Vladislav Gurin :: BioTech & Pharma consulting

Arthur Kornberg, the Stanford University Nobel laureate, who first synthesised DNA in a laboratory and whose identification of the enzymes used by cells to reproduce DNA laid the basis for the biotechnology, died of respiratory disorder on Friday at Stanford Hospital at the age of 89.

Kornberg was the founder of the Stanford University School of Medicine’s biochemistry department, taking in a talented group of unique scientists who worked together for nearly 50 years.

Kornberg lived to see his son Roger win the 2006 Nobel Prize in Chemistry.

It is often hard to conceive how little was known about the mysterious DNA molecule when Kornberg began his research in the 1950s. Scientists were pretty sure that it was the repository of genetic information. In spite of that, DNA was a mystery.

During the second world war Kornberg was interested in enzymes, the bioproteins used by cells to carry out chemical reactions, especially the synthesis of substances used by cells.

After preliminary work isolating enzymes involved in vitamin manufacturing, Kornberg tackled the more difficult challenge of DNA and RNA, the messenger molecule used by cells in the conversion of genetic information contained in DNA into proteins.

Kornberg reasoned that cells would produce DNA by stringing together pre-made nucleotides - combinations of a base, a sugar molecule and a phosphate group.

While Kornberg was working on the project in 1953, James Watson and Francis Crick published the DNA structure, providing clues to direct his efforts. By the following year, Kornberg and his colleagues had isolated the enzymes used to produce the nucleotides used in RNA and DNA.

By 1957, Kornberg had discovered and purified the key molecule, named DNA-polymerase, and submitted two papers describing the work to the Journal of Biological Chemistry. Referees, however, objected to calling the material produced by the enzyme DNA.

Disgusted, Kornberg withdrew the papers, but they were published the following year when the journal appointed a new editor.

His work confirmed speculation by Watson and Crick that genetic information was encoded in opposite directions on the two strands of double-helical DNA.

Kornberg shared the Nobel Prize in Physiology/Medicine for the DNA synthesis in 1959.

