Biotech and the business of balance

Drug development is risky business; for every discovery, there are 12 failures. Chances of profitability in the biotech industry are less than one in one thousand — just 20 of the world’s 4,000 biotech companies push beyond break-even.

“The biotech industry is complicated, labor-intensive and highly regulated — it’s not for everyone,” says Frank Baldino Jr., Ph.D., chairman and CEO of Cephalon in Frazer.

That’s why Baldino went into the business of balance.

“I knew there had to be a better business model for biotech because the industry is just too high-risk,” he says.

Building a successful biopharmaceutical firm is like science fiction in a sense: possible, but a far stretch from reality. Generally, both biotech and pharmaceutical firms sink money into research with slim chances of seeing returns — the nature of an industry founded on experiment. But Baldino’s balanced risk model involves splitting investments between new formula research and the redevelopment and repositioning of existing drugs.

“For every dollar we put into research and development (R&D), we put a dollar into acquiring and merging with organizations to give us products that are on the market already or products that we can grow and develop in new markets,” Baldino says.

This formula for success has paid off big for the biopharmaceutical company, best known for its innovative products for sleep and neurological disorders, cancer and pain. Since its start-up in 1987, Cephalon has grown from a company that employed Baldino and a few scientists to a worldwide corporation with nearly 2,500 employees.

“Science is hands-on and labor intensive,” Baldino says. “It’s not the task of one person but the task of many.”

Today, the company boasts $1 billion in annual revenue, one of only eight other biotech companies that can tout sales of this capacity.

To maintain market share in a high-stakes industry, Baldino knows that pioneering and introducing new products is critical.

“Higher-risk science provides opportunities,” he says. “But we must build a solid business behind [the science] so if products do fail, we have a business to continue going forward.”

The business of biotech
Baldino was just 33 years old when he embarked on his entrepreneurial experiment. Before launching Cephalon, he was a senior research biologist in DuPont’s Central Research & Development lab in Wilmington, Del., a research blender that, at the time, was churning out Nobel prizes and challenging conservative pharmaceutical research and development structure.

His “good fortune” at DuPont exposed him to the fact that growing investor relationships was as important as growing cells. Baldino’s job was to explain science to suit-and-tie colleagues and justify research dollars to investors.

“It was an exciting time in my life,” he says.

Baldino was in tune with the industry’s potential, inspired by biotech firms that breached research norms with studies in molecular biology technology and cloning.

“I saw the potential to do something different,” he says. “Drugs had been traditional and pretty conservative over the years, and I kept looking at the new biotech community of companies and watching the kind of science they were doing. They were doing the hard things — the things other companies didn’t want to touch.”

At the time, the biotech environment was entering a second boom, fueled with capital from California, big ideas and simple business plans.

“It was a time when people had good ideas and wrote a business plan, and you could get funding and nurture those ideas, and once you could perform, you could get access to the public market,” Baldino says. “I figured I was young and I was pretty good at science. If Cephalon didn’t work out, I could go back into R&D.”

But that didn’t happen. Lessons learned at DuPont had prepared Baldino well for running his own successful company.

“I was one of the guys [DuPont] trooped out to the executive committee to talk about the new biotech world,” Baldino says. “You find yourself talking about sophisticated science to a broader universe of people — people not steeped in science.”

By speaking at the “Street” level to investors and key managers, Baldino was challenged to translate complicated biological concepts into dollars-and-cents statements – and to reason why research initiatives were not only smart science pursuits but sound business decisions.

This communication conversion was valuable practice for when Baldino built investor support and drew a business plan for Cephalon.

“It was great experience to speak with many financially bright executives, and I carried that over to Wall Street,” he says.

He also learned the value of a mix-and-match lab structure. DuPont’s size and scale trumped the majority of pharmaceutical firms during Baldino’s time there, and he adopted some of its systems and research arrangements when he founded Cephalon.

