Creating Markets for Medical Innovation with Lower Commercial Potential


colleen rye is a director of FasterCures, a center within the Milken Institute. christopher lee is a director of the Institute’s Center for Financial Markets. tanisha carino and michael piwowar are the executive directors of FasterCures and the Center for Financial Markets, respectively. The authors would like to thank Julien Rashid and Rachel Tunis for their research assistance.

Illustrations by Martín Elfman

Published April 26, 2019


The biopharmaceutical industry is in a period of transition.

Over the past decade, pressure from insurers and regulators has forced greater attention to how capital is allocated and has created strong incentives for specialization among the established players. One unfortunate result: cuts in the pipeline for development of new therapeutic compounds.

We have talked with dozens of experts from across the biopharma ecosystem, and a common theme has emerged: the industry is focusing ever more narrowly on compounds with clear commercial value and strategic fit. Along with requiring greater certainty about safety and efficacy, the companies are demanding higher expected returns on investment. And the trend is likely to accelerate along with competitive pressures.

A 2018 EY survey concluded that 79 percent of executives in life sciences plan to pare their development portfolios in response to a perceived unfavorable regulatory and reimbursement environment. One can see glimmers of this future in recent announcements of cuts by established developers. For example, last October Novartis closed out one-fifth of its research projects, acknowledging at the time that promising science was being cut in order to fund high-priority initiatives.

As the industry concentrates in fewer therapeutic areas, such announcements could increase an already jarring mismatch between societal burden of disease and the level of R&D spending. One can look to mental health (15 percent of the disease burden but less than 2 percent of R&D, according to unpublished data provided by Amitabh Chandra, at Harvard’s Kennedy School) as an area where corporate fiscal discipline has decreased already meager prospects for new therapies.

So what happens to promising science that gets cut? While some compounds are out-licensed, donated or sold as part of a broader divestiture, dropping compounds for commercial reasons usually means an end to development, full-stop. And these cuts are bound to have cascading effects. Early-stage funders reprogram their investments around priorities of the later-stage companies they rely on for development and commercialization. There seems little doubt that therapies with considerable potential to benefit patients are being discarded, and the chances for discoveries emerging from academic labs and small companies are being reduced.

Is there a better way? Could there be a thriving market for good science in biopharmaceuticals that has lesser commercial prospects or is simply an ill-fit with corporate strategies? Here, we lay out the basic ingredients required to foster such a market and describe alternative channels that could unlock the capital needed to leverage the full scope of innovation. We see an emerging ecosystem of organizations pursuing new models and transaction structures that could narrow the gap between private and social returns on therapeutic compounds.

Getting From Here To There

In the marketplace we envision, promising science would be developed using capital from diverse sources, organized along a seamless spectrum of risk and return. Commercial investors would continue to focus on projects with generous expected returns, while social impact investors would help fund good science with modest commercial prospects. And philanthropic and public funders would develop promising therapies with no commercial potential, or would mitigate the risk of projects with less profit potential to kindle the interest of commercial investors. Across this spectrum, institutions and mechanisms would be in place to facilitate trades of potential therapies — and their underlying intellectual property — such that development played out to its natural scientific end point.

Plainly, we do not live in that world yet. So what would it take? Science in this sector presents three challenges that must be addressed: high risk, long timelines and significant costs. Increased transparency is needed to reduce information asymmetry among potential buyers and sellers, decreasing risk and creating the conditions for liquid markets. Shorter development timelines are vital to facilitate better mapping of risk and expected return. Meanwhile, lowering the outlays needed to bring drugs from the lab to patients is required to attract more market participants.

Left to themselves these sorts of changes would only happen gradually (if at all) in the current institutional setting. Given the reality that patients cannot afford to wait a generation for a treatment, we need to support the creation of new development paths that, if scaled, could set us on course toward enduring, systemic change.

Seeding New R&D Pathways

Alternative paths for compounds that are low priorities for commercial development would require a host of changes in the players, institutions and rules of the game. These involve lowering the hurdles to good science as well as facilitating the efficient exchange of intellectual property among organizations with varying comparative advantages. Here, we offer some thoughts on how to accomplish this, as well as offer some examples of how these changes could help to untie the invisible hand of the market.

Transactions: Out-Licenses

According to Datamonitor, large pharmaceutical companies sign two to three times as many in-licensing as out-licensing deals. Fact is, though, licensing to other developers with specialized knowledge and skills is often vital to facilitate good science. Among other advantages, the resulting synergies allow compounds to move through the pipeline more quickly with decreased risk and cost.