In association with Financial Times

TRIPS is the most significant agreement on intellectual property of the 20th century. More than a 100 ministers signed it on behalf of their nations in the magnificent Salle Royale of the Palais des Congrès in Marrakesh on 15 April 1994.
TRIPS is one of 28 agreements that make up the Final Act of the Uruguay Round of Multilateral Trade Negotiations, the negotiations that had begun in Punta del Este in 1986. Another of those agreements established the WTO, and it is the WTO that administers TRIPS.
TRIPS was the first stage in the global recognition of an investment morality that sees knowledge as a private, rather than public, good. The intellectual property standards contained in TRIPS, obligatory on all members of the WTO, would help them to enforce that morality around the world.
In India, generics industry warned of dramatic price increases in essential drugs that would follow from the obligation in TRIPS to grant 20-year patents on pharmaceuticals.
TRIPS is about more than patents. It sets minimum standards in copyright, trade marks, geographical indications, industrial designs and layout-designs of integrated circuits. TRIPS effectively globalizes the set of intellectual property principles it contains, because most states of the world are members of, or are seeking membership of, the WTO. It also has a crucial harmonizing impact on intellectual property regulation because it sets, in some cases, quite detailed standards of intellectual property law. Every member, for example, has to have a copyright law that protects computer programs as a literary work, as well as a patent law that does not exclude microorganisms and microbiological processes from patentability. The standards in TRIPS will profoundly affect the ownership of the 21st century’s two great technologies – digital technology and biotechnology. Copyright, patents and protection for layout-designs are all used to protect digital technology, whereas patents and trade secrets are the principal means by which biotech knowledge is being enclosed. TRIPS also obliges states to provide effective enforcement procedures against the infringement of intellectual property rights.
No one disagrees that TRIPS has conferred massive benefits on the US economy, the world’s biggest net intellectual property exporter, or that is has strengthened the hand of those corporations with large intellectual property portfolios. It was the US and the European Community that between them had the world’s dominant software, pharmaceutical, chemical and entertainment industries, as well as the world’s most important trade marks.
The rest of the developed countries and all developing countries were in the position of being importers with nothing really to gain by agreeing to terms of trade for intellectual property that would offer so much protection to the comparative advantage the US enjoyed in intellectual property-related goods.
For instance, an Australian study of copyright royalty flows during the 1990s showed that Australia paid out to overseas copyright owners around Aus$1.2 bln more than it received. Another Australian study showed that the cost to Australia of the TRIPS provision which extended the patent term of 20 years to patents already in existence could be as high as Aus$3.8 bln.
In Australia, as is the case in all small- to medium-sized developed country economies and developing country economies, the vast bulk of patents is in foreign ownership.
Sometimes we were told that ‘we will be eventual winners from intellectual property’. While it is good to be optimistic about one’s distant destiny, it does not explain why normally hard-nosed trade negotiators would take the highly dangerous route of agreeing to the globalization of property rules over knowledge that had brought their countries so few gains in the past. Of the 3.5 million patents in existence in the 1970s, the decade before the TRIPS negotiations, nationals of developing countries held about 1%.
Developing countries such as South Korea, Singapore, Brazil and India, that were industrializing, were doing so in the absence of a globalized intellectual property regime.
More disturbing for developing countries is the development cost of an intellectual property regime. The basis of competition lies in the development of skills. The acquisition of skills by newcomers disturbs roles and hierarchies.
After India built a national drug industry, it began exporting bulk drugs and formulations to places such as Canada. A developing country which had acquired skills threatened those at the top of an international hierarchy of pharmaceutical production – the US, Japan, Germany and the UK.
Australia has shown in the field of wine-making that the acquisition of skills can upset a European-led hierarchy of wine quality and production. The French have responded, in part, by insisting on protection for geographical indications, a form of intellectual property protection allowing them to claim, for example, exclusive use of the ‘Burgundy’ and ‘Champagne’ labels.
Underneath the ideology of intellectual property there lies an agenda of underdevelopment. It is all about protecting the knowledge and skills of the leaders of the pack.
The answer to the question about why developing countries signed TRIPS has much to do with democracy – or rather, its failure. Put starkly, the intellectual property rights regime we have today largely represents the failure of democratic processes, both nationally and internationally. A small quantity of US companies, which were established players in the knowledge game, captured the US trade-agenda-setting process and in partnership with European and Japanese multinationals drafted intellectual property principles that became the blueprint for TRIPS. The resistance of developing countries was crushed through trade power.
One answer to this might be that corporations are entitled to lobby, and, in any case, developing countries agreed to TRIPS through a process of bargaining among sovereigns. It is indeed true that big corporations are entitled to lobby. It is important that big business makes its views and policy preferences known to government since around the globe it represents hundreds of millions of jobs and investors. However, that lobbying in relation to property rights should take place under conditions of democratic bargaining.
Democratic bargaining matters crucially to the definition of property rights because of the consequences of property rules for all individuals within a society. Property rights confer authority over resources. When authority is granted to the few over resources on which the many depend, the few gain power over the goals of the many. This has consequences for both political and economic freedom within a society.
The stakes are high in the case of IP rights. Intellectual property rights are a source of authority and power over informational resources on which the many depend – information in the form of chemical formulae, the DNA in animals, the algorithms that underpin digital technologies and the knowledge in books and electronic databases. These resources matter to communities, to regions and to the development of states.

