The zero person biotech company

Com­par­ing the found­ing of two vir­tual drug de­vel­op­ment com­pa­nies, Funx­ional Ther­a­peu­tics in 2006 and XO1 ear­lier in 2013 proves at least one thing: in just seven years it has be­come dra­mat­i­cally eas­ier and quicker to cre­ate a vir­tual drug de­vel­op­ment com­pany.

Today it is even pos­si­ble to take vir­tual to its log­i­cal ex­treme: a zero per­son biotech com­pany. Given there is noth­ing in­side a vir­tual com­pany ex­cept for an asset, how can set­ting up and run­ning an empty husk have changed so dra­mat­i­cally in under a decade? The an­swer lies in what’s out­side, not in­side, the vir­tual de­vel­op­ment com­pany.  Today, a whole ecosys­tem of ser­vice providers exist to fa­cil­i­tate every facet of vir­tual drug de­vel­op­ment.  And these providers have evolved and op­ti­mized their ser­vices to such an ex­tent that they are barely rec­og­niz­able.

In 2006, the ser­vice ecosys­tem con­sisted al­most ex­clu­sively of Con­tract Re­search Or­gan­i­sa­tions (CROs).  Large or small, these CROs tend to be very good at what they do and very poor at every­thing else.  Hence, when a pro­ject de­mands real in­no­va­tion it is al­most im­pos­si­ble to de­liver in vir­tual mode with only CROs to help.

But by 2013, the emer­gence of true Out-Sourced Drug De­vel­op­ers (ODDs) have changed the equa­tion firmly in favour of vir­tual de­vel­op­ment for al­most every kind of drug can­di­date.  Vir­tual no longer im­plies a lack of qual­ity, nor a lack of scal­a­bil­ity. Drug de­vel­op­ment in com­pli­cated.  De­spite reg­u­la­tory frame­works, there is still a huge de­gree of free­dom in how to de­velop each drug can­di­date, with dozens of choices to be made that are unique to the par­tic­u­lar pro­ject.  

Ex­cept per­haps in late stage de­vel­op­ment, imag­i­na­tion and flair are as im­por­tant as ex­pe­ri­ence and knowl­edge. Slav­ish fol­low­ing of recipes (doing drug de­vel­op­ment ‘by the book’) leads to far more fail­ures.  It is at least as im­por­tant to make sure that a study is fit for pur­pose as it is fa­mil­iar and com­fort­able.  That’s not to say that change is de­sir­able for its own sake – con­sis­tency has its ben­e­fits, by en­sur­ing that dif­fer­ent stud­ies are com­pa­ra­ble, for ex­am­ple, but that should not be an ex­cuse for fol­low­ing an in­fe­rior path for the par­tic­u­lar asset in your hands.

This flex­i­bil­ity, in­no­va­tion and flair is the fairy dust of suc­cess

And – until re­cently – it has been dev­il­ishly dif­fi­cult to out-source.  In­deed, it is in short sup­ply both in­side and out­side com­pa­nies.   The prob­lem is that in large com­pa­nies (where, even today, a ma­jor­ity of drug de­vel­op­ment is per­formed) in­di­vid­u­als be­come spe­cial­ized, and too few have the op­por­tu­nity to gen­uinely gain an overview of the whole process end to end for mul­ti­ple pro­jects.  Cor­po­rate mem­ory then plays an in­creas­ingly dom­i­nant role in de­ci­sion-mak­ing (along with the con­ser­v­a­tive at­ti­tude that often per­vades large or­ga­ni­za­tions – no-one got fired for choos­ing IBM). 

The de­fault soon be­comes doing the same thing as last time. Drug de­vel­op­ers brought up in such an en­vi­ron­ment are strong on ex­pe­ri­ence and knowl­edge, but have often lost their propen­sity for in­no­va­tion and imag­i­na­tion. This con­ser­v­a­tive, by-the-book ap­proach to drug de­vel­op­ment is fur­ther but­tressed by a per­va­sive view of reg­u­la­tors as in­flex­i­ble and rules-based.  Such an as­sess­ment is man­i­festly un­fair – while the stan­dards re­quired to demon­strate ef­fi­cacy in a piv­otal trial are in­deed set in hard-dried mud if not stone, and the bar for safety of study par­tic­i­pants is rightly very high through­out de­vel­op­ment, in other re­spects reg­u­la­tory agen­cies are pre­pared to lis­ten to well-made ar­gu­ments and in­no­va­tion. 

