Betting the Pharma

August 1, 2009
Walter Armstrong
Pharmaceutical Executive
Volume 0, Issue 0

With the biotech industry reeling from the recession, big drugmakers hold all the cards when it comes to making deals, but picking a winner is still a gamble. Here are 10 to place stakes on.

Reports of the death of biotech as a result of the global recession may have been exaggerated, but the flight of venture capital over the past 18 months has taken its toll, especially for startups. Meanwhile, almost half of the 330 publicly traded biotechs in the US report that they are operating with less than a year's worth of cash. Still, there are signs that the sky may be clearing, even if the IPO window remains shut. VC investments rose almost 50 percent in the second quarter of '09, while the NYSE Arca Biotechnology Index is up nearly 30 percent for the year. Of course, the main driver is Big Pharma's panic to fill its pipelines—the more desperate the giant drugmakers become, the brighter the prospects are for biotech.

For this year's annual "hot biotech" cover story, Pharm Exec picked 10 companies with bright prospects indeed. They run the gamut of disease states, including cancer (two), Alzheimer's, women's health, superbugs, and good old-fashioned obesity. The lead products for two of the companies have already completed Phase II trials, while three have Phase II in the works. The other five are still in early-stage development, including two in preclinical, albeit with science of exceptionally high interest.

Beyond this diversity, these biotechs share two critical features: a medical goal that will make a major difference if met, and a management team that recognizes that a good business model is every bit as important as good science. All but one is privately held, but all remain interested in partnering with a Big Pharma (several already have codevelopment deals)—if the price is right. So let the bidding begin.

CALISTOGA PHARMACEUTICALS: THE NEXT RITUXAN

As big drugmaker's profit margins have fallen back to earth, cancer R&D has emerged as one of pharma's best investments. The science may be as hard as ever, but the regulatory hurdles are at least predictable, additional indications are often forthcoming, and the pressure on payers to reimburse remains high—even for products with five-figure price tags whose benefits amount to a few extra months of patient survival. The ongoing national debate about healthcare reform, may eventually scuttle that status quo, but for now the sun is shining on biotechs with products in Phase II oncology trials.

Carol Gallagher, CEO, Calistoga Pharmaceuticals (CASSIE REDSTONE)

Calistoga Pharmaceuticals is one of the most promising. The three-year-old, Seattle-based company's lead product, CAL-101, targets the PI3K pathway—a very crowded area of cancer R&D. PI3K, or phosphoinositide-3 kinase, is an enzyme that plays a key role in a cell's growth, differentiation, and survival; mutations and other dysregulations along the pathway result, not surprisingly, in cancer.

But Calistoga shows no sign of suffering from a little-fish-in-a-big-pond complex. "We're first-in-class and, we believe, best-in-class," says Carol Gallagher, the pharmacologist who took over last fall as CEO. CAL-101's data appear to back her up, showing a 50 percent response rate across a range of different blood cancers, including chronic lymphocytic leukemia, acute myeloid leukemia, non-Hodgkin's lymphoma, and multiple myeloma. "The first patient enrolled a year ago, and there was an almost immediate regression of tumor," she recalls. "Since then, we've seen 12 out of 24 patients show improvement."

PI3K may be a big target, but scoring a clean hit is tricky. Precisely because it is involved in critical cell functions, messing around with it can cause plenty of unwanted effects. Unlike many of its rivals, CAL-101 is highly selective for a single variation of the enzyme, allowing for more drug and greater efficacy before toxicity sets in.

Calistoga has deep roots in Seattle's biocluster. It was launched in 2006 by a team of local scientists, including Michael Gallatin, the company's president, who had joined ICOS Pharmaceuticals in 1990. Calistoga's chief medical officer, Albert Yu, and Clifford Stocks, chief business officer, are also ICOS alums. ICOS is famous for developing Cialis, and then being bought by Lilly and promptly shut down, casting a temporary pall of unemployment over the Seattle-area biotech community. On its way to erectile-dysfunction riches, ICOS shelved its PI3K-inhibitor platform (including 700 compounds), which was inherited by local VC firm Frazier Healthcare and would later become Calistoga's dowry.

