MARKETING

Bet on One Big Ideaor

Diversify?
by Toby E. Stuart
FROM THE NOVEMBER 2013 ISSUE

H BRs ctionalized case studies present dilemmas faced by leaders in real companies and
oer solutions from experts. This one draws on research by Toby E. Stuart.

The latest clinical trial of the experimental therapy L-39, conducted in India, was nally complete
and the results were thoroughly underwhelming.

Hilde Dach, the former chief scientist at the drug-development start-up Genbac and now a team
leader at the German pharmaceuticals maker Caliska, which had acquired Genbac, could read
disappointment in the face of Johan Greve, her boss. The journey ahead for L-39 suddenly looked
arduous.

Johan and the other leaders at Caliska might soon face a tough choice: Allow Hildes unit to continue
honing and testing the potential breakthrough drug, or play it safe by focusing on L-39s potentially
very lucrative application as a dietary supplement. Hilde strongly preferred the former. She hadnt
thrown in her lot with Caliska merely to sell medical foods, as they were known in the
nutraceutical industry. In the laboratory, L-39 (shorthand for a proprietary strain of Lactobacillus
bacteria that Hilde had spent years cultivating) was so eective in reducing bowel inammation in
mice that she believed it could become the rst probiotic ever to be approved by the European
Medicines Agency, or EMA, as a therapy for a specic human ailmentthe common gastrointestinal
condition known as Crohns disease.
Johan spread out the new study results on his oce table. The India trial was the companys second
of L-39. The rst, two years earlier, had assessed how well the bacteria in L-39 were tolerated, and
the results were positive, as expected. This time, L-39 was put to the test as a Crohns disease
treatment, but the data showed that it had little success in improving the trial participants clinical
outcomes. Worse, the lead researcher in India had noted that in one patient, the bacteria appeared to
have translocated tothat is, invadedthe spleen, perhaps because the patient was
immunosuppressed.

Johan tapped the page. Thats very troubling, he said.

I know, Hilde said. If L-39 could translocate, survive, and proliferate outside the intestine, patients
could be at risk of bacteremia and, ultimately, multiple organ failure.

And these numbers are so at, he said.

We can get them up, she said encouragingly. It just means further rening the strain. Weve
already made lots of progress on that, and well make more. Plus, look at this, she added, pointing
to a column of gures. Its a statistically signicant increase in blood ow to the patients lesions.
That tells us a lot.

Its not nearly enough for proof of concept in humans, he said. Were up against an EMA that has
rejected virtually every health claim put forward for probiotics. The fact is, we may have to be more
open-minded about L-39. Youve always seen it as a pharmaceutical product. In the end, that may
not be our best choice.

Hilde turned away. She knew he was talking about nutraceuticals.

Hey, he said. One way or the other, were bound to make some real money on L-39.

Good Germs
Hilde scrolled through her in-box, counting the e-mails with L-39 in their subject linesthree so
far today. They were from people all over the world, begging to know how and where to buy the
probiotic. Although her research hadnt made the mainstream media, suerers of inammatory
bowel disease (IBD) somehow found out about it. She had received some strange messages over the
years, such as the one (now on her oce wall) from a man asking whether the bacteria could help his
two ferrets, which apparently had developed IBD after eating veggie burgers.

Strange or not, the e-mails showed there was demand for a product like L-39 among patients with
IBD. In their own ways, these people had the same hopes that had rst motivated Hilde 15 years ago,
when she met Georg von Suttner at an Indian restaurant in Cambridge, England. She was a graduate
student, and von Suttner was a famous professor talking about the mysteries of the human gut.

She had piped up, as was her style, to say that the study of probioticsbacteria that help maintain
the natural balance of organisms in the intestineswas pseudoscience.

Von Suttner wasnt oended by the comment. He lifted a spoonful of pearly white raita. How many
bacteria do you suppose this spoon contains?

A few thousand, she said.

Probably 10 billion, he said. With a look of wonder, he described the microbiota, the community of
micro-organisms that live in and on the human body. You and I have many more microbial cells
than human cells, he said. We ignore them at our peril.

