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Text | Amino observations
The core of the business of innovative drugs can be seen as how to turn science into business.
Because biotech as a corporate organization, especially the listed biotech, its duty is to create value through biotechnology. This value includes not only seeking scientific breakthroughs, breaking down the barriers between basic and applied science, and developing a large number of new drugs, but also creating huge profits for the company and bringing returns to investors.
Focusing on whether science can become a profitable business, the market has begun to explore various ways, and biotech has also evolved a variety of development paths.
In recent years, with the deep participation of technological progress and capital, in order to fight against huge uncertainties and risks, the market has given birth to some model innovations to avoid risks. For example, the Flagship pattern, and the Hub-and-Spoke pattern.
The former is a model for Flagship to incubate biotech, a well-known venture capital in the biotechnology industry. In the past, the market believed that companies born under the Flagship model were more certain than biotech in the market, because they had been rigorously screened internally before entering the market, and the organization would build a relatively more experienced management team. It is in this mode that Moderna was born.
However, since the beginning of 2023, the model has suffered successive failures, and the five biotechs it has incubated have collapsed one after another, including Rubius, a star biotech led by a member of the National Academy of Sciences.
The so-called hub-and-spoke model refers to the fact that innovative drug companies control multiple companies across multiple technology paths and disease fields, and the parent company's advantage is no longer R&D capabilities, but factors such as fundraising, investment, manufacturing, management and commercialization capabilities. Its core is more like running a biotech with the idea of venture capital and making a portfolio of new drugs.
For example, BridgeBio, the representative company of this model, places each project in its own subsidiary, and the parent company has access to centralized resources, with the ability to transfer personnel and funds between different assets as needed. Another benefit is that the clinical failure of one subsidiary does not bring the doom of the parent company out of business.
"We make small, risky bets, and if you bring enough people into an aggregator platform, you start to get a statistical model of financial returns, and it's virtually risk-free," said Henderson, chief commercial officer at BridgeBio.
In previous years, when the market was hot, people began to pay attention to this model and expect it to disrupt the R&D landscape and open up new ways to invest, motivate teams and shape innovation pipelines.
But the tuyere was short-lived. The market value of the leader of tens of billions of US dollars is fleeting, and it even fell into the dilemma of relying on layoffs and selling projects to make a living, and other biotechs such as Centessa and Cullinan that adopt this model have already fallen by 80% due to factors such as clinical progress.
As it turns out, there's no such thing as a win-lie model when it comes to turning science into business.
01 New "God-making Mode"
According to Dr. Andrew Lo of MIT, genomics, epigenomics, transcriptomics, proteomics, metabolomics, and so on have all made tremendous progress in the past few years, with one exception, economic omics.
Dr. Lo's so-called economic omics actually refers to the investment and financing of biotechnology. "In fact, we still need to find a better way to pay for the development of all innovative therapies."
A successful new drug has the potential to return $2 billion per year for ten years, while the cost of creation is only $200 million, and of course, the chance of success is low (5%). Even with such returns, many investors are reluctant to take this risk.
What if the risks are pooled?
Dr. Lo proposed a new idea, assuming a $3 billion fund to fund 150 biotech start-ups, all of which must target a different (and unrelated) disease. That is, all entrepreneur bets are completely uncorrelated, which means that one person's failure will not have an impact on another.
In 2015, Dr. Lo's student Neil Kumar founded Bridge Bio, a rare disease treatment company based on this idea, which, along with biotechs such as Roivant Sciences and PureTech Health, pioneered a new business model:
In this model, the innovative drug company controls a number of companies across multiple technology paths and disease areas, and the parent company's advantage is no longer R&D capabilities, but factors such as fundraising, investment, manufacturing, management and commercialization capabilities, which is called the Hub-and-Spoke model in the pharmaceutical industry, and McKinsey calls it the Portfolio Model.
Taking BridgeBio as an example, there are senior Wall Street players such as KKR, Viking Global, and Qatar Investment Authority, and 20 subsidiaries such as Eidos Therapeutics, QED Therapeutics, and Adrenas Therapeutics. Infigratib has been approved by the FDA, and Acoramidis, another type of cardiothyretin amyloid cardiomyopathy (ATTR-CM) for heart disease, has also applied for marketing.
In a nutshell, BridgeBio spun off the project to its subsidiary, whose management team is made up of people from diverse backgrounds, including entrepreneurs, experienced scientists, and other professionals.
