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Fed up pleading with the federal government to fund research and tired of waiting for academic scientists to develop treatments, Robert Beall, president of the Cystic Fibrosis Foundation, made a historic decision in 1998: He would find a company interested in developing a cure for the fatal lung disease and pay it for its efforts. Beall knew it would be a waste of time to make his pitch to the giant pharmaceutical companies. Because CF afflicts a relatively small number of Americans — some 30,000 — treating them is estimated to be worth only about $150 million in annual sales. So Beall sent the team of scientists who consult for CFF to audition hungry biotechnology businesses. For John Mendlein, general counsel of Aurora Biosciences Corp., the September 1998 tryout was nerve-racking. Aurora, a San Diego-based company with an extensive library of chemical compounds, and extremely fast robotics, can quickly do thousands of tests on a single mutant protein. A deal with CFF would be a chance for Aurora to move beyond research, and into the potentially more lucrative area of creating a successful drug. But before these dreams could be realized, Aurora had to convince CFF it could do the job. And Mendlein had to make sure that, in the course of selling Aurora to CFF’s six highly trained research scientists, his team didn’t inadvertently leak any of the company’s trade secrets or patentable ideas. Mendlein and Aurora passed the CFF scientists’ scrutiny without giving away the store. And in March 2000 Beall was ready to talk terms. He flew to California with his lawyer of 15 years, Kenneth Schaner of Washington, D.C.-based Swidler Berlin Shereff Friedman. For Mendlein, this second meeting promised to be as fraught with problems and potential as the first. Aurora proved that it had the scientific ability to do the work, but could the company close the deal? Mendlein’s nerves were tested once again. For 20 hours on that March day, he, his executive in charge of business development, and an Aurora scientist wrangled with Beall, Schaner, and CFF’s top scientist, Melissa Ashlock. Finding a cure for a disease can take thousands of tests before scientists identify a single chemical that fixes the defective protein. So, the CFF and Aurora execs debated exactly how many tests Aurora would perform, what chemicals would be used on the CF gene (that contains the defective protein) and how much CFF would pay for the research. Schaner and Mendlein struggled to translate flowcharts that were scribbled on conference room white boards into legalese. By the time the group disbanded at four o’clock the next morning, Mendlein and Schaner had the draft of a contract for a revolutionary new business arrangement. Schaner was so revved up that he and Ashlock went to the hotel and played pool to unwind. Two months later, CFF and Aurora forged an alliance that allowed patients an unprecedented chance to shape medical research. CFF offered the biotech the expertise of the nonprofit’s affiliated scientists, and as much as $47 million for research. In exchange, CFF would get research that might someday lead to a cure for the deadly lung disease and potentially even greater riches. Two years into the five-year project, both sides say things are going swimmingly. Aurora’s first battery of tests has gone even faster than expected. And a few of its chemical compounds, which may eventually become drugs to treat or cure the disease, are having some impact on the CF protein. The foundation is so pleased with these results that it is now negotiating its eighth research deal — since Aurora — with other biotech businesses looking to cure CF. The patient advocacy group has invested about $131 million so far in these partnerships. And these alliances are proliferating. Groups dedicated to psoriasis, Huntington’s disease, spinal muscular atrophy, bipolar disease and other illnesses now have at least a dozen formal collaborations with biotechnology companies. Other charities are eager to follow suit, reports Robert Ohlhausen, a finance executive at McDonald’s Corp. who sits on the board of the Dystonia Medical Research Foundation. He says that his fellow board members ask him if their foundation, which targets a debilitating neurological disease, might partner with a small biotech company. Their most frequent question, says Ohlhausen, is: “How come we don’t have a biotech thing like cystic fibrosis?” These patient-biotech partnerships are novel arrangements for many reasons. The deal that biotechs typically forge with patient groups is much more favorable than the ones biotechs traditionally create with large drug companies. Generally, big pharmaceutical companies own the bulk of drug royalties; their partner biotechs, which do some of the initial research on a