After drawing on research from AMR Research, McKinsey & Company, I point to the widespread adoption of CRM technology solutions.
CRM (Customer Relationship Management) is the technology that tracks customer activity and tailors marketing pitches accordingly. Estimates of the size and growth of the CRM software market vary considerably. Nevertheless, the investment in this technology is both substantial and growing and an important focus of companies’ budget. The Gartner Group estimated that worldwide spending on CRM was already $23bln in 2000 and would grow to $76bln by 2005 (or about $100bln by 2007).
Two-thirds of all telecom operators in U.S. and half or more of all U.S. financial services, pharmaceutical, BioTech and transportation companies are either implementing or already utilizing such solutions. Across the USA and Europe, approximately 45% of the companies in the high technology, healthcare, aerospace, retailing and utilities sectors have invested in CRM systems.
Most large organizations dealing with a giant number of customers have adopted or will adopt one or more IT-based CRM solutions. Medium-sized and smaller organizations need to consider their existing and potential scale in relationship to the technology requirements.

Having analysed extensively CRM project management and using a range of sources I’d like to emphasize some of organizational prerequisites that make a company an ideal candidate for adopting an IT-based CRM solution:

• Do you have a large number of people in sales and service in direct contact with customers, say more than 30?
• Are you in a highly collaborative environment, with customer interaction requiring input from multiple players within each function (sales and service)?
• Do you sell complex products that require a high degree of configuration and customization?
• Do you have a large number of customers, say more than 10 000?
• Is a typical customer relationship worth a lot to you from a profit standpoint, i.e. will it cost you to lose one?
• Can your customers interact with you across multiple channels?
• Do you have frequent contact with large groups of customers, or all customers, across multiple channels?
• Is there a need to customize what you are saying to each customer through these channels?

I will try to provide several examples of a real option analysis in contractual relationships between two parties: a delivery contract for a service product with uncertain development time; a supplier contract for assets with short lead times such as fashion goods with market uncertainty; and a joint venture agreement to co-develop a new original drug with significant technical and market payoff uncertainty.
For instance, a joint venture on a product Research & Development program can be viewed as a sequential compound option whereby after the initial learning experience one of the partners makes an equity investment in the other partner.
Successful product development during the joint venture creates the option to expand the agreement to include sales or distribution rights and may ultimately create the incentive—and real option—to acquire the joint venture partner. These types of agreements are frequent in high-tech industries such as semiconductors, software development or biotechnology, which feature high R&D intensity and high levels of technical uncertainty.
A recent article in Financial Times alludes to Pfizer’s changing drug strategy to restructure R&D, which now involves a series of investments in start-up BioTech companies in exchange for equity. The size and research budget from Pfizer’s approximately $7bn in annual R&D spending and to be corrected later.
These examples also extend to other industries. Anheuser-Busch, the global brewery, within the past few years has initiated a novel strategy of growth option acquisitions by making small equity investments in local breweries in foreign markets. These investments given Anheuser both growth options as well as learning options: By participating in the small breweries, Anheuser learns quickly about the market structure, demand, and growth potential of these markets, thereby reducing much of the noise that would otherwise cloud assumptions about the attractiveness of these markets. This, in turn, facilitates informed decisions as to which of those growth options should be exercised by acquiring target firms in proliferating markets.
A joint venture creates the option to learn about technical and market uncertainty by preserving a stake in the development program. It provides the opportunity to participate in the upside potential while also sustaining enough flexibility to exit at low costs if the project fails. Those partner strategies that build on sequential investments constitute an important part of corporate strategies. They avoid the risk inherent in premature acquisition of some technology firm prior to obtaining a good understanding of the feasibility of the emerging technology and its market acceptance.
An agreement between two partners, be it to jointly develop a new product or to provide for product or service supply, should allow for sufficient embedded options and flexibility to sustain a fair and just allocation of obligations and rewards to each party for both the current conditions, under which the agreement is closed, and a set of future uncertainties. In other words, the agreement should create a Pareto optimal allocation of risks and reward in the face of uncertainty: there is no other allocation in which some other individual is better off and no individual is worse off. It implies that both parties can benefit equally from future upsides and are equally protected against downside risks. Contract embedded options that permit fair risk and reward sharing during the presumed lifetime of the agreement under a set of future uncertainties are likely to stabilize and sustain the relationship between the two parties.
One solution to the problem of future uncertainties is contingent contracts.
In a contingent contract, some of the deal terms are not finalized but are left open for future events, that is, the contingencies, to occur. Those contingencies may relate to uncertain market payoffs, the success of a joint project, or the costs it may take to complete a task. Real options are a great analytical tool to reconcile disparate assumptions and expectations in the structure of a contingent contract.
In other words, contract embedded options are constructed to make behavioral motives or penalize unwanted actions. These include delivery contracts with penalty clauses for delays or employment contracts that entail incentive options.

