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75% or more of all the funds needed by a Life Science startup will be spent on clinical
trials and regulatory approval. Pharma companies are staggering under the costs. And
medical device innovation in the U.S. has gone offshore primarily due to the toughened
regulatory environment.
At the same time, Venture Capital, which had viewed therapeutics, diagnostics and
medical devices as hot places to invest, is fleeing the field. In the last six years half the
VCs in the space have disappeared, unable to raise new funds, and the number of
biotech and device startups getting first round financing has dropped by half. For exits,
acquisitions are the rule and IPOs the exception.
While the time, expense and difficulty to exit has soared in Life Sciences, all three
critical factors have been cut by orders of magnitude in other investment sectors such
as internet or social-local-mobile. And while the vast majority of Life Science exits
remain below $125M, other sectors have seen exit valuations soar. It has gotten so bad
that pension funds and other institutional investors in venture capital funds have told
these funds to stay away from Life Science or at the least, early stage Life Science..
WTF is going on? And how can we change those numbers and reverse those trends?
We believe we have a small part of the answer. And we are going to run an experiment
to test it this fall at UCSF.
In this three post series, the first two posts are a short summary of the complex
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challenges Life Science companies face; in Therapeutics and Diagnostics in this post
and in Medical Devices and Digital Health in Part 2. Part 3 explains our hypothesis
about how to change the dynamics of the Life Sciences industry with a different
approach to commercialization of research and innovation. And why you ought to take
this class.
Life Sciences ITherapeutics and Diagnostics
It was the Age of Wisdom Drug Discovery
There are two types of drugs. The first, called small molecules (also referred to as New
Molecular Entities or NMEs), are the bases for classic drugs such as aspirin, statins or
high blood pressure medicines. Small molecules are made by reactions between
different organic and/or inorganic chemicals. In the last decade computers and
synthesis methods in research laboratories enable chemists to test a series of reaction
mixtures in parallel (with wet lab analyses still the gold standard.) Using high-throughput
screening to search for small molecules, which can be a starting point (or lead
compound) for a new drug, scientists can test thousands of candidate molecules
against a database of millions in their libraries.
Ultimately the FDA Center for Drug Evaluation and Research (CDER) is responsible for
the approval of small molecules drugs.
Drug R&D
1-2 years
1-2 years
Target ID &
Validation
Hit
Generation
Hits Confirmation
Potency & cytotoxicity
Prelim animal efficacy
Initial SAR
Clinical Trials
1-2 years
1 year
Pre Clinical
Animal
Studies
20-100 people
1-2 years
Phase 1:
Safety
100-300 people
1-2 years
Phase 2:
Efficacy
Safety
1,000-3,000 people
2-3 years
Phase 3:
Efficacy
Safety
1-2 years
FDA Review
& Approval
Potency Studies
Pharmacological profile
Selectivity Studies
Administration route
PK/ADME-Tox properties Drug interactions
SAR pharmacophore modeling
The second class of drugs created by biotechnology is called biologics (also referred to
as New Biological Entities or NBEs.) In contrast to small molecule drugs that are
chemically synthesized, most biologics are proteins, nucleic acids or cells and tissues.
Biologics can be made from human, animal, or microorganisms or produced by
recombinant DNA technology. Examples of biologics include: vaccines, cell or gene
therapies, therapeutic protein hormones, cytokines, tissue growth factors, and
monoclonal antibodies.
The FDA Center for Biologics Evaluation and Research (CBER) is responsible for the
approval of biologicals.
It was the Season of Light
The drug development pipeline for both small molecules and biologics can take 10-15
years and cost a billion dollars. The current process starts with testing thousands of
compounds which will in the end, produce a single drug.
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In the last few decades scientists searching for new drugs have had the benefit of new
tools DNA sequencing, 3D protein database for structure data,, high throughput
screening for hits, computational drug design, etc. which have sped up their search
dramatically.
