A Therapeutic Long Tail. Does Cell Therapy Fit the Model? (Part II)

...this is a continuation of Part I...

So are Personalized Medicines the Long Tail of the Therapeutics Industry?

In 2006, Chris Anderson, Editor-in-Chief of Wired magazine, released "The Long Tail" – a book describing the Web 2.0-induced business-to-consumer economics (r)evolution enabling businesses to now deliver product at outrageously affordable prices to global micro-markets.[i] The book quickly became one of the most influential business books of the ‘new economy’.

Indeed this flat new world – as Thomas L. Friedman describes it[ii] – is all about micro-trends and micro-markets, empowering small companies and niche products to participate successfully in the marketplace along with Fortune 100 companies and blockbuster products. More than that, this paradigm shift is forcing product and service companies to revolutionize their business and pricing models, the latest and rabidly successful of which is the pricing model of “Free!”. The blockbuster-based business model that depends on the economics of a ‘hit’ (whether it’s a platinum-selling CD or a ‘blockbuster’ drug) is no longer seen to be the only way to make money and, indeed, may not have any future at all.

To date, this internet-driven Long Tail (r)evolution has had its largest impact on – if not been largely restricted to – the retail sector. Business-to-consumer (B2C) companies are now enabled like never before to profitably supply unique global products to meet customer demands. In this respect, the (r)evolution has had a visible impact on the retail side of the pharmaceutical and biotech industries. However the ongoing realization of “personalized products” as the future of medicine for consumers seems a perfect fit for the Long Tail economic model.

But does this apply to therapeutics?

To the extent that the Long Tail economy is less about the mass market and more about businesses succeeding in serving niche markets with unique and/or customized products, the analogy fits.

Certainly, it would appear the sun is setting on the "blockbuster hit" days of the therapeutics industry. In June 2008 Genentech's Susan Desmond-Hellmann, president of product development, when outlining the biotech giant's development strategy to a group at the Goldman Sachs healthcare conference, told the group that the blockbuster drugs of the past may never be duplicated. “Future drugs,” she stated, “will cater to a smaller, better defined group of patients” and “the days of big cholesterol-lowering drugs for millions of people may be behind us.” (link).

In a June 8, 2009 post, authors of the IN VIVO Blog stated that pharma "managers these days are learning to leverage only very modest top-line growth into faster bottom-line growth through cost-savings, bolt-on acquisitions, and rapid introductions of incrementally-improved new products. The traditional, high-risk, high-growth R&D-based model is gone, in case you hadn't noticed."

The second indication that personalized medicine fits with the Long Tail supply-demand model is that therapeutics can now be customized taking advantage of personalizing elements such as HLA-typing and advances in genetic, diagnostic, and discovery testing that will permit us to more effectively both pre-select which medicines are best suited for which patient sub-groups and develop therapies that are better suited to particular genetic groups. On the clinical end of the spectrum, advances in theragnostic tools and surrogate biomarkers (e.g., imaging) are allowing clinicians to much more rapidly assess personal responses to treatment and adjust their therapeutic regimines accordingly before any symptomtic response can be observed.

The ability to match therapeutics to genetic make-up, disease stage/presentation, or predisposition will allow the provision of treatments with more confidence in their expected efficacy, fewer patient-specific adverse reactions, and result in cost savings to the health care industry and a better return to fund the premium for the development of such products.

In a recent interview with Xconomy's Luke Timmerman, Alan Frazier, founder and managing partner of Seattle-based Frazier Healthcare Ventures, one of the world’s biggest life sciences venture capital funds, said,

The trend is toward smart pharmaceuticals that address smaller populations, narrower indications, with better results. It’s based on a better understanding of disease from genomics and proteomics. You’ll see more targeted drug delivery. You’ll have incredibly focused pharmaceuticals, which will take care of some of the safety issues you read about.

Does the model apply to cell therapies?

At the intersection of the personalized and regenerative medicine sectors, lies the therapeutic industry’s response to (or reflection of) both the demand for and the ability to deliver a more personalized therapeutic to the consumer (the patient).

If the tail of the therapeutics market is being stretched longer to include products better targeted to smaller markets, this therapeutics Long Tail will almost certainly include regenerative medicine (regen 2.0) products and many of these will be cell-based therapies.

The cell therapy sector now encompasses the convergence of three distinct technologies, i.e. cell transplantation, tissue engineering, and biomaterials. Often also drawn in are elements of gene and molecular (e.g., proteins and antibodies) therapies.

Autologous cell therapies are the ultimate personalized medicine and while such medicines are often not included in definitions of personalized medicine, any approach to regenerative medicine – whether using tissue engineered products, cell-based therapies, small-molecule drugs, scaffolds, nano or biobots, etc – intended to trigger in vivo regeneration or repair... is personal!

