First off, the idea that a bunch of stock analysts could have a useful opinion on a pharma company's return on investment doesn't seem to strike many people as plausible. Variations on "What do they know about this business?" and "Aren't these the same geniuses that wiped out the mortgage bond market?" have come up numerous times. My answer to the latter is no, they aren't. The stock and industry analysts are a different bunch entirely. That's not to say that they can't be stupid, or make mistakes (they do!) But these aren't the people who thought that they had all the risks figured for interest-rate swaps and collateralized debt obligations. If you have disagreements with industry analysts, then you should fight in their territory.

There's more substance to the "What do they know" objection, but still (in my view) not enough. What they know is what's been made public, of course, and as we in the industry know, that's not everything. But that doesn't make Wall Street's case any weaker this time, as far as I can tell. Morgan Stanley and their ilk are not missing any of the successful projects from inside big pharma - those all get aired out thoroughly. If they're short on data, it's on how many projects fail, and how much they cost, and those numbers aren't going to make the ROI look any better. Meanwhile, most all the inlicensed compounds actually get announced, since they're material transactions for someone, so far fewer of those escape notice. I don't like the Morgan Stanley point of view, not at all, but dislike is not a refutation.

Another thing to remember is that the people with the best figures on ROI are the upper management of the companies involved, and these are the people who are slashing head count and outsourcing wherever they can. And we have to make a distinction here, between diagnosis and treatment. We can disagree on whether this is the proper response (although I'm kind of stuck for alternatives), but is it still possible to argue that these CEOs and the like are reacting to something that isn't there? Something is precipitating a lot of large, painful, and nasty decisions, and I think that it's probably the very concerns about cost that we've been talking about. We need to separate the argument about whether those figures are real from the argument about what's been done in response.

The larger problem is whether there are whole classes of compounds that should be avoided. It's not an easy one to deal with, because the question turns on how you're running your assays. Some things are going to interfere with fluorescent readouts, by absorbing or emitting light of their own, but that can depend on the wavelengths you're using. Others will mung up a particular coupled assay readout, but leave a different technology untouched.

And then there's the aggregation problem, which we've only really become aware of in the past few years. Some compounds just like to stick together into huge clumps, often taking the assay's protein target (or some other key component) with them. At first, everyone thought "Ah-hah! Now we can really scrub the screening plates of all the nasties!", but it turns out that aggregation itself is an assay-dependent phenomenon. Change the concentrations or added proteins, and whoomph: compounds that were horrible before suddenly behave reasonably, while a new set of well-behaved structures has suddenly gone over to the dark side.

This new paper is another attempt to find "Pan-Assay Interference" compounds or PAINs, as they name them. (This follows a weird-acronym tradition in screening that goes back at least to Vertex's program to get undesirable structures out of screening collections, REOS, for "Rapid Elimination of, uh, Swill"). It will definitely be of interest to people using the AlphaScreen technology, since it's the result of some 40 HTS campaigns using it, but the lessons are worth reading about in general.

What they found was that (as you'd figure) that while it's really hard to blackball compounds permanently with any degree of confidence, the effort needs to be made. Still, even using their best set of filters, 5% of marketed drugs get flagged as problematic screening hits - in fact, hardly any database gives you a warning rate below that, with the exception of a collection of CNS drugs, whose properties are naturally a bit more constrained. Interestingly, they also report the problematic-structure rate for the collections of nine commercial compound vendors, although (frustratingly) without giving their names. Several of them sit around that 5% figure, but a couple of them stand out with 11 or 12% of their compounds setting off alarms. This, the authors surmise, is linked to some of the facile combinatorial-type reactions used to prepare them, particularly ones that leave enones or exo-alkenes in the final structures.

So what kinds of compounds are the most worrisome? If you're going to winnow out anything, you should probably start with these: Rhodanines are bad, which doesn't surprise me. (Abbott and Bristol Myers-Squibb have also reported them as troublesome). Phenol Mannich compounds and phenolic hydrazones are poor bets. And all sort of keto-heterocycles with conjugated exo alkenes make the list. There are several other classes, but those are the worst of the bunch, and I have to say, I'd gladly cross any of them off a list of screening hits.

But not everyone does. As the authors show, there are nearly 800 literature references to rhodanine compounds showing biological effects. A conspicuous example is here, from the good folks at Harvard, which was shown to be rather nonspecifically ugly here. What does all this do for you? Not much:

"Rather than being privileged structures, we suggest that rhodanines are polluting the scientific literature. . .these results reflect the extent of wasted resources that these nuisance compounds are generally causing. We suggest that a significant proportion of screening-based publications and patents may contain assay interference hits and that extensive docking computations and graphics that are frequently produced may often be meaningless. In the case of rhodanines, the answer set represents some 60 patents and we have found patents to be conspicuously prevalent for other classes of PAINS. This collectively represents an enormous cost in protecting intellectual property, much of which may be of little value. . ."