Drug Discovery
10,000
Compounds
PreClinical
250
250
Compounds
Compounds
Clinical Trials
FDA Approval
5 Compounds
1 Drug
The problem is that the probability that a small molecule drug gets through clinical trials
is unchanged after 50 years. In spite of the substantial scientific advances and
increased investment, over the last 20 years the FDA has approved an average of 23
new drugs a year. (To be fair, this is indication-dependent. For example, in oncology,
things have gotten significantly better. In most other areas, particularly cns and
metabolism, they have not.)
With the exception of targeted therapies, the science and tools havent made the drug
discovery pipeline more efficient. Oops.
There are lots of reasons why this has happened.
Regulatory and Reimbursement Issues
Drug safety is a high priority for the FDA. To avoid problems like Vioxx, Bexxar
etc., the regulatory barriers (i.e. proof of safety) are huge, expensive, and take
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lots of time. That means the FDA has gotten tougher, requiring more clinical
trials, and the stack of regulatory paperwork has gotten higher.
Additional trials to demonstrate both clinical efficacy (if not superiority) and cost
outcomes effectiveness are further driving up the cost, time and complexity of
clinical trials.
The belief was that basic research + mass screening would make the drug
discovery pipeline more efficient. Thats hasnt happened. Theres still a debate
about why high throughput computer automated screening - going from hits to
leads isnt producing better than the manual animal-based screening it
replaced.
Biologics have a 2 times higher success rate in clinical trials than small
molecules.
Drug target Issues
In a perfect world the goal is to develop a drug that will go after a single target(a
protein, enzyme, DNA/RNA, etc. that will undergo a specific interaction with
chemicals or biological drugs) that is linked to a disease.
Unfortunately most diseases dont work that simply. There are a few diseases
that do, (i.e. insulin and diabetes, Gleevec -Philadelphia Chromosome and
chronic myeloid leukemia), but most small molecule drugs rarely act on a single
target (target-based therapy in oncology being the bright spot.)
To get FDA approval new drugs have to be proven better than existing ones.
Most of the low-hanging fruit of easy drugs to develop are already on the market.
Drug R&D
1-2 years
1-2 years
Target ID &
Validation
Hit
Generation
Hits Confirmation
Potency & cytotoxicity
Prelim animal efficacy
Initial SAR
Seed Round
Clinical Trials
1-2 years
20-100 people
1-2 years
1 year
Pre Clinical
Animal
Studies
Phase 1:
Safety
100-300 people
1-2 years
Phase 2:
Efficacy
Safety
1,000-3,000 people
2-3 years
Phase 3:
Efficacy
Safety
1-2 years
FDA Review
& Approval
Potency Studies
Pharmacological profile
Selectivity Studies
Administration route
PK/ADME-Tox properties Drug interactions
SAR pharmacophore modeling
Series A
Series B
Out Licensing
or Series C
For the last two decades, biotech venture capital and corporate R&D threw
dollars into interesting science (find a new target, publish a paper
in Science,Nature or Cell, get funded.) The belief was that once a new target was
found, finding a drug was a technology execution problem. And all the new tools
would accelerate the process. It often didnt turn out that way,
although
there
are
important
exceptions.
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Moreover, the prospect of the FDA also evaluating drugs for their costeffectiveness is adding another dimension of uncertainty as the market
opportunity at the end of the funnel needs to be large enough to justify venture
investment
-----In Part 2 of this series, we describe the challenges new Medical Device and Digital
Health companies face. Part 3 will offer our hypothesis how to change the dynamics of
the Life Sciences industry with a different approach to commercialization of research
and innovation. And why you ought to take this class.
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Manufacturers introducing Class II medical devices must submit whats called a 510(k)
to the FDA. The 510(k) identifies your medical device and compares it to an existing
medical device (which the FDA calls a predicate device) to demonstrate that your
device is substantially equivalent and at least as safe and effective.
Class III devices are generally the highest risk devices and must be approved by the
FDA before they are marketed. For example, implantable devices (devices made to
replace/support or enhance part of your body) such as defibrillators, pacemakers,
artificial hips, knees, and replacement heart valves are classified as Class III devices.