That conversation was the start of Hildes long, productive professional relationship with von
Suttner. Working in his lab in Karlsruhe, Germany, she had a knack for growing strains of bacteria.
Dubbed the Microbe Whisperer, she had developed strain after strainL-39 was her 39thand had
worked with her sta of drug-delivery experts to nd a way to keep the bacteria alive without
refrigeration. She and von Suttner published several articles in scientic journals, and they caught
the attention of a team of entrepreneurs and investors specializing in biotech start-ups. They soon
persuaded Hilde and von Suttner to launch a rm focused solely on the pharmaceutical aspects of L-
39. The nascent company, Genbac, raised 2 million; then, as Hildes ongoing experiments showed
that L-39 could reduce inammation in mouse intestines, 7 million.
After the rst human trials were complete, Big Pharma began to hover. At rst, Hilde and the rest of
the team politely hinted that they would retain control of the company indenitely. But then
Caliska, a global rm with businesses selling generic, o-patent medications and nutraceuticals, but
with a well-respected R&D unit, approached Genbac with a 40 million oer. Hilde had initially
resisted, worrying that Caliska might fancy L-39 more as a dietary supplement than as a
pharmaceutical. But von Suttner and the rest of the start-up team persuaded her that the deal was
too good to pass up, given the uncertain prospects of all therapies during the research phase.

Now Hilde was leading Caliskas pharmaceutical-probiotics research team, which employed some of
the scientists who had been with her at Genbac. Von Suttner was long gone, having retired happily,
and the initial investors and entrepreneurs had moved on, too.

The market for L-39 as a pharmaceutical was modest by Big Pharma standards. Of the estimated 5
million IBD suerers worldwide, a third or so had Crohns. The market size was nothing like that of
diabetes patients, who numbered in the hundreds of millions. But L-39 was relatively inexpensive to
produce, and as a pharmaceutical it could be sold for at least 5 per daily dose.

Still, Caliskas enthusiasm for L-39 was about more than numbers. As company executives watched
the EMA reject health claim after health claim from probiotics luminaries such as Nabisco, Chr.
Hansen, and DuPont Danisco, they grew obsessed with becoming the rst company to get the
agencys approval in this area. Anticipating huge positive publicity from such a breakthrough, they
poured millions into Hildes research.

Given the recent trial results, Hilde wondered whether Caliska would now rethink that investment.
She noticed Johan in the doorway, looking unusually serious.

Pressure from the Top

I just got o the phone with Oskar, said Johan. Hilde knew that Oskar, Caliskas CEO, would want
to know about the latest ndings.

Hes not upset, Johan continued. Hes been in this business a long time, but hes leaning on me
hard to see cash ow from your team, and the board is with him on that. Hes a big proponent of the
nutraceutical idea and cant wait to get your strain of Lactobacillus into the medical foods market
with the Caliska name on it.

Caliska may have a split personality as a pharma and a nutraceuticals company, but my team
doesnt, Hilde said curtly. We do biotech, not medical foods.

As you know, he said, even if nutraceuticals dont have to jump through the same regulatory
hoops as pharmaceuticals, they still can be highly eective for patients. We sell many sophisticated
compounds, and were well respected in the industry and among investors for that business.
Nutraceuticals make a big dierence to our bottom linetheyre our fastest-growing segment. In
fact, they pay for our R&D. Think about it: Using your existing work, we could manufacture an over-
the-counter L-39 tablet for 25 cents, which we could then sell for more than 1 per pill at retail.

Wed be competing for an unpredictable, fad-

inuenced customer base against nonscientic
companies that make all kinds of exaggerated
claims.
But wed be competing for an unpredictable, fad-inuenced customer base against nonscientic
companies that make all kinds of exaggerated claims. Remember that study we saw, saying that half
of 50 probiotics tested didnt even contain the specied strain or stated concentration? Id rather
stay out of that market, at least for now. After weve developed the Crohns therapy and shown the
world L-39s value as a pharmaceutical, nethe nutraceutical people can then do whatever they
want.

The company cant wait that long, Johan reasoned. We have a chance now.

What would we claim? she asked. That the bacteria increase blood ow to bowel lesions? That
they reduce inammation in mice?

You want to unlock the potential of L-39? Johan said. Selling it as a nutraceutical is just another
way to do that.
But what about safety? Hilde asked. If the bacteria translocate, if someone dies

We wont let that happen. Well solve all the safety issues before we take the product to market.

Let me see if I understand, Hilde said. You want me to tell my scientists, some of the best in their
eld, to spend their time and energy developing this nutraceutical instead of trying to improve L-39
so that it can help patients with Crohns and other serious conditions? You want me to postpone that
dream, probably for years, so that we can get the European Food Safety Authoritys approval of L-39
as a supplement? That would require strong, positive results in two full-scale, randomized, placebo-
controlled trials. Once Oskar sinks all that money into the supplement and starts getting a nice
stream of income from it, why would he continue to invest in L-39s pharmacological promise?