". . .Still significant value in Pharma - we see material upside to ROIC [return on invested capital], earnings and multiples as Pharma withdraws from most internal small-molecule research and reallocates capital to in-licensing and other non-pharma assets. Worsening generic pressure and R&D management changes lead us to expect material cuts to internal small research spend (~40% total R&D) in 2010/11, after a decade of dismal internal R&D returns. We expect AstraZeneca and Sanofi-Aventis to be among the leaders in externalizing research, and this is a key driver of our upgrade of AstraZeneca today to Overweight.

Reinvestment of internal research savings into in-licensing will yield three times the likely return, we calculate. Under in-licensing deals, downside risk for pharma companies is currently materially lower than for internally developed drugs. Although upside is also capped by pay-aways and milestone obligations, the net present value of these payments is more than offset by the lower risk-adjusted invested capital. Over one-third of pharma R&D spend is in pre-phase II, where the probability of reaching the market is <10%. our proprietary analysis indicates that, unless the probability of an in-house molecule reaching the market is 30% or more, the risk-adjusted economic value added, or eva, is three times higher under the external research model, with a greater predictability."

It could be said in fewer words, but it's all there. If you're looking for the reason the big companies are doing what they're doing, look no further. Agree with it or not, there's a case to be made - and there's Morgan Stanley, making it - that the cost of running new drug projects in big pharma is just too high relative to the risks of failure. Those returns, in fact, are calculated to be off by a factor of three.

You may not believe that factor, and I have to say, I found it hard to believe myself. But let's say the Morgan Stanley folks have their numbers off. Perhaps it's only twice as profitable to bring in outside drugs as it is to develop them internally. Don't believe that one, either? Maybe it's only 25% more profitable - can you imagine making a move that would increase your company's return on investment by 25%? Industries get remade by such changes at the margin, and this one is remaking ours. Why do we have any internal R&D left at all, if those figures are anywhere near right?

Well, no one's tried to run a large company entirely by in-licensing, and I think that there are a lot of reasons why that wouldn't work. (For one thing, I don't think that there are enough things to in-license, and if one or more large companies announced that they were doing that exclusively, the price of each deal would go right up). And there needs to be some internal expertise left, if only to evaluate those external drug candidates to make sure you're not being taken. But still. All this means is that internal R&D will stay around, but it has to get cheaper and will very likely get smaller.

We can argue about the assumptions behind all this, but there's no doubt that a compelling business case can be made for this world view. Anyone who wants to argue differently - and a lot of us do - will have to come up with solid numbers and reasoning for why it just ain't so. I'm not sure such numbers exist.

There are many corollaries to this line of thought. One of them - and I hate to bring this up, considering all the horrible layoff news recently - is that one of the most psychologically comforting theories that we in R&D have for our present fix is likely wrong. I refer to the "Evil Clueless MBA CEO" theory, which has its satisfactions, but is a hazardous way to think. It is always dangerous to assume that people who do things you disagree with are doing them because they're just idiots or because they're innately malicious. In general, I'd say that the first explanation to jettison is malice, followed by stupidity (Hanlon's Razor). What that leaves you with is that these actions, stupid and malicious though they may appear, are probably being done for reasons that appear valid to the people doing them. I know, I know - some of these reasons are things like "So I can keep my high-paying CEO job", and we can't ignore that one. But a good way to lose a high-paying CEO job is to try to tell your board of directors (and your shareholders) why you're going to pass up an opportunity to get three times your ROIC.

Another thing to think about is, if these cost estimates are right, how did we get here? The best reason I can think of for such a disparity is that small companies (the source of these in-licensed drugs and projects) are often betting their entire existence on these ideas. They are very strongly motivated to do whatever they can do to get them to work (sometimes a bit too motivated, but that risk is already factored in), and if things don't pan out, they usually disappear. Basically, the in-licensing world unloads the risk from the large pharma company (and its shareholders) onto the investors in the smaller ones. The cost disparity will exist for as long as people are willing to back smaller companies. Now, this isn't to say that the big companies are always going to do a great job picking what to bring in. We've been talking a lot, for example, about the GSK-Sirtris deal, and that one may or may not work out. But the idea of doing big in-licensing deals in general - that's a different story, no matter how any individual company manages to execute it.