A company acquires a growth option by making an initial investment in a new market, a new product line, or a new technology. This investment often requires more initial costs than the expected revenue would justify.
In other words, the Net Present Value (NPV) gives a negative result. However, the value of this investment opportunity comes from creating future growth opportunities. If the new market proves profitable, the initial cost can be expanded into a broader geographic region. If the new product line is successful in a pilot market area, production and launch can be expanded. If initial experience in a pilot plant with a new production technology decreases costs and increases efficiency, the technology can be implemented throughout the entire corporate enterprise.
Growth options create infrastructure and opportunities for future expansion and hence are of strategic value. They are sequential options that link distinct growth and expansion steps but always preserve managerial flexibility to embark on the next expansion step, depending on prevailing market conditions. Even if the pilot project turns out to be a complete failure, the company will gain experience and insights that may be of value for the planning or implementation of other growth options in the future.
Growth options exist virtually in every industry, but they may be especially essential for high-tech, high-risk endeavors. Growth options have been valued for BioTech companies, for the development and implementation of new software, or for an entire Information Technology infrastructure, including the consideration of competitive scenarios drawing on game theory. For example, Benaroch and Kauffman apply the binomial and Black-Scholes models to evaluating IT investment, with a real case study on the Yankee-24 electronic banking network.

The leadership role of the United States in the biotech and life-science industry has previously been explained by the real option approach to investments.
For high-risk and extensive R&D projects such as those leading to innovative original drugs, the investment approach is staged. These projects were characterized as sequential compound options. Concurrent investment into subsequent stages depends on the level of uncertainty that determines the critical cost to invest. At least two sources of heterogeneity between the U.S. and Europe, so goes the argument of this research, have helped the U.S. to identify and execute real options in the emerging biotech industry while preventing the EU from doing so.

1. Regulatory uncertainty, as one key uncertainty in the drug development and approval process, has been higher in Europe than in the U.S., and has elevated the critical threshold to invest in for innovative R&D projects. For one, European drug approval agencies were less structured and slower in the approval rate than the U.S. FDA.
2. Further, consumer concerns about the merits of modern biotechnology were much stronger in Europe.

In addition, as the drug development process tends to be a continious one, the rate of investment for the time to build & strengthen option is crucial for the option owner to fully execute all sequential steps of the compounded real options. In the U.S., at least within the early stages of the emerging biotech industry, there was much more capital, and specifically risk capital, available to support these real option owners.