Gallagher hooked up with Gallatin and company via Frazier, but her claim to fame dates back to her days at IDEC, where she headed the team that made Rituxan, a cancer blockbuster, and helped design the program for the monoclonal antibody's successful transition into rheumatoid arthritis. "Rituxan offers benefit everywhere you add it in a malignancy, and it has low toxicity. It's a great drug," she says. "That's the model we are looking at."

With Cialis and Rituxan in its corporate DNA, Calistoga boasts some serious commercial smarts to inform its scientific work. Gallagher has no illusions about the challenges, especially in crafting one version of the compound for blood cancers and another for autoimmune disorders. "You have to think strategically and long term," she says. "It's essential to have squeaky clean data. But because the markets are so different, you need a dose that is more about modulating immune cells."

At the annual American Society of Clinical Oncology confab in June, this class of compounds made headlines—though less for the data than the deals. San Francisco-based biotech Exelixis said that it was licensing its two lead PI3K inhibitors to Sanofi-Aventis for up to $1 billion in milestones, while Merck and AstraZeneca seemed eager to codevelop two of their candidates in a single program. But when the glitter had settled, the actual results from Phase I were less than glowing, with only a single patient response among the Exelixis, Merck, and Genentech candidates. (The trials were in solid tumors, a much tougher target than blood tumors. Calistoga is preparing its own solid-tumor PI3K inhibitor for Phase 1.)

Gallagher says that the biotech has met with potential Big Pharma partners, and is weighing that option. But after a $30 million series B in May from Frazier and other top-tier VC firms, Calistoga may have pockets deep enough to bankroll its own Phase II trials, taking on greater risks in the short term for greater potential gain in the down the road.

"If there's a signal across all these cancers, how big do we want to go with the trials?" asks Gallagher. That's a question every young biotech would love to have to answer. "I don't want to sound boastful. It always takes a little luck. And in the end, we have to wait and see what the data tell us."

ENVIVO PHARMACEUTICALS: A SMARTER BRAIN

EnVivo Pharmaceuticals, based in Watertown, MA, has its eye on improving the treatment of Alzheimer's disease and schizophrenia, but it wouldn't mind being out in front of the coming "smart pill" craze. "Our focus is on the diseases. And yet the use of these treatments as lifestyle drugs is inevitable," says EnVivo CEO Kees Been. Been previously headed Bionaut Pharmaceuticals, a biotech focused on cancer and inflammation; he also spent four years at Biogen Idec, where he ran the oncology business, including the collaboration with Elan on MS blockbuster Tysabri.

Kees Been, president and CEO, EnVivo Pharmaceuticals

The cognitive-enhancement market is estimated to be worth $20 billion. Although FDA currently shows no sign of smiling upon the use of "smart pills" for patients with no health problems, the working assumption is that consumer demand will eventually force the agency to create some kind of mechanism for approval.

Meanwhile, Been and his team, including Michael Ahlijanian, Pfizer's former head of CNS discovery, and Jean-Marie Vallet, former VP of Bristol-Myers Squibb's European business, have their hands full with Alzheimer's and schizophrenia—two diseases in which incremental treatment advances define success.

EnVivo's pipeline boasts five early-stage agents, most bought from Bayer when the German drug firm was selling off its entire CNS group. EnVivo's chief scientific officer, Gerhard Koening, had headed dementia research at Bayer, "so we kind of had the inside track," says Been.

The demographics and dynamics of Alzheimer's remain devastating. In the developed world, rates of Alzheimer's in people 65 and over range from 5 to 10 percent; the annual cost of treatment is close to $100 billion in the US, to say nothing of its psychological burden on caregivers.

