The Next Stage in the Evolution of Drug Development
By: Nikolai Lambsdorff
Tags: Blockchain, Pharmaceutical, Health, Portfolio, Venture Capital

The Pharmaceutical Industry: A Broken System

Recent studies in the field of pharmaceutical drug discovery yieldedalarming findings. The pharmaceutical industry has been suffering from a slowdown in innovation that greatly limits its capabilities to discover essential and much-needed drugs for the treatment of entire areas of disease. For example, an estimated 7,000 rare genetic diseases lack any available medical therapy. Deaths from Alzheimer’s disease have increased by 145% between 2000 and 2017. With no treatment in sight, it now kills more people than breast cancer and prostate cancer combined. Moreover, the global COVID-19 outbreak has been the third Coronavirus outbreak (SARS in 2002/2003 and MERS in 2012) in the last 20 years. Despite a 17-year effort, no vaccine has been found yet. Although there is no general rule as to how long it should take until a vaccine is available, the handling of the Ebola outbreak presents a good example for a better approach. Upon the Ebola outbreak, great coordination and collaboration efforts have been undertaken by the World Health Organization (WHO) to significantly speed up the development of a vaccine. On the one hand, these efforts brought together all parties involved such as scientists, industry and funders’ communities, and public health partners. On the other hand, infrastructural improvements to the R&D process were made to speed up the development and production of other vaccines. Nevertheless, the fact that it took the coordinating effort of the world’s largest health organization and a deadly virus outbreak to bring all parties together, reveals how dysfunctional the pharmaceutical system is. Thus, substantial changes and bold entrepreneurs are required to revolutionize the drug discovery process. We believe Molecule will be at the forefront of this wave of innovative startups to fix the pharmaceutical industry.

A Brief History of Drug Discovery

Dating back to the emergence of molecular medicine in the 1970s, Big Pharma corporations have built their business models around large-scale, narrowly-focused research. By pooling essential skills and knowledge, the entire drug discovery process has been established in-house (see Fig. 1). Although the traditional model has made these companies highly profitable, it also has created rigid boundaries discouraging stakeholder interactions and stifling innovation. What was once an optimized process for a trial-and-error approach based on ethnobotanical knowledge and often driven by lucky coincidence failed to adapt to the ongoing transformation of the drug discovery process: A hypothesis-driven, goal-oriented approach based on molecular biology methods and knowledge of the human genome. The results were ever-growing costs to bring a drug to market.

Figure 1: Traditional drug discovery and development process of Big Pharma. The entire drug discovery process from compound sourcing to sales and distribution is efficiently streamlined within one company. Note, there is no interaction and thus, no collaboration between the development processes of different companies

As these development costs increased rapidly, while sales stagnated, pharmaceutical companies started to outsource research fields, in order to reduce costs and avoid serious development risks. Today, multinational pharmaceutical companies have largely withdrawn from the early and high-risk stages of drug discovery, focusing on late-stage clinical research and international marketing.

The Fragmentation of the Drug Discovery Process

The outsourcing strategy has resulted in a widely fragmented drug R&D market and discovery has become the limiting factor in productivity. Research of potential treatments is now largely carried out by underfinanced public institutions (such as universities) and independent research teams at small startups. All of which are all highly dependent on external infrastructure like investors, service providers, contract research organizations (CROs), patient groups, specialized consultants, and other research teams. As gatekeepers of the distribution channels, large pharmaceutical companies benefit from the acquisition of drugs that have been tested and verified at multiple stages and now carry less risk of failure while promising large returns (see Fig. 2). By outsourcing the high-risk part of drug discovery to an underfinanced market and focusing on the profitable late-stages, the drug discovery has been turned into a race towards the big buyout money of Big Pharma. This development has led to a skewed market towards the research of drugs with potentially high margins. As a result leaving the research for millions of patients with severe but less common diseases on the shoulders of nonprofit and governmental organizations. On top of that, fierce battles around intellectual property (IP) intensified, defying any opportunity of collaboration. When IP is only valuable if it can be commercialized into a product, the only winning strategy is to make it to the end of the tunnel where a potential buyout awaits.

Figure 2: Current Drug Development Process. This example shows the path from drug discovery to buyout. Although most companies do not get beyond the first stage, those who do, are eventually bought out by an IP buyer or a Big Pharma company. Note that each participant is interacting with the company despite being only interested in the IP. Furthermore, the exchange of knowledge with other research teams and patient groups is one-directional

It is thus no surprise that several studies (see this and the reference list here) have identified the lack of data transparency and funding as major bottlenecks in the current drug discovery industry. On the one hand, high fragmentation of individual research teams in combination with a lack of incentive for collaboration leads to geographical and industrial clusters that hinder the global free flow of research results and findings. On the other hand, funding for many urgently needed drugs is low due to a limited upside. Thus, the research is mainly dependent on working groups and initiatives. In a market where promising IP almost directly translates into money, collaboration allows small teams to leverage their research and contribute to a potentially promising drug. Meanwhile, a lack thereof creates a difficult environment for fundraising for individual research teams. The result at best is a considerable time to market delay due to less profitable projects, with some not even reaching the stage of a potential buyout. In the worst case, significant research progress gets buried in history to be rediscovered at a later point in time.

