Brian Dovey: “Devices are less profitable investment targets than medicines”

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Brian Dovey has been involved in the development of 260 biopharmaceutical companies and leads the US venture capital firm Domain Associates with $2.7bn USD of capital under management. In summer 2016, he came to Moscow to announce the strategic partnership between NovaMedica – a company created by Rosnano, Domain Associates and American Pfizer. The companies aim to build a new pharmaceutical manufacturing facility in Kaluga Region.

NovaMedica partnership is one of the few Domain projects outside of the US where the biopharmaceutical investments have been booming in recent years. In H1 2016, the Life Science investments in the US totaled $4.7bn – 17% of the American venture capital market. To put it into perspective, in 2015, investments in the Life Science start-ups in Russia fell short of $18.5m (according to RVC and Frost & Sullivan, Russia accounts for less than 0.1% of the international biotech market). Russia has many great scientists and experts in natural science, but besides talents, the science-based business requires the  infrastructure. Today, Russia is only trying to develop its own biopharmaceuticals but the global opportunities are still not exhausted, convinced Brian Dovey.

• What is the driving force behind the current boom in biomedical investments? For how long is it going to last?

I believe that life science investments will continue booming in the decades to come. Today, thanks to the potential of genetics, we are able to take advantage of the vast opportunities for creating new pharmaceuticals. We are now capable of identifying genes responsible for the development of a particular disease. Consequently, we can more exactly pinpoint the root cause (target protein) of the disease and focus on it only while reducing the medicine's impact on other processes inside the human body. Recently there have been many breakthroughs in the discovery and description of genes, including those linked to various types of diabetes, cancers, and hepatitis C. The problem is that diseases like those are systemic and associated with multiple genetic changes. The further we progress in genetic research, the easier it will be for us to develop medications for new targets rather than for the existing ones. For example, in 2015, the FDA approved 45 novel drugs, with only 16 of them identified as first-in-class. So far, we have discovered only about a quarter of all the potential therapeutic targets, and I am inclined to believe that the pharmaceutical industry will be able to increase that number at an advanced pace by using genetic approaches.

What do these changes mean to biotech investors and developers of new drugs?

New market niches emerge as genetic data are becoming increasingly accessible. The human genome was almost completely deciphered in 2003, which cost some USD 2 bn. You can compare that to the invention of an alphabet, but at the time scientists were still miles away from book printing or Shakespeare's sonnets. After that, deciphering of the genetic code was getting cheaper at an accelerated pace, outdoing the fall in prices for the processing power of microchips described in Moore's law. Currently, genome sequencing costs an average of USD 1,000. That accelerates the scientists' search for potential mechanisms to be used in novel medications. For example, a scientist can take one hundred people suffering from the same disease and one hundred healthy people, compare their genetic data and identify the set of genes responsible for the disorder. We are therefore witnessing a change in the drug development paradigm, with researchers shifting from random selection of target proteins with subsequent confirmation of initial hypotheses to pre-defined targets. This means a revolution in the biopharmaceutical industry as the evidence-based approach is being replaced by the predictive one.

Going forward, will the new-generation target drugs focus above all on anti-cancer research?

Not exclusively, although innovations in chemotherapy for treating cancer are undoubtedly an extensive market. It is important to understand that here we are talking not only about a shift in the development paradigm, but also about a change in business models. Currently, the pharmaceutical market works as follows: scientists develop a universal pill, which is subsequently launched into mass production and packed into polymer containers to be delivered to pharmacies. Genetic therapy is different in that it has to deal with the genetic data of every single person. The pharmaceutical industry will probably switch from the production pattern to an area of service, while new players will have to come up with new business models and learn to deal with tumour tissue samples and arrange all the necessary logistics.

On average, it takes 10 to 15 years and almost USD 5.5 bn to develop and market a new medication. Still, only one drug in 5,000 under development eventually makes it to the market. Are the pharmaceutical corporations ready to invest their efforts and time in novel drugs?