Class III medical devices that are high risk or novel devices for which no predicate
device exist require clinical trials of the medical device a PMA (Pre-Market Approval).
Percent of PMAs With Major Deficiency Letter (MAJR) on 1st FDA
Review Cycle*
*Includes&all&led&original&PMAs&(1st&cycle&completed&for&all&cohorts)&
24&
The FDA is tougher about approving innovative new medical devices. The
number of 510(k)s being required to supply additional information has doubled in
the last decade.
The number of PMAs that have received a major deficiency letter has also
doubled.
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9&
~1 year
Concept /
Design
1-3 years
Pre-clinical
engineering
development
510(K) exempt
1-9 months
Class 2
Class 3
Reimbursement
Assignment
510(k)
Approval
1-3 years
9-36 months
Clinical Trials
PMA
Approval
Cost pressures are unrelenting in every sector, with pressure on prices and
margins continuing to increase.
Devices are a five-sided market: patient, physician, provider, payer and regulator.
Startups need to understand all sides of the market long before they ever
consider selling a product.
In the last decade, most device startups took their devices overseas for clinical
trials and first getting EU versus FDA approval
Companies must pay a medical device excise tax of 2.3% on medical device
revenues, regardless of profitability delays or cash-flow breakeven.
The U.S. government is the leading payer for most of health care, and under
ObamaCare the governments role in reimbursing for medical technology will
increase. Yet two-thirds of all requests for reimbursement are denied today,
and what gets reimbursed, for how much, and in what timeframe, are big
unknowns for new device companies.
Venture Capital Issues
Early stage Venture Capital for medical device startups has dried up. The
amount of capital being invested in new device companies is at an 11 year low.
Because device IPOs are rare, and M&A is much tougher, liquidity for investors
is hard to find.
Exits have remained within about the same, while the cost and time to exit have
doubled.
Life Sciences III The Rise of Digital Health
Over the last five years a series of applications that fall under the category of Digital
Health has emerged. Examples of these applications include: remote patient
monitoring, analytics/big data (aggregation and analysis of clinical, administrative or
economic data), hospital administration (software tools to run a hospital), electronic
health records (clinical data capture), and wellness (improve/monitor health of
individuals). A good number of these applications are using Smartphones as their
platform.
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1-3 months
3-12 months
Customer
Development
3-12 months
3-12 months
Pilot Design
Trials and
Iteration
510(k)
Regulatory
Approval
0 months
Class 1 No
Approval
Needed
1-24 months
Reimbursement
Assignment
A good percentage of these startups are founded by teams with strong technical
experience but without healthcare experience. Yet healthcare has its own unique
regulatory and reimbursement issues and business model issues that must be
understood
Most of these startups are in a multisided market, and a few have the same fivesided complexity as medical devices: patient, physician, provider, payer and
regulator.
Some startups in this field are actually beginning with Customer Development
while others struggle with the classic execution versus search problem
Regulatory Issues
Digital Health covers a broad spectrum of products, unless the founders have
domain experience startups in this area usually discover the FDA and the 510(k)
process later than they should.
Venture Capital
Seed funding is still scarce for Digital Health, but a number of startups
(particularly those making physical personal heath tracking devices) are turning
to crowdfunding.
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But while these are all great programs, they are likely to fail to deliver on their promise.
The assumption that the pursuit of drugs, diagnostics, devices and digital health is all
about the execution of the science is a mistake.
The gap between the development of intriguing but unproven innovations, and the
investment to commercialize those innovations is characterized as the Valley of Death.
We believe we need a new model to attract private investment capital to fuel the
commercialization of clinical solutions to todays major healthcare problems that is in
many ways technology agnostic. We need a Needs Driven/Business Model Driven
approach to solving the problems facing all the stakeholders in the vast healthcare
system.
We believe we can reduce the technological, regulatory and market risks for early-stage
life science and healthcare ventures, and we can do it by teaching founding teams how
to build new ventures with Evidence-Based Entrepreneurship.