Im not trying to force you into anything, Johan said. The company values your expertise. But we
must be practical. Some form of diversication might prevent your team from losing its standing
within Caliska during the long journey toand throughthe clinical trials for the EMA.

You know how I feel, she said resolutely. We should go for broke on making L-39 work as a
pharmaceutical.

A Chilling Premonition
Hilde was trying to get into her suite of oces and labs, but chains were on the doors. Her
employees were outside with her. Whats happening? she asked. Someone told her that the
clinical trials in Europe had failed, L-39 was causing organ failure, Caliska had disbanded the team,
and everyone was out of a job.

She woke up with a start and glanced over at her husband. Are you awake? she said. I had a
terrible dream.

What about? he asked sleepily.

Ever since the latest trials, Ive been worrying that L-39 might turn out to be a complete failure,
she admitted.
It wont be, he said. But even if it is, at least youve already made your money on it.

I didnt get into this to get rich, she protested.

Maybe your dream is telling you something, he said.

What do you mean?

Your single-minded focus on the pharmaceutical aspect might ultimately be, I dont know, self-
destructive?

How can you say that?

If L-39 fails as a drug and youve got nothing else, sureCaliska might shut it down. But if you have
a separate, thriving nutraceuticals line, theyd think twice. And you could bring Genbacs scientic
expertise to bearand change the whole probiotics eld. Educate customers about the science of
probiotics.

He did have a point, Hilde thought later that morning on her way to work. Shed never get a chance
to change the world if Caliska halted her work on L-39. But developing a dietary supplement would
undoubtedly be a big distraction for the members of her teamand would certainly delay their work
on the drug. Hilde was torn.

Should Caliska market L-39 as a nutraceutical?

What Would You Do? Some
advice from the HBR.org The Experts Respond
community
The vast majority of alternative medicines
turn out to be ineffective or even
dangerous. If the goal is for L-39 to make
money, then by all means Caliska should
consider marketing it as a nutraceutical.
But if the goal is to improve health, the
only defensible route for it is as a
 pharmaceutical.Brian Jackson, MD,
associate professor of pathology (clinical),
University of Utah
If Caliska introduced a safe nutraceutical Jonathan Lewis is the CEO
version of L-39, people with Crohns
disease could try it immediately, yielding
anecdotal results on its potential as a
pharmaceutical. This inexpensive proof of
of Ziopharm Oncology, a Boston-based
concept would help the company decide
whether to invest more into developing it biopharmaceutical company.
as a treatment.M. Voionmaa, educational
outreach coordinator, Finger Lakes
I have nothing against nutraceuticalsmany
Independence Center, Ithaca, New York
therapies outside the strict limits of Western
The balance between diversication and
straight-line focus is what produces medicine are highly eective. But I do have
results. Hedging is the same as wearing a something against losing focus, and thats the
harness while climbing a rock wall. When danger for Caliska.
you go to new destinations, it is wise to
hedge proactively and have alternatives as
safeguards while you still focus on the Theres a right way and a wrong way to do drug
main goal.Jeremy Reinbolt, private wealth development. The right way starts with a well-
manager, Vancouver, Canada
planned strategy thats approved by all of the
companys stakeholders. Equally important is a
singular focus on perfecting new drugs and
bringing them to market. Im not talking just about targeting your resourcesits also about having
the unwavering discipline to ignore the many daily distractions you face on the path to the
marketplace.

One potential distraction that Ziopharm encountered was a project involving information
technology. IT holds enormous promise in the world of cancer therapies; networking capabilities
and big data will be transformative. But getting involved in IT would have meant losing our main
focus on bringing new, eective cancer medications to market. So we didnt pursue that approach.

I dont mean that a company should stick to a narrow objective, such as developing a single therapy,
at all costs. That approach is fraught with risk, given that drug development is inherently
unpredictable. Several years ago Ziopharm began collaborating with Intrexon, which had gured out
how to use synthetic DNA components to control cells. The Intrexon collaboration was well within
our focus, but it also allowed us to broaden our optionsto hedge our bets, in a sense. That hedge
helped us recover earlier this year, when experimental data showed that a molecule Ziopharm had
been developing wasnt having the eect wed hoped for.

Caliska should resist the allure of easy money in

the nutraceuticals market.

That brings me to another, vital aspect of drug development: You must be guided by the data. We
put a lot into that molecule. The laboratory ndings and the early rounds of human testing were
compelling, but the big randomized, double-blind, placebo-controlled trial told us that the molecule
didnt work, at least in the setting we had chosen. We were brutally honest with ourselves, and we
stopped immediately. The pain and grief were enormous.

