Vantage Point - Biotech partners force shifts in US biosecurity funding

When it comes to enticing pharma companies to develop responses to the risk of man-made and naturally-occurring disease outbreaks, the US government has found itself dealing with an unexpected partner – small undercapitalised biotechs.

As federal agencies built the biosecurity field in the last decade, it was hoped that the bait of billion-dollar contracts would attract big pharma partners. Yet those hopes have faded, forcing a re-assessment of how to support and encourage smaller and mostly underfunded companies. One important initiative is the government’s proposal to transfer $100m in dedicated biosecurity funding to a non-profit “strategic investor” that would become, in effect, a publicly funded venture capital firm to spur development in the field. The green light to create such an agency should come by the end of the year as part of the government’s current budget.

The idea of a strategic investor is a sign that the federal government recognises, in the absence of well-capitalised pharma giants bidding for contracts, that there is a need to do more than hand out money and wait for contractors to deliver. Instead, as the intelligence community learned more than a decade ago, there is a need to identify new technologies, accelerate them from the discovery to the development stage, and provide guidance on both science and business.

It is also a sign that the federal government will not be withdrawing its investment in biosecurity, which has been spurred on by the anthrax mailings of 2001, the SARS outbreak of 2003 and dangerous influenza outbreaks, including the swine flu pandemic of 2009. Whilst there is reason to worry that the US government will be less generous in coming years as it grapples with a deep and growing debt, it does not appear that biosecurity funding will dry up (Unknowns for pharma haunt US budget austerity law, August 8, 2011).

The model

The model for the Department of Health and Human Services (HHS) is a non-profit venture called InQtel, created in 1999 to assist in the development of information technologies that would fit the needs of the US intelligence community – and InQtel may be the ultimate destination of the $100m in biosecurity funding should Congress authorise the transfer.

As a private not-for-profit strategic investor seeded with government money, InQtel has invested in 165 companies and supported the development of 350 technology products that have been purchased by US intelligence agencies.

In InQtel’s case, the approach has been much like a venture capital firm’s, with a strong focus on evaluating the company and technology before investing and leveraging other VC dollars; InQtel says every dollar it has invested has yielded an additional nine dollars of VC money. It has also become somewhat effective at recycling capital, although still relies on some taxpayer money to sustain itself.

“We would provide the money, but more importantly, we would provide the direction,” Robin Robinson, the deputy assistant to the US HHS secretary for preparedness and response, who also directs the Biomedical Advanced Research and Development Authority (BARDA), says of the agency’s hope for the strategic investor. “These are the types of things we would like you to seek out in early investment and move those products forward.”

Unintended consequence

A growing community of small biotechs like Siga Technologies, PharmAthene and Emergent Biosolutions bidding for and winning contracts sometimes worth billions of dollars is not what was envisioned when the biodefence efforts were ramped up a decade ago in response to the 9/11 attacks and the anthrax mailings of autumn 2001.

One of the great challenges government agencies had difficulty overcoming was how to persuade big pharma to spend millions of dollars to develop a product that, in a best-case scenario, may never be used and thus have no commercial market.

Combine that with big pharma’s drop in R&D productivity and increasingly risk averse strategies, and you get a great reluctance among the global majors to partner with the US government in this field (R&D productivity needs to assess quality, not just quantity, March 10, 2011).

It has been an uncertainty compounded by the usual mercurial nature of government funding, where political pressures and shifts in electoral majorities can change priorities overnight, which makes even high risk-taking biotechs nervous.

“All these moving parts within government create a risk that biotechs aren’t that comfortable with,” said Eric Richman, chief executives of PharmAthene, a Maryland based biosecurity specialist company.

In addition, notes Mr Robinson, government contract compliance is a big barrier, and repurposing already commercial or near-commercial drugs for government programmes is a risk many big pharma firms do not want to take.

“They may have a drug that is licensed or about to be licensed, and they are worried about having another clinical study done and they get some untoward adverse event,” says Mr Robinson, a former vaccines director at Novavax. “That not only knocks it down for what the government wants but more importantly for them, their commercial market. Why would you take a $4bn a year product, and for some small amount of money relatively speaking, risk that whole market for another clinical study?”

Inexperienced

So what has emerged is an industry of small development-stage biotechs serving the biosecurity field - capable of innovation but inexperienced on such matters as advanced clinical development, manufacturing and management.

