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This is a student paper from the 2009 final projects in the NIH Foundation for Advanced Education in the Sciences’ TECH 366 — Biotechnology Management. The students were asked to tell a story based on the course lectures, and to expand with general lessons on biotechnology company management.

The changing roles of CRO

Alex Bao

Contract research organizations (CRO) have played significant roles in the research and development (R&D) of biotechnology industry ever since its first appearance in the late 1970s.  CRO provide important services in clinical trial management, safety monitoring, formulating and manufacturing, laboratory services, data management, NDA writing and filing as well as other regulatory affaire support, etc.   The CRO industry had shown stable and increasing revenue on the global scale in recent years despite the weak growth of global economy.  For instances, CRO shared $15 billions of global biotechnology R&D market in 2007 and $18 billions in 2008.  In the United States, approximately $9 billion, accountable for 15% of total of R&D funds flowed to CRO in 2007.  Even under the impact of global financial crisis, CRO revenue increased to approximately $10 billion when the total U.S. R&D increased to $65 billion in 2008 (Fig 1).

In recent years, the biotech industry has generated several lines of biomedical products that are sold over billion dollars each year, giving more room for CRO industry to grow.  In 2008, for instances, monoclonal antibodies sales reached $33 billion, TNT blockers reached $18 billion, and erythropoietin reached $9.5 billions.  The global sales of biotech drugs jumped from $75 billion in 2007 to $125 billion, almost 16% of global drug sales, in 2008.  This fast growth (Fig 1) of biotech revenue may encourage R&D expenditure in biotechnology and therefore expand the market size for CRO in the near future.

baofig1
Fig 1. Global sales by CRO and Biotech industries.  (data source: reference 1, 2, 3, 4.).

Today’s CROs may operate either as local niche services or on international scales.  Several CROs, such as Quintiles translational corporation, Covance Incorporated, Pharmaceutical product development, Charles river labs and MDS incorporated, have generated over billion dollar revenues each in 2008.  Out sourcing to CRO has become an attractive strategy for many biotech firms because CRO may provide services that are not available in-house for start-up firms.  In some other cases, CRO may provide services with more competitive quality and better-targeted milestones than in-house research department for some large biotech firms.  CROs are often used because their ability to reach out for regionalized patient populations and ability to efficiently manage international clinical studies.  In any cases, however, the conventional role of CRO is to merely act as the “extra capacity” to facilitate R&D projects of the sponsors.  By saving time, capital, labor, and/or space using specialized skills and/or research facilities of CRO, sponsors can focus more on the “core skills” and the growing regulatory demand that are relevant to their products.

Compared to other types of biotech firms, CROs have much better success rate as business entities either as small privately owned companies or as large international corporations.  One of the important reasons is that CROs are less dependent on external funds such as VC than other biotech firms.  CROs may survive on the service fees when external funds are not available for expansion.  However, CROs usually do not request for the right of the potential intellectual property (IP) that may be generated from the services it provides. The matter of fact is that, most often, the part of the R&D project that CROs are involved are unlikely to generate any IP.  The fact that the CRO is unable to claim for the right of the IP that may be generated through their own activities is probably the most obvious “downside” of the CRO business, especially when IP rights after Bay-dole act are usually claimed by research organizations even if the research might had been sponsored by the other parties.  Therefore, CROs may be characterized as “low risk, low return” type of business and may be less attractive to investors who are looking for high return opportunities.

The global financial crisis may have created an opportunity for CROs to break the “low risk, low return” formula and enter the arena to compete for IP titles.  As the financial support for start-up and early stage biotech companies quickly reduce to the very minimum, the so-called “valley of death” would become more “deadly” .  As the result, new IPs are unlikely be developed to relatively maturation stages where the large and well-funded firms can see promising products and to invest further R&D efforts.  Soon will see a shortage of relatively mature biotech drug candidates to supplement the inheritably insufficient in-house R&D of the established biotech firms.  Having the infrastructures and funding in place for research and development, the profiting CRO may invest in early stage biotechnologies and seek for higher returns. CROs may not necessary become the replacement of small biotech firms, but an extra funding mechanisms for the desperate industry that is not on the “bail-out” list of the government.

Initiatives should be launched to invite CROs to invest in early biotechnologies.  It is a risky idea for CROs to invest in early stage biotechnology.  But the potential benefit of this initiative is not for CROs alone if “we” are seriously considering the challenges caused by lack of funds for early and small biotech firms.  Here, I define “we” as the local government and established biotech firms because the pressure won’t be on the small and vanishing biotech firms’ shoulders alone if “we” are not going to do anything about the development pipelines that will soon be more broken in the “valley of death”.

Then the question comes to how to invite CRO to the IP hunting arena.  The Maryland technology development corporation (TEDCO) had provided a good model by collaborating with Johnson & Johnson (J&J) to establish a co-managed funding agreement in 2005.  This funding awards seed biotech companies with funds to develop technologies that are potentially of interest for J&J.  TEDCO matches the J&J funds.  J&J has opportunity for equity investment as the technologies mature (reference 5).

To invite CROs to joint collaborative research agreement, funding should be established by pooling money from government and sponsor companies to fund part (eg. 2/3) of a specific R&D project.  CROs will identify and license the IP of interest and provide the rest (eg.1/3) of projected cost.  Collaborations of the like will significantly increase the pipeline portfolio of early stage technologies for the sponsor with reduced risks without significant increase in R&D costs.  CROs will obtain opportunities for generating IP assets without exhausting the profits earned from the contract works.