But you cant be emotionally attached to any one treatment. The human response to therapies is just
too hard to predict. Things that work in the labon inbred, identical mice living in controlled
conditionsoften dont work in people. Human beings are very dierent from one anotherthere
are so many variables.

Hilde Dachs story illustrates the inherent tension between those two elements of doing drug
development right: maintaining a singular focus and following the data. The crucial question for
Hilde is whether the data, at this point, are denitive. I dont think they are. A preliminary human
trial was a disappointment, but she admits theres room for improving the strain of bacteria. On
safety, she doesnt yet have enough data to make a decision. So she should persevere, and the
company ought to support her.

For now, Caliska should resist the allure of easy money in the nutraceuticals market. Distracting
Hilde from her singular focus would be too great a risk.
 Colin Hill is a professor at the School of Microbiology, University College

Cork, in Ireland. He is also the president of the International Scientic Association for Probiotics and
Prebiotics.

Hilde mistakenly thinks she faces a zero-sum game. She assumes that if Caliska markets her strain of
Lactobacillus, the company will lose interest in possible pharmaceutical applications, and shell
become a mere purveyor of dietary supplements. That reects a simplistic view of the probiotics
industry.

Probiotics is an enormous, under-researched eld. No one knows where todays studies will lead.
Our bodies are superorganisms that host vast numbers of microbesthe human gut may be the
richest ecosystem on Earth. Some of those microbes produce neurotransmitters that aect brain
behavior; others prevent infection. When ve people eat contaminated chicken, why do three get
sick while the other two shrug it o? It might be because distinct populations of microbes interact
dierently with each human host.

The path for Caliska is fraught with uncertainty,

whether it takes the pharmaceutical or the
nutraceutical approach.

The microbes can be manipulated in various waysby diet, by probiotics, and by prebiotics (which
stimulate microbial growth). Taken together, they may constitute a treasure trove of novel therapies.
Someday, for instance, we might be able to use a microbe as a vehicle to deliver drug treatment to a
specic area of the body.
Given that promise, Caliska would do well to take on multiple dimensions of this largely unexplored
eld at the same time. It would be shortsighted to focus only on pharmaceutical applications of L-39
when its greatest potential may lie in medical foods.

It would also be very dicult to get approval for a probiotic-based pharmaceutical, though not
impossible. I can envision approval for one that, for example, prevents recurrence of a bacterial
infection. For now, though, no probiotic pharmaceuticals exist. The big hurdle is understanding the
mechanism of action: How does a probiotic produce its eect? What metabolite interacts with what
receptor? The interaction between a microbe, which might have 3,000 genes, and a human body is
very complex.

Thats not to say that the nutraceuticals road is easy. The European Food Safety Authority has very
high standards for approving probiotics as medical foodsand for good reason. In the early years, a
lot of smoke and mirrors surrounded probiotics. A company could put Lactobacillus into a product,
call it a probiotic, and make all kinds of vague claimswithout doing any research to back them up.
That wasnt good for consumers or the industry.

Nowadays, the EFSA requires rigorous proof of ecacy merely to approve low-level health claims.
That means companies like Caliska have to sink millions of euros into research and clinical trials just
for the glimmer of a possibility that theyll win the right to make very bland claims for a probiotic
nutraceutical. Some rms may wonder whether that investment is worth the trouble.

Clearly, the path for Caliska is fraught with uncertainty, whether it takes the pharmaceutical or the
nutraceutical approachor pursues both simultaneously. But I believe that the risk and hard work
will eventually pay o in the creation of therapies that we cant imagine today. To my mind, the
science of probiotics is the most exciting area in the eld of biology.

A version of this article appeared in the November 2013 issue of Harvard Business Review.

Toby E. Stuart holds the Leo Helzel Chair in Entrepreneurship and Innovation at the University of California
Berkeleys Haas School of Business.
This article is about MARKETING
FOLLOW THIS TOPIC

Related Topics: PRODUCT DEVELOPMENT | RISK MANAGEMENT | PHARMACEUTICALS

Comments
Leave a Comment

POST

0 COMMENTS

JOIN THE CONVERSATION

POSTING GUIDELINES
We hope the conversations that take place on HBR.org will be energetic, constructive, and thought-provoking. To comment, readers must sign in or
register. And to ensure the quality of the discussion, our moderating team will review all comments and may edit them for clarity, length, and relevance.
Comments that are overly promotional, mean-spirited, or off-topic may be deleted per the moderators' judgment. All postings become the property of
Harvard Business Publishing.