TMF: What are the bottlenecks that you see in the drug development process?

Pappas: The first bottleneck is occurring because of the huge technology strength developed out of the genomics and proteomics platforms. These platforms have produced a huge amount of information, and we think there are interesting opportunities in technologies that can help sort through that information.

The second bottleneck we see occurs in identifying -- from the thousands of compounds generated by the high throughput screening processes -- those that you want to take to the clinic.

The third bottleneck that we see is in the clinical trial area itself. Once you've sorted your products out, you still have patient enrollment, and there we see tremendous interest in using genomics, in particular, pharmacogenomics, to better assess patients and match them to drug candidates, and that's going to create the need for more patients in clinical trials, at least for a period until the FDA decides the best route for the products to get to commercialization. Now, I'd like to let Myles comment on his views on the biology and chemistry bottlenecks.

Myles Greenberg, Director & Principal, Fund Management: It's not a unique thing to say that the genomics revolution has provided a whole bunch of very interesting, very early biological data. Despite this, very little progress has been made in taking these new drug targets and validating them, making sure that you are choosing the right target from a drug standpoint.

Equally important, the industry has not really accelerated its ability to turn even validated targets into actual drugs. And, there are a lot of disease areas in medicine that haven't been aggressively targeted from a big pharma standpoint simply because the big drug companies spend their time looking for the next blockbuster that will have $1 billion-plus in sales. What a big pharma might call a niche area may still be a $500 million dollar market that hasn't had the amount of capital and resources devoted to it. For example, cell lines that can be used for research don't even exist in a number of unmet medical need categories. Animal models that can reproduce disease to help predict efficacy in humans have not been developed. 

On the chemistry side of the equation, in many respects big pharma is really operating funnel style in choosing compounds for development -- a big bottleneck is just figuring out which of the compounds a pharmaceutical company has in its library that have the qualities to make effective drugs. In many cases it is still little more than a trial and error process.

TMF: Can you explain the process a little bit more?

Greenberg: Part of the early chemistry process, after a target is selected, is to start running your chemical libraries past that target in an assay, looking for compounds that bind to that target. That's the first step. Then you have something called a hit, where you have a compound, a small molecule or biologic, that binds with that target. But that's still a long way from being a drug candidate. You have to decide and analyze whether or not that compound is something that can be absorbed in the human body, distributed to the appropriate tissues, metabolized appropriately, and that the human body can detoxify and excrete. In addition to that, you have to determine how toxic to the human body that chemical compound is.

And these processes really haven't changed much in the past 20, 30, 40 years. We're still in many respects using the same trial and error process that traditional chemistry is to find out whether these compounds are appropriate to become human drugs. We're using the same animal models and same animal testing processes to figure out whether the compounds are toxic or not.

TMF: Is that just because the process is as good as it gets, or do you see an improved model to get from target to drug?

Greenberg: There are lots of opportunities popping up. We look at opportunities every day in these different areas that certainly purport to improve the process or speed it up, or reduce the cost of it. I would say yes, there are new technologies being developed in these areas. Obviously, as investors we're not only interested in seeing the technology, but also that there be a business model and investment thesis that works for us. So I'm really only addressing the first part of the equation right now, which is the requirement that the technology address an unmet medical need, an unmet pharmaceutical industry need, or an unmet life science need.

Once you get past that first hurdle, which for us is the technology hurdle, then you can start addressing the issue that given the technology, given the ways the company has been structured, does it make sense from a business model standpoint? Can they sell it to the pharmaceutical industry or produce a product more quickly or at such cost that it makes it a good investment thesis?  That's the big question.

TMF: It's about identifying companies that can potentially sell to big pharma?                

Pappas: That is our approach, rather than relying on the capital markets to provide a return on our investments.

TMF: Do you look beyond the big pharma companies and other biotech firms?

Pappas: In addition to the opportunities in private equity created by a lack of funds available for early stage investment, and the bottlenecks in the drug development process we just talked about, there is another opportunity for us in the commercial sector. We believe a deconstruction of the pharmaceutical industry is underway to satisfy the natural need to provide better efficiency and to combat the price pressure on the revenue side. The blockbuster drugs coming off patent are forcing the industry to consolidate, though certainly not as fast as I believe that it will as it further revolutionizes. Still, it is combining at a relatively fast rate.

The biotech industry provides drugs to the pharmaceuticals, which have the large dollars and major distribution capabilities-- this offers a very attractive route for the biotech industry, which has shown its efficiency in research and development. In addition, there are opportunities for biotechs to take projects from the large pharma players, accelerate them on a more cost-effective basis than big pharma can, and then pass them back to big pharma to further develop and distribute.

So we believe that there's an opportunity out there to work with large pharma to identify those programs they're no longer investing in -- both on the research side and development side -- and find a way to switch and fund them back in the biotech sector until such time as they are large and attractive enough to sell back to a large pharma that can use its marketing and distribution strength.

TMF: Thanks for taking the time to talk with us today!

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