Local government, especially the state government, should take the initiative to invite CROs invest in early biotechnologies, not just to benefit CROs, but to stimulate the biotech industry and the economy of the state.  Historical data showed that states that paid more attention to the biotech R&D received more returns from the industry.  When the relative efforts in biotech R&D by states (national ranking of state expenditure in 2006) were plotted against the relative benefit received by states (national raking in patent number, VC investment, and NIH funding received), a clear positive correlation was seen between the state’s effort in R&D and the benefit the state received in a long run (Fig 2).  For instance, California invested $6.5 billions (13.6% of total U.S. investment) in biotech R&D, ranking number one in the U.S. in 2006, indicating the involvement and focus of the state government.  At the mean while, California received 24,293 patents between 2002-07 (nearly 20% of the national total), $20.7 Billion CV investment between 2002-07 (40.5% of national total), and $3.2 billion of NIH funding in 2007 (15% of national total), all ranked in number one on the national list.

State involvement and policy in biotech development play no doubt the most critical roles nurturing the growth of local biotech industry, including the CRO industry.  Investing $1.7 billion in biotech R&D, North Carolina ranked in number eight on the national list in 2006, and now hosts two of the world-top-10 public-traded CRO companies, Quintiles transnational corporation and Pharmaceutical product development, making $3.57 billion of revenue in 2008.  The state attracted capital investment from several internationally operating pharma/biotech companies.  Recently, Novartis announced to build a $267.5 million vaccine manufacturing and Merk announced a $100 million expansion on its vaccine facility in the state.  Constella Group, a private CRO company in Durham North Carolina grow from a statistical consulting service to a $200 million revenue-making bioinformatics firm in 2007 by assisting life-science clients.

In conclusion, encouraged and appropriately guided by the local government, CROs may deliver great value to the local economy.  It’s important to recognize that the value of a CRO does not only exist in the revenue it generating, but also exists in its readiness to help the biotech industry overcome the current financial challenges.

baofig2
Fig 2. The correlation between the state R&D expenditure and the returns (number of patents, VC investment, and NIH funding to the state). The colored trend lines are regression lines corresponding to the data points of the same color. The Y-axis is the national ranking of the state with smaller numbers indicating the top states. (data source: reference 6)

1. US Pharmaceutical Industry Report, 2008-2009: www.reportlinker.com/p0118600/US-Pharmaceutical-Industry-Report-
2. Business insights: www.globalbusinessinsights.com/content/rbcr0001m.pdf
3. Global market review: http://knol.google.com/k/krishan-maggon/global-biotechnology-market-review/3fy5eowy8suq3/16#
4. IMS health: http://www.imshealth.com/portal/site/imshealth/
5. Maryland TEDCO: http://www.marylandtedco.org/tedcoprograms/ fundingopportunities.cfm
6. Biotechnology Industry Organization: http://www.bio.org/speeches/pubs/er/statistics.asp

This is a student paper from the 2009 final projects in the NIH Foundation for Advanced Education in the Sciences’ TECH 366 — Biotechnology Management. The students were asked to tell a story based on the course lectures, and to expand with general lessons on biotechnology company management.

Discovering potential drug targets

Myung K. Kim

At the NIH, I am focusing on discovering potential drug targets in diseases associated with obesity and aging, and developing orally available, small molecule drugs against these targets with the potential to treat metabolic disorders such as obesity, type II diabetes and various aging-related disorders. The Tech 366 course helps to identify business/science issues for the future development of the compounds of our study.

Obesity is a major risk factor for developing Type 2 diabetes, heart disease, stroke, certain types of cancers and neurodegenerative conditions such as Alzheimer’s disease. The FDA now recognizes obesity as a disease. While there are many aging-associated diseases, aging per se is not considered a disease and one cannot get an FDA approval and validation for a treatment of a non-disease.

Exercise and calorie restriction (CR) produce many health benefits for the treatment and prevention of aging- and obesity-related illnesses, but most people do not exercise regularly and consume an excess of calories. Our drug candidates are thought to mimic certain beneficial health effects of exercise and CR at a low concentration, without requiring a change in exercise or eating habits, by activation of the kinase that we believe may control rate-limiting steps in the key pathways of the processes associated with aging and obesity.

Increased calorie intake and sedentary lifestyle have fueled the obesity epidemic in developed nations. Since 1980, the number of obese adults has doubled, and the number of obese children has tripled in the United States. Approximately 65% of Americans are now overweight or obese. One in three children born in the year 2000 will develop diabetes as a result of obesity. Another factor that affects obesity is age; an average American gains 1 lb per year starting from the second decade of life and the number of people 65 or older is rapidly rising throughout developed countries. The Centers for Disease Control and Prevention (CDC) estimate that by the year 2030, there will be 70 million elderly Americans, more than twice the current number. Additionally, the United Nations recently estimated that the world’s population over the age of 65 will reach two billion within 50 years. The aging and obesity in America and the rest of the world mean an increased demand for better compounds to combat those diseases and indications specific to the elderly or obese people.