Alzheimer's R&D is intense, with more than 500 clinical trials ongoing. Yet little about its medical profile is clear. There are two competing hypotheses regarding cause, based on the two hallmarks of its pathogenesis: amyloid plaques (deposits of the amyloid beta protein between brain cells) and neurofibrillary tangles (twisted forms of the protein tau in the cells). The standard treatment, acetylcholinesterase inhibitors, led by Aricept (which nets about $2.5 billion in global sales) works by blocking the enzyme that breaks down the neurotransmitter acetylcholine. While these drugs can help slow the symptoms of memory loss, they don't make a dent in disease progression.

EnVivo had good news to report at July's International Conference on Alzheimer's Disease. Its lead product, a nicotinic alpha-7 acetylcholine receptor agonist, showed positive Phase Ib/IIa results on six of eight standard cognition measures. The alpha-7 nicotinic receptor has emerged as a popular target for cognitive enhancement because it plays a role in the transmission of messages between neuronal synapses. The nicotine chemical stimulates these receptors. "In Alzheimer's patients, who are typically diagnosed after they've already lost half their brain, the drug can make the remaining brain fire harder," Been says.

Accordingly, Big Pharmas have teamed up with alpha-7 biotechs in the race to market. Last November, Roche snapped up Memory Pharmaceuticals, whose alpha-7 candidate was the first to reach proof-of-concept. AstraZeneca recently inked a deal to co-develop several of Targacept's neuronal nicotinic receptors, while Mitsubishi is helping EnVivo with it's alpha-7 trials in Japan.

EnVivo is testing four other compounds in Alzheimer's, including a second alpha-7 and a gamma-secretase modulator (GSM) that also targets the amyloid beta protein, reducing the number of longer pieces while increasing the shorter ones. This down-with-the-bad, up-with-the-good mechanism may prove to be disease modifying, although the first-in-class GSM, codeveloped by Myrial Genetics and Lundbeck, crashed and burned in Phase III last year.

The biotech is also working on a phosphodiesterase-10 (PDE 10) inhibitor for schizophrenia that fuels neurotransmission from the cell membrane to the nucleus, which may translate in the clinic to decreasing the delusions and other so-called positive symptoms of the disease.

Further along is a histone-deacetylase (HDAC) inhibitor, which shows evidence of improving memory by increasing synaptic plasticity and possibly by targeting the tau protein. EnVivo has exclusive rights to the neurodegenerative corner of the HDAC inhibitor field, which it licensed from MethylGene, complete with biomarkers.

Yet EnVivo's fate will likely be determined by its alpha-7's performance. Next up for the nicotine drug are Phase IIb efficacy trials in both Alzheimer's and schizophrenia, at a cost of $10 million to $30 million per disease. "We are debating about whether to partner—it depends largely on the specifics of the deal," says Been.

The biotech also put its most profitable asset on the auction block: its collection of flies. EnVivo started in CNS drug-discovery in 2001 with transgenic fruit flies, whose genome is easy to manipulate. Been spun it off as a fee-for-service gadget after he came onboard, and now the collection may help bankroll the company's next big push into the smart-drug market.

NEKTAR: BIOTECH DO-OVER

When Pfizer yanked Exubera, its billion-dollar inhaled insulin fiasco, in 2007 and dumped it back on Nektar, ending a 13-year-long partnership, the drug-delivery shop in San Carlos, CA, promptly lost 150 people, including the head of its top-selling pegylation business. Thus began Nektar's transformation into what CEO Harold Robin is pleased to call "a world-class drug development company." With all that belt-tightening, which included the sale of its pulmonary business unit to Novartis for $115 million, Nektar ended 2008 $400 million in the black—not bad for a born-again biotech. By July, its stock had almost doubled in price. Now the company's lead product, a pegylated version of the pain drug Naloxone, has completed Phase II trials; if approved, it would be the first oral analgesic for opiod-induced constipation.

