Alex Philippidis Senior News Editor Genetic Engineering & Biotechnology News

VCs are attracting Big Pharma’s attention, but data validation remains a problem.

As startup biotechs struggle to balance reduced funding with investor impatience for results, some funders have responded by helping create “virtual” companies focused on a single project they hope will quickly attract biopharma giants scrambling to plug their thinning pipelines.

Big biopharma is taking the bait. In June, Astellas Pharma joined Drais Pharmaceuticals in launching the virtual company Seldar to develop and commercialize Astellas’ experimental drug ASP7147 for irritable bowel syndrome with diarrhea. Two months earlier, the companies formed virtual Telsar Pharma to develop Astellas’ ASP3291 for ulcerative colitis.

Shire bought virtual biotech FerroKin BioSciences in March for $100 million up front and up to $225 million tied to milestones for clinical development, regulatory and net sales. FerroKin has a Phase II iron chelator treatment for patients with iron overload after numerous blood transfusions. And in February, Biogen Idec bought virtual Stromedix for $75 million up front, plus contingent value payments of up to $487.5 million based on development and approval milestones.

In virtual companies, a small, sometimes scattered management team farms out operations—they can include R&D, clinical trials, regulatory affairs, financial and human resources. Some virtuals prefer to keep some operations in-house. Rubicon Biotechnology, which helps smaller companies develop drugs, is in talks to buy or lease lab space. “If you can retain some development capabilities internally, I think at the end of the day, you’ll actually save money. You’re preventing problems from happening,” Richard Richieri, a partner in Rubicon Biotechnology, told GEN.

Richieri, a former head of development and manufacturing at CMO Avid Bioservices, helps small biotechs navigate production challenges as they scale up from bench to GMP production for clinical trials. One challenge, he said, is shifting from processes based on Chinese hamster ovary (CHO) cells to less expensive production systems using yeast or E. coli.

“Instead of 14 days in a bioreactor, you’ll be in there for two or three or four days, for example. And it doesn’t take you weeks to get to that point. It just takes you a few days to get into the fermenter,” Richieri said.

Virtuals have added incentive to control production processes: would-be suitors are waiting longer to acquire them.

“No longer are the Pfizers of the world buying companies in preclinical stages. Now they’re buying companies in their second and third phase. The process of getting there is just as important as the technology itself,” said Cassidy Brady, senior manager of marketing and business development with Pfenex. Rubicon is in talks with Pfenex, which Brady said is drawing a growing number of virtuals among current and prospective customers.

While their executives and investors say virtual companies promote more efficient use of capital, one consultant questions their ability to develop valuable medicines.

Stewart Lyman, Ph.D., owner and manager of Lyman BioPharma Consulting, says virtual companies are more prone than traditional biopharma startups to problems with science since they lack facilities to validate data. That data, he said, can come from entrepreneurs associated with the virtual companies; executives who left biopharmas that didn’t develop those ideas; or previously published studies.

Published data isn’t necessarily foolproof. Key findings for only six of 53 landmark cancer research papers could be reproduced by an Amgen R&D team, according to a study published March 29 in Nature. In online comments, several readers faulted the study for not disclosing full details of the research at issue.

Some virtuals address validation by hiring CROs, posing a potential conflict of interest: “If you tell the CRO you want to have your results validated, some of them (at least) will make every effort to get the result you wish so that they can retain you as a client in the future,” according to Dr. Lyman.


Virtual companies seeking to validate data face another challenge: paying for it.

“Who wants to tell the company that you don’t believe their data and won’t invest until it is validated? Much of the work in startups comes from academic labs, and I can’t see academic investigators dipping into their NIH grant funds to pay someone else to reproduce their work,” Dr. Lyman said. “If they have already been spun out of a university, startups often won’t have the money to validate it themselves (that is, pay for someone to reproduce the work), and I don’t know if VCs will pay to have this work done before they invest.”

While fully staffed companies might use a typical $10 million first round to set up independent labs, “if you did it virtually, maybe you’d spend $8 million,” Michael Greeley, general partner at Flybridge Capital Partners, told GEN.

“There’s some modest savings, because you’re not incurring a lot of fixed costs, but in order for you to get access to third-party lab space, you’re going to pay a premium to get that. And to get the right attention and the right priority, that’s not free,” Greeley said.

Bruce L. Booth, D.Phil., a partner in the Life Sciences group of Atlas Venture, told GEN half his firm’s portfolio biotechs are virtual.

“You don’t need a lab down the hall to do scientific validation work. Great science can get done by virtual biotechs, and is being done all the time,” Dr. Booth said. “Instead of hiring a group of generalist B+/A- molecular biology folks to staff up an in-house lab, virtual biotechs can go and partner with the world’s best A+ specialists—the labs with the most knowledge, the CROs with the most expertise, etc.”

Companies with their own labs can have conflicts, Dr. Booth added: “Once you have an in-house lab with scientists, you want to ‘feed’ it with stuff to do which dilutes the focus under the guise of portfolio diversification. Because you’ve got infrastructure, you don’t want to kill bad projects as you’re amortizing costs across them, etc. A focused virtual biotech is very efficient about titrating in capital to push science and assets forward.”

Validation Studies

One proposed solution to the conflict issue, Reproducibility Initiative, would let authors present studies to an advisory board that selects experimental providers to replicate key experiments. Providers’ identities will not be shared with authors. If their papers are validated, authors can publish their results in PLoS ONE, and deposit primary data in an open-access repository.

Sounds good in theory, but the program has potential problems, Dr. Lyman said.

“Who exactly are these people who are going to do the validation? I can’t imagine that a top science lab is going to be validating somebody else’s stuff that they’re not necessarily working in that same area. What would be the incentive?” Dr. Lyman said. “For contract research organizations, how many of them are actually qualified to reproduce highly complex experiments that sometimes require specialized animals, specialized proteins, and very expensive equipment?”

Reproducibility Initiative was launched last month by commercial online portal Science Exchange, whose CEO Elizabeth Iorns told Nature that authors will initially fund validation studies, with the hope of shifting that cost to funding agencies. That’s unrealistic, since NIH’s budget has barely budged in recent years, and could shrink next year under sequestration.

For now, virtual companies must rely on CROs or in-house experts to validate their science. The Reproducibility Initiative could be a first step toward a true validation protocol, if journal publishers and top research institutions can agree on basics. Then comes the hard part: convincing virtuals the extra cost of formal validation will ultimately pay off by preventing failed clinical trials later.

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