BridgeBio is responsible for centralizing and allocating the resources needed for each subsidiary, providing core support, while being able to transfer staff and funds between different development initiatives as needed. This way, if a few initiatives fail, a large percentage of these resources can still be shared with other initiatives. This ability to reuse resources can greatly affect the possibility of a fatal blow to biotech.
Roivant was also one of the first biotechs to adopt the Hub-and-Spoke business model. Roivant has since acquired a pipeline around which Roivant has established a subsidiary on a single or a few drugs, allowing those subsidiaries to operate as separate entities.
Roivant has created more than 20 subsidiaries that end with Vant, which focus on different areas. For example, Myovant focuses on women's health and endocrine diseases, Dermavant focuses on dermatology, and Enzyvant focuses on rare diseases......
In such a situation, the parent company has a rich and diverse product pipeline that can improve hit rates, and even if one subsidiary fails to develop a drug, it will not affect the others. For example, after the failure of Axovant, the company that developed Alzheimer's, Roivant's other subsidiaries were not affected and are still operating normally.
In addition, it is also important to note that Roivant operates in such a way that it can attract some of the top talent in the biotech field, such as David Hung, a star in the pharmaceutical industry, and Atul Pande, who led drug development in GSK's neuroscience area.
In a way, whether it's BridgeBio or Roivant, these parent companies become a platform to create a virtuous cycle by raising funds from the market, investing in more efficient drug development projects (subsidiaries), and allocating the resources needed for each project in the middle.
Its core is actually more like running biotech with the idea of venture capital, making a portfolio of new drugs, not putting eggs in one big basket, but preparing many small baskets.
02 Biotech的“moneyball”
People naturally have high expectations for seemingly disruptive innovations, whether it's business models or product technologies. The Hub-and-Spoke model is no exception.
It has been argued that this model is a blend of best practices from venture capital and big pharma, and that it can bring many benefits to parent companies, subsidiaries and investors, including increased focus, improved operational efficiency, and more flexible fundraising methods and risk diversification.
More proponents believe that this model could disrupt the R&D landscape by taking luck and risk out of the equation and opening up new ways to invest, motivate teams and shape innovation pipelines. In other words, they can "turn a penalty into gold".
In the hottest two years of the market from 2020 to 2021, the primary market financing of this type of biotech was active, and many companies, including Roivant and Cullinan Oncology, also successfully completed IPOs and were highly sought after in the secondary market. At their peak, Roivant and BridgeBio were both worth more than $10 billion.
But the tuyere was short-lived.
The new model does not change the risk of new drug research and development, nor does it smooth the stock price trend of these alternative biotechs, which seems to have established a platform, but it is still product-oriented, that is, the stock price skyrockets and plummets due to the success or failure of a single core pipeline clinical trial. This is no different from the traditional model of biotech.
For example, BridgeBio, the stock price of Acoramidis, the core pipeline of the factor company, soared and plummeted, and it was once in trouble, and had to lay off employees and sell pipelines.
In December 2021, Acoramidis, an ATTR therapy led by Eidos Therapeutics, a subsidiary of BridgeBio, announced the failure of its Phase 3 clinical trial.
For BridgeBio, this clinical failure was a huge blow because it was expected to be a potential blockbuster drug in the market, but the clinical failure failed. As soon as the news broke, BridgeBio's stock price plummeted 72%. Since then, its stock price has been falling, and at its lowest point in May 2022, it was only $800 million. And just a year ago, its peak market capitalization exceeded $10 billion.
What's worse is that in the first quarter of 2022, BridgeBio's cash and cash equivalents in hand were only $370 million, compared to $650 million in total operating costs and expenses in 2021.
To this end, the company began to lay off employees, and the chief strategy officer who had served the company for 5 years also left. After two rounds of layoffs, the company began seeking licenses out of six more projects and sold a priority review voucher for $110 million.
Of course, BridgeBio hasn't given up on Acoramidis. In order to support the continued research and development of drugs, the company has gambled almost its entire net worth. Fortunately, BridgeBio won the bet, and after more than two years of perseverance, the phase 3 clinical trial of Acoramidis has been resurrected and has now applied for marketing.
On the day the clinical data was announced, BridgeBio's stock price surged 75.85%, and its market value soared by $2.4 billion.
From this point of view, the expectation that the new business model is low-risk or will disrupt the R&D landscape does not seem to be valid. In the experience of BridgeBio's sharp decline and surge in the past two years, it seems that the original intention of diversifying risks has not been achieved.
03 "Unsuccessful Investment"
According to Roivant CEO Matt Gline, this model is a means to an end, recruiting good leaders and putting good people with the right expertise to work on important projects. Matt Gline said this gave him an opportunity to be more efficient at scale in drug development.
