If you’re a biotech exec or investor, then nothing warms your heart more than a big acquisition – and last month’s was a whopper. In exchange for $800 million upfront plus downstream biobucks, BMS acquired Flexus Biosciences, whose lead immuno-oncology drug hasn’t even been tested in a single patient.
Is this, as venture capitalist Bruce Booth opined quipped, a “fair recognition of value”? Perhaps. But most VCs and pre-commercial biotechs probably shouldn’t break out the bubbly. Instead, they should be afraid – very afraid – of how the industry is changing, and look hard at whether their early-stage R&D programs are poised for a successful deal down the road.
For context, I urge you to read (or re-read) the classic business strategy book by former Intel chairman Andrew Grove, Only the Paranoid Survive. Grove identified a “strategic inflection point” that could disrupt Intel’s business model when new, low-priced memory chip manufacturers emerged. He recommended that Intel abandon that market and focus its energies elsewhere – which is a large part of why the company still exists and thrives today.
Importantly, in defining a “strategic inflection point” Grove notes that it isn’t easily-identified – instead, it’s a continuum that “build[s] up force so insidiously that you may have a hard time even putting a finger on what has changed, yet you know that something has.” Hence the need for constant vigilance and, yes, paranoia.
The drug industry is surely at a similar “strategic inflection point”. Sales forces are less effective, prices are under constant and increasing assault, and physicians and patients alike are raising the bar for how they define clinical value. (My prior takes here, here, here and here.) High prices and huge sales forces used to prop up even minimally differentiated drugs, especially in big markets like hypercholesterolemia and depression. But today, something is changing: commercial muscle no longer guarantees success unless you also have a compelling clinical benefit.
Biotechs need to be paranoid about this shift, even though they're years away from the market – because their potential Pharma partners are. As Pharmas nervously experience the industry’s evolution first-hand, they’re more likely to demand at least some differentiation data before they make an offer for biotechs’ assets.
Nay-sayers may see the BMS/Flexus deal as evidence that there’s no cause for alarm in biotech – but this may be an exception that proves the rule. Inhibitors of the IDO pathway are thought to be valuable in cancer treatment, but they're scarce, and BMS may have been willing to pay a “strategic premium” for Flexus's drug to be able to combine it with its own portfolio agents, independent of any evidence of differentiation. But these sorts of strategic imperatives are unlikely to be the norm, even elsewhere in the hot area of immuno-oncology. For example, my most recent count shows about a dozen biotech preclinical candidates targeting the immune checkpoints PD-1 and PD-L1. How are these agents better than or different from one another, let alone the established leaders that are approved or in Phase 3? We honestly don't know yet. And as these agents advance toward the clinic, they’re unlikely to get snapped up until and unless there are at least some data to put them in context.
The solution for biotechs is to be paranoid – and to channel that paranoia into focusing more of their early R&D efforts on differentiation and competitive positioning, even as they pursue the “critical path” toward approval. Even companies that are already investing in preclinical and early clinical studies of novel biochemistry and pharmacology, unique patient populations, predictive biomarkers of response, potential combination partners and head-to-head efficacy probably need to consider if they’re doing the right type and number of experiments to explore how they’re differentiated. Yes, these studies may uncover the fact that a drug isn’t as differentiated as one had hoped – but if so, it’s far better for biotechs and their investors to know that answer quickly than to continue to advance a drug with little chance of securing a Pharma deal, let alone achieving success in the market.
Is it possible that this need for biotech paranoia is overblown? Sure – after all, there’s been chatter about the need for clinical differentiation for years, yet somehow many “me-too” drugs have still done just fine.
But I’d argue we’re in the midst of a “strategic inflection point” that threatens many biotechs’ ability to secure Pharma deals. Whereas the biggest hazard to biotechs in the past was moving too slowly or running out of funds, it’s hard to deny that today, the risk of not demonstrating clinical differentiation is far greater.
And if that happens, then a decade from now, only the biotech execs and investors that are paranoid today will have survived to tell the tale.
