According to pharmaceutical scientists, all contemporary drug therapy is based on a total of 500 targets. Recent advances in genomics and proteomics promise a quantum leap in usable drug targets, but pharmaceutical and biopharmaceutical companies are in a bind when it comes to validating targets and optimizing leads. This has created a market for outsourced drug discovery chemistry.

“The most significant change in medicinal chemistry can be traced to the genomic revolution,” said David Coffen, Ph.D., the chief scientific officer of Discovery Partners International (DPI). “Before, the medicinal chemist focused around a particular therapeutic area. Now, he or she is more likely to be an expert in target classes.” For example, the skills for finding HIV/AIDS protease inhibitors can be used for other inhibitors in such areas as heart attacks and Alzheimer’s disease. “It’s led to a new breed of chemist,” Dr. Coffen added. “And it turns out that older chemists have skills they didn’t even know about.”

A new business model has followed this new conception of chemistry. “In the last two years, there’s been a minor explosion in providers of lead optimization services,” said Michael Ratchford, the recently appointed president of Argenta USA, a subsidiary of Argenta Discovery. “Three to five years ago, this sort of outsourcing was unheard of. Now everyone does it.”

The boom in drug discovery service providers seems to derive partly from the wave of big pharma mergers and acquisitions in the late 1990s. “For years, Wall Street has declared that big pharma companies need to roll out at least two to three major drugs annually, to build valuations,” Mr. Ratchford commented. “Even with their merger strategies, which brought pipelines together, they haven’t been able to get to that level.” One of the problems, he argued, is that companies simply don’t have the resources to do perform it all in house.

“M/A activity has led to an explosion of opportunities,” said Thomas D’Ambra, Ph.D., chairman and chief executive officer of Albany Molecular Research, Inc. (AMRI). “With the goals of more NDA submissions, pharma companies need a lot of early stage programs running in parallel.”

Mr. Ratchford agreed. “Thanks to genomics, there are plenty more juicy targets out there. Pharma companies have been building up their discovery chemistry units, but not quickly enough to catch up with the proliferation of targets.” He added, “They can’t get to as many targets as they need to, and they can’t simply buy in all the capacity, because many targets may turn out not to be worth pursuing.” Thus, the market for discovery service providers was born.


Optimizing Opportunity
Players within the industry contend that the annual market for outsourcing drug discovery chemistry may exceed $1 billion. Michael T. Flavin, president and chief executive officer of MediChem Life Sciences, compares the development of this field to that of clinical trials. “I’m old enough to remember when nobody outsourced clinical trials,” said Mr. Flavin. “And that’s changed for sure. Now, outsourcing may account for 50% of total clinical trial budgets, which is an enormous number.” Several industry figures contend that 15-18% of total pharma R&D budgets is devoted to chemistry, so a comparable 50/50 split with outsourcing could create an enormous opportunity for providers.

Mr. Flavin’s company has spent the last three years preparing itself for this new marketplace, making several acquisitions and recently announcing a restructuring plan. “For the first 12 years of our business, we were self-funded from cash flow. In the last two years, we’ve gone public and taken outside funding to build infrastructure, add personnel and acquire and develop proprietary technologies.”

In the last two years, the company acquired Emerald BioStructures, a structural proteomics company based in Seattle, and ThermaGen, a biocatalysis firm, with the intention of moving upstream in drug development. “By adding structural proteomics technology, we can get more creatively involved in the discovery process. Without making that shift, our services could have become more of a commodity, rather than an opportunity to generate intellectual property value,” said Mr. Flavin.

Similarly, AMRI recently acquired the lab facilities of Great Lakes Fine Chem-icals, in Mt. Prospect, IL. For $10 million, the company purchased an 88,000-square-foot site with chemistry synthesis labs, including 55 fully equipped scientific workstations, and a two-bay, non-GMP chemical pilot plant, as well as research fermentation facilities and scale-up fermentation capacity. Dr. D’Ambra commented, “The people, technologies and expertise at this facility form an excellent complement to our capabilities. The biocatalysis and fermentation technologies bridge the next step in optimization and scale up of discoveries coming out of our combinatorial biocatalysis and natural products groups.”

Ricerca, LLC has also moved further back in the development chain with its recent restructuring. The company has moved away from some of its agrochemicals support businesses to boost its drug discovery services. David M. Stout, Ph.D., Ricerca’s director of medicinal chemistry, remarked, “The impetus for this change was Ricerca’s strengths in ADME and process chemistry. The company wanted to get in upstream, to address the needs of biopharmaceutical companies all the way to NDA filing.”