Again, to the extent the Long Tail economy is about “selling less of more” then medicines such as cell therapies will certainly be part of the long tail of the therapeutics industry giving access to highly-personalized, tailored products to meet the unique needs of the consumer.

But does the Long Tail economic model apply?

While there may well be blockbuster cell therapies in the future, concern around the scarcity of potential blockbusters in cell therapy are seated in the notion that the blockbuster economy is the only successful model.

Who thought you could make money by giving free access to internet searches and email? There are a lot of ways the analogy breaks down but what the Long Tail economy has shown us is modern corporate ingenuity in finding profitable business models in niche markets despite the long-standing dominance of blockbuster products.

Where the paradigm falls short, in my opinion, is when one realizes that a fundamental pillar to the Long Tail economy is the commoditization of products and production processes as well as the standardization of delivery systems. The Long Tail economic model is enabled by the fact that the cost of goods sold has been brought sufficiently low enough - by new technologies which allow for small batches to be produced and shipped - that the products in question are affordable to most. Highly unique and/or customized goods were always available to those with sufficient ability to pay. The Long Tail brings these kinds of products to micro-market at the same price or lower than their mass-market counterparts.

We are a long way from this kind commoditization of personalized medicines and, in particular, of cell-based therapies. There is little-to-no standardization of production systems at any scale. The next generation of these therapies will still be highly priced goods which many people, insurers, and/or healthcare systems will be pressed to afford.

In once sense, this is not surprising. Even in the world of electronic or digial products, Moore's principle only applies because the cost of goods for new technologies when they first enter the market are prohibiitively expensive. If the model applies in the therapeutics industry, technological advances in production will bring down the cost of goods and therfore the price.

On the other hand, what drives the price of therapeutics has not been so much the cost of goods (production) but the need to recoup massive upfront R&D costs which must be recovered (with a reasonable profit) during the life of a patent.

Will this change with personlized medicines and cell therapies? One could argue it might if personlized medicines and cell therapies can deliver on the promise to have a much higher effective rate among those given the therapies. Pharmaceuticals have a notoriously low effective rate among those prescribed any given drug. New research methodologies employing surrogate biomarkers, imaging, cell-based assays, etc promise the potential to significantly lower R&D costs by (a) getting to a much quicker "go/no-go" decision point in therapeutic development, and (b) identifiying patient sub-groups for which the therapeutic will have a high rate of effectiveness. One the one hand, this has the potential to lower the cost of goods (driven by R&D costs) and simultaneously justify a higher price point because of a high rate of therapeutic success.

However, even if we were able to materially lower upfront R&D costs, this still does not change the fact that cell therapies are costly to produce on a per-unit basis and the opportunity to "scale-up" is limited particlarly with autologous cell therapies which require lot sizes to be an individual batch. While this is a seperate discussion, I am confident technological and/or commercial innovation will find a way to economically bring therapeutics to market that are proven effective. I am not alone. Recenly Howard Liang, MBA, Ph.D., Analyst and Biotechnology Managing Direct at Leerink Swan as quoted as saying that “Autologous manufacturing is not the deal breaker it used to be. If these [cell-based] vaccines work for really difficult-to-treat diseases, the manufacturing issues will be worked out.” ("Special Report: Customized Cancer Vaccines Finally (Maybe) Arrive". GEN News Highlights. 12 June 2009)

There are other reasons the Long Tail business model as it is currently defined does not fit cookie-cutter with the therapeutics industry not the least of which is that the consumer demand does not solely regulate supply. In highly regulated industries, the economies are different. Some would argue this should not be the case particularly if personalized medicines, genomics,theragnostics, etc advance to point where the consumer has an abundance of therapeutic information and options but that is the subject of another discussion.

In the end, it is certainly clear to me that the emerging technologies are enabling new therapeutic paradigms that will introduce elements of the Long Tail business model into the therapeutics industry.

How much Impact will Cell Therapies Have on New Therapeutic Paradigms and Systems?

Despite the exponential escalation of cell therapy innovation, is cell therapy ready to be a viable business that will make any material impact on the therapeutic industry? For reasons which I will continue to explore in this blog in the months to come, I believe the answer is 'yes'.

The cell therapy industry has more products in late-stage development than many believe. While the existing commercial products are far from blockbusters and questions remain regarding the business models and potential margins for cell therapy products, ground-breaking research and market enthusiasm is driving a renewed interest among an early second-round of investors including participation by mature industry players making cautious plays in the sector. Regulatory issues in the primary markets of the US and EU are rapidly becoming less problematic though harmonization remains a significant challenge.

