With venture capital flowing more slowly into the biotechnology sector, the Valley of Death (a period in which start-ups cannot secure additional funding required to remain viable) has become more deadly. Duane Roth, CEO of CONNECT, has a solution. CONNECT is a dynamic San Diego association increasing the number of San Diego start-ups and their success rate.

Roth’s business model innovation aims to pull risk out of drug development, thereby bringing needed investment funds to this important US industry. In a 2010 Kauffman Foundation article Roth and his UCSD co-author Pedro Cuatrecasas call for creation of a “distributed partnering approach that would involve four distinct, independent organizations to collaborate in a risk-adjusted manner to discover, define, develop and deliver innovative products.”

The significant innovation is within “define.” The co-authors advise creation of Product Development Companies (PDC), entities that combine “an experienced management team with investment capital to advance a portfolio of discoveries through the product definition stage.” PDCs would license 8-10 early stage discoveries from University and independent research institutions, taking them through a rigorous due diligence process to find product applications with a high chance of scientific and marketplace success. A team of highly experienced professionals in research, clinical sciences, regulatory affairs, operations and marketing would run each PDC.

Madison Wisconsin’s Quintessence Biosciences models the work of a PDC. According to its CEO, serial entrepreneur Ralph Kauten, “At Quintessence Biosciences, we had five technologies under license and through a due diligence process four of the technologies did not result in product definition success. Our result was to focus on the EVade(tm) Ribonuclease technology from which has come anti-cancer drugs and a lead candidate, QBI-139.” Quintessence’s QBI-139 is nearing completion of a Phase I clinical trial. Clearly Quintessence Biosciences has lowered the risk for downstream investors, the key aim of PDCs.

The PDCs weren’t needed in the past, Roth argues, because biotechnology discoveries and products largely related to “recombinant DNA protein engineering and monoclonal antibody technologies. In nearly all cases, the potential products were genetically engineered human proteins of known function and role in the pathophysiology of diseases and all had high potential for medical utility.” The “known unknowns” dealt much more with manufacturing uncertainties that, once resolved, created high returns for venture capital investors.

But many of today’s projects, according to Roth, focus on small molecules and are highly innovative and therefore unpredictable and risky, involving long-term financial commitments. Big pharmaceutical and biotech companies therefore view these projects as being too early for investment.  They “prefer to invest in technologies possessing well-identified lead compounds with high probabilities of success that are not far from entering clinical testing. Unfortunately, such opportunities almost never exist.” Herein rests the need for the PDCs.

High net-worth individuals, hedge funds, strategic partners like big pharma/biotech companies, venture capitalists, maybe even state governments, would fund PDCs. The authors anticipate returns of two to ten times invested funds over a 7-year period. PDCs would locate the largest hubs for biotech (Boston, San Francisco and San Diego) as well as cities with great biotech research institutions, like Madison. Indeed, the PDC concept might be what finally accelerates Madison’s biotech sector, enabling its commercial success to match UW Madison’s academic success. The PDC concept could apply to areas outside biotech as well.

Roth’s idealized system for drug development includes a number of focused players working in an aligned fashion.

• Research institutes, funded by government and philanthropic grants, focused on scientific discovery.
• Investor funded PDCs which license scientific discoveries and use an investigative process to identify promising product opportunities and do early development.
• Venture Capital firms whose funding is used to acquire the risk-reduced product ideas from PDCs and fund development through Phase III clinical testing. (The PDCs may be retained to oversee this work.)
• Large pharmaceutical/biotechnology companies who acquire the drugs from venture capital firms and distribute them or, like venture capitalists, directly acquire PDC risk-reduced packages and conduct remaining FDA testing.

These four entities would be surrounded by an ecosystem of professional service providers who allow those involved in drug development to do their work efficiently and effectively. (E.g., Madison’s Covance, which oversees FDA testing for its customers, is part of this ecosystem).

Roth’s work reminds us that some of the best business model innovations come from the balcony view required to identify large-scale system-level changes. What larger system, of which your organization is a part, might your firm innovate?