That was spelled out very clearly when HHS in 2006 pulled the plug on a contract with VaxGen to develop a recombinant protective antigen vaccine for inhalational anthrax that required fewer doses than Emergent’s BioThrax, which requires five doses and annual boosters for full effectiveness.

The VaxGen contract was the first government effort to procure a medical countermeasure under Project Bioshield, a response to the anthrax mailings of autumn 2001, which killed five people from the inhalational form of anthrax and infected 17 others. Amongst the factors contributing to the failure of the VaxGen contract was its lack of expertise in vaccine stability and formulation as it sought to move the candidate through phase II trials.

It is these sorts of scale-up woes that some of the newer biosecurity initiatives are trying to eliminate; for example, a 25-year contract with Novartis has yielded a factory that can be used to manufacture influenza vaccine in the event of another pandemic, or can be used to produce other pathogens in the event of man-made or naturally-occurring outbreaks. Mr Robinson adds that work is underway to build similar facilities supported by industry-academia consortia.

Funding interruptus

While a big pharma company could more easily absorb sporadic funding, the way a government contract is normally funded does not make life easy for an undercapitalised biotech. Mr Richman describes the situation as “funding interruptus”. The completion of a single phase of development does not trigger immediate discussion of advancing into the next phase, as happens in private sector collaborations, but rather necessitates submitting a new contract proposal to the government, and hoping and waiting for approval.

In private sector partnerships, even as the developer is working on one phase a “contemporaneous conversation” about the shape of subsequent trial designs and financing is usually underway, says John Hollway, vice president of business development at privately held Achaogen, an infectious diseases specialist based in California.

“It’s very difficult to build a business that relies solely on that funding, unless you have some other source of capital,” Mr Hollway says.

Thus was born HHS’ desire to create the strategic investor. However, the reimbursement system is changing somewhat. The 2006 legislation that created BARDA also authorised the use of milestone payments under government development contracts. This is something that Biota, for example, will be eligible for under the contract it won in March to develop influenza antiviral laninamivir for future pandemic preparedness in the US market. In the current federal fiscal year, BARDA has more than 25 advanced development catalysts that include milestone payments.

But even as the government has embraced escalating payment awards, the development pathway in partnerships with the government is a rather stutter-step one. For example, PharmAthene’s development of its SparVax anthrax vaccine relied first on $83.9m in funding from the National Institutes of Health before securing its big contract with BARDA, worth up to $78.4m if milestones and other contingencies are met.

And those contract awards are meaningful to investors. The impact of a US government biosecurity contract, secured or cancelled, can equal any big pharma deal, with a significant effect on the share prices of publicly traded firms, as the table below shows.

Top Five Gainers Related to Government Contract Events
Rank Date Company Event Share Price Change (%) Market Cap Change ($m) Market Cap ($m)
1 13-Oct-10 SIGA Technologies Company is awarded a contract worth up to $2.8bn to supply the US Department of Health and Human Services with 1.7m courses of its smallpox treatment, ST-246. 46% +178 570
2 16-Jul-10 Tekmira Pharmaceuticals Company is awarded a US Department of Defense contract valued at up to $140m to develop a treatment for the Ebola virus. 38% +25 92
3 02-Feb-09 Human Genome Sciences Company begins delivery of 20,000 doses of its inhalation-anthrax drug ABthrax to the US government, earning $165m in revenues from the award; $150m in the first half of 2009 following the delivery, and the rest upon the FDA's licensure of ABthrax. 31% +78 323
4 05-Oct-09 AVI BioPharma Company receives expanded funding of $11.5m from the US Department of Defense to support the development of AVI-7012, for the treatment of Junin virus; the company has received a total of $45m from the agency to develop drugs to treat Ebola, Marburg and Junin virus infections. 23% +38 205
5 22-Feb-11 SIGA Technologies Company receives a new Request for Proposal from BARDA, seeking to procure 1.7m courses of company's smallpox antiviral, worth ~$500m, with an option to buy an additional 12m courses. 19% +105 651
Top Five Fallers Related to Government Contract Events
1 08-Dec-09 PharmAthene The Department of Health and Human Services (HHS) cancels its request for an anthrax vaccine supplier, stating that it does not believe that vaccine developers, such as PharmAthene, which had submitted a proposal, can have a product ready for FDA licensure within 8 years. (52%) (49) 44
2 11-Dec-09 SIGA Technologies The US government announces changes to its earlier request for 1.7m treatment courses for smallpox, stating that it will now consider awarding more than one company a contract for the smallpox treatments, and companies with treatments not tested on non-human primates will be eligible as well, raising concerns that the amendments will hurt SIGA's involvement in the deal. (28%) (89) 223
3 17-Dec-07 Peregrine Pharmaceuticals The Defense Threat Reduction Agency (DTRA) of the US Department of Defense (DOD) terminates late-stage contract negotiations, due to wider congressional budget cuts, with the company over bavituximab and other anti-phosphotidylserine (PS) antibodies as potential therapies for hemorrhagic fever virus. (15%) (16) 88
4 14-Jun-11 SIGA Technologies Shares fall following reports that two Congressional committees are investigating whether undue political influence was used in the award of a $2.8bn contract to supply the U.S. government with company's smallpox treatment, ST-246. (10%) (63) 548
5 08-Dec-09 Emergent BioSolutions The Department of Health and Human Services (HHS) cancels its request for an anthrax vaccine supplier stating that it does not believe that vaccine developers, including Emergent BioSolutions, can have a product ready for FDA licensure within 8 years. (8%) (36) 408

