Commercializing biotechnology in China

I recently had the opportunity to conduct a brief interview with Mireille Gingras, Ph.D. President and CEO of HUYA Bioscience on doing business with and in China:

Tell me about HUYA and what makes the company unique?
HUYA Bioscience International has pioneered the most innovative and productive approach for pharmaceutical co-development between the U.S. and China. We were one of the first companies to recognize the potential of China as a source for novel preclinical and clinical stage compounds. Through our partnerships with Chinese companies and institutes, HUYA can use preclinical and clinical stage data generated in China to guide drug development process in the West. Even though clinical trials must still be completed in the West, the process is streamlined, and risks are minimized because HUYA’s Western pharmaceutical partners will have access to critical data from China. Simultaneously, HUYA provides significant development assistance to our Chinese partners. As a result, I anticipate that HUYA will source compounds in China that may become important drugs globally.

What led you to target China as a source for compounds?
There is an urgent need in the global pharmaceutical industry for fresh new sources of novel compounds. As a licensing consultant for pharmaceutical and biotech companies, I was seeking to find novel preclinical and early clinical-stage compounds in Europe and Asia. Many of us were looking in the same places and the pools of novel compounds were depleted. I subsequently spent time in China meeting with heads of government research institutions, biotechnology parks, incubators and pharmaceutical companies. In China, I recognized that there were untapped and significant opportunities for drug discovery and development. To leverage these opportunities, I formed HUYA Bioscience International. HUYA’s business model, the Integrated Co-Development model (ICM), is designed to reduce the risk and cost of drug development in the U.S. by providing a framework for sourcing, licensing and developing validated, preclinical and clinical stage compounds from China. We currently have two compounds licensed from China that are in preclinical development in the U.S., thus validating our model.

What are the unique challenges/opportunities to developing compounds sourced from China?
One challenge, of course, is the language difference. We must have bilingual staff in both the US and China so that we are confident that our due diligence is performed with the utmost attention to detail. Another challenge is that I must spend a significant amount of time in China. This is crucial for developing trust, forging partnership agreements and licensing compounds. HUYA has the “first mover” advantage in China, having been there now for four years and developing critical personal relationships with the heads of the Chinese research institutions and pharmaceutical companies. The Chinese seem to prefer to do business with people they trust and with whom they have long-standing relationships. No other company has the breadth and depth of relationships that HUYA has developed in the Chinese research community.

Because of these relationships, we are able to take advantage of the enormous opportunities presented by China’s large community of world-class scientists, many of whom were educated in the U.S. and have returned to China to develop their careers. We are also able to draw from the well-established scientific infrastructure in China of research institutes, bioparks, and pharmaceutical companies that provides one of the world’s richest sources for novel compounds.

We have a truly unique opportunity to lower the risks and costs of Western drug development by providing access to data from the Chinese development process. Of course, all of the compounds that are developed in the U.S. will have to go through the same rigorous FDA process that they would have gone through had they been sourced from the U.S., including animal and human trials. But, this process is streamlined, and the risks are minimized because HUYA’s U.S. pharmaceutical partners will have access to critical data from our Chinese partners. For example, a U.S. pharmaceutical company that takes on one of the new compounds has access to efficacy, toxicology, and dosing data from Chinese clinical trials, so the trial is not started from scratch, but can be designed based on the information gathered through the Chinese trial. In addition, the Chinese clinical trial data can be used as supporting data to the FDA process here in the U.S.

For each promising new compound in development, HUYA assembles a world-class team of clinical advisors to direct the clinical trials and ensure that they meet U.S. FDA standards. In addition, because HUYA’s model is to co-develop compounds with our Chinese partners, we can help our Chinese partners design trials in China that will inform our trials in the U.S.

About Mireille Gingras, PhD, CEO and President of HUYA Bioscience International
Mireille is a seasoned entrepreneur, scientist and consultant with wide ranging experience in drug discovery, licensing programs (both in- and out-license), preclinical research design and academic partnering programs for top pharmaceutical and biotechnology companies including Organon, Cypress Bioscience, Phenomix, and GeminX. She has made major contributions to the study of complex addictive diseases, and has led research and drug development efforts in the areas of neuroactive steroids, and neurological and neurodegenerative diseases. Through her extensive work in China with HUYA, Mireille has developed unrivaled expertise in partnering with Chinese research institutions and pharmaceutical companies and building bridges into the Western development process.

About HUYA Bioscience International
The global pharmaceutical industry faces an urgent need for fresh new sources of novel compounds. HUYA Bioscience International, LLC, was one of the first companies to recognize China’s potential to help meet this need through its burgeoning biotechnology industry and world class talent pool. HUYA pioneered an innovative co-development model through which it identifies and licenses the most promising preclinical and clinical stage compounds in China, partners with Chinese research institutions to leverage and extend their research efforts, and provides a bridge into the U.S. development process and the Western biopharma market. Because the compounds have already been validated through a rigorous discovery, selection and development process in China, this model streamlines and accelerates product development in the West, while lowering risk. HUYA is now the leader in U.S./China pharmaceutical co-development, with three strategic offices in China, the broadest Chinese compound portfolio, and more exclusive agreements with premier Chinese biotech centers than any other company. HUYA has joint headquarters in San Diego, California, and Shanghai, China.