“[The Central Research & Development group] at DuPont was a highly integrated scientific environment,” he says, explaining that chemists and biologists worked in close quarters. “This was unusual. Prior to this lab, most of the industry was separated.”

DuPont blended chemistry, biology, marketing and other critical business units, and Cephalon’s set-up models this collaborative structure.

“Each department can interact and talk, and that makes a big difference [in a company’s success],” Baldino says.

The risk equation
Cephalon’s first drug never made it to the shelves. For eight years, the company poured its start-up resources into the development of myotrophin, a drug with the potential to treat amyotrophic lateral sclerosis (Lou Gehrig’s disease), at the same time scrambling to build a successful business model.

“Imagine a company that is moving along with just enough resources to develop one drug — and that one fails,” Baldino says.

The Food and Drug Administration didn’t approve the formula and asked Cephalon for additional clinical research. The company decided not to invest further in the product but survived because of its dual investment in breaking R&D and clinically proven compounds.

“Most companies have drugs that fail and they lose their business,” Baldino says. “We were fortunate to build a company that could withstand that.”

It benched research on myotrophin and relied on its “safety” investment — modafinil, developed to treat excessive sleepiness. When the FDA approved Provigil (modafinil) in December 1998, Cephalon introduced a compound that secured its stature in the sleep market. This year, it expects Provigil to produce $550 million to $600 million in sales.

Cephalon’s balanced-risk business model marries the best of biotech and pharmaceutical structures, weighing the odds of success in its favor by investing in drug developments that get sidelined when companies choose to invest in other, more successful products.

“There are only so many resources you can apply to drugs,” Baldino says. “A company might have many opportunities, but there is only so much room in the budget, so it might concentrate on one or two and the rest get lost. We focus on those opportunities that get lost in the shuffle, not because companies don’t see them but because there is only so much money to spend.”

Baldino looks for what he calls “lower hurdle opportunities” with market promise. Then he combines these investments with higher-risk ventures in new science and development.

“We discover some drugs ourselves, and we have a large mergers and acquisitions group that identifies opportunities — it’s part of the game that everyone plays,” he says. “You can’t discover it all yourself, and the good companies know that, so you marry drug discovery with aggressive M&A.”

Some drug acquisitions Cephalon licenses and develops; some molecules it licenses and sells. Others it discovers and introduces to market.

“You have to balance your investment portfolio,” Baldino says. “Spend some money on high-hurdle projects that could change medicine forever, realizing these have the highest rate of failure. Spend more money on R&D on products with a higher probability of success. Most of the R&D money we spend is on products already on the market or those with a high probability of success.”

And Baldino knows he must back research dollars with healthy financials so he can continue to capture capital.

“You need to secure a return for your shareholders and guarantee their investments will be reasonable ones,” he says.

Baldino looks for drug formulas “that are broken, can be fixed and have a lot of upside.” Cephalon examines development possibilities for drugs, looking beyond the limits of their current use. Many times, its scientists notice a product fit in a completely different therapeutic market — one with more profit opportunity or less competition. This innovation explains how Cephalon tenaciously breaks into new markets.

Take Provigil. Before Cephalon acquired the compound, it was being developed as an antidepressant by a French company. Rather than pursuing this market, the company investigated other properties of the drug and developed it for wakefulness among those who suffer from sleep disorders such as narcolepsy and obstructive sleep apnea.

“We looked at the data and saw something that others didn’t see,” Baldino says.

Or consider Actiq, developed by Anesta Corp. for breakthrough cancer pain. Baldino questioned why sales were just $15 million when Cephalon acquired Anesta in mid-2000 and, along with it, the drug Actiq.

“We said, ‘It’s a good drug — maybe there’s something wrong here,’” he says, calling it “an example of seeing an early opportunity in a new market.”

“We brought it to a different universe of physicians — pain specialists — rather than solely oncologists.”