One of the reasons for the lack of exercise in the elderly and obese people is that the capacity for exercise diminishes as age and obesity increase. Aging causes loss of mitochondria in skeletal muscles in lean and healthy individuals, the organelle that burns fat and produces energy, and loss of mitochondria increases abdominal fat accumulation and decreases physical stamina. As skeletal muscle loses mitochondrial function, the capacity to oxidize fat and generate energy during physical activity decreases, resulting in accumulation of fat, particularly abdominal fat. Therefore, a majority of people in developed countries is caught in a vicious cycle that is difficult to break; obesity and aging lead to a decline in physical fitness, which leads to physical inactivity, which further increases obesity. CR (calorie restriction), on the other hand, increases mitochondrial biogenesis and reverses many aging- and obesity-associated declines.

One of the hallmarks of aging is increased oxidative damage, including double-stranded breaks of nuclear DNA. We have found that the mitochondrial decline is driven, in part, by an enzyme that senses DNA-breaks. Our study proposes that this DNA-break sensing enzyme is responsible for aging and obesity in mammals, and that when used at a low concentration, the enzyme inhibitors reproduce many beneficial effects of exercise and CR such as induction of mitochondrial biogenesis in skeletal muscle and increase in insulin sensitivity in skeletal muscle and fat. The enzyme inhibitors also lower blood pressure and blood glucose level, reduce inflammatory signaling, improve memory and cognitive abilities and decrease anxiety/depression in mice. Overall, the enzyme inhibitors showed a reversal of obesity- and aging-associated loss of capacity in mice.

Because increased mitochondrial content could lead to increased oxidative damage, it is possible that repeated exercise may damage muscle and decrease endurance. This potential concern may not be a problem, because both the genetically modified mice deficient in this DNA-break sensing enzyme or mice treated with the enzyme inhibitors showed reduced serum lactate levels and increased endurance even after many days of repeated exercise, indicating that these muscles were not prone to damage by repeated exercise. Our work demonstrates that modulating this enzyme in muscle and fat could represent a novel strategy to increase exercise capacity and to reduce obesity-aging-related diseases.

With two-thirds of Americans said to be obese or overweight, a successful obesity drug could have huge sales. There is a need for better drugs because the existing ones are hampered by serious side effects. Anti-obesity drugs in the market operate through one or more of the following mechanisms; suppression of the appetite, increase of the body’s metabolism, or interference with the body’s ability to absorb specific nutrients in food. Some anti-obesity drugs have severe and often life-threatening side effects. These compounds carry a risk of severe psychiatric problems, high blood pressure, tachycardia, heart palpitations, closed-angle glaucoma, drug addiction, restlessness, agitation and insomnia. One of the drug targets for obesity is a serotonin-receptor affecting appetite. However, since eating and reproducing are absolute priorities in life, it is difficult to alter these pathways without causing serious side effects. Because of the safety concerns, developing a successful obesity drug appears to be a treacherous task. For example, Sanofi-Aventis, Merck and Pfizer all discontinued work on experimental obesity drugs last year because of concerns that the drugs, which all worked by similar mechanisms focusing on a serotonin-receptor, could contribute to depression and suicidal thinking.

The enzyme inhibitors in our study work by a different mechanism to induce weight loss and decrease anxiety/depression in mice showing no sign of psychiatric side effects. Also, there was no sign that the drug damages heart valves in mice. Mice treated with the compound ate more than the control group indicating that the compound would not induce a simple nausea which leads to weight loss.

Our initial goal is to get FDA approval of the enzyme inhibitors for the treatment of metabolic symptoms and abdominal obesity in overweight type II diabetics. If we take this out into the broad obese or overweight population which includes both pre-diabetics and diabetics as an anti-obesity drug, safety could become a problem once millions take this drug. We think that it would be better to start treating (abdominal) obesity and diabetes in overweight diabetics initially, which just about all type II diabetics are, to target a narrow segment of the population. This is based on our data that the enzyme inhibitors of our study improved all metabolic parameters in mice 1) by inducing weight loss; and 2) by directly increasing insulin signaling in skeletal muscle and fat.

Although there are many diabetes drugs on the market, there is no drug that can target both obesity and diabetes effectively. Weight loss is essential for the treatment of type II diabetes. Given that, the enzyme inhibitors of this study which can target both obesity and insulin resistance could provide an attractive treatment option. All diabetes drugs operate according to one of the following three mechanisms: stimulating insulin secretion from pancreatic beta cells, reducing glucose production in liver, or reducing insulin resistance in insulin-sensitive tissues (i.e., skeletal muscle, fat, liver). Among these, TZD  type drugs (rosiglitazone, pioglitazone), the insulin sensitizers, are known to induce a significant weight gain, because these drugs activate a transcription factor called PPARg that promotes fat cell formation. It is dangerous for diabetics to gain weight. Furthermore, when concerns were raised about the safety of rosiglitazone (Avandia, GlaxoSmithKline) in May 2007, many patients and doctors made the decision to discontinue use of the TZD type drugs. Rosiglitazone discontinuation left many diabetic patients without good control for their insulin resistance. For these reasons, we think that the enzyme inhibitors of our study can claim a distinct position even in the crowded diabetes drug market.

The trend in drug development suggests that one can sell something which does not cure a disease if one has a good enough argument that it can prevent a disease. For example, high cholesterol is not a disease, but six billion dollars is spent each year on cholesterol-lowering drugs. Obesity in general, abdominal obesity, in particular, is a major risk factor for many diseases such as type 2 diabetes, cancer and Alzheimer disease. Our hope is that we may be able to expand our trials to a broad obese population that includes pre-diabetics, based on the efficacy and toxicity data in the overweight type II diabetics. With an ever-increasing obese population, a successful obesity drug could have huge sales.