Contract research helps keep drug pipeline flowing

Guest content from Turner Investment Partners‘ Heather Flick McMeekin, Frank Sustersic, Vijay Shankaran, and Theresa Hoang:

Contract research helps keep drug pipeline flowing

Imagine a new-product development process that typically lasts 10 to 15 years, has only a one in 5,000 chance of succeeding, and costs at least $800 million. That’s the daunting reality that biopharmaceutical companies face in seeking to bring a new drug to market.

To help them navigate the time-consuming, risky, and costly waters of new product development, biopharmaceutical companies are turning to contract research organizations (CROs). The large CROs offer two kinds of services that in effect provide one-stop shopping for drug R&D: 1) preclinical services, which include chemistry and animal-testing services in laboratories to assess the safety of a drug candidate before it’s introduced to human patients; and 2) clinical services, which involve such functions as project planning and management, patient recruiting, and trial monitoring and analysis to test the safety and effectiveness of new drugs given to volunteer human patients.

500 CROs worldwide

Currently about 500 CROs compete around the world, with the smaller ones tending to specialize in either preclinical or clinical services. Most CROs work under fixed-price contracts. Preclinical contracts are typically smaller, $2 million or less, and shorter in duration, lasting for months. Clinical contracts, in contrast, can total $100 million or more and run for years. In general, preclinical contracts have been the most profitable.

The drug-development process has become so time-consuming, risky, and costly in part because of a growing risk aversion and preoccupation with safety by the Food and Drug Administration (FDA). The FDA in recent years has intensified its focus on safety and has shown a diminished tolerance for side effects in new drugs.

Consequently, last year the FDA approved just 19 new drugs, the fewest in 24 years, and issued more than 70 new or revised “black-box” warnings about potential side effects, twice the number in 2004. Also, the number of “approvable letters,” which typically require biopharmaceutical companies to submit more data before the FDA makes a decision on a drug, increased by 40% last year, as reported by Sagient Research Systems, which monitors drug approvals.

Drug applications slump

In turn, as the approval bar gets raised higher and higher, biopharmaceutical companies are submitting fewer new-drug applications to the FDA. In the past two years the number of applications submitted by the companies declined by more than 20%. And as the FDA requires more and more tests of new drugs, the development cycle is becoming more elongated. All of this has helped exacerbate financial and operational problems for biopharmaceutical companies — problems that the outsourcing services of CROs are proving uniquely able to address.

For instance, it was widely expected that pharmaceutical companies would launch a slew of new drugs to offset the revenue lost from their existing drugs that are going off patent. Obviously, that hasn’t happened, and the resulting financial pressures have compelled pharma companies to cut costs across the board. Pfizer, for instance, has reduced its number of R&D centers from 15 to 10 over the past three years. But here’s the challenge: pharma companies must innovate to survive, which means that while they are striving to control costs, they also need to keep spending on research and development to create profitable, proprietary new drugs and replenish the pipeline. R&D spending has in fact been increasing 8-10% annually over the past five years and should rise at a similar rate going forward, in our estimation.

In essence, pharma companies are turning to CROs as an outsourcing solution in an effort to optimize their R&D spending. The CROs can develop drugs faster than the pharmaceutical companies can, with comparable quality, the Tufts Center for the Study of Drug Development found. According to the pharma companies themselves, CROs deliver genuine value — a high level of technical expertise, improved productivity, and cost savings.

Smaller customers fuel growth

Another problem that CROs are helping to solve is that relatively small biopharmaceutical companies are hard-pressed to fund all the internal capabilities, laboratories, and equipment critical to developing new drugs, especially in the preclinical phase of development. As a result these smaller companies have found it more practical to pay CROs for their internal capabilities, laboratories, and equipment to handle preclinical testing. The volume of outsourcing from small firms has been central to CROs’ rapid growth. For instance, biotechnology companies now furnish more than 30% of CROs’ revenue, up from 21% in 2003. As we see it, that percentage should continue to rise steadily over the next few years.

What’s more, regulators worldwide prefer biopharmaceutical companies to conduct multi-center international drug trials. Also, it’s often much easier to enroll patients in certain types of clinical trials overseas. These trends are benefiting CROs that have dozens of international locations. Today more than 40% of CROs’ revenue is generated outside the U.S., according to industry data. Kendle International, a leading CRO, anticipates that more drug R&D will migrate from the U.S. to Europe, Asia, and Latin America, with the company’s revenue there rising to 60% by 2010.

So we think there’s a great deal of growth both domestically and internationally for CROs to pursue. Altogether, less than 25% of all drug R&D spending is outsourced, in our estimation. Managers at Covance, another leading CRO, say the company and its competitors may perform 50% of all drug R&D in the future.

