People or pasture?

By Rebecca Macfie

Saturday 1st March 2003

New Zealand wants a drug development industry, right? We're proud of the cutting edge work our scientists are doing in the fight against everything from cancer to HIV, diabetes to neurological disease. We like the idea that our clutch of biomedical start-ups - Virionyx, Protemix, Neuronz, Endocrinz, Proacta et al - will make it big in the cold, hard global pharmaceutical market.

And it frustrates the hell out of us that those damned venture capitalists are so fixated on short-term payback that they refuse to back our scientists in their honest toil for mankind.

But wait, there's another take on all this: New Zealand is too small, capital too scarce and our biomedical industry too immature to foot it in the high-cost, high-risk, grandiose world of drug development. That may be, and - here's a sacrilegious thought - the venture capitalists may be right to turn their backs on our drug discovery start-ups.

One of the many that has done so is Quest VC, a biotech fund associated with Dunedin's Howard Patterson. Quest simply refuses to back developments with a long and expensive path to market - think full FDA clinical trials. Director Stuart McKenzie argues if New Zealand wants to develop a robust biotech industry, launching with a whole raft of human drug development companies isn't the way to go about it.

There are some meaty figures to underpin McKenzie's point. It takes 10-15 years to get a new drug to market; 70% of new pharmaceutical candidates are dropped before they reach phase I clinical trials; only one in five drugs that get as far as human testing get final approval; and, according to the Tufts Center for the Study of Drug Development, the average cost of bringing a new drug to market (including the cost of failures) is a staggering $US810 million.

It seems investors here are taking one look at the odds and choosing to keep their money in their pockets. Even John Kernohan, who as chief executive of Auckland University's commercial arm UniServices wet-nursed the bulk of our drug development companies through their post-natal years, is despondent.

"I am coming around to the view that it is very difficult to do a drug company in New Zealand," he says. "It's a long haul that New Zealand investors don't understand, and overseas investors are most reluctant to come in unless we have plans at an early stage to move the company offshore ... I think we are going to have to look at starting companies overseas and work out how we can get value for New Zealand out of that."

Kernohan won't talk detail, but he says all the UniServices spin-offs - including the likes of Protemix, Neuronz, Proacta and Endocrinz - are making "very serious decisions about their futures at the moment". He admits expectations of our drug discovery spin-offs have been "unrealistic".

In 14 years, UniServices has just broken even on its investments in new spin-offs. Kernohan says it has invested $29 million and got $32 million back. "It's not a fantastic return on investment."

So what is a tiny nation, hungry for the economic largesse promised by biotechnology, to do? The answer, reckons McKenzie and other pharma sceptics, is for New Zealand to take small steps, building biotech strength by leveraging off our traditional competitive advantage in the agricultural sector.

"The area we really need to get into is functional food. New Zealand is really good at making food and we have an emerging trend of people not just wanting to eat food, they want it as a prophylactic that is tasty and has health benefits. This is real high-value-added stuff, and New Zealand could become really good at this.

"My vision is that we have to grow to the point where we can fund the drugs. If we can build two or three big biotech companies with big balance sheets, we can get into the field of funding pharmaceutical developments."

Max Shepherd, fellow Quest director and founder of Zenith Technology, one of our most prolific biotech companies, agrees. "There is not one company in New Zealand with the capability to take a single chemical entity to market. It's not just the money, it's also the time and the fact that most of these companies will have to lose their control. The closer they get to market the more of the work that will have to be done offshore."

Since it was founded in 1987, Zenith has commercialised a raft of scientific discoveries, including colostrum supplement ImmunoZen, a sterile wound dressing marketed globally as AcryDerm and, most recently, the botrytis preventative BotryZen. Zenith's philosophy throughout, says Shepherd, has been to focus on positive cash flow by selecting candidates with a short path to market and strong export potential.

Agreeing with McKenzie and Shepherd in this debate is Paul Tocker, chief executive of Crop and Food: "I don't think New Zealand can demonstrate a competitive advantage in taking drugs to phase II or III clinical trials." He, too, reckons the future is in functional foods, like glucagel, the cholesterol-lowering, immunity-boosting barley extract currently being commercialised by Crop and Food. Because the regulatory hurdles are much lower than in the pharmaceutical game, Tocker anticipates the product will be on the market within two years.

Not that anyone is suggesting the medical research that led to the formation of Endocrinz and Proacta should stop. "I'm just saying we need to recognise the limitations," says Shepherd.

So what are those limitations? McKenzie reckons that rather than pouring scarce capital into high-risk drug development companies with ambitions to conduct clinical trials, New Zealand should be licensing the intellectual property at the pre-clinical stage and leaving the commercialisation to someone else.

"If you license it early you are accepting that you don't retain ownership, but you still get something for it and that helps you retain good scientists."

Not surprisingly, though, our biomedical entrepreneurs aren't content with the idea of selling the IP and resting with a modest royalty flow. While they accept that no New Zealand company is capable of taking a new drug all the way through to full FDA approval, they reckon we are better to retain the IP and take it as far as possible along the path to market before selling it.

What's more, they say, the real cost of developing well-targeted new drugs is just a fraction of the $US800 million cited by Tufts. Aki von Roy, chief executive of Proacta, believes the cancer therapies his company is working on could be done for $US60 million. He thinks it's a mistake for our universities to flog off their medical IP at the pre-clinical stage. "The difference between selling at the pre-clinical stage and selling at phase II could be 500- to 1000-fold."

John Chang, chief business officer at Virionyx, which has just raised $7 million through a public offering to pay for phase II trials for its HIV treatment, sides with von Roy. Although he concedes it's been a struggle to raise money "every step of the way", the resistance of investors is no reason to "sell the farm". Virionyx reckons it will cost only $70 million to get its drug HRG214 to market.

"If you can get as far as phase II or phase III and then partner with one of the large drug companies, depending on the agreement it could bring millions into the country. That's better than giving it up at the conceptual stage."

Chang cites the $2 billion paid by Bristol-Myers Squibb last year to the infamous ImClone for its phase III anticancer drug Erbitux as a case in point.

And it seems that this is a strategic vision that appeals to those who control the government research and development purse strings. Last November, Technology New Zealand gave its largest ever research and development grant - $1.7 million - to one-year-old Antipodean Biotechnology to help take a new treatment for Friedreich's Ataxia and Huntington's disease through to phase I clinical trials. The rationale? Tech NZ believed Antipodean's approach would help build New Zealand's capability to take new drug discoveries to the point of commercialisation.

Antipodean's strategy is to contract New Zealand companies, universities and Crown Research Institutes to do development work on a new chemical entity, mitoquinone, discovered by Otago University researchers Mike Murphy and Rob Smith. "We see the opportunity for New Zealand as taking a new chemical entity that has been patented through to the clinical proof of principle [efficacy] stage," says Antipodean chief executive Ken Taylor.

Tech NZ says its backing of Antipodean is all part of a balanced biotech portfolio. Group manager portfolio management John Smart says: "We think increasingly we need to be investing in research in New Zealand to improve the value of the prospect, which means getting the research findings as far down the validation track as we can go. It's about capturing as much of the value as possible."

Really? Or perhaps it's more akin to having a flutter. John Kernohan likens the drug development game to Lotto. "Everyone that buys a ticket thinks they are going to win something, but most people are disappointed ... You have to have a ticket in the lottery to win, but only one in 10 or 20 of these things is going to be a success story after five or 10 years."

The question for New Zealand's emergent, capital-starved biotech industry, perhaps, is just how many tickets can we afford to buy?

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