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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: derekb.lowe@gmail.com Twitter: Dereklowe

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May 6, 2010

Perverse Incentives In Clinical Trials

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Posted by Derek

I came across an article from 2007 that I'd missed, and I'm willing to bet others have, too. It's on the sometimes perverse incentives in developing oncology drugs (although the points in it apply to many other fields as well. The author (Tony Fiorino) is an investor, not a researcher, and seems to be an exceptionally clear-headed one.

He notes that larger profitable companies have more of an incentive to be careful about what drug candidates they take into the clinic, since they're spending their own profits when they do so. Start-up companies, on the other hand, tend to get valued according to how many clinical candidates they have going, so their incentive is to push things along rather more. . .briskly. This will be a familiar phenomenon to many readers here - the topic has come up whenever we talk about some compound wiping out in Phase III after what looked like promising data:

"This factor often leads development-stage companies to make very poor assessments with their own product candidates and to radically misjudge their likelihood of success. Indeed, if the fortunes of the entire company depend on the fate of a single phase II compound, and the interests of those deciding whether or not to enter phase III are tied entirely to the ongoing viability of the company, it would hardly seem surprising that companies push forward with the development of drugs when to objective outside observers further development seems futile. Indeed the market is likely to punish correct decision making by development-stage biotechnology companies. Given a set of questionable phase II data, the stock price of a company would suffer far more if management concluded it would be improper to expend shareholder capital on a phase III program likely to fail than if management decided to forge ahead into phase III on the basis of some dubious, post hoc subgroup analyses."

Of course, when this article was written, the funding environment was more permissive than it is today - but it will surely go that way again, and anyway, when the money is tight, the pressures to fight for it are even stronger.

"Thus, market forces do not produce efficient drug development; at least for the biotechnology industry, they may actually hinder it. This is particularly true in oncology drug development, where a set of unique circumstances conspire to make drug development more difficult and increase the likelihood that drug candidates are advanced too quickly. Zia et al1 documented a high rate of phase III failures in oncology, even when the phase III protocol uses a regimen identical to what was used in phase II. In particular, the lack of reliable surrogate markers and the common practice of looking for response rates in single arm trials make phase II oncology trials unreliable.

Most troubling, in my view (which is admittedly the view of a battle-scarred skeptic), oncology clinical development programs often appear to be designed specifically not to provide insight into the likelihood of success in phase III. . ."

Remind you of any events of the last few years? Fiorino's only answer to these problems is to call for the oncology clinical community to be more skeptical when it comes to enrolling patients in Phase III trials. And that might help a bit, but in a better world, we'd be running better Phase IIs.

Comments (19) + TrackBacks (0) | Category: Business and Markets | Cancer | Clinical Trials | Drug Development


COMMENTS

1. John Johnson on May 6, 2010 12:34 PM writes...

Well said, and explains some of the absolute bone-headed (and in my opinion bordering on or outright unethical) decisions I've seen over the years.

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2. Stephen on May 6, 2010 12:37 PM writes...

In my mind, the solution is suggested by Fiorno's observation that "and the interests of those deciding whether or not to enter phase III are tied entirely to the ongoing viability of the company"

Fix this problem, and you fix the overall problem.

Typically, most biotech salaries-- at all levels-- are fairly high. You can make a good living even if you work in the trenches. By contrast, equity is rather low. Mid-level biotech employees generally get so little equity that its very difficult for them to ever imagine becoming filthy rich (in contrast to IT, where early employees of Facebook, etc at all levels became rich).

Thus, at all levels, folks' interests are tied to the ongoing viability of the company.

The way to fix this is to drastically reduce salaries and drastically increase equity-- at all levels, especially on top. This will better align employees interests with those of investors.

And as soon as employees suspect a biotech technology or idea won't work out, their incentives will be to cut their losses and get out. Why stay, if they're not getting paid much, and their equity will never be worth anything?