With these goals in mind, we are currently engaged in IND-oriented preclinical trials for the first-in-human studies. We are also treating animal models for Duchenne muscular dystrophy, which is an orphan disease, and are planning preclinical trials in various age-related diseases.

This is a student paper from the 2009 final projects in the NIH Foundation for Advanced Education in the Sciences’ TECH 366 — Biotechnology Management. The students were asked to tell a story based on the course lectures, and to expand with general lessons on biotechnology company management.

Financial opportunities for early stage biotech companies

Tammy Jones

One of the aspects of entrepreneurship that interests me is the process of early stage financing.  What are the options of financial backing and the advantages and disadvantages of these opportunities? There is a wide variety of financial support for early start-up companies.  The entrepreneur can obtain money through friends and family and him or herself.  Support is also available through Angel investors, incubators, Venture capital, federal and state funding. These investors are considered high risk investors because of their early stage involvement.  The company is high risk because the technology is in the development stage and there are no more academic resources this is also known as the “Valley of death”.   The investors fill in that financial gap so the company can remain productive in getting the product to market. The funding is allocated at different phases of the project. The money is not guaranteed from one phase to another.  To get to the next phase of funding, the company must show progress in the form of reports and also proof of concept.

Self and friends and family are the least recommended form of funding.  Because a return or a profitable return is not likely and a loss is guaranteed, friends and family are not a good alternative.  But sometimes it is the only alternative when your company does not interest other investors.  An example of this is Bonnie Robeson, founder of Spectrum Bioscience.  She used her own money and friends and family to partially fund her venture because her company did not have the appeal for big investors.

Incubators are programs that provide start-up companies with support in the way of resources, services and contacts.  Start-up companies that participate and complete the program are more likely to stay in business for the long term.  The incubator can provide space for very little rent.  They can also provide equipment, support staff and group rate for insurance which would help the company’s budget.  The amount of time the space is available is not indefinite, it usually is about 3 years and when the milestones are met for graduation.

Angel investors are another form of financing.  They are individuals that invest their own money and usually like to remain anonymous.  The funding usually ranges from $150,000 to $1.5 million. Angel investments are about $20 billion to $50 billion compared to $3-5 billion of venture capital investments per year in the U.S.  Angels expect a return in 5-10 years. The advantages of an angel investor are that it is easier to persuade an angel to invest in your company, due diligence is less involved and a lower rate of return is expected (smallbusinessnotes.com).  Our guest speaker, Ajoy Chakrabarti, senior director of Emergent Biosolutions, is an advocate for angel investors. He spoke about Angel groups which are individuals that pool their resources for investments.  They form groups in a certain specialized area.  This is good for a company in that specialized arena but it also means there will be more people to convince to buy in to your idea. Some feel angel groups are ad hoc VCs, because of the VC like behavior when dealing with entrepreneurial companies and they also have formed alliances of angel groups such as The Angel Capital Association and the Mid-Atlantic Investment Network were they exchange ideas and information.

Angels, as with other investors, expect certain things in return for their money and that ranges from a board position, weekly or quarterly reports, 5%-25% stake in the business.  They also request stock.  Some want the company’s convertible debt or redeemable preferred stock.  This is advantageous to the angel but not to the company because the company would have to repay the investment plus interest.  Angels may also request to be the first to opt out of the next round of financing and that the business can’t make certain decisions without approval of the Angel investor.  All of these requests are in part to protect their investment (smallbusinessnotes.com).

Technology Development Corporation (TEDCO) and the Center for Innovative Technology (CIT) are economic development organizations that provide state and federal funding to start-up companies.  TEDCO and CIT usually finance the company between phase I and II of the SBIR funding or when the SBIR ends completely and while the company is awaiting Angel or Venture capital resources.  TEDCO requires that the start-up have fewer than 16 employees and 50% of them must be employed in Maryland and the start-up is a university spin-off that is in business for less than 5 years and before the company sees a profit or it receives funding from other resources.    It awards up to $75,000 for early stage technology development.  The company is required to repay in the way of 3% of its revenue or 40% of the award over five years. Again, if there is a downturn in the economy, the repayment can be a problem.  The start-up company keeps the intellectual property and the commercialization rights of the technology when dealing with TEDCO (marylandtedco.org).  CIT offers business acquisition, commercial real estate financing, franchise financing, construction loans and business succession financing.  The amount of the loan is from $350,000-$10 million, financing up to 85%-90% and with terms up to 10-25 years (cit.com).

Federal funding is another avenue for a start-up company to obtain money. Government grant funding is given by way of the Small Business Administration through Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs. SBIR and STTR programs are given through federal agencies with over $100 million and over $1 billion, respectively, in their extramural research and development budgets. Both programs require that the for profit business have 500 or fewer employees, be at least 51% individually owned and controlled in the United States.  The differences are that the SBIR requires the principle investigator be employed at the company at the time of the award and the duration of the project.  The principle investigator may be employed by the research institution or the company for the STTR award.  Also the STTR requires that there be a CRADA between the company and the research institution where 40% of the work is performed at the company and 30% of the work is performed at the research institution (sbir.gov). Both programs are very good for small business.  The programs award money for phase I and II.  The funding amount in phase I, which is dedicated just to research, is between $70,000-$150,000 for 6 months from SBIR and 12 months from STTR. Phase II is focused on research and development and the funding ranges from $750,000-$800,000 and in some instances $1 million.  Phase II bridge provides funding of $1 million/yr for 3 years and this is to fill in the financial gap between phase II to product commercialization.  The downside is that other aspects of the company such as the protecting and growing the company’s intellectual property are neglected.