ACHAOGEN: SUPERBUG SWATTER

This San Francisco biotech is developing a new antibiotic arsenal against the growing global superbug crisis, including methicillin-resistant Staphylococcus aureus (MRSA) and Gram-negative bacteria. Achaogen's lead product, a tricked-out, new-dosing version of the old aminoglycoside class of antibiotics, is set to enter Phase II next year against K. pneumoniae, E. coli, and MRSA. The biotech also has several preclinical programs, including broader spectrum follow-on neoglycosides, the first-ever oral antibiotic for community-acquired MRSA, and novel agents against Gram-negative and biothreat bugs. Under CEO J. Kevin Judice (a veteran of both Genentech and Theravance, where he led the team that discovered telavancin), Achaogen has snagged $100 million in backing from VC firms, the NIH, the defense department, and other public funds.

ZAFGEN: AN ANTI-FAT PILL

After the giant flop of Sanofi-Aventis' Acomplia, pharma has lost its appetite for a chemical approach to weight loss. Targeting the brain has proved too complicated, while aiming at the bowels, like Alli, is too messy. This Boston-based startup deserves at hand, at least, for finding a wholly original approach: with angiogenesis inhibitors that failed to eliminate cancer tumors but might just shrink adipose tissue enough to win FDA approval for obesity. Zafgen's preclinical success in mice models—obese critters not only lost 25 percent of their fat cells but also reduced caloric consumption as much as 80 percent—has garnered considerable press this year. The startup also hired a high-profile CEO, Tom Hughes, who helped win EU (though not FDA) approval for Novartis' DPP-4 inhibitor, Galvus, in the equally sticky category of diabetes; plus an even newer CFO, Matthias Jaffe—signs that it's serious about partnering on clinical trials.

NEUROCRINE: ON THE MEND-OMITRIOSIS

If a Big Pharma were looking for a late-stage drug to plug a leak from patent loss, it could do worse than shopping at Neurocrine. The San Diego–based biotech has completed a whopping four out of five Phase II studies of its GnRH antagonist, elagolix, for endomitriosis, a painful condition occurring mainly among women of childbearing age when endometrial cells are deposited outside, rather than in the lining of, the uterus. Elagolix would be the first orally administered version of the hormone. Although elagolix missed hitting one end point with statistical significance, Phase III trials are expected to get rolling early next year, including a head-to-head comparison with standard-of-care injectable Lupron. A nod from FDA would certainly help Neurocrine forget the pain of the NDA for its insomnia drug indiplon, which got torn apart two years ago.

ARQULE: A KINDER KINASE INHIBITOR

Many self-respecting biotechs complain of not having the cash to unlock the awesome potential of their amazing platforms. ArQule may be able to back up its claim. This combinatorial chemistry shop is developing small-molecule drugs for oncology via its so-called Activated Checkpoint Therapy technology. After inking a deal with Daiichi-Sankyo to take its lead product, a highly specific kinase inhibitor against non-small cell lung cancer and related tumors, through late-stage trials, the Boston-based biotech got $75 million in up-front payments (and up to $560 million in potential milestones) to boost the rest of its pipeline. The new management of CEO Paolo Pucci and Chief Medical Officer Brian Schwartz, who helped shepherd Bayer's kinase inhibitor Nexavar to market in liver and kidney cancers, may be able to shake its second kinase inhibitor from the preclinical tree.

PACIFIC BIOSCIENCES: AT-HOME GENOME

A top competitor in the race for "the $1,000 genome," this San Francisco biotech was started in 2004 with venture capital from Silicon Valley firm Kleiner Perkins, among other investors. PacBio is developing technology that does third generation, "Single Molecule Real Time" sequencing of DNA—the goal being creation of an affordable, half-hour diagnostic tool in the personalized-medicine bag. After raising $120 million last year, the biotech hired new chief scientific officer Eric Schadt, the big-deal biomathematician who cofounded Rosetta InPharmatics in 1999 (and sold it to Merck, in 2001, for $600 million). Schadt will presumably help define and refine the PacBio platform's commercial applicability with his experience as a leading innovator in data integration and model building.