What that also means is that more of us are going to end up working for those smaller companies (which is something that I, and several commenters around here, have been saying for a while). If the large pharma outfits are going to devote more money to in-licensing, there will then be more opportunities for people developing things for them to in-license. The rough part is that all these structural changes in the drug industry are taking place (largely by coincidence, I think) during economic conditions which make funding such companies difficult.

And then there's the internal cost-cutting, for the R&D that's actually staying at the big companies. That, of course, generally means sending a lot of it to China, or wherever else it can be done more cheaply. And that's going to continue as long as it can indeed be done more cheaply, which means "not forever". Costs are already rising in China and India, although they have a good ways to go before they catch up to the US and Europe. I know that we can argue about how well that whole idea is going to work - there are clearly inefficiencies to doing a lot of your work through outsourcing, but as long as those don't eat up all the cost savings, it's still going to keep happening.

This, as a side note, is why I think that one of the suggestions that gets floated here in the comments from time to time, the idea of forming a "medicinal chemist's union", is completely useless. Unions form when workers have the leverage to preserve a higher-cost business model. In the end, the big industrial concerns of the early 20th century had to have workers, and they had to have them in certain locations, so the unions always had the threat of going on strike. At attempt to lower the boom under these conditions would result in everything going to China, and damned quickly.

So. . .what's happening to us, and to our industry, is not really mysterious. Our cost structure does not look to be supportable, and since there are cheaper alternatives that appear to be feasible, those will get tried. The disruption and destruction that all this is causing is real, of course. But the best I can offer is to try to understand what's driving all this upheaval, because that might help people to figure out how to protect their own jobs or where to jump next. Everyone has to give this some serious thought, because I don't see any reason why all this won't keep going on for some time to come.

This sort of thing may or may not be a sign of imminent bad news, but it's never a sign of good news. We'll see what happens as the company continues to deal with the oncoming Plavix patent expiration and other issues. . .

Good luck to all concerned.

I sometimes think that we'd be better served if each of the medicinal chemistry journals were split. In J. Med. Chem.'s case, we would then have the Journal of In Vitro Medicinal Chemistry and the Journal of In Vivo Medicinal Chemistry. The criteria for publishing in the two journals would be exactly the same, except to get into the latter one, you would have at least had to have tried your compounds out on something besides an in vitro assay. Doesn't mean that they have to have worked - you just have to have looked.

Although the case of compounds with molecular weights of 900 that have four amides and a sulfonamide in them, and are directed against a target in the central nervous system, might still be a bit of a stretch. I supposed what irritates me about this paper is that it starts off talking about Alzheimer's disease. And that's natural enough in a study dedicated to finding inhibitors of BACE-1, but the problem is, Alzheimer's disease occurs in human beings. And these compounds do not look to have much chance of doing anything inside any human's body. The best I can say for them is that they might give someone else an insight into something that they might be able to do to make something that might have a better chance of working.

Cranky folks like me would probably refer to the latter of my two new journals as just "J. Med. Chem.", and would refer to the former one by a variety of other easy-to-remember names. I offer this suggestion for free to the scientific publishing community, who will, I'm sure, reciprocate with things of equal value.

This blunderbuss is getting a lot of attention these days, since the data for a Phase III trial against Alzheimer's should be available sometime in the spring. The road to that was a strange one. Dimebolin was used for years as an antihistamine in Russia, although I'm not aware if it had any particular reputation for cognitive enhancement in its time as a Soviet allergy pill. It was picked up in screening done during the 1990s at a research institute in the (once secret) military/industrial research city of Chemogolovka Chernogolovka, about two hours from Moscow. It showed effects on learning in rodent models, and gradually advanced to human trials for Alzheimer's. Impressive data came out in 2008, and Medivation, who own the rights to it here, partnered with Pfizer for development.

Update: the city mentioned above is surely Chernogolovka, but it's interesting that it's appeared many times as Chemogolovka in the English press and literature. I chalk that up to the "rn" looking very much like an "m", and to the mistaken name being semi-plausible in a Stalinist-industrial way, as witness Magnitogorsk. Chernogolovka's much older, though.)

That Bloomberg report I linked to above has a lot of people excited, since there hasn't been a new therapy for Alzheimer's in quite a while (or, arguably, a decent one ever). I don't know what to think, myself. It's absolutely possible that the drug could turn out to have beneficial effects, but it's just as possible that it could miss meeting the high expectations that many investors seem to have for it. (Medivation's stock is up 80% over the last year, for example). A lot of eye-catching numbers from small Phase II trials tend to flatten out in the wider world of Phase III, and if forced, that's the way I'd bet here. (I am most definitely not giving investment advice, though - Alzheimer's drug development is a total crap shoot, and should only be approached with money you can afford to see incinerated).

