NextWave of Pharma Innovation?

Posted November 8th, 2012 in Exits IPOs M&As, Pharma industry

Medical innovation is the key to addressing the big unmet needs in neurodegeneration, metabolic and heart disease, cancer, among many other conditions.  Not only do new therapeutics and devices aimed at this diseases offer clinical promise, but they also can provide significant health economics benefits.

This combination – clinically meaningful advance coupled with sound economics – is what those of us in the life science R&D funding ecosystem focus on every day.  On the venture side, figuring out how to generate returns from medical advances requires us to innovate both with regards to products and business models.

Pfizer’s recent acquisition of NextWave Pharmaceuticals sparked my interest in exploring this topic of innovation.  As many of you probably saw in October, Pfizer announced it was purchasing NextWave for $255M upfront and up to $425M in earnouts if sales milestones are met.

Founded in 2004 by Mahendra Shah in concert with Vivo Ventures and Sofinnova Ventures, NextWave was initially focused on developing more than 25 products leveraging various liquid and combination delivery technologies.  They raised a $10M Series A in 2005, a $40M Series B in 2007 led by Aisling Capital and Fidelity (which we looked at), a bridge round in 2010, and a $45M Series C in early 2011 led by Panorama and Bay City along with Kearny Venture Partners.  This recent financing also focused the company onto just a pair of lead programs rather than a large basket.

Kudos to all of those involved.  After ~$105M was invested over the past 8 years, the venture investors will likely see a 2-3x return upfront and a path to significantly more over time.  If some of those milestones pay out, this is certainly a top quartile deal outcome.  Beyond the interesting financials, I see three other pieces of good news worth highlighting from this deal.

First, it represents the successful exercise of an option-to-buy deal structure.  Pfizer put in a $20M option earlier in 2012, and upon approval exercised their pre-negotiated right to purchase the company.  Always good to see those deals play through the way we hope.

Second, and a related point, during the option period Pfizer collaborated extensively with NextWave to ensure a good outcome (approval with the right label) and an appropriate manufacturing plan was in place.  Witnessing successful big-small company partnerships is also a good thing, especially given how challenging joint efforts can be.

And third, this deal was done by Pfizer’s Established Products business unit.  Unlike the Primary Care and Specialty business units at Pfizer, this business is supposed to be where old products go to die on the tail of their lifecycle.  Yet this group has been remarkably creative in how they structured the deal with NextWave and worked to a great outcome.  Unexpectedly innovative business units and their strategies should be celebrated and rewarded.

But let me now share my broader concern and where my enthusiasm for the deal dims: why is Pharma spending hundreds of millions for a reformulated 50-year old molecule, methyphenidate, in a world where healthcare costs are spiraling out of control?  At a time when Pfizer is cutting its internal R&D budget and missing out on innovative BD deals (i.e., they aren’t one of the top buyers of innovation these days, or known as a preferred strategic partner in the biotech world), why are they going to fork out up to $700M for a liquid version of Ritalin?

To counter the criticism that I might be shortchanging the story, lets look at the market and the product, Quillivant XR.  Methylphenidate (Ritalin) went generic ages ago and is widely used to treat Attention Deficit Hyperactivity Disorder or ADHD in children and adults.  ADHD is a serious medical condition and I’m all in favor of diagnosing and treating it to help those who suffer with it.  In the Ritalin-related armamentarium for ADHD, there are pill forms for once-daily and twice-daily use.  There are chewable tablet forms for those kids that can’t swallow pills.  There are even liquid forms for those kids who prefer drinking fluids, albeit prior to Nextwave these were only twice-daily versions as far as I’m aware.

This is where Quillivant XR comes to play.  It’s a once-daily liquid formulation, based on innovative liquid delivery technology from Nextwave’s partner Tris Pharma, NextWave.  Its interesting technology for sure – attractive extended release profile, stable across food effects, less nighttime disruption when given in the morning, etc – and offers parents with kids who don’t like pills a nice incrementally improved alternative.

The big question is what should we – and we all are paying for it in our insurance premiums – pay for this type of product advance?  Is it worth a significant price premium over all the generic alternatives?  For a parent with a child who doesn’t like pills and wants convenience with effectiveness, a once-daily liquid would be great – especially if health insurance pays for the bulk of it.  But should this narrowly differentiated improvement demand a big premium over other ADHD alternatives, especially generics?

Apparently Pfizer must think so.  To justify the price tag Pfizer paid, they must have a forecast above $500M at peak sales.  And to get to these forecast numbers amidst a sea of generics and competing ADHD franchises (like Adderall), the price has to be an order of magnitude, or more likely two orders, higher than generic or even branded generic versions.

That’s hard to stomach at a time when the fiscal cliff of healthcare costs looms large.  It’s obviously great for Pfizer to get an approved product with $500M+ in top line revenues that they can drop into their sales rep’s bags, and their option-to-buy structure derisked the bet enormously for them.  So for each individual Pharma company, acquiring this type of incremental, marginal product may make sense to their P&L in the near term.  Wall Street will likely reward them.  But for the healthcare ecosystem, is this really worth it?  I’m doubtful.

The question I keep coming back to: where’s the commitment to real biomedical innovation – focusing on high impact, clinically-meaningful advances with unquestionably positive health economics?