In the XXI century, we are much more enthusiastic about outlooks of nanotechnologies for our life and environment. Nanotechnology, when fused with biotechnology, creates nanobiotechnology and nanobiomedical technology; the products of which hardly resemble the parent biotechnology products. These new scientific disciplines, by overall opinion, can even change the face of our civilization in this century. The important point is that dealing with nanotechnologies, we faced new phenomenon: the transition of compounds to nanostate dramatically changes their characteristics such as electrical, magnetic, optical, mechanical, biological and etc. This really great phenomenon permits creation of novel functional materials with unique custom-made properties.
Development of completely new technologies and innovative nanomaterials and nanosystems with exceptional desirable functional properties lead to a new generation of products that will improve the quality of life and environment in the years to come. There are numerous new generation nanomaterial products of high quality including biocompatible biomaterials, antimicrobial biodevices, surgical tools, implants, decorative and optical devices, and, finally, nanocarriers and nanosystems.
One of the most important applications of the so-called nanomedicine/nanotherapy appeared to be the targeting of medicines or additives to the desired organs and tissues using special nanoparticles and nanocapsules of various nature to cure human diseases. Because of their unique features, nanosystems enhance the medicines’ performance by improving their solubility and bioavailability, increasing their in vivo stability, creation of high local concentrations of bioactives in target cells and cellular compartments in order to gain therapeutic efficiency.
Nanocarrier systems used for medicine targeting are mainly consisting of lipid molecules, surfactants, and certain polymers, such as dendrimers, which are specially designed to be drug carriers. Hybrid organic/inorganic materials have also become popular now. Carbon-based nanostructures (nanotubes, etc.) are used for implant construction and as nanosystems for drug targeting.

Given the large decline in expected sales that usually occur where generics enter the market, brand companies begin planning a strategic response to this entry in advance of the patent expiration of a commercially important product. These responses are typically referred to as Life-Cycle Management (LCM) strategies. The options used by brand firms:
1) the introduction of a new therapeutic class for the same indication;
2) the introduction of a new formulation (e.g., a new delivery system or a combination product) that has improved therapeutic benefits in terms of patient tolerance, compliance, safety or efficacy;
3) the introduction of an Over-The-Counter product.
Each of these strategies has been employed on a selective basis with some success by brand firms.
The most effective life-cycle management strategy seems to be the introduction of a new class of therapies. Competition evolves in pharmaceuticals by the introduction of new classes of entities with superior therapeutic properties to prior generations of products. Firms that have a commercially important product subject to patent expiration will frequently be conducting R&D on new therapeutic approaches for the same indication. However, there are no guarantees in this regard because the candidates for the next advance in therapeutics often span a large spectrum. Furthermore, the R&D process is subject to many technical, regulatory, and competitive uncertainties with long time durations.
Another life-cycle management option for the brand firm is the introduction of a product line extension such as a new delivery system. Under the Hatch-Waxman Act (1984), a new formulation involving additional clinical trials is eligible for a 3-year exclusivity period. Moreover, a new delivery mechanism or formulation may be covered by a new patent. One of the most successful cases in this regard was the introduction by Pfizer of Procardia XL, a once-a-day formulation of a leading calcium channel blocker for hypertension. The extended release Procardia improved the tolerability and the side-effects profile associated with the active ingredient.
As a consequence, Procardia XL appeared to be a much larger commercial success than the earlier formulation of Procardia. This life-cycle management strategy has been employed in several other situations with somewhat mixed success. The weekly formulation of Prozac, for example, has enjoyed only very limited success. The degree of therapeutic improvement is a key factor in the success of this life-cycle management strategy.
A third basic option available in the case of some therapeutic categories is to develop an over-the-counter version of a product subject to patent expiration.
The strategy has been employed for example for anti-inflammatory pain relievers such as Motrin and Naprosyn, anti-ulcer therapies such as the H2-blockers Tagamet and Zantac, proton pump inhibitors such as Prilosec, and in several other therapeutic categories. However, a shift to OTC status requires approval by the FDA that the drug is safe for self-medication (Juhl 2000; McCarran 1991; Schweitzer 1997). A company will normally need to submit new clinical trial evidence to that effect. If approved by the FDA, the company receives a 3-year exclusivity period for its OTC drug in recognition for the new clinical trial work.
A key driver of success in the OTC market is the ability to capitalize on the brand loyalty enjoyed by the prescription product. The number of category shifts to OTC status approved by the FDA has grown over time.
At the same time, there are many therapeutic categories where this is not as viable strategy because they would not meet the FDA’s requirement on safety for self-medication (e.g., mental health and cancer drugs). The FDA has also declined several product requests for shifts to OTC status, such as anticholesterol drug agents.