Currently, out-licensing happens mostly in the context of strategic re-orientation, when a company decides to cut all research in a therapeutic area but has candidates with scientific and commercial promise. Companies thinking about out-licensing must wrestle with concerns about inadvertently giving away the next blockbuster, with the challenges in retrieving complex testing data and samples, and with ongoing legal liability. Even so, out-licensing has potential to revive the prospects of deprioritized compounds, and in the process open the door to revenues from projects heretofore thought to be lost causes. It could also contribute to a more liquid market that includes funders from across the continuum with different risk-return requirements (think nonprofits and venture philanthropists).

Transactions: Donations

Some potential therapies require more research to progress than companies are willing to conduct. Others may simply have negative expected financial returns on investment. Here, one approach is to donate the compound to a public intermediary or nonprofit drug developer willing to press ahead. Such arrangements could allow the donors to retain rights to future development if the nonprofit phase of research proves promising.

One version of this model is the New Therapeutic Uses program at the National Center for Advancing Translational Sciences (NCATS). Here, several companies have provided researchers with access to molecules that surmounted key hurdles in drug development, but needed additional research. NCATS serves as matchmaker between academic researchers wishing to find new uses for these compounds, and it offers funding and template agreements to facilitate collaboration. But the use of this mechanism could easily grow: there are only 10 assets in the 2019 NCATS portfolio.

Given the reality that patients cannot afford to wait a generation for a solution, we need to support the creation of new pathways that, if scaled, could set us on a course toward enduring, systemic change.

There are, however, other complementary models. Consider, for example, GlaxoSmithKline’s donation of deprioritized compounds to a private consortium called ATOM (Accelerating Therapeutics for Opportunities in Medicine). Here, the focus is on new development approaches based on analysis of failure. But one could envision donations of promising science with no clear profit potential to consortia willing to invest with the goal of furthering nonprofit development or moving projects along to the point they again interest commercial investors.

Buyers: Spin-Outs

Out-licensing often fails to happen because outsiders (a) lack information about what compounds are being deprioritized, (b) rightly worry that compounds have been shunted aside for good reasons known only to the developers, or (c) don’t have the support of senior leaders in searching for promising but deprioritized science. How might we do better?

Consider the case of SpringWorks Therapeutics, conceived by Pfizer to provide a new avenue for therapies for underserved patient communities. Operating in rare diseases and oncology, SpringWorks is financed by a syndicate of nonprofit and commercial investors, including Pfizer. Within a year of the company’s launch, it has reprioritized two assets with promising science and is ready to begin late-stage trials in the next couple of months.

Spin-outs — whether for-profit, for-purpose, or a mix of the two — allow precision customization of risk and return, opening up new sources of capital to keep the science on track. One could imagine a larger network of specialized SpringWorks-like organizations across the biopharmaceutical system — both for-profit and nonprofit — providing the transparency, access points and market-making infrastructure needed to bring a broader set of investors to biomedical innovation.

Buyers: Virtual Drug Developer

Given the dispersal of skilled professionals outside traditional biopharmaceutical value chains, some pharmaceutical companies are now operating in virtual space with small teams that contract specific R&D functions. This reduces costs and timelines (e.g., the successes of Alkeus Pharmaceuticals or PVP Biologics). On-demand, disaggregated expertise with low overhead makes even later-stage development by innovative organizations possible — and cost-effective. Full-spectrum drug developers in virtual space could develop compounds with lower return-on-investment potential (at lower development costs). A virtual drug utility could be supported by a variety of for-profit or nonprofit funders — philanthropists, health systems and even crowdfunders — to develop and commercialize therapies that can’t attract commercial players operating in traditional fashion.

Market Infrastructure

Scaling these approaches into viable alternative development paths may require new market infrastructure. To increase market liquidity, one could imagine a widely accessible database of deprioritized compounds that aides in selection of opportunities. And one could see the emergence of third-party intermediaries that vet these public or private databases along with clinical trial data — perhaps with help from artificial intelligence — to aid buyers in exercising due diligence. Or, one could foresee firms internalizing these vetting functions (or retaining a stake in an external intermediary) and generating revenue from compounds that would otherwise be destined for zero future returns. The potential for customization here is quite broad.

This sort of infrastructure could reduce uncertainty about what compounds are available and how they should be valued. It would also increase expected return on investment by decreasing both search time and costs associated with the current hit-or-miss approach of identifying good science through personal networks. Once the market-making infrastructure for deprioritized science is constructed and transactions begin to occur with sufficient frequency, these nascent pathways could be expected to converge with more traditional R&D approaches, bringing the entire breadth of financial intermediation to bear.

• • •

While there are a variety of new approaches, it’s important to remember that we will always need traditional pathways in drug development. Large biopharmaceutical companies still perform critical functions, among others providing the economies of scale necessary for keeping costs manageable. But it’s not a matter of either/or: by creating new channels to coexist with old ones, we will be closer to optimizing the societal value of the science for patients.

main topic: Medical Research
related topics: Public Health, Innovation