FATE THERAPEUTICS: DRUG DELIVERY GAME CHANGER

The political and ethical thicket ensnaring embryonic stem cell research has led some enterprising scientists to focus on an alternative: the body's own largely dormant adult stem cells. However controversial the original spur to this action, the result has been a cascade of electrifying scientific breakthroughs from which not only new drugs but a whole new way of studying disease and developing drugs might proceed.

Scientific and Executive Team Founders, Fate Therapeutics (GEOFF SCOTT)

Six pioneers in the field from Harvard, Stanford, MIT, the University of Washington, and Scripps Research Institute gathered their brain power, intellectual property, and other synergies to form Fate Therapeutics in 2007. Based in La Jolla, CA, and backed with $25 million in top-tier VC funds, Fate made news in May when it announced that its lead product was entering human trials, edging out Novartis with the first ever adult stem cell therapy for blood and marrow transplants. Fate calls this platform stem-cell modulation; a second drug candidate, for bone regeneration, is already in the works. The most interesting aspect of all this may be that Fate is using not only conventional pharmaceuticals, but failed or otherwise abandoned ones to try to spark such remarkable results.

Says CFO Scott Wolchko: "The business model around stem cell therapy as a delivery has been very difficult, so our approach is appealing to investors. After all, we're talking about discovering and developing pills."

Fate's lead product is a fatty-acid derivative that was shelved as a treatment for peptic ulcers in the 1990s. The dud gained immortality last year as "the first small molecule ever shown to activate stem cells to transplant better," according to Harvard's Leonard Zon, director of the Stem Cell Program at Children's Hospital Boston and a Fate confounder. While screening some 2,500 chemicals in zebrafish embryos, Zon discovered that it had a knack for making stem cells multiply and move toward bone marrow. The hope is that when added to human umbilical blood, the chemical will boost the quantity and quality of stem cells, and improve the odds for post-chemo blood cancer patients who are without of a marrow donor. As many as 6,000 such patients die each year because of the cost and risk of the procedure.

Embryonic stem cells have one huge advantage over the adult version: Their so-called pluripotency. That means they have the potential to develop into any one of the body's 200 different kinds of cells; a mature stem cell can grow into only a cell of its resident tissue. Yet scientists have succeeded in overcoming this limitation by reprogramming adult stems through the use of genetic manipulation—essentially turning back the developmental clock and restoring the adult cell to its embryonic state. In 2007, the Scripps Research Institute's Sheng Ding (a Fate co-founder) improved upon this remarkable feat of induced pluripotent stem cell (iPSC) by returning a mature skin cell into its original, pre-skin state without touching its genetic makeup.

In April, Fate teamed up with Stemgent (which makes reagents for stem cell therapeutics), to launch Catalyst, an open-source group of biotechs and pharmas to industrialize iPSC technologies. Based on a pre-competitive IP-sharing model, Catalyst aims to develop and test the concept of induced pluripotent stem cells as an alternative method of drug discovery.

"We have talked to most of the Big Pharmas, and they are very positive," says Wolchko. "The novel business structure is attractive from an ROI standpoint because all funds are pooled."

Not surprisingly, this hyper-dynamic field has already yielded a crop of first generation startups in addition to Fate. In July, at the annual confab of the International Society for Stem Cell Research, iZumi Bio and a faction of leading Harvard stem-cell scientists announced the formation of iPierian, with a VC bankroll of $11.5 million. Corey Goodman, the neurobiologist who recently resigned after less than two years as the head of Pfizer's Biotherapeutics and Bioinnovation Center, was tapped to chair the board of the new discovery shop, which will focus on finding small molecule treatments for neurodegenerative diseases.

In Vivo blogger Chris Morrison noted that "between these guys and Fate Therapeutics, we might have a new Alnylam/Sirna thing going on in the iPSC space." The comparison to RNA interruption is noteworthy both in terms of the field's potential for therapeutic advances—and IP litigation.