Pharmaceutical majors have never matched the likes of Google or Facebook. They do not include new products into their sales plans and would rather sell generic drugs than develop original medicines. This trend gained momentum during the patent crisis: since the late 2000s, dozens of best selling drugs have become available for copying. Yet venture capital funds are benefiting from this. As we specialise in the marketing of novel drugs, we basically build our business on the promises of pharmaceutical companies to buy innovative medicines. Representatives of the big pharma often acquire companies that have just completed animal testing. Sometimes they can also purchase a company that is still at the stage of laboratory studies (i.e. after the completion of chemical screening and optimisation).

Why is this happening?

People inside corporations remain impervious to the revolutionary ideas, as large players are not willing to take the huge risks they entail. Even if they do take the risks, they still avoid radical innovations and focus on improving the existing solutions. In contrast, venture capital funds tend to view fundamentally new developments that may either fail or grow into a multi-billion enterprise as the core of their business.

Perhaps, it is all about tolerance for failure. People inside large pharmaceutical companies shy away from any failure, as it may damage their reputation and career. Those in the venture capital market see losses and written-offs as a normal thing. Partners in venture capital funds are used to risks, so they know from the start that one or two successful projects can cover the losses from the ten failed. Likewise, you will hardly find a venture capital fund’s CEO with a no failure record. This explains why, let’s say, projects to improve cardiac medications are so popular with pharmaceutical companies and are of little interest to us. We are more focused on breakthrough innovations in the emerging business areas, such as immunotherapy or treatments for mental illnesses.

What emerging business areas are represented by companies in your portfolio?

We decided to focus on a number of innovation areas, including treatment of obesity and food addictions, which is a huge problem in the USA and an increasing threat worldwide. One of our portfolio companies is Orexigen Therapeutics, Inc., which produces an obesity medicine to suppress appetite by impacting the patient’s hypothalamus. Another asset is Obalon Therapeutics Inc., a producer of a weight loss gastric balloon swallowed in small capsules and inflated via an attached slender tube with no sedation required as before. Both companies have been approved by the EMEA (European Agency for the Evaluation of Medicinal Products), although it took us a lot of effort to get things done. For example, during Orexigen’s product development, appetite suppression was found to be offset by an appetite increase triggered by the drug’s alternative action mechanism, so the company had to switch from a single active ingredient to a combination of those.

Another major innovation area attracting venture capitalists is painkillers. As the strongest of painkillers – opioid analgesics – are prohibited in many developing countries, the pharmaceutical industry is looking for new classes of anaesthetics that would effectively deal with pain without causing dependency.

Neurodegenerative diseases are another big topic. Research teams around the world struggle to find a treatment for, let's say, Alzheimer's disease, but all the relevant medications have not gone beyond the first two stages of clinical trials. Their testing on animals is virtually impossible, as the disease does not affect any other animals but polar bears. Hence, laboratories need genetically modified mice to conduct trials, which is very expensive. One of our portfolio companies was selling transgenic mice to other laboratories, with the price reaching USD 1 bn.

Do you invest in medical devices and telemedicine?

Medical devices are a less attractive investment segment than medications, as corporations are more reluctant to buy them. But overall, we are positive about medical devices. Patients regularly fail to follow the prescribed treatment, which is the major problem for the healthcare industry. Any technology that would enable doctors to make sure that patients take the necessary medicines (e.g. a device that would notify a doctor, when a patient opens and closes a medicine bottle) will be in great demand. Likewise, self-diagnostic tools will also enjoy demand. Both researchers and venture capitalists are now discussing the future of internet-based remote monitoring technologies. My personal view is that telemedicine projects are not likely to be a great success. They offer a useful service, but it is not clear who is the buy-side. It is not that valuable for either patients or doctors for them to be willing to spend a lot on it.

If large business is in no hurry to work with new drugs, who is driving innovation in biomedicine today?

It is hardly possible to name just one change agent, as in this sector of the venture capital market a veritable “food chain” is in the making. New molecules emerge in research institutions. The innovations are subsequently picked up by private investors (business angels or venture capital funds) and passed on to pharmaceutical corporations. The latter do less in terms of research; instead, they seek to fine-tune marketing and sales, which constitute a larger budget item for corporations than their R&D.

Are there any weak links in this chain?