Venture Capital (VC) provides funding to early stage biotechnology companies in late phase II and early phase III. Venture capital usually comes from institutional investors and high net worth individuals pooled together by investment firms such as Toucan Capital. The return usually comes in the form of IPO or sale of the company in 2-3 years.  This is seen as a disadvantage and quite stressful to some entrepreneurs who feel rushed into going public or selling their company.  Another disadvantage is the entrepreneur will no longer have 100% ownership of the company, the VC takes a percentage.  In order for a company to get the attention of a VC, the firm must believe that the company will operate in a billion dollar market and have potential to make $100 million in sales in five years and be sold for $400 million, the exit, (allbusiness.com).  Because of such high standards, many good start-up companies can’t get VC funding such as Spectrum Bioscience. It is a service company providing a much needed service and it doesn’t meet the criteria of a VC. Once the company has VC funding, an advantage of the funding is that it allows the business to expand and not be pigeonholed into just research and development.  The company also can get management support to guide the product to market.  Another is that it is not a loan that needs to be repaid.

Depending on the entrepreneur’s objective for the company, venture capital and federal funding are both good ways to get start-up money but because of the criteria to receive federal funding it is impossible to receive both simultaneously. If the company is 51% or more owned by VCs, then the company can’t qualify for federal funding, SBIR. Venture Capital has been at odds with the SBA for years because of the restrictions placed upon the grantee.  Venture Capital firms think this restriction is foolish and it adversely hurts the government and the tax payers because VCs are funding the more promising start-ups and the less promising start-ups are getting SBIR money.  This is perceived as such a problem by venture capital firms that the National Venture Capital Association and the Biotechnology Industry Organization got the House and Senate involved to change the restrictions (bostonvcbolg.typepad.com). As it stands currently, the house supports the VCs and the Senate favors some restrictions to VC owned companies (bizjournals.com).  An informal poll taken showed that about 80% of small companies were opposed to large VCs owning and controlling small businesses competing for SBIR funding (zyn.com). If this movement is successful, the question that comes the mind of many early stage companies seeking financial backing is will there be enough SBIR money available for non-VC funded start-up companies?  Jonathan Cohen, CEO of 20/20 Gene Systems, a guest speaker, is opposed to the elimination of the restrictions because VC funded companies would have an unfair advantage over early start-up companies. VC companies are more established and more likely to succeed and a company just starting out hasn’t had the opportunity to establish themselves and the SBIR funding is for that purpose.

The entrepreneur must know the criteria when dealing with these various finance opportunities. The entrepreneur/founder must know when and how much control they want to relinquish, as in running the company or the company going public when dealing with Venture Capital firms. Federal funding and Venture capital provide money that does not have to be repaid but the trade off is that the 51% requirement of both entities makes it difficult for the entrepreneur, leading to the SBIR, VC controversy.    Angel investors seem to be the more persuasive and lenient, even though they do have expectations, but as the economy tightens so does the angel investors’ money as well as the other investors.  The company must leave the Incubator after graduation or maybe before if the benchmarks are not achieved but the company has longevity after leaving. With TEDCO and CIT, the company has to repay the money but it can keep IP rights and ownership. The opportunities of early stage financing have its pros and cons attributed to them.  The entrepreneur must find what is appropriate for them.

Guest content from John Avellanet, managing director and principal of Cerulean Associates:

Solving the FDA Crisis

John Avellanet

By John Avellanet, Managing Director and Principal of Cerulean Associates LLC

News of the latest crisis under the FDA’s watch – salmonella contamination and the peanut plant in Georgia – has all the usual suspects calling for increased inspections and hiring more inspectors. It won’t work. With all the money from the US bailout, the FDA could permanently station inspectors at every single biotechnology building, food processing plant, pharmaceutical site, and medical device factory in the US. And we would still have the problems we have today…only at an $800 billion price tag.

To solve the underlying issues we need an approach that will cost less, will strengthen our safety (especially as we enter the era of personalized medicines), and yet will still allow innovation and a level competitive playing field. This strategy will also need foresight – not only to expect that events will occur in the future that will challenge this solution – but to assume that without satisfying the public outcry when something does go wrong, the strategy will not last, and we will again be revisiting the “solution” when the next crisis du jour occurs. Put simply, we need a solution that can be applied with such tenor that it will “leave the people at once satisfied and stupefied” (Machiavelli, The Prince); we need stricter, harsher penalties.

The False Premise of More Inspections

As anyone with real-world experience in quality systems, information technology security, records management, or corporate espionage knows, you can have the best written rules in place, everyone trained, and auditors and inspectors in place, active, and auditing away, recording and documenting each transgression. So what? If the penalties are just a slap on the wrist – or in some places I’ve seen, a friendly chat – the transgressions will continue.