KINETA: REBOOTING THE IMMUNE SYSTEM

The road to immune-based drugs is littered with failures, as the history of the "miracle drug" interferon illustrates. In the making of immune-based drugs, selectivity and specificity are key. Because the human immune system is (obviously) such a web of interactions, waves of unintended consequences can arise from a single intervention. Only the foolhardy enter without first removing their shoes.

Shawn Iadonato, chief scientific officer, and Charles Magness, president and CEO, Kineta (MIKE NAKAMURA)

Charles Magness and Shawn Iadonato, cofounders of Seattle-based Kineta Pharmaceuticals, are far from being fools.The team of CEO Magness and CSO Iadonato scored a win with their first biotech outing, Illumigen Biosciences, which they founded in 2000 to explore the therapeutic potential of genetic mutations that trigger immune protection against disease. One of the many projects to attract VC funds in the bubble released by the Human Genome Project (HGP), on which both men worked. Using a targeted sequencing approach that Magness helped invent for HGP, Illumigen identified a variation in a specific gene in people whose immune systems mounted a powerful response to the hepatitis C virus. The protein developed around that discovery showed a similar anti-HCV test-tube potency, at which point Cubist Pharmaceuticals swooped in for the acquisition. Magness and Iadonato inked a deal worth up to $150 million in potential milestone payments, although 18 months later Cubist has yet to file an IND for the compound.

With Kineta, the team hopes to duplicate that success by targeting a protein called RIG-1, or retinoic acid inducible gene I, which serves as a kind of master switch to an important part of the body's cell-mediated immunity. A successful drug would turn on RIG-1 even after a virus had invaded the system, and restore the innate immune function. The RIG-1 pathway is active against a broad range of RNA viruses such as HCV, flu, and RSV, but so far it remains a target in search of a compound. Using NIH backing, Kineta has developed a screening platform and is busy aiming for its target protein.

In July, the biotech did some acquiring of its own: a portfolio of ShK analogs from Airmid, a Redwood City, CA-based biotech. Originally derived from the toxin of the Caribbean sea anemone, this class of compounds is being developed to treat autoimmune disorders. Kineta has designated one such chemical that produces remission of Multiple Sclerosis in animal models as its lead product; plans are for Phase I trials to begin by the middle of next year.

But Kineta has other ambitions as well. The biotech is selling itself as a retail R&D shop with a specialty in bringing preclinical immune-based compounds to proof-of-concept.

"There's a glut of these potential drugs hung up at the bigger companies," Magness says. "And they don't know which will be winners, and they're bad at determining that."

"Why can we do it better?" asks William Cadwallader, head of corporate development. "Because we have a world-class antiviral research-and-development team."

"Look at it in terms of supply and demand," says Ken North, head of finance. "There's an oversupply of pre-POC drugs, which are available at a comparatively low cost, and an undersupply of POC drugs, which are being sold or licensed at a big premium. We turn the low-cost, pre-POC compounds into high-cost POC potential drugs."

The pitch is interesting. You can argue that Kineta has put its finger on one of the industry's most significant (if all-too-familiar) problems. And a problem for Big Pharma is an opportunity for a little biotech. Kineta estimates that it can cut the cost to the industry of getting to proof-of-concept from $50 million to $10 million.

But isn't it essentially what every hungry young biotech is saying? "Invest in us: we're cheap, fast, and smart. And if we're not as cheap and fast as all that, we're certainly cheaper and faster than Big Pharma."

Absent a specific lead product or platform—an impressive-sounding retinoic acid inducible gene I or a cool sea anemone agent—doesn't it have a bit of a hollow ring to it? After all, "supply and demand," doesn't have the same mystery and majesty as "meeting serious unmet medical needs."

Still, as a business model—and a way to meet its goal of becoming profitable within three years—the pitch shows ingenuity. Plus, if you were going to pass on investing in the RIG-1 platform or the ShK analogs, it offers an option an MBA could surely wrap his or her mind around.

But that's biotech in the dog days of the Great Recession. And these magicians have already pulled one rabbit out of a hat.