In blogs to come I will outline the commercial developments I see transpiring that make me believe the primary issues around the 'business models' question are being addressed. Regenerative and personalized medicines are enough of a force that creative business people will (a) invent ways to lower the cost of goods and (b) figure out how to price and reimburse appropriately to ensure effective therapies get to people that need them and incentivize doctors to prescribe them.

Most indicia point to this sector being poised for a phase that will start demonstrating real answers to those challenges which have to-date prevented many from participating in a sector that they believe presents too many unanswered risks.

Conclusion

As with so many of the paradigm-shifting economic revolutions in the past, once the underlying technologies exist, business and economic models radically adjust to reflect and accommodate that change. The latest of these is the Long Tail economy (r)evolution with it ability to deliver niche (if not personalized) products to niche markets. Pesonalized medicines - regenerative medicine and cell therapies in particular – are the therapeutic industry’s answer for the demand for personalized products. For a host of reasons, however, the economic model is not yet one which makes for profitable delivery of such products to niche markets.

Nonetheless, while questions about the viability of the business and economic models for these paradigm-shifting therapies are reasonable, the next 5 years will show that today’s questions about the business models for cell therapy were rooted in limited imagination about the potential for technological and commercial innovation as well as outdated concepts of the therapeutics industry and its economies.

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[i] Anderson C: The Long Tail: Why the Future of Business is Selling Less of More. Hyperion (2006).

[ii] Friedman TL: The World is Flat. A Brief History of the Twenty-First Century. Farrar, Straus and Giroux (2005).

A Therapeutic Long Tail. Does Cell Therapy Fit the Model? (Part I)

I'm always skeptical of companies or products or technologies that depend on a 'paradigm-shift' or 'sea-change' in the long-entrenched habits of people before they will be widely adopted and/or successful.

It's why, for example alternative fuel autos might succeed in the U.S. where public transit has not - because they don't require as big a change. People can stay in their car and change their habits less.

Disruptive Technologies Lead to Paradigm Shifts

Nevertheless there are from time-to-time disruptive technologies that do arise which are paradigm-shifting. These are readily (though perhaps not quickly) adopted because the benefits are seen to outweigh the trade-offs and/or effort required to make the change. In many instances there are entire industries built around the pre-existing technologies that foolishly resist such change rather than learn to adopt and adapt. It's the classic mistake of railway companies believing they were in the business of trains rather than transporting people and goods and thus missing the opportunity to dominate transport by road and plane when these industries started to compete for the transport customer.

Will Cell Therapies Disrupt Sufficiently to Shift the Therapeutics Paradigm?

There are a lot of people talking about how regenerative medicine, personalized medicine, and cell therapies are going to revolutionize health care. I'm one of them. There are, however, many good reasons to be skeptical - not the least of which is the sheer size of the industries built around the pharmaceutical model and the power they can exert in resisting change. This might be comparable to Detroit's resistance to alternative transport systems or Houston's resistance to the use of fossil-fuels. It's massive.

But just as Detroit is now embracing the need for change and Houston is touting alternative energies, could it be that New Jersey is having its own 'come-to-Jesus' moment and realizing there may be - perhaps must be - a future for pharma beyond the blockbuster pill model? The other big 'industry' to convince is the healthcare inudstry. How readily will hospitals and doctors adapt to a therapeutics paradigm shift?

Last week, I had an interesting conversation with someone from a struggling cell therapy company that has completed a semi-successful phase II trial and is very quickly running out of money despite having been on a road show for over a year. They are engaged in a "number" of "partnering" discussions with pharma companies who understand the science, the manufacturing, and the cost-of-goods data but say they are still uncomfortable with the "business model for cell therapy."

The know the market, have good data on the COGs and can assume a certain product price and reimbursement...so what's left? I'm told that "business model" is code - at least in this instance - for two concerns:

(1) what will clinical adoption rates be like, i.e., will doctors adopt these new therapies and, if so, at what rate? and
(2) the model they are being presented does not offer them the type of margins they've come to expect.

Let's look at each of these in turn.

Health 2.0

Doctors have traditionally been driven by clinical results and reimbursement. But there's a new driver in town - it's the informed patient and their participation in Health 2.0. Patients no longer rely solely on their physician for healthcare information.

Deputy Editor of Wired magazine, Thomas Goetz, author of "The Decision Tree" (blog and upcoming book), describes this new era of healthcare as follows:

"We are entering a Third Phase of medicine - one that spots disease and illness based on risks rather than one that responds to symptoms (phase 1, from pre-history to the mid 19th c), or one that seeks out the causes (phase 2, from circa-1850 to just about now).

