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Second-Generation Proteins

This article was originally published in Start Up

Executive Summary

A steadily growing group of companies is using a variety of technologies to help shorten the path from platform to product company by creating improved versions of known and, in some instances, already marketed therapeutic proteins. Companies like Neose, Genencor, Applied Molecular Evolution and Maxygen, hope that by starting out with molecules already known to possess therapeutic properties, they can reduce the risks normally associated with drug discovery and development. The technologies employed by these second-generation protein players vary widely: from new methods, like directed evolution, to refinements of older ones such as glycosylation modification and PEGylation. And their business models run the gamut from a pure human therapeutic focus to the use of protein engineering in agriculture, industrial chemicals, as well as health care. But the fact remains for each of these companies that, whatever the improved odds for success afforded by second-generation protein work, they're still in a very risky business where more than half of their programs will fail. And, at least when it comes to the small universe of already marketed drugs, there will be plenty of competition among the companies. Still, there may be plenty of lucrative service opportunities to go around, as biotechs desperate for pipeline diversification, and with money to spend, look for ways to fully exploit the potential of their protein drugs.

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The New Pharmaceutical Sciences

Now that several waves of novel discovery technologies have failed to deliver promised efficiencies, pharmaceutical sciences once dismissed as boring are attracting increasing numbers of admirers. Appreciation for the practical is easing the way not only for precedented disciplines such as drug formulation and delivery, but also for utterly new technologies that offer solutions to specific R&D problems. Start-ups today know they bear a high burden of proof. Some have been hunkering down to get evidence they hope will in time convince skeptics and increase the value of their offerings, while others are agreeing to demonstrate their worth via pilot programs. Emerging start-up models are enabled by two key factors: huge stockpiles of venture capital and an expanded audience of potential partners-namely, big biotech and specialty pharmaceutical firms that are relatively wealthy and hungry for products.

Genencor Returns To Its Roots

Genencor is using many of the same technologies which helped it become a leading producer of industrial enzymes to build a health care business. But in running a profitable industrial operation along side an unprofitable, resource- consuming biopharmaceutical unit, the company faces the challenge of effectively managing two distinct business models under one roof, while maintaining investor confidence during a transitional period. Although the company's management acknowledges that they may eventually have to split its health care and industrial businesses, they are now seeking to take advantage of the scientific synergies between the two to create a diverse, yet focused portfolio of near- and longer-term opportunities. They are also attempting to use the protein engineering expertise previously applied in the industrial setting to reduce the risks and shorten the timelines typically associated with drug development by making improving others' inventions, for example, creating next-generation versions of late stage--or even marketed--therapeutic proteins.

Terra Infirma: Pharma Dealmaking 2001

With Big Pharma still trying to figure out how to create productive businesses from their mega-mergers, most of the year's high-value M&A saw biotechs buying late-stage or marketed products. But these biotechs are also, with the risk of development failure ever clearer, actively in-licensing and acquiring products and product-creating technologies in order to diversify what are often single-product portfolios. Unlike many Big Pharmas, these companies have been willing to improve existing chemical entities, often exploiting drug delivery and other pharmaceutical sciences. Meanwhile, large companies focused on late-stage in-licensing, in part because they couldn't afford acquisitions--given the valuation disparities between large companies and small ones with valuable late-stage products. Nonetheless, while more affordable than acquisitions, the high price of these deals has transferred the majority of the regulatory and commercial risk to the licensee. As for the early-stage side of the biotech industry: platform companies have not been able to sell their discovery technologies at anything like the prices they expected; as a result, many of them have merged in an effort to create product-focused discovery operations.

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