(I've actually discussed this with numerous VCs and management types-- asking why it isn't done. The only answer I've ever gotten that I can understand is that if compensation were structured this way, they wouldn't be able to attract good employees. That's because the employees would believe that the promised equity would never materialize, because management/investors would do all sorts of stuff with different class shares and dilution to keep any eventual windfall for themselves. Oh well.)

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3. RB Woodweird on May 6, 2010 12:43 PM writes...

"...employees would believe that the promised equity would never materialize, because management/investors would do all sorts of stuff with different class shares and dilution to keep any eventual windfall for themselves..."

There is very good precedent to base these fears upon:

http://en.wikipedia.org/wiki/Hollywood_accounting

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4. Nick K on May 6, 2010 1:04 PM writes...

I'd always thought the real, if unspoken business model of Biotech entrepreneurs was to sell the company to Big Pharma while the csndidates were in Phase II and let them discover the bad news in Phase III.

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5. RandDChemist on May 6, 2010 1:23 PM writes...

Wow. Have to read the article now.

As always, be careful what sort of behavior you are rewarding.

The flip side is that since smaller companies are more willing to take a risk than hem and haw over it. They might not want to have everything be just so, and go with the best they have. Don't let the perfect be the enemy of the good.

Right now failure is heavily penalized and as a result there are is an incredible atmosphere of risk hostility. No one want to take a chance they might get fired.

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6. James on May 6, 2010 1:50 PM writes...

@Stephen-

If that rationale held, then how do Facebook, Zynga, etc attract good people? Are programmers just a dime a dozen relative to skilled biotech scientists, so attracting "good" people is harder in biotech? Or is the problem that biotech lets its investors dilute equity while the tech sector does not?

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7. Stephen on May 6, 2010 3:01 PM writes...

@James-
Good question, speculating (I don't know much about the business side), I think your second suggestion is basically correct. Biotech is a lot more capital-intensive than tech, esp. software. (Funding a trial takes a lot more money than launching a startup from a garage or dorm room.) This gives biotech VCs a lot more leverage than software VCs. So I expect biotech VCs wind up with a much bigger fraction of total equity (I think.. haven't seen any formal studies of this).

The irony is that by grabbing the biggest piece of the pie they possibly can, biotech VCs set up incentives which ensure that the pie never grows too large.

Since almost all profits will likely belong to investors, there is a strong incentive for biotech employees/decision makers to keep spending investors' money on their own salaries for as long as possible.

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8. CMCguy on May 6, 2010 3:05 PM writes...

I would tilt away from some of the views much like expressed by #6 RandDchemist were biotech may not always behave in efficient/wise manners but there is risk aversion that tends to paralyze Big Pharma in doing any good drug development. Granted smaller organization can miss-read or be mislead by their own data because of lack of critical expertise (which I have wonder if even Big Pharma really has left these days), although not sure as apparent as implied by some of the statements above (how often is there totally unquestionable data in development?), and may not be always financial/survival motivation. Often in oncology targets in particular are for unmet needs or present treatments are poor (efficacy and/or side effects) and there is desperate hope to help desperate people that can come in to play. Rather than being totally objective there is a chance that "promising results" are pushed because of that inherent desire that may or may not correlate to the companies survival. I think people are aware of this and try not to get caught up but easier said than done.

Good Clinical Study Design is important at all stages but not easy to achieve. Running better Phase IIs sounds nice but does not match the reality of need to accumulate Clinical data from complex populations and within the FDA requirements where emphasis is more Safety than true Efficacy at that point. Many VCs/Investors claim now want Phase II to be more like Phase III but are unwilling to pay upfront for that difference in execution requirements, which is typically huge. I don't disagree that patients/clinicians need to critically evaluate projects before enrolling but if take an overly skeptical approach then will not be much progress in anything.

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9. qetzal on May 6, 2010 5:06 PM writes...

Stephen,

I agree that part of the answer relates to the high capital cost required for biotech. The other factors to consider are uncertainty and time to market.

When a drug first enters the clinic, there's about a 90% chance it will ultimately fail. Biotechs can only develop one or a few candidates in parallel. Obviously that means that any given drug development biotech has a high chance of failing. Even if it succeeds, it will probably take 8-10 years to bring the first product to market.

