Bioprinting a New Hope
By: Marco Chan & Dave Tang
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
The pharmaceutical and biotechnology industry is in the midst of a cost crisis. The number of drugs approved per billion USD spent on Research and Development (R&D) has halved every nine years since the 1950s. Compounding the problem, the amount of time necessary to get drugs to market has continued to increase, stretching market leaders as older drugs expire before newer products in development get to market. The amount of revenue generated by drugs which had patents expire in 2014 generated almost $50B in industry revenue annually – these drugs are now at risk of cheaper competition via biosimilar products. Roche Holdings Ltd.(Roche), a Switzerland-based pharmaceuticals and diagnostics company, has been significantly affected by this phenomenon. To continue functioning effectively, Roche must counteract this ominous trend by utilizing innovative technologies from InSphero Inc. to substantially increase R&D efficiency.
Pharmaceutical Industry Overview
Revenue growth for the global pharmaceutical industry is projected to taper to 1.6% per annum by 2020. Combined with ballooning R&D costs, pharmaceutical companies will see declining profitability. This negative forecast is driven in part by the expiration of $230B, in annual revenue, of patents between 2011 2015; creating an unprecedented ‘patent cliff that pharmaceutical companies are worriedly trying to replace. As these patents expire, biosimilar manufacturers quickly flood the market with ‘generic’ substitutes, driving down prices and profitability significantly. For example, Pfizer Inc.’s blockbuster drug Lipitor saw a 42% drop in sales and 19% overall pro fit decline due to substitutes after the drug’s patent expired in 2011.
As drug approvals are a multi-year and risky process, big pharma companies are turning towards M&A for short to medium-term growth, specifically by acquiring companies with potential blockbuster drugs partway through the development cycle. Fuelled by cheap debt, there has been over $260B in M&A activity in 2014, the most since 2002.
Drug Approval Process
Currently, the average drug approval process spans 12 years. In order to gain FDA approval, pharmaceutical companies must test compounds via a series of rigorously monitored examination stages to ensure product safety and effectiveness. Following development of a new compound, pharmaceutical companies begin the pre-clinical process by testing on multiple animal species for toxicity and adverse effects. If successful, the drug sponsor will submit an Investigational New Drug application to seek approval for initial human testing. After receiving verification, the compound will begin clinical trials on humans.
In the first phase of clinical trials, the compound will be tested on less than one hundred healthy volunteers to determine the safety of the compound, how it is metabolized, and possible side effects. If the drug appears safe, the second phase of clinical trials is initiated, which consists of testing the compound on hundreds of individuals afflicted with the applicable condition to establish effectiveness. Finally, should the drug pass phase (phase 3) to gather more information about safety and drug effectiveness.
Overall, the success rate of a single compound receiving FDA approval is 7.1% and the average cost per new drug approved, including failures, is $2.6B as of 2014. In addition, the average time for a clinical trial increased by 70% from 1999-2005 due to an increasingly stringent regulatory processes. The more efectively a pharmaceutical company can screen compounds before initiating the FDA approval process, the more time, manpower, and cash can be saved. Early screening allows pharmaceutical companies to improve drug design and improve probability of success with a much lower investment.
Opportunity for Roche
As a global leader in biotechnology, Roche has developed its market position primarily within oncology, the branch of medicine that deals with tumours and autoimmune diseases. Holding a substantial 9.2% of global pharmaceutical sales, Roche is currently the largest player in the oncology space and, by revenue, is as large as the next three competitors combined. Tis market is the largest therapeutic class with annual sales of $67B and is expected to grow at a CAGR of 7% to $109B by 2020. Roche is facing a number of challenges including the recent unpegging of the Swiss franc. This currency upswing heavily impacted Roche’s profitability because most of its costs are incurred in Swiss francs, while over half of revenues are denominated in other (now less valuable) currencies. Roche also appears most susceptible to the patent cliff given the company has a history of one of the highest R&D expense-to-revenue ratio of any major pharmaceutical firms. Despite its size, Roche is incredibly susceptible to future market forces and needs to innovate its drug testing processes.