-----Part 3 in the next post will offer our hypothesis how to change the dynamics of the Life
Sciences industry with a different approach to commercialization of research and
innovation in this sector. And why you ought to take this class.
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When I wrote Four Steps to the Epiphany and the Startup Owners Manual, I believed
that Life Sciences startups didnt need Customer Discovery. Heck how hard could it be?
You invent a cure for cancer and then figure out where to put the bags of money. (In
fact, for oncology, with a successful clinical trial, this is the case.)
Pivots in life sciences companies
But Ive learned thats not how it really works. For the last two and a half years, weve
taught hundreds of teams how to commercialize their science with a version of the Lean
LaunchPad class called the National Science Foundation Innovation Corps. Quite a few
of the teams were building biotech, devices or digital health products. What we found is
that during the class almost all of them pivoted - making substantive changes to one or
more of their business model canvas components.
In the real world a big pivot in life sciences far down the road of development is a very
bad sign due to huge sunk costs. But pivoting early, before you raise and spend
millions or tens of millions means potential disaster avoided.
Some of these pivots included changing their product/service once the team had a
better of understanding of customer needs or changing their position in the value chain
(became an OEM supplier to hospital suppliers rather than selling to doctors directly)
Other pivots involved moving from a platform technology to become a product supplier,
moving from a therapeutic drug to a diagnostic or moving from a device that required a
PMA to one that just needed a 510(k).
Some of these teams made even more radical changes. For example when one team
found the right customer, they changed the core technology (the basis of their original
idea!) used to serve those customers. Another team reordered their devices feature set
based on customer needs.
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These findings convinced me that the class could transform how we thought about
building life science startups. But there was one more piece of data that blew me away.
Control versus Experiment 18% versus 60%
For the last two and a half years, the teams that were part of the National Science
Foundation Innovation Corps were those wanted to learn how to commercialize their
science, applied to join the program, fought to get in and went through a grueling three
month program. Other scientists attempting to commercialize their science were free to
pursue their startups without having to take the class.
Both of these groups, those who took the Innovation Corps class and those who didnt,
applied for government peer-reviewed funding through the SBIR program. The teams
that skipped the class and pursued traditional methods of starting a company had an
18% success rate in receiving SBIR Phase I funding.
The teams that took the Lean Launchpad class get ready for this had a 60%
success rate. And yes, while funding does not equal a successful company, it does
mean these teams knew something about building a business the other teams did not.
The 3-person teams consisted of Principal Investigators (PIs), mostly tenured
professors (average age of 45,) whose NSF research the project was based on. The
PIs in turn selected one of their graduate students (average age of 30,) as the
entrepreneurial lead. The PI and Entrepreneurial Lead were supported by a mentor
(average age of 50,) with industry/startup experience.
This was most definitely not the hoodie and flip-flop crowd.
Obviously theres lots of bias built into the data those who volunteered might be the
better teams, the peer reviewers might be selecting for what we taught, funding is no
metric for successful science let alone successful companies, etc. but the difference
in funding success is over 300%.
The funding criteria for these new ventures wasn't solely whether they had a innovative
technology. It was whether the teams understood how to take that idea/invention/patent
and transform it into a company. It was whether after meeting with partners and
regulators, they had a plan to deal with the intensifying regulatory environment. It was
whether after talking to manufacturing partners and clinicians, they understood how they
were going to reduce technology risk. And It was after they talked to patients, providers
and payers whether they understood the customer segments to reduce market risk by
having found product/market fit.
So after the team at UCSF said theyd like to prototype a class for Life Sciences, I
agreed.
Heres what were going to offer.
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Weve segmented the class into four cohorts: therapeutics, diagnostics, devices and
digital health. And we recruited a team of world class Venture Capitalists and
entrepreneurs to teach and mentor the class including
Alan May, Karl
Handelsman, Abhas Gupta, and Todd Morrill.
The course is free to UCSF, Berkeley, and Stanford students; $100 for pre-revenue
startups; and $300 for industry. See more here
The syllabus is here.
Class starts Oct 1st and runs through Dec 10th.
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