VCs can deal with that risk by investing in a range of biotechs. They can't confidently predict which might succeed, but as long as one or two make it big, they'll make their profits. Biotech employees can't do that. They can only work for one company at a time. Equity has a lot less appeal than salary because a) there’s a high risk the equity won’t ever have much value, and b) any chance of getting ‘filthy rich’ is many years in the future.

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10. befuddled on May 6, 2010 5:49 PM writes...

@#2, Stephen:
I've never had the impression that biotech salaries are all that high, except maybe at well-established companies like Genentech and Amgen.

In any event, I think there are (at least) three ways in which internet/software companies differ crucially from biotech companies.

The first difference is in degree of difficulty. For software companies, you can generally be sure that you can make a working product; the question is whether it will be popular enough to be economically worthwhile. Granted, it may be that development will be more difficult or take longer than planned, but in principle that could be compensated for by raising the price.

The situation is quite different for biotech companies. With novel therapeutics, you can often be quite sure that the product will be profitable, even if late or expensive. The difficulty is in actually producing it. Even the best scientists with the best resources can't ensure that any particular therapeutic idea (or even lead compound) will result in a marketable product.

The second difference is regulatory burden. Biotech products have to pass through the gauntlet of FDA approval, something no internet startup has to worry about. Would we have a Facebook if they'd been required to do a trial involving thousands of teens to show that their chance of posting embarrassing material was within regulatory requirements?

Third, the timelines from start of development to product launch are significantly longer in biotech. I don't know when the coding for Facebook started, but I'm willing to bet it wasn't ~10 years prior to deployment.

In short, what works for tech will not work in biotech. The problem domains are too different. It would be crazy for most employees of a biotech to risk years of their lives in exchange for (mostly) equity.

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11. Cellbio on May 6, 2010 9:18 PM writes...

"And as soon as employees suspect a biotech technology or idea won't work out, their incentives will be to cut their losses and get out."

Yes, and this would be disastrous, as the path to success is seldom smooth with ever increasing clarity of the eventual outcome. Persistence in the face of adversity is a requirement for success. Persistence to the point of absurdity does happen, and certainly was a greater fraction of "biotech' pre-bust, but it is not a common trait that defines biotech, from either investor or company perspectives.

Permalink to Comment

12. hibob on May 6, 2010 9:36 PM writes...

Two things come to mind: The first is almost addressed by comment #4 (Nick): Could there have been a selection so that small biotechs with the most promising phase II results are bought by larger companies, so that the pool of small biotechs going into phase III on their own or with limited partnerships is enriched for failure? The second is: what about the perverse incentives in large companies, where V.P.s at each stage of the pipeline have numbers to make if they want to get their bonus? It's also another reason why equity might not work to ensure performance: it only works if the decision makers' equity only increases years after their decisions are made. Companies that offer no bonuses or stock to their senior management, just options that are never repriced or gamed and only vest after 5 years will lose staff.
tho maybe that's a good thing ...

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13. CMCguy on May 7, 2010 9:11 AM writes...

#11 Cellbio I applaud your statements:

"Persistence in the face of adversity is a requirement for success. Persistence to the point of absurdity does happen, and certainly was a greater fraction of "biotech' pre-bust, but it is not a common trait that defines biotech, from either investor or company perspectives."

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14. RandDChemist on May 7, 2010 9:29 AM writes...

My first post might have been at least a little too strong.

CMCguy makes some excellent points.

My point was that smaller companies sometimes make better decisions due to urgency. Sometimes they don't. It depends on the personnel and how they work together.

I disagree with Fiorino's assumption that large companies are inherently rational. They are not always so. Politics, ego and power sometimes take control. I've seen situations where lack of vision and no one on some sort of executive committee that likes your project mean that it goes away. However, if you have some sort of patron on that committee, then your project will go on, even if it is dubious.

