The "valley of death" is a phrase used in the biopharmaceutical industry to describe what is created when big pharmaceutical firms, and other significant deep pocket investors, are unwilling to invest in early stage drugs or treatments (preclinical-Phase I or II, until they reach Phase III or issue certifiable results and efficiency findings). The theory is to wait and see if the company is on to something before jumping in with cash backing. Since drug development from conception through lab, trial and market can take 10-15 years, a "valley of death" occurs as potential treatments, cures, and life saving remedies may never see the light of day-often due to lack of funding for an early stage biotech company. As a result, many patients die from inflictions that may have been curable had someone invested earlier.
But in 2011 some factors, and the direction of big investors (including Big Pharma), have been trending in another direction -- one that may directly affect traditional drug development, the "valley of death", and by extension, smaller biotechs. Pfizer (NYSE:PFE) first announced that it is lowering its 2012 research and development spending budget by an eye-catching 24%. That percent equates to $2 billion less in spending, seemingly a negative for new drug development. Glaxo Smith Kline (NYSE:GSK) also followed this path. Only Merck (NYSE:MRK) has held steady in the former direction with R&D spending.
So the important question is: Why reduced R&D spending plans?
- Are the Big Pharma firms becoming more risk adverse?
- Are sales and subsequent profits dimensioning and affecting available R&D investment?
- Has earlier patent expiration dates and subsequent generic drug implementation changed the profit formula so drastically that investment is no longer worth what it once was?
- Has competition from smaller biotechs started to affect them in a David vs. Goliath manner?
- Have they simply changed strategy and realized that more investment does not always mean more received?
It turns out that it may be a combination of these factors causing the trend to develop. One school of thought is that the days of super wonder drugs, blockbusters in terms of sales, may be elusive due to multiple changing factors in industry. Shareholders' pressure on CEOs for profitable quarters, and diminishing product investment-returns, are forcing executives to find more creative ways to develop drugs and treatments.
Big Pharma is big, and that extends to how they operate, how long it takes to accomplish things, including endless meetings and other bureaucratic realities. As well noted, big business loses its edge in product development, its scrappiness, edge, and risk-taking sense. So the idea may not be to develop from concept to market within, but rather to invest in smaller development firms which are exactly what Big Pharma is not - scrappy original thinkers, and risk-takers who know how to operate on a shoe string budget. The end result of this trend is that more partnerships and joint ventures with smaller biotech and biopharmaceutical may materialize.
The reduced funding of Big Pharma may be more like a diversion of funding overall, than a long term reduction. There may be more outright investments in smaller development firms with early stage treatments and drugs, more acquisitions of these firms, and a result that may lead to a reduction of "valley of death" factors. This trend results in win-win-win results. Big Pharma gets to take fewer risks and gains access, with possibly less investment, to emerging drugs and remedies, even possibly a front row seat to an inexpensive acquisition in time. Small biotechs get desperately-needed funding, access to clinical trial facilities and know-how, and patients potentially get the benefits of life- saving drugs and treatments that reduce death rates.
So who is on the radar to date that validates the above-described trend? The answers are: Isis Pharmaceuticals (ISIS) (a California firm that has been courted and partnered with Glaxo Smith Kline and Genzyme Corp); Lpath Incorporated (NASDAQ:LPTN) (also a California firm that has worked with Pfizer); and Amylin Pharmaceuticals (AMLN) with Elli Lilly (NYSE:LLY), Biocon (BIOCON-BO), Takeda Pharmaceuticals (OTCPK:TKPYY).
Lpath, with only a $61 Million Market Cap, is a great example to follow, not only because it has partnered with a Big Pharma firm but because it shows how the patience, commitment, and persistence of all parties may result in something significant coming to fruition.
Lpath engages in the development of lipidomic-based therapeutics. Utilizing its proprietary ImmuneY2™ discovery engine, the company aims to leverage its technology platform to provide monoclonal antibodies targeting bioactive lipids in a safe, efficacious, and reliable manner. LPath is an early stage biotechnology company currently involved in two efficacy trials with its partner, Pfizer, for its ocular formulation of the humanized monoclonal anti-S1P antibody (Sphingomab™). Pfizer has invested $14 million in Lpath to date, which has 50 or so patents pending.
Unfortunately for LPath and Pfizer, the clinical trials that Lpath was engaged in came to a grinding halt as LPath announced that dosing of iSONEP will stop due to cGMP non-compliance issues at its contract fill / finish source Formatech. Lpath company officials have issued public statements that ISONEP is safe and well-tolerated, (by approximately 20 patients dosed, most of them multiple times in Nexus and Pedigree trials), and does not appear to be affected by the "environmental" issues faced at Formatech.
In terms of patients who were dosed during the trial, the company says they will continue to be monitored for safety while patients who did not complete the full program will not be given as much weight statistically in the final analysis. Pfizer has agreed to be responsible for cost overruns in the iSONEP program and remains supportive of the iSONEP program. This is a significant factor and may be the difference in whether this drug makes it to commercialization. Pfizer is still in the game and this indicates that they believe the science behind Lpath's products are solid. The company's Asonep drug is unaffected and on schedule, with the trial set to begin in July. It is expected that there will be a delay of 4-6 months, with the FDA on board to respond quickly to a request to resume dosing. A release of trial data to date is not expected by either Lpath or Pfizer. With Pfizer involved and committed, and Lpath patient and aggressively pursuing continued dosing and trials, the trend of Big Pharma coupled with a small biotech could produce positive results and a win-win-win outcome for all involved, including investors in both companies.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.