drug, get just a minority share. Deals like CFF’s are actually structured to shut out the big pharmaceutical companies. The biotechs and the groups representing potential customers co-own all IP rights and royalties in the treatments they develop. But these deals don’t come without risks. Because there is little precedent for these new partnerships, it falls on the biotech GCs to hammer out these unique agreements. Confidentiality and IP issues are the biggest concerns. The GCs have to wean the charities’ habit of sharing information. Given the increase in these deals and the number of nonprofits interested in them, it may be time for Big Pharma to start paying attention. Right now, major drug companies may not consider it much of a loss to get shut out of treatments for diseases like CF that afflict relatively few people. But science is beginning to discover that many common diseases such as cancer are really a bunch of niche illnesses, and each requires its own drug treatment, says Peter Tollman of The Boston Consulting Group, a management adviser to the pharmaceutical industry. Patient-biotech alliances, he predicts, could be a place for many of these smaller drugs to get developed. If demand for those drugs takes off, pharmaceutical companies, at some point, may want to have a stake in these products. MUSCLING IN ON PROFITS In the past 15 years the biotech industry’s expansion has led to a shift in basic research; it’s not just for universities anymore. The biotechs have attracted innovative scientists and their government grant money. “Work that only used to be done at the University of Arizona, say, is now being done at some small biotech in the Bay Area,” says Cole Owen, whose Del Mar, Calif.-based Owen & Associates Inc., advises the pharmaceutical industry on the latest technologies. Around the same time, AIDS patients aggressively confronted government and industry — and succeeded in accelerating research; they served as a model for other interest groups devoted to curing a single disease. The Cystic Fibrosis Foundation was among the first to combine patients’ new assertiveness with a thorough appreciation of biotech’s possibilities. This savvy was particularly apparent when the foundation’s attorney, Schaner, rigorously debated questions of control with Aurora’s Mendlein and still walked away with a deal. The biotech GC saw the nonprofit as a substitute for a big drug company. But he thought it necessary to put confidentiality limits on the charity’s consulting scientists, who work for different universities and organizations — not just for one corporation. He worried that CFF’s network of academics could too easily run away with some of Aurora’s most valuable assets: the cells (with the mutant CF protein) on which it runs its tests. These cells “are like wild animals; they can run free unless they’re properly handled,” says Mendlein. “Unfortunately, [they] aren’t as large as elephants. [They] are easily put in a pocket, taken on an airplane, and transferred to another lab.” Aurora’s deal with CFF also differs from the traditional arrangements forged between biotech and big drug companies in another area: key IP rights. When biotech companies find, after extensive research, that certain chemicals are having an impact on a defective gene or abnormal protein, they rush to patent this short list of “drug finalists.” So, long before any treatments are on the horizon, biotechs typically demand licensing fees from big pharmaceutical companies that want to use those finalists in the hopes that one will ultimately provide a treatment or cure for a disease. In the case of CFF and Aurora, the two will split licensing revenue from the most promising drugs. And industry-watchers presume, although neither organization will confirm, that this arrangement is more favorable for Aurora than the one it usually strikes with the big pharmaceutical companies. Sharing IP rights was a key part of the deal for CFF, too, Schaner says. The charity retains a percentage of licensing rights in any finalists created — just enough of a right “to make it interesting,” says the lawyer, although he declines to discuss the size of the group’s share. Those rights include not just a share of any future royalties, but also control over Aurora’s research for the nonprofit. If through its CF work Aurora finds a treatment for related conditions like asthma, chronic bronchitis or the common cold, and wants to sell the treatment to one of the major drug companies, CFF could threaten to block that other deal unless the buyer also agrees to work on CF. Ultimately, Aurora hopes that its relationship with CFF will allow it to cut out the big drug companies altogether. The biotech would like to produce a drug and sell it directly to CF patients and doctors. CFF is under no contractual obligation to