Malcontents and people who are ethically-challenged are always to be found. When I give talks and workshops on corporate espionage or quality systems compliance, I always review the four key reasons people do not follow rules: money, ego, ideology, or coercion. How does stationing an inspector at every building stop these motivators?

The reality is simple: for some people, just having the risk of getting caught is not enough. For these individuals, the risk of getting caught needs to be combined with the penalties for being caught, and together this must outweigh any perceived benefits to not abiding by the rules. And it is for these people that rules, regulations, policies and punishments are designed.

So if hiring more inspectors and increasing the frequency of inspections will not work, what will?

An Example that Works

All of us know the incredible annoyance of the telephone ring at dinner time as the telemarketers begin their evening onslaught. Thankfully, my children are growing up in a world where this does not occur. Is it because the telemarketing companies suddenly discovered that kindness and consideration preclude them from calling during family time?

Or is it to do with the National Do No Call registry? Think about it. By itself, the registry is just a big list. Again, so what? Just because you and I can put our names on a national Do Not Call registry does not really keep the telemarketing calls away, does it? Instead, the power of the registry has to do with the coupling of strict, harsh penalties associated with violating the rules.

And the penalties are simple and severe: $11,000 (USD) per sales call.

Ultimately, this is why the Do Not Call registry works – its teeth are both satisfactory and stupefying. It is satisfactory that people who knowingly violate the law have to pay so much. It provides us, as the consumers, the impetus to gleefully file complaint paperwork. And the penalty is stupefying. Would you like to pay $11,000 out of your pocket for a misplaced call? Or would that make you do everything within reason to avoid the misplaced call (and its associated penalty)?

So why is it that we’re willing to take this approach to stop a few phone calls every evening, but for products that enable us to actually live – food and medicine – we only suggest increasing the number of monitors?

The Way Forward

The FDAAA of 2007 took tentative, baby steps in the right direction. As attendees of my January teleconference, Bulletproof Yourself Against FDA Enforcement in 2009 (http://www.ceruleanllc.com/seminars), are quite well aware, the use of civil monetary penalties was expanded beyond just device makers, and the agency was given several powers of enforcement that it had long argued in the courts it required. Under the possible roadmap of the Do Not Call registry, however, the FDA is still sorely lacking in its ability to levy penalties against those executives and companies who do not produce safe products. And as we move from the one-size-fits-all medicines of the 20th century into drugs tailored specifically to your or my genetic makeup, product safety needs to be much, much higher on our priority list than stopping a telemarketing call or two.

There are three steps we can take to ensure a more consistent degree of safety in the products we get from companies under FDA jurisdiction:

1. Increased Penalties. Penalties for violation of FDA regulations and laws need to rise to at least the level of Do No Call penalties. Today, a firm receiving a Form 483 inspectional observation has no real penalty; only if the observed deficiency is “grossly deficient” will the company even risk being temporarily shut down until the deficiency is resolved. How effective would the Do Not Call registry be if instead of the $11,000 fine per call, it was only a “gross deficiency” of not following the registry that might cause the telemarketing firm to be temporarily stopped from making calls until they agreed to not call anyone on the registry? Instead, under a stricter approach modeled on the eminently functional Do No Call registry, a firm receiving a Form 483 inspectional observation might be assessed an $11,000 fine per observation; this would not be immediately due – rather, the firm could have the same process that exists today to head off a warning letter (e.g., fix the problem within a defined time period). If the firm does not fix the observation to the agency’s satisfaction (no different than today), then the warning letter is issued along with a penalty statement explaining that for each item listed on the letter, the firm is required to pay $11,000 per day until resolved. The firm would also be required to hire an independent third-party to inspect and certify that the violations were resolved.

2. Increased Incentives. At minimum, incentives for whistleblowers, consumers, healthcare providers, and even other non-FDA inspectors (customs agents, state food inspectors, etc.) need to be increased to encourage the filing of substantiated claims. For instance, we could look at the financial incentives from Sarbanes-Oxley as a possible model; a whistleblower of an FDA-regulated company whose allegations were proven correct could receive 10-30% of the levied fines as a thank-you for helping to protect the public.

Lest the incentives are all seemingly against firms, positive reinforcement should also be granted. At a minimum, rather than just publishing the list of firms who’ve demonstrated poor controls in its weekly enforcement reports, the agency can note firms who successfully passed inspections or otherwise adequately resolved previous issues. As shareholders increasingly agitate against executives who delay product launch because of FDA noncompliance, this type of public commendation can be a positive tool for executives seeking increased funding or new product approvals.

3. Strengthened Early Inspection Triggers. Today, the agency inspects firms for one of three main reasons: routine (also known as “surveillance”), for cause (such as a whistleblower complaint or adverse event or recall), and pre-approval. Pre-approvals are generally undertaken when a company files an application to sell a product in interstate commerce (pharmaceutical companies, for instance, file an NDA or ANDA). For medicines – including medical devices – a pre-approval inspection should also regularly occur when a company wants to start clinical trials. For foodstuffs, state agencies are the main inspectors, with the FDA chronically understaffed in this area. While state agencies should continue to play their role, the rules could be strengthened to force first-time manufacturers and processors to undergo a joint state-FDA inspection prior to allowing the product on the marketplace.