Thus, it has become painfully clear that an outdated economic incentive structure and technological advances towards information as a major commodity have created an ecosystem in which every company is strongly intertwined with many other players. In contrast to the traditional model of vertically integrated corporations, a single party is no longer in a position to benefit alone, but only through a joint effort. What it requires is an appropriate and enabling IP framework that can align the primary concerns of all stakeholders in drug development while promoting transparency and collaboration. It needs a shift from competition to open-source network models.

The Transformation of the Drug Discovery Process

This is where Molecule comes in. Their vision is to build a platform that manages and streamlines the interactions at all stages of the drug discovery and development process. They achieve this by structurally separating the IP from the IP owner (a company or a group of researchers) and putting it in a separate entity. This entity is then tokenized and the tokens are distributed among the original IP owners. In this context, a token can be anything from a virtual share to a cryptographic token on a distributed ledger. By doing so, an illiquid asset (the IP) is converted into a liquid and tradeable digital asset (the token) and enables flexible funding. A set of mathematical functions take care of the relationship between supply and demand and allow for a sophisticated price discovery mechanism.

Securitization: A procedure where an issuer designs a marketable financial instrument by turning any asset into a tradeable, fungible item of monetary value. Securitization offers opportunities for investors and frees up capital for originators, both of which promote liquidity in the marketplace. Fractionalization: The process of splitting a unit into sub-units (fractions).

Meanwhile, all research funded through the platform is made openly available to everyone. Through these concepts of fractionalization, securitization, and distribution of pharmaceutical IP, Molecule addresses current issues and re-aligns all stakeholders of the R&D process (see Fig. 3).

Figure 3: Example of Drug Development with Molecule. On Molecule’s platform, the IP is separated from the company. This democratizes access to knowledge for each stakeholder in a give-and-take fashion. Everyone can participate in the advancement of IP by contributing research or funding, while also receiving shares or data in return. Note that each stakeholder is interacting with the IP instead of a company. This naturally allows all stakeholders to free up resources for the advancement of the IP instead of negotiating funding rounds

The approach is closing the existing market gaps and eliminating barriers to enter the drug discovery value chain, where everyone can participate and profit from the drug discovery process. At the same time, the Molecule platform provides a trusted ecosystem for managing drug IP. A solution that enables cross-border investments and streamlines the globally fragmented patent systems. This decreases the development cost and time-to-market significantly, while at the same time increasing the overall succession rate through data transparency and easy access to funding. Of course, there are actors in the current system that help to bridge certain funding gaps by buying promising IP early on and selling it when it appreciates in value. But these companies are merely middlemen, whose solutions are error-prone and require a great deal of effort to gain the trust of all parties in such a sensitive industry. Instead, Molecule builds a trustless, decentralized and self-managing ecosystem in which IP, data and financing can be exchanged without barriers and without a central entity.

This opens up the drug development market such that a broad range of players is able to participate and benefit:

Small research teams can receive funding much faster while their IP and current research results are accessible to everyone, secured on blockchain. This significantly reduces the time-to-market by bridging the financing gaps between development phases. Investors can participate early, fast, flexibly, and reliably in promising drug IP and have high liquidity in their investments. They also benefit from the high level of transparency regarding research results and milestones achieved. Other research groups profit through the availability of data and research results. CROs can contribute to and benefit from existing research results and IP. Patient groups are getting involved quickly and profit by a wider range and greater availability of essential new drugs. For pharma companies, the M&A process is much more transparent and simplified, as Molecule de-couples IP and assets.

In short, Molecule is building a sophisticated decentralized platform for syndicated financing, where the investors receive real value in the form of IP shares, while patients and research teams benefit from transparent data and the scientists receive the required funding for their research. In the long term, we expect the platform to have a profound impact on the pharma industry. Lowering the barriers will bring in a higher level of networking between investors, service providers, CROs, patient groups, specialized consultants, and other research teams. This, in turn, will improve the aggregation and sharing of knowledge on the research side and make it easier for investors to estimate the potential value of IP. Additionally, with time, further developments in tokenization will open up new ways to participate in the investment process beyond professional investors. As a result the Molecule platform will increase efficiency and reduce costs significantly. A fact that will particularly benefit low margin drugs. Finally, due to lower M&A expenses, increasing profitability, and higher transparency pharma companies will be incentivized to revisit their current strategy of closed-door, large scale and narrow research and join the innovation around a more open ecosystem by focusing on their core strengths.

While we acknowledge that the short term will involve a lot of experimentation in particular with regards to the right incentive structure, we are convinced that the evolution towards an open ecosystem in drug discovery is inevitable in the long term.