These three phases closely parallel our technological capacity to spot disease: Phase 1 was primed to spot symptoms because humans relied on our senses - and nothing more - to recognize illness. If we couldn’t see it (or smell it), it wasn’t yet evident. Phase 2 emerged with the perfection of the microscope and the discovery of the germ theory of disease: finally we could see disease in its pathogenic form - bacteria, mostly - and thus began a race to find the little buggers that were causing disease. The late 19th century saw a flurry of diagnosis, as the cause of one disease after another was identified, and the Pasteurs and Kochs went about devising antibodies or vaccines to vanquish them... So now this third phase dovetails with the bevy of new diagnostics emerging - devices and techniques that look for certain molecules and DNA strands to not only detect the presence of disease, but predispositions towards certain conditions as well...

This third phase contains elements of what many are calling “personalized medicine,” but I hate that term - it sounds too servicey and implies that this is simply regular medicine/clinical practice that’s been tailored for you, as if we have a computer watching our health (it’s “personalized!”).

To my mind, what’s happening now is much more than simply a move to personalization; it’s an entirely new way of relating to disease and illness, one that’s as impactful and as new as the realization that germs - not bad air or bad luck - caused disease. What’s happening now makes disease/illness an optional state, one that can be opted out of (ideally) or engineered against (more likely)."

This is, he says, "...a new phase of health and medical care, where more decisions are being made by individuals on their own behalf, rather than by physicians, and that, furthermore, these decisions are being informed by new tools based on statistics, data, and predictions. This is a good thing - it will let us, the general public, live better, happier, and even longer lives. But it will require us to be stewards of our health in ways we may not be prepared for. We will act on the basis of risk factors and predictive scores, rather than on conventional wisdom and doctors recommendations.

We will act in collaboration with others, drawing on collective experience with health and disease, rather than in the isolation and ignorance that can come with “privacy” concerns. And we will act early, well before symptoms appear, opting to tap the science of genomics and proteomics in order to mitigate our risks down the road.

Together, these tools will create a new opportunity and a new responsibility for people to act - to make health decisions well before they become patients. This can be characterized as a decision tree, a series of informed choices we will make to minimize uncertainty and optimize our outcomes. Indeed, we will use decision trees to navigate most of our health decisions, sometimes in overt ways - new decision support tools will both inform us and guide us, and they’ll be steeped in statistics, prediction, and the power of collective experience.”

For better or for worse, patients have an increasing multitude of sources and options. Not only are patients now much more informed of their diagnoses and conditions but also of their treatment alternatives. More each year are demonstrating a willingness to access cell-based treatments out-of-country. Others are lobbying for the loosening of the regulatory sphincter around cell-based therapies such as stem cell transplantation, Dendreon's PROVENGE, etc.

Increasingly patients' demands are influencing doctors as much or more than anything else. Pricewaterhouse Coopers recently listed "the internet and social network" as the Health Industry's "top nine issues for 2009" citing web2.0 as "changing how healthcare is navigated and experienced by consumers".

It remains to be seen how doctors will adopt cell therapies and this will depend in large part on the adequacy of reimbursement but certainly patients are driving their doctor's decisions like never before and patients seem enthused - perhaps even overly so - about cell-based therapies.

Therapeutic Profit Margins

In terms of margins, even pharma executives are now realizing - in the face of diminishing pipelines and massive R&D costs per drug - that the models that have worked so well to-date financed by the kinds of margins they have received to-date may not be possible going forward. M&A, the creation of decentralized divisions, increased academic collaborations, etc.... they are all measures to try and address the same problem of diminishing margins.

Decreasing product margins are being tackled like it's the disease when at least some would suggest it's the symptom. The disease may not be lower margins at all but the model which demands such massive margins to succeed. But more on that in just a minute...

Personalized Medicine

I believe there is a third challenge to pharma's "business model" concerns. From one direction we have pharma's increasing desperation for new therapeutics; from another direction comes the public's increasing demand for access to cell-based therapies, and - to complete the trifecta - we have the fast-growing sector(s) of personal genomics, theragnostics, and/or personalized medicine.

The ability to analyze the effects of therapeutics on patient sub-populations and use that to target such groups and/or tailor therapeutics accordingly opens up so many promises therapeutically but also puts incredible additional pressures on the blockbuster model with its low-rate of success per overall prescription rate. Some insurers are now catching on to the notion that reimbursement can be - perhaps should be - tied to therapeutic success and are willing to pay a higher price tag for success but nothing at all for failure.

Others before me have described the increasingly hard-to-ignore crack in the blockbuster model much better than I. One of the better analyses I've read recently can be read here.

To predict that cell-based therapies will contribute to and succeed because of a shift in the healthcare paradigm may not be that much of a stretch at all. The stars do appear to be aligning for a rather wholesale change to be readily adopted by all involved - or at least the major players.

...

(click here to continue to Part II)