A second order consequence of deals like this is that, reflecting the herd mentality of many venture investors, these deals channel more risk capital towards these less innovative, more incremental medical advances.  I’ve already heard VCs talking about “NextWave 2.0”.  I wish them luck, and hope they make money off the deals.  Returns will help the asset class as a whole.  But I’ll remain on the sideline on this “2.0” thesis, and focus on real innovation solving big medical challenges.

The NextWave flavor of specialty pharma reformulation play was in vogue back in 2005-2007, where lots of similar reformulation plays were funded (e.g., Zogenix, Alexxa, Alimera, Cogentus, Horizon, etc).   Atlas did some as well unfortunately.  But given the challenging returns in that space, I had hoped the model had run its course.  The number of truly early stage deals (see blog here) suggests that the recent tide is moving towards more meaningful medical innovation.  And fortunately, funding the latter type of play still pays dividends when done well: great returns have been achieved in deals like Avila, Stromedix, Amira, Plexxikon, BioVex, Intellikine, and many others focused on cutting-edge innovation.

In the capital markets, where companies and their projects compete for funding, I’m hopeful the winners in the long run will stand on the side of real innovation.


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  • JK

    You make a valid case here, but couldn’t the same question be raised about any cancer drug approved within the last 15 years that costs the system $60-120k per year and prolongs survival by the next best drug over a mere 2-3 months? These cancer drugs are “innovative” (at least some of them) but their price tag dramatically overstates their true value. The reason, of course, is that neither Medicare nor private payors consider cost-effectiveness when reimbursing a drug. It’s a backwards system that will likely undergo significant change over the next 2-5 years once people wake up to what’s going on.

  • Bruce,
    I can appreciate your point of view that investing in reformulations of old drugs uses capital that could be better spent on advancing novel treatments for critical indications. I have an opposing point of view on old reformulations.

    When we take on a program to reformulate an old drug, our primary focus is on reducing or eliminating the side effects or other unwanted events associated with the innovator’s product. Our approach is to scour the original clinical data to find the problems that were caused by the pharmacology of the molecule and look for ways to mitigate or eliminate those issues. We do that by changing the formulation in a way that impacts the pharmacokinetic profile and creates a more favorable plasma profile over time. The three advantages of this approach are: 1) we can reduce the original side effect profile, 2) we can generate new intellectual property that protects our client from generic competition and 3) we can help get a well known drug with a well known safety profile onto the market with a new presentation that benefits the patients.

    Not all investments in reformulations are worthy of being passed over by venture capitalists. Some may actually become useful and profitable.


  • I completely agree with Richard Soltero.

    Innovation is a spectrum. If you can take an old drug and reduce side effects and/or increase compliance, then patients benefit. Is patient benefit not innovative? I certainly think so. It doesn’t really matter how one achieves it, does it? Cancer is a great example of this. So is pain management.

    Is Quillivant XR a high-risk, high return opportunity for VCs that will make “Fierce” headlines? Probably not, especially since many reformulation-based products will have short commercial life spans due to loss of exclusivity.

    But. if there is a patient benefit, and if it can be developed efficiently, then these types of opportunities should be supported by some investors, just not traditional VCs. For VCs who need those home runs over a 10-year fund lifetime, then these types of opportunities may not be appropriate.

    That doesn’t mean they are not innovative.

    Will this be reimbursed? That’s a tougher question to answer. Again, if there is a patient benefit over a generic, then it should be reimbursed. I think a product like this has a stronger reimbursement case compared to a marginally different NCE (cf., certain statins).

    In our practice, we come across a number of companies that are identifying reformulation opportunities, developing them efficiently, and bringing them to market. They may not have headline-grabbing PYS, but they provide a patient benefit that physicians and payers understand.

    I do think that some reformulation concepts provide minimal benefit. And so some of the companies you mentioned struggled with this issue. Just because a drug can be reformulated doesn’t mean that it should. But there are a number of therapeutic areas (really pockets within therapeutic areas) where reformulations can continue to provide clinical benefit, such as cancer, pain, asthma, and CNS.

  • Charles Versaggi

    Thanks Bruce for an honest and poignant article. I couldn’t agree more. It’s refreshing — and rare — to hear someone talk about the “healthcare ecosystem” and the cost/benefit of products to more than just consumers and ROI to investors.

  • I agree with the logic of your comment… yet: my father lost the cancer battle two months before his youngest granddaughter was born. if he could see her before passing away… how do you put a price on that? it’s a tough subject.

  • look out for new personalized dosage of existing drugs, delivered as Rx/Dx packages. That’s where old drugs can really have very meaningful new lives.

    the “one dose fits all” formulations are very crude and undertreat many patients, because the sponsors trialed a safe dosage, population-wise.

  • A Marshall

    A typically insightful post and I see I am late to the party. Agree with the comments that innovation will happen by improving on existing drugs as well as providing totally new ones in new indications. One other area where there will clearly be innovation is finding ways of
    using the massive existing pharmacopeia of approved drugs better…so
    that we understand which molecules in a particular class work best and
    can be targeted to the right patients. A lot of this last type of innovation is ignored at present because noone (in pharma or biotech) has interest in carrying out these types of comparative trials once their drug has been approved, which might reduce their market. The problem as I see it is that nobody seems to have a clear idea of what the economic incentives are that will make this happen and who/where they are going to come from.

    BTW drug pricing is a whole different post (mebbe Bruce could write one on that going forward and how much this goes into VC models?)