Market poised to grow

In short, the CROs are in a fast-growing, highly profitable global business. The CRO market should grow at a 12.6% compound annual rate through 2011, to $29.4 billion, up from $16.3 billion in 2006, according to Goldman Sachs. And Goldman Sachs calculates that earnings before interest and taxes at CROs are more than $20,000 per employee — one of the highest rates in any industry. That level of profitability is even more remarkable in light of the heavy hiring that CROs have done since 2004; during that time the six largest CROs have increased their employee headcount by 57%, to 37,300 people. What’s more, the largest CROs have boosted their book-to-bill ratio to about 1.4 over the past year. Such a high book-to-bill ratio, in our judgment, provides high earnings visibility, i.e., a good picture of CROs’ favorable future profit trends.

Among CROs, we think five of them possess especially good growth prospects over the next two years: Covance (market capitalization: about $5 billion), Icon (about $2 billion), Kendle International (about $540 million), Parexel International (about $1.5 billion), and Charles River Laboratories International (about $4.4 billion). All five provide both preclinical and clinical services to varying degrees.

Covance, headquartered in Princeton, New Jersey, has been a profit pacesetter: its earnings growth has exceeded 20% annually for the past seven years. Its annual revenue exceeds $1.4 billion, and its services are as comprehensive as any in the industry. The company is currently involved in more than 14,000 clinical trials worldwide. A program-management service that’s designed to accelerate the early development of drugs is highly regarded in the medical community and generates revenue of more than $200 million per year.

Icon: an international presence

As international drug development becomes the norm, Icon would seem to be especially well-positioned: the company is based in Dublin, Ireland, and more than 40% of its $870 million in annual revenue is produced outside the U.S. To beef up its international presence further, the company in 2007 opened 18 new offices in six countries, including Japan, which it considers a potentially lucrative market. In customer surveys, Icon consistently ranks highly for the quality of service.

Kendle International, based in Cincinnati, derives about 54% of its $570 million in annual revenue overseas. The company expects much of its growth will be in Asia, where its customers’ R&D spending on drugs is expected to reach $20 billion by 2013 — nearly double the current level, according to the Frost & Sullivan consulting firm. By its own analysis, Kendle assisted 44 of the 50 largest biopharmaceutical companies in developing more than 600 new drugs last year, and its clinical business is growing at twice the average rate of the industry.

Parexel International gets 59% of its more than $740 million in annual revenue in foreign countries, a higher percentage than that of any competitor. Parexel’s clinical services account for more than 70% of revenue. The company does business in 51 countries and is admired for its skill in training new employees. Over the past five years the company’s net income has increased by 250%, powered by its expertise in four fast-growing fields of drug R&D: cardiovascular, central nervous system, infectious disease, and oncology. Based in Waltham, Massachusetts, and founded in 1982, Parexel was one of the first CROs to venture overseas.

Charles River Laboratories International is another CRO pioneer: its history dates to 1947. Through acquisition the company has built a far-flung network of preclinical operations, which account for most of its annual revenue of more than $1.2 billion. Headquartered in Wilmington, Massachusetts, the company plans to add about 1 million square feet of preclinical-laboratory space between 2007 and 2009. Its Charles River Dedicated Resources Unit, providing staffing and laboratory space to customers, has been a prime source of new business.

In sum, as long as the drug-development process remains costly and risky, as long as drug R&D spending continues to increase, and as long as cost control and outsourcing remain priorities with biopharmaceutical companies, we think CROs should flourish. In our analysis, if they fail to flourish going forward, it would likely be due to these reasons: a diminishing customer base, caused by consolidation among biopharmaceutical companies; an inability of early-stage, unprofitable biotechnology companies to obtain capital; or a surge in contract cancellations (which have averaged less than 6% annually).

But we think none of those risks are great in the near term, and we anticipate that CROs will continue to help their biopharmaceutical customers and apply technical expertise to the drug-development process in a highly cost-effective way.

The views expressed represent the opinions of Turner Investment Partners as of the date indicated and may change. They are not intended as a forecast, a guarantee of future results, investment recommendations, or an offer to buy or sell any securities. Opinions about individual securities mentioned may change, and there can be no guarantee that Turner will select and hold any particular security for its client portfolios. Earnings growth may not result in an increase in share price. Past performance is no guarantee of future results.

Turner Investment Partners, founded in 1990 and based in Berwyn, Pennsylvania, is an investment firm that manages more than $26 billion in stocks in separately managed accounts and mutual funds for institutions and individuals, as of June 30, 2008.optical communications

As of June 30, 2008, Turner held in client accounts 730,308 shares of Covance, 656,980 shares of Icon, 454,973 shares of Kendle International, 1.8 million shares of Parexel International, and 2.3 million shares of Charles River Laboratories International. Turner held no shares of Pfizer.

Beyond the Business Plan: Managing unexpected risk in biotechnology business development

Here’s a slideshow of a talk I recently gave at the Johns Hopkins biotechnology MS/MBA program. The purpose is to illustrate the elements which are important to consider after penning your business plan, and to help position oneself to be prepared for unexpected risks.

The material is largely drawn from my book, Building Biotechnology. Go ahead and post any questions you may have in the comments.