lend its trademark or market on behalf of Aurora. Still, the biotech is counting on the group to be cooperative. “Because there is a tight medical and patient community in cystic fibrosis, it permits the opportunity of a different type of marketing strategy,” explains Mendlein, now the CEO of Affinium Pharmaceuticals of Toronto. With the organized CF network, Aurora also might be able to avoid hiring a sales force. EXCLUSIVE CLUB Unlike the cystic fibrosis deal that seeks to remove major drug companies from the equation, a new alliance between the American Diabetes Association and Entelos Inc., of Menlo Park, Calif., hopes to lure a handful of big pharmaceutical companies into the game. But this business plan created a whole other set of IP challenges, which took the ADA and Entelos months to resolve. For years the top drug companies have succeeded in finding ways to treat, but not to cure, diabetes. Supplying treatments to the 13 million diagnosed diabetes sufferers in the U.S. is a $6.2 billion business annually, according to health care information analysts at Fairfield, Conn.-based IMS Health Inc. And those sales are expected only to grow. The ADA wants to make that business obsolete — by finally finding a cure. To do so, it enlisted the aid of Entelos, a computer simulation company. In early 2002 Entelos designed a virtual diabetes “patient” that enables researchers to experiment safely, by letting them see a potential drug’s impact on all the different bodily systems. The ADA decided that the most compelling way to focus big drugmakers on a cure for diabetes was to make them a unique offer: the group’s credibility and expertise (it has 17,000 medical professionals affiliated with it), along with Entelos’ groundbreaking tool. To sign up for the program, a big drugmaker must pay $5 million to Entelos. That buys access to the electronic patient for three years plus full-time Entelos programmers. Participating companies also will own all intellectual property rights to the discoveries they make; both Entelos and the ADA have forsworn any royalties. Hammering out these terms took months of negotiation between Entelos’ director of legal affairs and business development, Susan Meyer and the ADA’s general counsel, Duane Brown. Entelos and the ADA wanted their scientists to work closely with the competing pharmaceutical teams, which presented two significant problems. What role should Entelos and ADA scientists play in these alliances? And how could the top drug companies be assured that their trade secrets would remain confidential? Meyer and Brown decided that each pharmaceutical company would get at least two Entelos employees who will work exclusively for that business. The Entelos staffers will be sworn to secrecy. And only the drug company can patent any innovations the Entelos staffers help create. Entelos is willing to do without the all-important IP rights, says CEO James Karis, because it receives fees up front. The ADA won’t receive royalties from the pharmaceutical companies either, in order to protect its independence, said Brown. But what role should the ADA scientists play? The organization’s credo demands that useful information pertaining to the disease be shared, and the ADA insisted that its scientists’ advice should be available to all participating drug companies. Meyer and Brown’s solution: ADA scientists would never speak directly to company scientists. The ADA scientists will just advise the Entelos employees consulting for the participating drug companies. The complicated relationships seem to have appeased all the parties. So far, four major drug companies have expressed interest and entered into discussions, reports Entelos’ Karis, who will reveal some partners in a June 2002 announcement. The pharmaceutical businesses’ interest isn’t surprising, considering that the promise is great and the entrance fee for this deal is relatively small for these billion-dollar corporations. A company with a cure for diabetes might be able to charge as much as $150,000 per patient, according to Lehman Brothers senior biotechnology analyst Joe Dougherty. He bases that estimate on what a diabetic’s secondary ills cost health insurers over a lifetime. For now, Entelos and Aurora are focused just on getting their research off the ground — any medicine or cure for diabetes or cystic fibrosis remains years away. And, as the dystonia group’s Ohlhausen knows, diabetes and CF patients are luckier than some. Scientists can’t justify industrial-scale research into many diseases because they simply don’t know enough about how those illnesses work. Perhaps Ohlhausen’s time will come in the next few years. By then, he will probably find the biotech companies waiting at his door. Related Chart: Big Pharma: In or Out?

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