Rolling the Dice

Although the blockbuster model is supposedly dead in research and development world of the pharma industry (the idea of trying to invent a drug that will be vastly superior and be able to command a high price, a large market share, and billions in revenue), it is very much alive in the acquisitions world (let another company take on the R and D risk) and is generating some spectacular thuds rather than booms.  Last week, Bristol-Myers Squibb (BMS), one of the largest drug companies at $20 billion in annual sales, officially threw in the towel on BMS-986094, an oral therapy for hepatitis C, due to indications of heart and liver toxicity that occurred in a Phase II trial (FierceBiiotech article 1).  BMS had acquired the candidate drug by purchasing Inhibitex (Inhibitex) for $2.5 billion last January so the company’s write-off of $1.8 billion (which assumes the remaining assets are worth $1 billion, an exaggeration to me) and loss of billions of its market capitalization was a precipitous drop (FierceBiotech article 2).  By buying Inhibitex, BMS had entered the red-hot race for the next generation of treatments for chronic hepatitis C viral infection (HCV).  About 4 million Americans have HCV of whom about 15,000 die each year (it is the leading reason for liver transplants) not to mention an additional 170 million infected people in the rest of the world.  Current cost of a course of treatment in the US is about $50-60,000, and with a successful drug, a company may “quickly seize” $3-5 billion in annual sales (FierceBiotech article 2).  So BMS’s bet of $2.5 billion for a payoff of $40 billion over ten years was a logical one, even though the (very) rough chance of success was only about 35% (see Note 1 below).  This got me thinking about what may be a logical bet (also known as an investment) on a candidate drug for treating HVC in the rest of world where very few could pay the US price.

Let’s assume that there are about 10 million people of those 170 million infected with HCV who are able to afford $10 either through an insurance plan or government subsidy and are “accessible” each year, meaning that the medical system can treat them if the drug existed.  The annual revenue would be $100 million and the ten-year total, $1 billion.  For a candidate drug with only preclinical data (before testing in humans), the rough probability of success is 0.5% (very low) or 70 times a worse bet than what BMS made and for an expected payout 40 times less.  So using my fifth grade math skills (see Note 2 below), I calculate that BMS (or a similar big pharma) would be willing to spend $900,000 to acquire such an opportunity.  Not much compared the $5-10 million that is typically considered by the venture capital community to be the minimum needed to start-up a drug development company.  However, if one is willing to place a bet with a smaller payoff ratio, like rather than a 40x just 10X, then the amount of goes up to $3.2 million, still not much but may be enough for lean virtual-type company to generate data in humans that, if positive, may bring in additional, non-dilutive funding (funding that doesn’t dilute the previous investors’ shares).  Of course, the only source of this level of non-dilutive grant funding is the good ol’ Bill and Melinda Gates Foundation, and supposedly this is exactly the kind of “program-related investment” the Gates is looking to make in global health (see “Toe in the Water”).

So where does all this hand-waving leave us?  Well, if I squint hard enough, I could see a group of investors having a similar risk-tolerance as BMS (like of the big health funds like the Texas-Pacific Group [TPG Biotech] or MPM Capital [MPM Capital]) but willing to take a lower payout and to invest in start-up company with promising lead candidates for treating HCV on a global basis.  Of course, they would use their sophisticated multivariate analyses and modeling to refine the risk, reward, and investment numbers to three decimal places convince themselves it is a good bet/investment.  As for the source of the drug candidates, my hypothetical start-up may license them from a university or failing biotech (both pretty cheaply), or, even better, could buy BMS’s BMS-986094 program which, as a write-off, should be cheap, and figure out if the drug really is causing liver/cardiac toxicity.  As for keeping their investment (money at risk) as small as possible, if the investors and the management of the new company commit to making an HCV treatment that costs no more than $10, they may find many academic researchers willing to contribute their expertise to a solution and maybe some grant money from the US government.  And as an added benefit of committing to a ROW, low-cost treatment, the company will avoid competing with the almost two dozen companies that are in the HCV race (Seeking Alpha article).

Sounds crazy, but is it?

Note 1:  The probability of success in clinical trials is based on the analysis of thousands of drug trials over multiple years.  A blogger (Clinuity blog) cited a recent study of trials from 2003 to 2010 that included 4,275 drugs and 7,300 indications.  The approximate probability of completing each stage was given as:

Phase I: 9%

Phase II: 15%

Phase III: 44%

Submission: 80%

Note 2:  The goal of a bet is to maximize the expected value (EV) and EV = probability of winning × payoff – probability of losing × bet amount (Betting Resource).


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