Par­tic­u­larly in early de­vel­op­ment, where pharma R&D most needs to im­prove its suc­cess per dol­lar, in­no­v­a­tive study de­signs are read­ily ac­cepted by reg­u­la­tors as long as safety is not an issue – too bad, they say, that they don't see more of them. All these dri­vers to con­ser­v­a­tive be­hav­ior mean that those few that do have the blend of ex­pe­ri­ence, knowl­edge, flex­i­bil­ity and flair that suc­cess de­mands are con­se­quently hot prop­erty. 

At Index Ven­tures, it is the sup­ply of such in­di­vid­u­als (the Index Drug De­vel­op­ers, or IDDs), and not the avail­abil­ity of worth­while as­sets (or in­deed avail­abil­ity of cap­i­tal), that lim­its the scal­a­bil­ity of the as­set-cen­tric in­vest­ment model. With so lit­tle sup­ply, and in­creas­ing de­mand, it is no sur­prise that CROs fail to at­tract these in­no­v­a­tive types.  A decade ago, it was the se­cu­rity and salary ad­van­tage of large pharma that drew them in. But the power of the cor­po­rate cul­ture sti­fled the cre­ativ­ity of those po­ten­tial stars. 

The very same cul­ture that is es­sen­tial to keep the lesser mor­tals that make up the bulk of such large com­pa­nies going in roughly the right di­rec­tion was a straight-jacket for the gen­uinely gifted and in­no­v­a­tive.  By the mid­dle of the naugh­ties, the bright­est thinkers in drug de­vel­op­ment lacked any kind of spir­i­tual homes. So they cre­ated them. In the lat­ter half of the last decade, a new kind of ser­vice provider began to pop­u­late the drug de­vel­op­ment space – not an CRO but a provider of out-sourced drug de­vel­op­ment in­no­va­tion.

Skill, flair and in­no­va­tion in drug de­vel­op­ment  is now widely avail­able on a pay-to-play basis - if you know where to look

De­vel­op­ing a novel drug can­di­date is rather like build­ing a house – it's a long, com­plex task with lots of com­po­nent steps.  Faced with an empty plot, few would con­sider just em­ploy­ing a builder and ask­ing them to build a house.  In­stead, they would first en­gage an ar­chi­tect to de­sign the build­ing, and to over­see the di­vi­sion of labour into man­age­able tasks.   For sure, a high qual­ity builder is nec­es­sary to de­liver a good home, but it is not suf­fi­cient. Out-sourced drug de­vel­op­ers, then, are the pharma equiv­a­lent of ar­chi­tects (just as CROs are the equiv­a­lent of builders).  They de­sign a be­spoke de­vel­op­ment plan ideal for each new drug can­di­date, based on ex­pe­ri­ence but not in­flex­i­bly fol­low­ing past ex­am­ples.  They di­vide up the whole com­plex de­vel­op­ment plan into man­age­able chunks, which can in turn be out-sourced to con­ven­tional CROs.

Most do not offer truly an end-to-end ser­vice from early dis­cov­ery to post-mar­ket­ing tri­als, but spe­cial­ize in par­tic­u­lar areas of the de­vel­op­ment time­line.  In the UK ecosys­tem, for ex­am­ple, Not­ting­ham-based Syg­na­ture focus on dis­cov­ery, and par­tic­u­larly med­i­c­i­nal chem­istry; Rx­Cel­er­ate in Cam­bridge focus on pre­clin­i­cal de­vel­op­ment; Total Sci­en­tific on early stage clin­i­cal de­vel­op­ment.  A few, such as Aptiv So­lu­tions (for­mally Ful­crum) cover the whole spec­trum. It is these ex­cit­ing, rapidly-grow­ing com­pa­nies that are the home, today, of many of the most ex­cit­ing, in­no­v­a­tive drug de­vel­op­ers.  And they are an im­por­tant step in re­dis­cov­er­ing eco­nomic re­turns from drug dis­cov­ery and de­vel­op­ment. 