InSphero: The Way Forward
InSphero is a private company headquartered in Switzerland that supplies in-vitro 3D microtissues for preclinical drug testing. Preclinical studies are needed to ensure a degree is safe before formal clinical trials are pursued. Testing of 2D in-vitro studies are the industry standard; however, 3D microtissues are more effective due to longer lifetimes and a more realistic reaction to drug responses. An example of this difference is evidenced when testing breast cancer cells; 2D cell cultures can be killed with low doses of chemotherapeutic drugs or radiation, while 3D cell cultures are resistant to similar doses, better reflecting the effects on the human body.
InSphero is able to create 3D cell cultures through a patented process, and can produce human livers, tumours, and custom microtissues. A liver is typically priced around $2,000 USD per 96 microtissues; however, many other products are priced dynamically given the custom nature of the microtissues. To date, InSphero’s clients include the top-15-pharmaceutical and cosmetics companies, while continually collaborating with top researchers at universities. In a study conducted by Genentech, a subsidiary of Roche, InSphero’s 3D liver microtissues were able to detect toxicity at significantly lower concentrations in 13 of the 42 compounds tested. This improved sensitivity allows big pharma companies to filter out drug candidates that may have potentially passed through 2D cell culture testing but fail in 3D clinical testing. By aborting a project before the FDA approval process begins significant time and money can be saved.
Redefining R&D
Roche should acquire InSphero to take further advantage of its 3D tissue technology. As Roche continues to spend an increasing amount on failed drugs, InSphero offers a way to reverse that trend. InSphero’s technology may prove especially beneficial in the oncology segment, as the company has the expertise to quickly create custom tumours for Roche’s oncology drug testing. By frontloading InSphero’s capabilities onto safety and efficacy testing with 3D tissues, factors that contribute to 57% and 10% of all Phase III failures respectively, Roche gains a valuable cost advantage. Roche gains the ability to potentially prevent hundreds of millions of dollars from being lost on drug failures further along in the development cycle.
The entirety of the FDA approval process costs on average $382M in total as of 2014, regardless of whether a compound passes or fails the third phase. However costs rise at each stage- Phase I costs $28M, Phase II costs $74M, and Phase III costs $280M. The cost savings that Roche can realize if they screen out a drug at the preclinical stage rather than during clinical testing is at least $28M or up to $382M for a Phase III failure. These cost savings can be passed back into further R&D efforts, swelling compound output and, in turn, Roche’s bottom line.
Refocusing R&D
Following an acquisition, Roche can directly focus InSphero’s efforts towards further developments applicable to oncology. The technology is in its infancy, giving Roche an opportunity to purchase InSphero at a lower valuation before the technology gains widespread adoption. An acquisition is more favourable than a partnership in this case, since it provides Roche more control over InSphero’s R&D focus. InSphero has already launched its “Personalized Tumour Kit” that grows mini tumours based on a patient’s tumour material. These tumours can identify cancer biomarkers, which are genetic codes or human processes that are cancer indicators, helping healthcare professionals develop targeted medicine treatments. Testing drugs on tumours with specific biomarkers will lead to higher efficacy drugs with faster drug development times. Faster development increases the length of time a patented product can be commercially available driving revenues and profitability.
For InSphero, the benefits lie in both the funding required for the amplified R&D spending necessary to remain an industry leader, as well as the addition of a strong strategic partner. Roche has a cash balance of over $3.7B and can provide low interest access to financing. Expertise sharing between the two entities may also allow for more effective tissue development. In addition, Roche serves as a guaranteed client to test the effectiveness of InSphero products.
It is time for Roche to change the way they approach R&D. With the incessant escalation of R&D expenses across the industry, Roche needs a new and more efcient way to test their drugs in development and maintain competitiveness in the market. InSphero offers such an opportunity – reliable, tested 3D microtissues that are a significant improvement upon the 2D cell cultures most often used by Roche. InSphero will be able to continue selling tissues through Roche to other pharmaceutical manufacturers, as 3D tissue technology is far superior to current pre-clinical testing methods. Tis allows InSphero to continue generating profts it would have otherwise generated but with the beneft of a signifcant backer and a constant customer. With InSphero, Roche will begin its own cost-saving revolution across its business units. As a result of this upheaval, Roche will be able to test compounds more efciently, create more drugs for the commercial market, and continue saving the world, one drug at a time.
