Megafunds as an avenue to boost drug development

Monday, April 4, 2016

With skyrocketing drug development costs and increasing pressure on traditional resources, creation of private megafunds to boost drug research seems to be gaining more traction.

A recent initiative is an $866 million development fund established by Mitsui & Co., contract researcher Quintiles and other investors. The new private equity fund will invest mainly in drugs from major U.S. and European companies that are in phase III clinical trials, particularly cancer therapies and treatments for central nervous system disorders.

“It certainly seems to me that there is more money chasing drug development in different ways than there has ever been,” observed Michael Martorelli, a director at the investment banking firm Fairmount Partners. “What’s different is that these kinds of partnerships are being formed to invest not in companies, but in products.”

Mitsui, a Japanese trading house, contributed $150 million to the fund. Quintiles has committed $20 million, with overseas investors such as pension funds putting up the rest. The fund, NovaQuest Pharma Opportunities Fund IV, is being overseen by NovaQuest Capital Management, a Mitsui affiliate created from Quintiles’ fund management operations.

Although neither Mitsui nor Quintiles were available to comment on what Quintiles described as their investment strategy, details of the fund indicate that individual projects could receive up to $200 million, and drugmakers will retain full ownership of their products. The drugmakers will compensate the fund if the trials succeed, and a separate payment based on market sales also could be included in some contracts.

Easing the cost burden of pharmaceutical development has been a burgeoning concern. A study by Tufts University reported that development of a prescription drug that gains market approval costs an estimated $2.6 billion, when factors such as drug failures and exploratory expenses are included.

Drug development in areas such as nervous system disorders, where revolutionary treatments have yet to be found, often brings high costs associated with research setbacks. The risk of backing any one compound is great, but megafunds can sufficiently de-risk investments while generating returns.

“What’s so interesting now is that the old model, where one company can bring a product all the way from the laboratory bench to the marketplace, is gone,” said Kenneth Kaitin, Ph.D., director of the Tufts Center for the Study of Drug Development. “The most significant shift we’re seeing in the landscape is the move to strategic partnerships and other types of collaborative arrangements, where companies can not only share the risk but also leverage knowledge and resources across all stakeholders.”

The scale of new drug research is becoming larger every year. The Tufts report attributed rising costs to factors including increasing clinical trial complexity, larger trial sizes, inflation in the cost of inputs taken from the medical sector that are used for development, and possibly changes in protocol design, among others. At the same time, the success rate for new drugs today is less than 12%, according to Tufts, compared with 21.5% in 2003.

“Getting a medicine through the development process and into the marketplace is a formidable challenge,” Kaitin said. “In some areas, such as Alzheimer’s and central nervous system disease, the technical challenges are so enormous that even though there is a significant market out there, a lot of companies have decided this is not a risk they can absorb by themselves.”

The NovaQuest Pharma Opportunities Fund IV is not the first investment affiliation between Mitsui and Quintiles. In 2013, they joined with other investors to create a $459 million drug development fund. Ten drug candidates under development at Takeda Pharmaceutical, Shionogi and elsewhere have been given funding. The fund is already recouping part of its investments.

“Spreading out the risk and spreading out the commensurate reward makes sense,” Martorelli said. Private equity funds “give a broader range of companies, institutions and investors of all kinds an avenue to help fund drug development. Pension funds out there would not in a million years invest in a startup company to fund the risky development of a drug that’s going to cost $2 billion to develop, but they will put some money into a fund like this, to share the risk and reward.”

Collaborative megafunds continue to grow strong roots overseas as well. Last year, the U.K. Secretary of State for Health announced the creation of a $100 million new venture capital fund dedicated exclusively to dementia research, with contributions from the British government, Alzheimer’s Research U.K. and five major pharmaceutical companies.

In January 2016, a unique collaboration between AstraZeneca, GlaxoSmithKline, Johnson & Johnson and three universities in the U.K. formed a $57 million joint venture called the Apollo Therapeutic Fund to support the translation of promising discoveries into new drugs for a broad range of diseases. That same month, the international investment group Abingworth announced the creation of a $105 million development fund to support certain phase III trials.

“Requirements and challenges that decrease success and increase costs are leading the industry to look for other funding models,” Kaitin said. “The key is to de-risk the drug development process through alternate funding sources and collaborative strategic relationships.” 

 

This article was reprinted from Volume 20, Issue 13, of CWWeekly, a leading clinical research industry newsletter providing expanded analysis on breaking news, study leads, trial results and more. Subscribe »

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