The out-sourc­ing model lets the best brains work on sev­eral pro­jects in par­al­lel, lever­ag­ing their flair over more as­sets that would be the case if they were locked in­side con­ven­tional biotech com­pa­nies. Out-sourced drug de­vel­op­ment firms also de­liver cost sav­ings.  Firstly, they en­able vir­tual biotech com­pa­nies to progress their as­sets with­out ma­te­r­ial over­heads (ei­ther fi­nan­cial or emo­tional).  As a re­sult, as soon as a drug can­di­date loses its sparkle, it can be killed, with no fixed cost base or in­fra­struc­ture to con­sider.

Sec­ond, and per­haps even more im­por­tantly, the out-sourced drug de­vel­op­ment par­a­digm makes trans­par­ent the cost of every con­stituent process.  One prob­lem with in­ter­nal drug de­vel­op­ment using owned in­fra­struc­ture is the con­sid­er­able dif­fi­culty in ac­cu­rately cost­ing each task.  Once you are pay­ing fixed costs for in­fra­struc­ture, the ac­tual cost of using that ca­pa­bil­ity is blurred.  But faced with a quo­ta­tion for the ex­e­cu­tion of a par­tic­u­lar well-de­fined task it is straight­for­ward to de­cide if the in­for­ma­tion it re­turns will be worth that cost.

Out-sourced Drug De­vel­op­ers (ODDs) are the pharma equiv­a­lent of ar­chi­tects

It is amaz­ing how, faced with such stark de­ci­sions, in­di­vid­u­als balk at the cost of var­i­ous processes that they would have sim­ply con­sumed with­out ques­tion if it were part of their in­ter­nal in­fra­struc­ture.  With a lim­ited bud­get and prices for a range of dif­fer­ent com­po­nent processes, drug de­vel­op­ers be­come quite flex­i­ble in dif­fer­en­ti­at­ing what they need from what they want – with a sub­stan­tial cor­re­spond­ing sav­ing in cost.

In 2006, when Funx­ional Ther­a­peu­tics was launched as a vir­tual com­pany, out-sourced drug de­vel­op­ment was an emerg­ing con­cept.  In most cases, vir­tual was just a eu­phemism for un-funded, and CROs pre­tended to offer a fully in­te­grated de­vel­op­ment so­lu­tion while lack­ing the in­di­vid­u­als who could re­ally de­liver it.  Though small, the ‘vir­tual’ com­pany still had to have its de­vel­op­ment stars in­side the com­pany be­cause there was no means to ac­cess them out­side. But found­ing XO1 in 2013 was a very dif­fer­ent story. 

Every as­pect from com­pany cre­ation to de­vel­op­ment plan­ning, ac­count­ing to an­ti­body man­u­fac­tur­ing was out-sourced at the touch of a key­board. Some of the ser­vice providers, such as Lonza who will man­u­fac­ture the XO1 an­ti­body drug can­di­date, have been in ex­is­tence for many years, but oth­ers such as the back-of­fice ad­min­is­tra­tion func­tion tai­lored for vir­tual biotech com­pa­nies at The Cam­bridge Part­ner­ship, had not even been imag­ined back in 2006.

The bright­est thinkers in drug de­vel­op­ment lacked any kind of spir­i­tual homes - so they cre­ated them

But the biggest dif­fer­ence is the level of skill, flair and in­no­va­tion in drug de­vel­op­ment that is now avail­able on a pay-to-play basis.  The toolkit is there for the com­plete vir­tu­al­iza­tion of biotech – the com­pany with­out any em­ploy­ees or con­sul­tants is, at last, fea­si­ble: the com­pany be­comes a shell to hold the IP and ac­cu­mu­lat­ing value, an in­stru­ment of fi­nan­cial en­gi­neer­ing to en­sure that the value as­so­ci­ated with the asset is dis­trib­uted to the asset own­ers and cap­i­tal providers. The chal­lenge now is to demon­strate the power of such a model.  Out-sourced drug de­vel­op­ers have, for the first time, made true vir­tu­al­iza­tion fully scal­able.  In a hand­ful of years we will see the im­pact on R&D pro­duc­tiv­ity in drug de­vel­op­ment.  The early signs are that it will be rev­o­lu­tion­ary.

* Note that Drug­Baron (David Grainger, PhD) has an in­ter­est in XO1, as in­terim Chief Ex­ec­u­tive Of­fi­cer.