Roivant seems to have proven himself.
Since its establishment in 2014, Roivant has established more than 20 subsidiaries. In 2019, Sumitomo Pharma acquired the stake in five subsidiaries for USD 3 billion, and in 2022, Sumitomo Pharma acquired an additional USD 1.7 billion for the remaining shares of Roivant's subsidiary.
At the same time, there are also 6 drugs in Roivant's pipeline that have been approved by the FDA for marketing.
In October, Roche just paid $7.1 billion to acquire the rights to a novel TL1A-directed antibody (RVT-3101) for the treatment of inflammatory bowel disease from Roivant's subsidiary Telavant.
This is a potential first-in-class TL1A antibody that targets inflammatory and fibrotic pathways by inhibiting TL1A and is currently being used primarily for the treatment of inflammatory bowel diseases, including ulcerative colitis and Crohn's disease.
Previously, RVT-3101 has been studied in patients with moderate to severe ulcerative colitis in the TUSCANY-2 Phase 2b study. Data released in June of this year demonstrated the potential of RVT-3101 to be "best in class" with positive long-term results in a Phase 2 clinical trial for the treatment of patients with ulcerative colitis. In the trial, the participants achieved a CR (clinical response rate) of 36%, and the safety and tolerability were also good.
Matt Gline said it was the data that ultimately led to the deal with Roche.
But he also admits that if Roivant were an investment company that could sell shares at any time before the pipeline data was read out, it would be a very successful investment. But it wasn't a very successful investment for Roivant. For example, Axovant's research and development of Alzheimer's disease failed, and hundreds of millions of dollars were almost wiped out.
The core is that this kind of model innovation does not reduce the probability of failure of a single project or subsidiary, because it is determined by objective laws.
In most industries, the basic feasibility of the technology may not be an issue for project development. In the automotive industry, for example, engineers may struggle with various parts engineering and functional issues related to the car, and worry about whether the design will be manufactured and whether the customer will pay for it, but they are almost certain that the vehicle will eventually work. Even in high-tech industries such as semiconductors and computers, it is often clear which R&D projects are scientifically feasible and which are not.
This is not the case with drug development. Whether a drug candidate is safe and effective can only be determined through a lengthy trial and error process, and no conclusion can be made until the last minute. Despite extraordinary advances in genetics and molecular biology over the past few decades, scientists still find it extremely difficult to predict how a particular new molecule will work in humans. Even today, after years of hard work, the most likely outcome of a project is failure.
"The whole world knows that developing new drugs is a risky gamble in science. We're developing something right now that may or may not work," said Matt Gline, failure is part of building biotech, and if the lesson you learned is don't take risks, biotech is a very difficult industry to succeed in. Therefore, he argues, it is necessary to learn to build a diversified portfolio.
In other words, although not very successful, he still believes that this model is the optimal solution.
04 Summary
Tracing back to the roots, why did the Hub-and-Spoke model appear?
The reasons can be broadly boiled down to two points. First of all, this is a product of the growing maturity of the development of the innovative drug industry.
With the rapid development of technology, the role of technology in the field of innovative drugs is gradually decreasing, and external factors such as R&D management, cooperation and commercialization are becoming more and more important. To some extent, capabilities and resources outside of technology are reusable.
Most importantly, the promotion of investment institutions. In fact, if you look at the listed biotech, the companies that adopt the Hub-and-Spoke model have well-known or non-well-known investment institutions in their founding teams.
Through this model, investment institutions provide some start-up teams with financing options other than acquisitions and IPOs, and also package assets, which can be seen as the institutions have learned lessons on how to build a distributed portfolio from a risk perspective.
It should be noted that, on the surface, the fate of such biotechs is not determined by a single pipeline, and most of them have diversified portfolios (subsidiaries) and use the ideas of venture capital to make medicines. However, for the capital market, traditional biotech is easy to give a relatively reasonable valuation due to its small pipeline and simple structure, while biotech under the Hub-and-Spoke model is difficult to value due to its large number of pipelines, wide range of therapeutic areas and technical fields, and complex proportion of equity and drug equity.
In addition, due to the different clinical progress and potential size of the subsidiary, the parent company is also highly vulnerable to the impact of a single pipeline. The risks are still there.
No matter what kind of model innovation, the essence is that the market is pursuing an ultimate answer, whether science can become a profitable business.
However, judging from the results of practice so far, the revolution has not yet succeeded, and comrades still need to work hard.