There are other items as well that would strengthen the incentives for making safe, efficacious and quality products while lowering taxpayer costs. Congress can encourage the FDA to expand the current joint inspection pilot programs with authorities in Canada, the EU and Australia to cover all medicinal products and foodstuffs. The agency can be more accepting of third-party and ISO-based inspections to stand in for nominal risk products (such as most Class I devices and foodstuffs).

Final Thoughts

Under this strategy, the FDA would need to publish a clearly defined baseline of inspectional criteria that will trigger the stricter penalties (much as the Federal Trade Commission publishes the clear list of criteria that will trigger the Do Not Call fines). Such a baseline would need to spell out that for the vast majority of – if not all – companies, inspectional observations such as “insufficient conveyor belt clearance” would not initiate a penalty unless other thresholds were also triggered; on the other hand, executives who decide to repeatedly test their product for the presence of contamination until they hit upon the “right” test and then pronounce their product “safe”, could be assured of painful consequences that would stupefy them and satisfy the public. The simpler and clearer the rules, and the stricter and swifter the penalties, the greater the adherence.

No regulatory schema or enforcement program is perfect; someone who values money, ego, ideology or coercion enough will eventually break the rules. But just as under the Do Not Call registry, this rule-breakage is extremely rare, so too should be the rule-breakage of FDA-supervised products. The question we face is ultimately one that asks us to choose between priorities: are good medicines and safe food more or less important than skipping a few telemarketing calls this evening?

Are you ready?

About the Author

John Avellanet is the founder of the regulatory intelligence and lean compliance program for executives and business owners, SmarterCompliance™. He is the author of more than 30 articles on lean compliance and quality systems, a contributing author to the book Best Practices in Biotechnology Business Development (Logos Press), the publisher of the SmarterCompliance™ newsletter, and a frequent speaker with FDA officials.

He can be directly reached through his independent advisory firm, Cerulean Associates LLC, on the web at http://www.ceruleanllc.com.

Guest content from Sandy Graham, managing partner at Sequoyah Associates:

A Business Plan is the single most important document you will develop in establishing and growing your business. How your business plan is developed is certainly up to you. Either you can take the time to develop your plan, or you can work with one of many professionals and organizations that provide business plan services from development to review. What is important for you to understand is that a business plan is required by commercial lenders, venture capitalists, individual investors, franchisors, and the Small Business Administration (SBA). So, not only do you need a business plan to map out the roadmap for business success, it is a major requirement for obtaining a business loan.

The SBA reports that:

50 percent of all small business fail after their first year, 33 percent fail after two years, and nearly 60 percent fail after four years.

Reasons for failure cited by the SBA include: over expansion, poor capital structure, over spending, lack of reserve funds or too little free cash flow, failure to adjust to market changes, underestimating competition, poor business execution, poor business location, and an Inadequate business plan.

Fundamentally a business plan should:

  1. Define your opportunity, product/service including keys to success and risks
  2. Provide an analysis of your market
  3. Detail your competition
  4. Lay out your marketing plan and strategy for acquiring customers/clients
  5. Identify key management, and what their roles will be
  6. Provide important financial information

A general outline you can follow in developing a business plan follows. While there may be many versions of this outline, if you are seeking or interested in an SBA loan, this is the outline they prefer.

I. Executive Summary

II. The Opportunity

a. Description

b. The Product

c. Keys to Success

d. Risks

III. Market Analysis

a. The Market

b. Market Differentiation

IV. Competitive Analysis

V. Marketing Plan

a. Objective

b. Approach

VI. Management Team

VII. Financials

a. Business Objective and Funding Needs

b. Source and Use of Funds

c. How Loan Is To Be Repaid

d. Financial Assumptions

e. Estimated Financial Statements

1. Income Statement

2. Cash Flow Statement

3. Balance Sheet

4. Key Financial Ratios

i. Current ratio

ii. Total debt ratio

iii. Profit margin

Sandy Graham is Managing Partner at Sequoyah Associates, with over 20 years of progressive senior level experience with some of our Nation’s leading organizations and Fortune 50 companies, as well as new ventures and small business enterprises. His experience includes business strategy, planning and development; new business solution development and delivery; client services delivery; and engagement management. Sandy’s academic credentials include an MBA and an MS in Economics, and is a recipient of the Ewing Marion Kauffman Foundation Internship in Entrepreneurship. In addition, he is a contributing author on Free Cash Flow. Since 2005, Sandy has been driving winning business strategies that have met client needs using consultative, coaching and advising skills to deliver the right business solutions for the small business firm and new venture enterprise.

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Guest content from John Avellanet, managing director and principal of Cerulean Associates:

Intellectual Property Theft on the Rise

John Avellanet

By John Avellanet, Managing Director and Principal of Cerulean Associates LLC

Reprinted with permission from SMARTERCOMPLIANCE™ 2(9): p 1-2 (September 2008)

Nine out of ten companies do not have appropriate policies and controls in place to stop employees, contractors or partners from walking out the door with intellectual property and trade secrets.

For those of us who’ve spent much of our careers helping prevent corporate espionage, the July report by the not-for-profit IT Policy Compliance consortium comes as little surprise.

Protecting Information

Passwords and patents do not make your company’s information and discoveries any more secure than locks and labels make your home and its belongings safe from theft.

Carnegie Mellon University’s CERT research think tank has followed information theft for decades and has come to two eye-opening conclusions:

  • · Most confidential information theft comes from people you know—employees, contractors, suppliers or even partners (especially for co-developed products); and
  • · More than 30% of this type of theft comes from people working in your computer department (IT/ICT).