There’s been a lot of talk about the flaws of one-stop shopping in other aspects of pharmaceutical outsourcing, but Ricerca, AMRI and others are betting that clients will want to stick with a single vendor in the drug development field. “It may not have started as such, but discovery outsourcing has more of a strategic model than other parts of pharmaceutical outsourcing,” said Dr. D’Am-bra. “That’s partly because this field requires so many different skills and capabilities, with projects that involve relationships that develop over years.”

Dr. D’Ambra contends that the move upstream can lead to more stable, long-term business. “If you only provide custom synthesis, there’s a distinct endpoint to your work. Discovery projects, on the other hand, tend to be more open-ended, like lead optimization work.”

He added, “The more the Full-Time Equivalent (FTE) scientist is involved in a project, the more valuable he becomes. If you want to do more than hire a pair of hands, you have to get the scientists more involved and motivated.” Dr. D’Ambra noted that AMRI also provides “a pair of hands” when the need fits, but emphasized that discovery chemistry work can involve a great deal of creativity that can be lacking in other pharmaceutical outsourcing venues.


FTEs vs. Royalties
While the potential for a billion-dollar market exists, the business of outsourcing medicinal chemistry remains a work in progress. “In the last two years, there’s been a lot of margin pressure on FTE rates,” said Mr. Ratchford. “But price pressure tends to be like a pendulum, and I think it’s swinging back ‘the right way,’” he commented.

In addition, discovery companies hope to build more milestone/royalty relationships with pharma and biopharma companies, rather than FTEs. The trick, they say, is convincing their clients to go along with it. “Generally, the biotech companies are willing to work in a royalty-based relationship,” said Mr. Flavin. “With the bigger pharma companies, the work tends to be FTE-based.”

“The real value is in doing our own fundamental discovery,” said Mr. Ratchford. To that end, Argenta Discov-ery, which was established in the UK by a team of scientists from Aventis UK’s pharma research center and Chem-MediCa, a spinoff of the Imperial Col-lege of Science, Technology and Med-icine, is performing research on its own against a number of novel targets. The company plans to license out these compounds at the preclinical stage, for upfront fees and subsequent milestones and royalty payments.

MediChem is following the same path, developing anti-cancer drugs based on a particular enzyme. The company has received more than $2 million in grants to pursue its leads, employing its new structural proteomics technology to find more effective treatments.

In some respects, AMRI serves as a model for this type of company. In 1995, four years after its creation, AMRI gained patents on the active ingredient in the non-sedating antihistamine Allegra, which was then licensed to Hoechst Marion Roussel (now Aventis). AMRI receives royalties on Allegra sales; those royalties topped $27 million in 2000. “The Allegra royalty revenue has been very beneficial to us and our ability to grow. Allegra provides us with a cash flow that most of our competitors don’t have,” Dr. D’Ambra commented. In December 2000, AMRI acquired New Chemical Entities, a west coast-based drug discovery company with a genomics technology platform.

AMRI plans to balance its contract chemistry business with more royalty-based revenues. With Allegra’s patents currently under attack by Barr Laboratories, it’s become more important for AMRI to diversify its revenue sources.

But this is a dicey proposition, given the incredible odds against finding useful compounds. “Developing a useful lead for a target is large risk,” Dr. Stout commented. “It used to be that 1 in 10,000 was useful.” With the use of combinatorial chemistry, in which massive libraries of modular compounds are tested, the odds can grow even worse.

Still, not all discovery providers are working on their own compounds. Dr. Coffen of DPI remarked, “We’ve developed an effective, broad suite of skills for drug discovery, but we’re not using them in house. It makes our clients more comfortable this way. We might change course in the future, but I don’t think clients want to give info on lead compounds to a company that’s working in the same field.”

Michael Flavin at MediChem disagreed. “In my experience, we’ve seen very little intellectual property paranoia. We talk openly with clients about our own R&D activities,” he said, adding, “If anything, it builds confidence, showing that we’re putting our money where our mouth is.” Mr. Flavin contended that pharma companies are concerned about adding Investigational New Drugs. “They don’t care if the IND is generated in house or not,” he said. “It’s almost like R&D performed on spec.”

As our genomics and proteomics technologies advance, and the number of therapeutically useful targets grows from 500 to perhaps as many as 5,000, drug discovery outsourcing will be a necessity for both large and small companies. “No pharma company, no matter how big, is going to support the capacity to search through so many targets,” said Dr. Coffen. “And the biopharma players are too focused on biology to devote their resources to chemistry. So both sides are going to be looking for help.”

Dr. D’Ambra advised caution in the issue of getting immediate results from drug discovery providers. “What we have to remember is that the compounds in the lab today will likely hit the market in 8-10 years. So think back that far to the economic and healthcare factors and remember that we’re reflecting those developments right now. The good news is that early pipelines are bulging. By 2004-2005, there will likely be a huge upswing in NDAs, and new technologies will also help boost numbers. But chemistry is the bottleneck, and it’s one that we’re all looking to open up.”