This year, Cephalon expects sales of Actiq, the only prescription medication approved in the world for the treatment of breakthrough pain in opioid-tolerant cancer patients, to reach up to $420 million.

Cephalon applies the same method to target growth markets: acquire, develop, market and carve new business. Its recent acquisition of Salmedix brings with it Treanda, which is in Phase II clinical trails in the United States and Canada for treatment of slowly progressing non-Hodgkin’s lymphoma. Additionally, Cephalon’s agreement with Cell Therapeutics to acquire the Trisenox injection will provide worldwide marketing, sales and development for the brand.

“We were developing a drug and getting excited, realizing its potential two years ago, but we also realized then that we never sold a drug to the oncology market,” Baldino says.

With these acquisitions, paired with Cephalon’s ongoing studies of CEP-701 in acute myelogenous leukemia, the company is buffered with resources to enter the oncology market with multiple product candidates.

“Before, we only had a promising drug,” Baldino says. “Now we have a promising oncology business.”

New and improved
The mindset behind Cephalon’s oncology expansion is a result of its company culture, Baldino says. Described as self-confident and independent-minded, the freedom to create and the ability to make an impact empower its employees.

“People join us because they want to make a difference,” he says, and the entrepreneurial spirit infuses every department in the organization.

Baldino relies on department leaders to help identify and pursue possibilities in the cutthroat biopharmaceutical field.

“Finding opportunities and developing them is quite a challenge, and more people fail than succeed,” he says. “The name of the game is to have more new and innovative products.”

A race to maximize market opportunities before patents expire and products go generic means biotech and pharmaceutical companies must maintain a revolving door of R&D, constantly feeding customers with inventive alternatives.

“The more innovative the product, the more value it adds to patients’ lives, the better you will sell it and the longer you will hold on to it,” Baldino says.

Cephalon is fulfilling this profit prescription and plans to introduce five drugs to the market in the next 14 months, four of them in its existing therapeutic areas of neurology, psychology and sleep medicine.

“We started the company years ago by looking at the process of cell survival and cell death,” Baldino says of Cephalon’s core business: drugs for central nervous system (CNS) disorders. “It’s no surprise that we evolved into a CNS and oncology company. The molecules that kill cells are helpful in the treatment of cancer, and those that promote cell survival are helpful in neurodegenerative diseases like Parkinson’s, where cells are dying. No drug today alters the course of those diseases.”

This is the high-risk research Baldino speaks of — the gamble he takes in the name of science and discovery.

“Those are the society-changing molecules of the future,” he says. “That is how you will make your mark in life.”

In the meantime, Cephalon will dive into the rapidly growing pediatric market, where there still is room for effective drugs for attention deficit hyperactivity disorder (ADHD). Also, by adding Vivitrex to its portfolio, a drug Cephalon acquired for development from Alkermes, the company has the potential of reaching an audience of 18 million Americans who suffer from chronic alcoholism, Baldino says.

An estimated 2.3 million people seek treatment each year, and he hopes Cephalon’s drug will become an effective part of a recovery plan.

“We think Vivtrex can be used in combination with other counseling and the abstinence approach, and because it is a once-a-month injection, we think it will change how people will treat alcoholism,” Baldino says.

Already, the biotech industry is changing science and medicine with progressive treatments, promising drugs and significant investments in research. Philadelphia is the crux of much of this development, centered between Wall Street and the White House, and home to more hospitals, medical schools, and pharmaceutical companies than any city in the country — and the world, Baldino says.

This year, Baldino served as co-chairman of Bio 2005, an international convention of the Biotechnology Industry Association. Philadelphia was a fitting host city for the event, he says.

“When you have a business as capital-intensive and highly regulated as ours, being in the middle of Washington, D.C., and New York City is a great advantage,” he says. “One of my missions is to advertise Philadelphia as the place to be and to attract businesses to move here.”

And he also considers the human side of the business.

“When you look back and see millions of people positively affected by your product,” he says, “that makes you feel good.”

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