products that weren’t worth developing in the first place – hence the high failure rate.
Many of the industry’s problems, as it relates to bringing new drugs to market, lie in the very science that is biotech’s lifeblood. Business and science can be a combative couple: a company demands secrecy in order to capitalize on its intellectual property, but science works best when people collaborate and ideas are shared freely. As the industry’s issues grow more staggeringly complex, more expertise is needed from a wider range of disciplines. Geneticists need to work with chemists, who need to work with molecular biologists. Yet in a company such as Neuromed, the scientists working on one of the company’s proprietary projects aren’t allowed to discuss their work with those who are working on the project partnered with Merck.
Arti Rai is a Duke University researcher who is looking at ways to make drug research more open and collaborative. She believes that finding a new model for funding and pursuing discoveries is critical and suggests one way may be to take some of the lessons learned from open-source software development and apply them to biotech. “The low-hanging fruit is basically gone,” Rai says. “We are running out of good targets in the human genome that can easily be dealt with using small molecules. If all the easy, safe molecules have been found, the next round is going to be harder to make safe.” If Rai is right, the scientific problems that await will be far more complex and more expensive to solve. This may explain Charette’s gloomy outlook for B.C.’s sagging biotech industry. “I’ve been doing this for 16 years,” she says. “I’ve been through three of these cycles, but I have to say this is the toughest cycle. Typically, I see a way out. I just don’t see a way out right now.”QLT is banking on a new product, a drug-delivery device called a punctal plug, to bring it back into the black. But the device shows how chastened QLT has become. The plug delivers a drug, Latanoprost, into the eye, that already has FDA approval. By developing this device and shedding itself of other drug development projects it acquired in efforts to diversify its product pipeline, QLT sidesteps the minefield of creating a new drug from scratch. The company hit the jackpot its first time around, but it is an industry where lightning very rarely strikes twice. For QLT and others in B.C.’s biotech sector, the possibilities remain limitless. It’s the probabilities of achieving those dreams that are increasingly tough to swallow.