One of the biggest issues with big pharma that I've encountered is waste. The companies are not always good stewards of their resources (as Fiorino would have us believe). There are managers and bureaucrats who do everything they can to justify their existence. These larger entities can be inefficient because people don't know what resources they have, or have the motivation to use them. Waste comes in situations when people make purchases they don't need just so they use up there budget.

With big projects at a big company, there can also be pressure to make something, even when it should be dropped. Hard decisions are sometimes avoided, or ignored altogether.

There are no absolutes in pharma/biotech. The things described in the article do happen. There are also exceptions. You don't want to chase exceptions, but be aware they exist. It's a continuum.

Besides, all big companies started as small companies. They don't simply materialize.

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15. downonthePharm on May 7, 2010 2:26 PM writes...

Oncology drug development over the last 10 years has had multiple examples of failures due to greediness, rather than just bad luck. Having been on the inside in both large Pharma and small biotech, I've seen evidence of both the investor-driven follies of little pharma strategy, as well as the foolish, huge all-comer Phase III trials, rather than targeting populations using biomarkers when testing targeted agents, a policy perpetrated by marketing folks in Big Pharma (Pfizer is particularly egregious in this regard). In either case, when money drives the science, rather than science driving the money, disaster ensues. Contrast this with the fantastic success of Novartis with Glivec, where the science clearly drove the success and the revenue.

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16. Hap on May 7, 2010 3:23 PM writes...

Stupidity (individual or structural) makes bad decisions likely, but when incentives make bad decisions profitable, then even in the absence of structural stupidity they are almost guaranteed. Ego and intransigence exist everywhere, both in small and big companies, though I imagine intransigence at a smaller company is a luxury no one but the owner can afford.

"The race is not always to the swift, nor the battle to the strong, but that's the way to bet."

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17. RandDChemist on May 10, 2010 12:59 PM writes...

More on pharma/biotech:

http://money.cnn.com/2010/05/10/news/companies/pharma_biotech_marriage.fortune/

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18. Tony Fiorino on May 13, 2010 11:03 PM writes...

Because I wrote the piece, I thought I'd add my thoughts to this conversation - especially since I've been running a company and actually tangibly involved in drug development for the past 2+ years. One thing I've learned from this experience is that the situation of being a tiny biotech dependent on success of a single drug creates even more pressure than I had imagined on planning out a drug development path. Some of it is insidious (and its not just about getting rich; it is also about having a job and a career and having employees) and one must be constantly vigilant about that. Some of it is just practical - resources are scarce and tough decisions have to be made sometimes, and the ability to do every study and ask every question is generally not there. Sometimes, lack of resources force companies into bad decisions. But still, in oncology in particular, I continue to see enormous self-interest driving management teams to create mountains from data that can hardly be said to constitute molehills.

I should also point out that I never intended to give big pharma a gold star. Yes, I still believe that big pharma is more likely to run good phase 2 trials and less likely to put candidates in phase 3 on the basis of garbage data than small biotech. Clearly, however, some things don't work well at big pharma. It seems that they over-spend on their development programs and often run more studies than necessary. It is also the case that they may give up too early at times - sometimes the desperate clinging to a bad-looking program from a small biotech can actually redeem it. It is also clear that their in-licensing process is fundamentally flawed as they throw millions at acquiring programs that many outsiders look at as sure-bet failures. These could be cases of excess information increasing confidence without increasing accuracy, but I think more likely business development as a function is probably managed badly, creating incentives to do almost any deal if it buys a one in a million shot at owning a blockbuster. And probably no real downside for whoever is responsible when the program implodes.

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19. Ashritha (infoalcpl@gmail.com) on October 30, 2010 6:08 AM writes...

My colleagues and I have just concluded one of India's most in-depth studies on "Clinical Trials in India". We have looked at various areas such as:
- Market Trends
- Growth Drivers
- Regulatory Bodies and Framework
- Major Players.
-Etc.
We interviewed over 200 individuals and firms to collect the data in what we believe is one of the most detailed study on the subject in India. If you are interested in a copy, you may email me at infoalcpl@gmail.com.

Ashritha
infoalcpl@gmail.com

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