Given all the security efforts around stopping outsiders when the real risk lies within, is it any wonder that 90% of businesses do not have any way to stop—much less even detect—intellectual property (IP) and trade secret theft?

Improving Your Chances

Before we even get down to work on reasonable trade secret controls, I give my clients a brief set of “yes/no” questions to answer on their own.

These questions are straightforward and easily answered in less than 30 minutes. For instance, “Do you have a ‘clean desk’ policy for sensitive or confidential information?”

The goal of these questions is to help my clients quickly outline their weaknesses—and their strengths. In this way, we can quickly shift into discussing solutions.

And while many executives need the more detailed audit with its prioritized recommendations, keep in mind that a half-dozen quick-fixes implemented now can stop today’s disgruntled employee or frustrated contractor from sabotaging your work.

Two Quick Fixes to Take Today

Ask yourself, What documented proof do we have that our policies are being followed?

For instance, a typical “clear desk” policy requires personnel to clear their desk and office area of confidential information before they leave for the day, locking it in a file cabinet, turning it back over to the document specialist for filing and so on.

When companies state they do this, my reaction is always to be skeptical. How do you know this is actually being followed?

If your people turn sensitive material over to an archivist, that individual should have log files that can be reviewed.

However, what proof do you have that people are clearing their desk and securing their office area?

A simple way to test this is to simply stay late one evening and walk around, from cubicle to cubicle, office to office. How many documents do you see labeled “confidential” or “private” or “trade secret” sitting out? How many documents do you quickly recognize that should be labeled “confidential” or “trade secret” (such as product drawings or formulations) but that aren’t labeled and aren’t put away?

Then, take the next step. Ask your internal auditors (or hire an outside independent auditor) to include this in their regular audit routine. Assuming no other extenuating circumstances, I usually suggest my clients audit this once or twice a year (perhaps more for habitual “offender” departments).

Final Thoughts

I’ve made a free version of my intellectual property and trade secret security checklist available for download. You can use this to quickly assess your strengths and opportunities for improvement.

You can get your free PDF copy here: http://www.ceruleanllc.com/biotechblog

Are you ready?

About the Author

John Avellanet is a former Fortune 50 subsidiary C-level medical device and biotechnology executive where he created, developed and ran his firm’s Records Management and IT departments, and was directly accountable for trade secret protection. In 2006, he founded his independent consulting firm, Cerulean Associates LLC (www.ceruleanllc.com) and has since become one of the leading experts on trade secret and corporate espionage protection for biotech, pharmaceutical and device companies.

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.

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.

Guest content from Christopher Starr:

After years of confusion and neglect, translational research is now becoming institutionalized.

Citing the barriers between the lab and clinic, along with the difficulties and complexities of conducting clinical research, the NIH set up a major program to advance clinical and translational research. The Clinical and Translational Science Awards consortium, or CTSA consortium, was launched in October 2006. Its aims are no less than to “catalyze the development of a new discipline of clinical and translational science.”

The CTSA consortium consists of major academic health institutions, like the Mayo Clinic or John Hopkins University, who are given large grants by the NIH. The grants are used to develop centers for translational and clinical research. These centers set up graduate programs and advance research in a variety of ways, including developing partnerships with industry and other private and public institutions. By 2012, 60 institutions will be “linked together to energize the discipline of clinical and translational science.” The NIH is not skimping on this initiative, as it plans on funding the completed program to the tune of $500 million per year.

Although “translational research” is a varied term, the CTSA will mostly focus on research that is relevant to industry. According to an article by Steven H. Woolf in the Journal of the American Medical Association (JAMA), two major areas have been defined, called T1 and T2. T1 is more applicable to industry, as it involves “the transfer of new understandings of disease mechanisms gained in the laboratory into the development of new methods for diagnosis, therapy, and prevention and their first testing in humans.” T2 involves “the translation of results from clinical studies into everyday clinical practice and health decision making.” The CTSA program seems to mainly focus on T1.

Although the CTSA program is young, there have already been examples that show how partnering with CTSA researchers can benefit pharmaceutical companies. One is the Yale Clinical trial network, which should streamline and improve the clinical trials process for the companies that are part of it. Among other goals, the network will remove barriers to clinical trials and promote trial participation. There is also at least one example of a cross licensing agreement between a CTSA funded researcher and industry. Dr. Daniel Rader, at the University of Pennsylvania, took advantage of his university’s CTSA to develop an MTP inhibitor that was very effective in treating a rare disease called familial hypercholesterolemia. Seeing the potential of lower doses of the drug to treat patients at risk of heart disease, Aegerion Pharmaceuticals is developing the drug for this purpose.

CTSA consortium grants work as individualized cooperative agreements between the NIH and the grantee. This means that each CTSA institution will be organized differently. Individual CTSA’s will have varying degrees of openness to participants from industry. However, the ones that are very open to industry participation present extensive opportunities. One example of an industry-friendly CTSA is the Institute of Clinical and Translational Sciences (ICTS) in St. Louis. According to their website, individuals from companies that collaborate with an ICTS-affiliated academic researcher can register for ICTS membership. Benefits of membership include access to research facilities, access to consulting services, and increased potential for further collaboration with ICTS-affiliated academic researchers.

Further information, including a list of all current CTSA institutions, is available at www.ctsaweb.org.