There is a gap between the stage where scientists establish a connection between a new target and a pathology, and the first steps taken to commercialise the discovery. For instance, many research teams are able to successfully complete their pre-clinical studies (these would often be covered by grants or budget funds of the research organisation), but they have no financing for human trials. Even venture capitalists are reluctant to finance such projects – they want to have at least a preliminary understanding of the effect the drug is going to have on humans.

In fact, the situation is changing for the better now. Research financing is on the wane because of the crisis, so scientists are seeking to raise more private capital instead. As a result, more and more inventors feel that their research could be in great demand in the market. All too often they end up leaving the laboratories and launching their own business or cooperating with people who have entrepreneurial background.

How is the boom in biotech and pharma investments changing the novelty drug approval process?

The regulatory environment is improving. Over the last five years, the FDA has beaten several records with regards to the number of medicines registered in the span of one year. Needless to say, regulatory changes come in fits and starts. A safety or efficacy concern with regard to any given medication could bring about a scandal followed by the introduction of new regulations for many biotech innovations. And, vice versa, impressive results demonstrated by one novelty drug could soften regulation in respect of other drug classes. Overall, the FDA and the EMEA feel favourably towards the lab teams and their investors, as long as those are ready to take high risks in pursuit of greater returns.

Pharmacogenetics is another factor influencing the regulator. In the past, research made it possible to test a particular effect of a new medication on a human, but other impacts, often hidden, revealed themselves at a later stage. Now we can track the body's response to medication by taking a look at its DNA, which shows all modifications caused by the experimental drug. Hence, the knowledge of human genome makes the approval of new drugs less risky and helps to mitigate the side effects of new medicines and propitiate regulators.

How do you evaluate projects seeking investment from you?

We receive around 1,500 applications annually, with only 5 to 7 companies eventually receiving the financing. Many people believe that venture capitalists rely on some innate intuition, while in reality projects are selected in accordance with strict scientific criteria. There are thousands of companies that we hold in sight; we talk to notable scientists from all walks of discipline and monitor scientific publications. If we find a promising product and seriously consider financing it, we invite several leading researchers representing the company's industry to discuss the product. In case of the positive verdict, we interview doctors, because ultimately it will be up to them to make prescriptions and drive demand for the medicine. After that, we talk to the patients. All of this usually takes 2 to 3 months.

The real work starts after the deal is signed. There is a widespread myth that venture capital funds invest money in order to wait and see which project is going to be a new breakthrough and which one is going to fail. This approach does not work with Life Sciences. At the initial stage, we recruit a team of executives and financial officers. In venture business, success is not only about finding the right business idea or successful marketing of innovative businesses. Success could also mean a timely identified failure. If you could have invested tens of millions of dollars into a project, but then realised that it was not going to work and spent only USD 500,000, it is a success. A good venture capitalist knows how to fail quickly. This is exactly why it is so important to have a competent management team for your start-up: they are sure to point out the mistakes in good time, while scientists will keep experimenting with the proposed innovation to make it last longer.

What are the Russian prospects of developing the Life Sciences market?

Up to now, Russian presence in the global biotech market (particularly, in medicine and pharmaceuticals) has gone unnoticed. Certainly, there are plenty of talented scientists. There is also a high quality of scientific education (largely owing to the Soviet past), but there is hardly any infrastructure in place for knowledge-intensive business. I am afraid it will take decades for young talents to stop seeking jobs abroad or switching to other innovative business areas, and be able to find their own place in the national biotech industry. It is highly unlikely that I will travel to Russia in the coming years to search for high-potential teams of professionals. There are only several areas where Russia proved to be a strong player. Let's take ophthalmology as an example. The USSR was the pioneer of laser eye surgery, and Russia still has an impressive scientific base in this area. Cell technologies are another area where Russia has a competitive edge largely due to the prohibition of stem cells in many countries, including the USA.

In this context, transfer of technologies could be the right strategy for biotech innovation development. If the government and businesses buy licences from international pharmaceutical companies for new drugs that have already been included in the pre-clinical and clinical trial programmes, Russia will be able to launch its own innovative production. It is at that point that Russia could switch from the adaptation and sale of foreign produce to the development of its own novel products.