(Data Source: EvaluatePharma's EventAnalyzer)

Companies like Siga and Emergent, for example, have infectious diseases pipelines mainly targeting public health threats, and thus much of their future prospects rest on government purchasing decisions - a dimension of business strategy they may need to change should they not succeed with their government contracting approach (Emergent seeks diversity in Trubion purchase, August 13, 2010).

Capital efficiency

Certainly with erratic funding, the barriers for small biotechs are incredibly high. But there are strong reasons to pursue those contracts nonetheless.

“One incentive: Non-dilutive capital,” says Alan Rudolph, director of the chemical/biological technologies directorate of the Defense Department’s joint sciences and technologies office and one-time chief executive of the Maryland biotech Adlyfe.

“The government funds biotech; they don’t sit on the board, they don’t take equity and in some ways leverages dollars either companies can’t get otherwise, or if they’re getting venture dollars it provides leverage against those,” Mr Rudolph says. “As a former CEO, I can say that was the best kind: Cash without strings."

Yet while there may not be direct strings attached, the processes and hoops to jump through to get that government cash can be a big turn off for some companies. Those include the need to adapt to US government accounting, administrative and legal requirements – as Mr Hollway notes, “Pfizer doesn’t care if you’re an equal opportunity employer”.

But there are other ways in which working in the space can be more capital efficient, such as clinical development. For example, whilst an anthrax vaccine can be tested for safety on humans, its efficacy can only be judged ethically based on how well a vaccinated animal repels a challenge from the bacteria, speeding up R&D, Mr Richman says.

“Rather than a traditional biotech company where you can raise $800m and wait 10 years to find out if your product is effective, we know very early on if our product has efficacy,” he says.

Business model

In spite of Mr Hollway’s insistence that a biotech business cannot be built on the strength of biosecurity contracting alone, PharmAthene is giving it a go. With the knowledge that the government would be its primary customer, Mr Richman says the company’s business development specialists have been hired from aerospace companies and have a wealth of knowledge in federal contracting regulations.

To anticipate the next areas of interest, PharmAthene has also built a government relations division to build an understanding of what products agencies are looking for, so the company in turn can acquire or co-develop assets that fit those needs.

It is not necessarily a strategy that is for every biotech, but as Mr Richman notes, in-licensing means that PharmAthene is not dependent solely on its own technology or platform when trying to win a contract. As a business model, it is, however, heavily dependent on the government’s continued interest in biosecurity; a change in the government’s focus could conceivably cause the market to dry up long term.

In this new community of biosecurity-oriented firm, the holy grail is for a product that has both a public health and a commercial usage. For example, Biota has hit a jackpot: it is getting non-dilutive government funding to run advanced trials for US approval of laninamivir, currently only approved in Japan, and would expect to have a major commercial market in addition to government purchasing for the strategic stockpile.

Not every product can expect to be like that, however: a treatment for radiation poisoning, such as that being developed for BARDA by Humanetics, will likely have a much smaller commercial use than a pandemic vaccine or antiviral might.

With the promise of billion-dollar contracts, it is no surprise that the small biotechs have been ready to take on the biosecurity field when big pharma decided to largely stand on the sidelines. It has taken the government biosecurity agencies some time to adjust to the reality that their main partners will not be global corporations. The creation of a government chartered strategic investor, should it be authorised, would be another sign that the government has come to terms with this reality.

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