I hope that Dimebon actually works, though - the world could use something that does. Just don't let anyone convince you that they know how it works, if it makes it through. Unraveling that will take quite a while. . .

And on another literature note, I wanted to mention that I've accepted an invite to the editorial advisory board of the new ACS journal ACS Medicinal Chemistry Letters. You can tell, I guess, when you've been doing this stuff for a while - when I look at the rest of the advisory board, I see people I went to grad school with, people I used to work down the hall from, and so on. The journal has started publishing its first papers; we'll see how it works out, and how it competes with the other short-form outlet for this sort of work, Bioorganic and Medicinal Chemistry Letters. I promise not to let any anti-Bredt cyclobutenes get past me!

For one, these are not antimalarial compounds, at least not to a medicinal chemist. Some of them might be, but for now, they're all potential antimalarials, with a long, long way to go. This is all in what most drug discovery organizations call the "hit to lead" stage. Some of these compounds may well be screening artifacts. Others will turn out to work through mechanisms that won't be useful - they'll kill malaria parasites, but they'll kill lots of other things, too. Some of them will hit other targets that aren't quite as severe, but will still be enough to make them undesirabel. And many others will be too weak to be useful as they are, and turn out, after investigation, to have no clear path forward to making them more potent. And so on.

The most interesting compounds still have a long road ahead. What are their blood levels after various sorts of dosing? Which of those dosage forms are the best - the most reliable, the easiest to make, the most stable on storage? What metabolites do the compounds form in vivo, and what do those do? What long-term toxic effects might they have? How susceptible are they to resistance on the part of the parasites? On top of all these questions are the big ones, about how well these potential drugs knock down malaria under real-world conditions.

This, in short, is what drug development is all about, and it would be good to see some of this brought out in the press coverage. This is what I (and many of the readers of this site) do for a living, and it's enough to occupy all our time with plenty left over. If you can do this sort of thing, you're a drug company, and I'm always looking for opportunities to tell people just what it is that drug companies do and to move people past the evil-pharma versus saintly-university mindset. Nature has it right in their editorial:

Meanwhile, universities and other academic institutions should do more to support and reward the sort of translational research required to develop drug leads such as those offered by GSK — even though that work usually does not result in high-profile, breakthrough research papers. In addition, such translational activities provide a means for universities to contribute to public–private partnerships such as the MMV, the Drugs for Neglected Diseases Initiative and the Institute for OneWorld Health.

Universities also have another part to play. Their often aggressive intellectual-property policies can stymie research and development in neglected diseases — they should ensure that their licensing deals with companies make exceptions for royalty-free use of technologies for good causes. That change, too, is beginning to happen — although, when it comes to hogging intellectual property, academics and their institutions are often among the worst offenders. . .

Several European newspapers have since come out with word that several thousand cuts are going to be announced, but I have no more details on what's going to happen. I suppose we're all going to find out on Thursday, though. Stand by for what's going to seem like a long week if you're at GSK, and best of luck to you if you are.

What you often read about, but many people don’t understand, is how hard it is to make a drug. Our approach to RNA Therapeutics is made with a recognition of the full package it takes to launch a successful commercial product. . .That’s versus another strategy you see from smaller companies, which is to get an interesting experimental result, and publicly disclose it in an attempt to increase the value of your investment or a VC’s investment, without a real [awareness] of what it will take to make a therapeutic eight years later. . .

We immediately, after the acquisition, invested not just heavily in the RNA piece that is here in San Francisco, but we built an entire delivery group in West Point, PA. The thing that continues to differentiate Merck is that we have people with decades of experience in pharma R&D, drug safety, metabolism, pharmacokinetics. . .

Outside of RNA as a therapy in itself, he also talks about Merck's use of the technology to better understand its small-molecule targets. It's not something that you'll ever see press releases about, but trustworthy data of that sort is very useful and important. As the Xconomy interviewer notes, Wall Street values this sort of thing as basically zero (partly because you can't see the results of it for quite a while, if they're ever made public at all), but the value inside the company can be significant.

Of course, there can be things that happen inside drug companies that significantly destroy value, too, and it's not like the stock market can see (or understand) many of those, either, but that's a topic for another post entirely. . .and on a not perhaps unrelated note, one part of the interview above seems to suggest that "POS" is an internal Merck acronym for. . .wait for it. . ."probability of success". I, uh, kid you not.