GSK Tries to Mimic Real-World Biotech

Not satisfied with its R&D experiments to date, GSK has taken its most radical step yet toward re-creating biotech within its walls: even smaller units complete with investment boards occupied by external VCs and CEOs and milestone-based funding and external VCs.

Not satisfied with its R&D experiments to date, GSK has taken its most radical step yet toward re-creating biotech within its walls: even smaller units complete with milestone-based funding and external VCs.

By Melanie Senior

GlaxoSmithKline has pushed its evolving CEDD experiment through its most radical step yet, with the creation of even smaller, pathway-focused drug performance units.

The new structure mimics real-world biotech as far as is arguably possible; CEDDs and their DPUs are assessed by investment boards that include external VCs and CEOs, and are on a three-year, milestone-linked funding cycle.

GSK’s hands-off, performance-based philosophy is reflected in the multiple risk-sharing, option-based deals with external biotechs that have become the Big Pharma’s hallmark.

But the Big Pharma knows it can’t rely too heavily on success in this latest R&D re-organization—hence CEO Andrew Witty’s broader strategic moves into emerging markets and lower-risk areas such as branded generics and consumer. These will have more impact on GSK’s performance, at least in the near- and mid-term.

When GlaxoSmithKline PLC first announced its Centers of Excellence for Drug Discovery (CEDD) structure post-merger in 2000, the idea was to break down huge corporate line-function R&D into more focused, and hence productive, units. Each spanned discovery to proof-of-concept in a particular therapeutic area (or areas); each had about 300 to 400 scientists and they competed with each other for company funds.

That was seen as pretty radical at the time. But nine years on, after several iterations and additions, including a biologics CEDD and a partnering-only unit known as the Center of Excellence for External Drug Discovery (CEEDD), it’s clear that CEDDs version 1.0, as it might be called, failed to address the R&D productivity problem. (See "R&D Productivity at GSK? He CEDD, She CEDD," In Vivo Europe Rx, January 2004 (Also see "R&D Productivity at GSK? He CEDD, She CEDD" - In Vivo, 1 Jan, 2004.) and "GSK’s Risk-Sharing Deals to Compete with In-House R&D," IN VIVO, March 2006 (Also see "GSK's Risk-Sharing Deals to Compete with In-House R&D" - In Vivo, 1 Mar, 2006.).) GSK’s late-stage pipeline appears woefully inadequate in the face of patent expiries--most notably, that of COPD and asthma treatment fluticasone/salmeterol (Advair).

Hence GSK’s management, under new-ish CEO Andrew Witty, introduced the latest, and most radical, change within GSK R&D one that takes this Big Pharma as close as is arguably possible to mimicking real-world biotech within its walls. First of all, the unit-size got smaller, with the creation, announced in mid-2008, of two dozen or so pathway-focused drug performance units (DPUs), each with just about 50 scientists. Most of these sit within the CEDDs (with a couple of stand-alone exceptions), and as for the CEDDs themselves, the buzzwords are ownership, accountability, and efficiency.

But because these qualities aren’t normally associated with corporate structures, GSK has also created investment boards, complete with not just senior GSK management but also with external VCs and CEOs. The Drug Discovery Investment Board oversees the entire R&D structure; this and other boards at CEDD- and even DPU-level review and approve business plans, and allocate milestone-linked funding on a three-year cycle. The setup is designed to mirror the biotech-style risk-reward culture and delivery-dependent financing rounds.

GSK isn’t alone in trying to shake up discovery. Many other Big Pharma, including Roche, Novartis AG, Japan’s Takeda Pharmaceutical Co. Ltd., and, to a lesser extent, AstraZeneca PLC, are trying out their own flavors of smaller-unit R&D. (See "Takeda’s Global Ambition, IN VIVO, June 2008 (Also see "Takeda's Global Ambition " - In Vivo, 1 Jun, 2008.).) As for Pfizer Inc., one of the more recent (but apparently no less enthusiastic) reformers, it’s still singing the virtues of its federation of small biotechs—known as the Biotherapeutics and Bioinnovation Center (BBC)--even while building the largest pharmaceutical company in the world via its $68 billion Wyeth acquisition. [See Deal] (See "Why Wy-Pfi?" IN VIVO, February 2009 (Also see "Pfizer/Wyeth: Industrializing Pharma?" - In Vivo, 1 Feb, 2009.), "Welcome, Wyeth, to Pfizer’s Biotech Federation," The IN VIVO Blog, January 2009 and "Pfizer’s Increasingly Specialist Focus," IN VIVO, November 2008 (Also see "Pfizer's Increasingly Specialist Focus" - In Vivo, 1 Nov, 2008.).)

But few appear to have taken "biotech-ization" to the extreme that GSK has. Perhaps with reason: after all, some question whether re-creating the entrepreneurship and sense of ownership characteristic of stand-alone biotech is logically possible within a large corporation. There’s always the knowledge, the argument goes, that for all the boards and budgets, the mother-ship will always be there to pick up the stragglers. The specter of bankruptcy and takeover is absent, and GSK is unlikely to shut down DPUs in three years’ time if they fail to meet objectives. GSK executives themselves, many fresh in from biotech, acknowledge that cultural change is proving the hardest. "We’re running an experiment," admits Jose Carlos Gutierrez-Ramos, PhD, SVP and head of the Immuno-Inflammation CEDD (II CEDD).

But it’s an experiment that, for all the uncertainties, GSK management knows it has to run. "Five years ago, it wasn’t a life or death situation [for Big Pharma]. Now it’s clearly understood, certainly by us, that it’s a question of survival," Gutierrez-Ramos continues.

Biotech-izing Big Pharma R&D: Stand Up and Be Counted

Gutierrez-Ramos is one of a half dozen or so new executives who have joined GSK as CEDD-heads in the last couple of years. An immunologist by training, he spent eight years as a professor at Harvard Medical School before joining Takeda Oncology (now part of Takeda) very soon after the biotech’s founding. After stints at Peptimmune and Aviria, he ended up at Amgen Inc., where he stayed for less than a year before being recruited to GSK in the second half of 2007.

As such, Gutierrez-Ramos arrived with his own ideas about what the company needed to do. "The CEDDs were too big," he declares. "They didn’t have the risk-taking feel or the sense of ownership of a biotech." Thus along with Witty, GSK’s R&D chairman Moncef Slaoui, PhD, one of the drivers behind the entire CEDD enterprise, and SVP drug discovery Patrick Vallance, MD, "we wanted to build a more biotech-style drug discovery," he says. "We knew what we thought 40 to 50 people could do over two or three years, with the equivalent of A and B rounds of funding."

So Gutierrez-Ramos set up four small DPUs within his CEDD, each focused on a particular mechanism, chosen with the ambition to be best-in-industry. "I wanted to pick areas that could be revolutionary [in drug discovery] six or seven years from now," he told IN VIVO. The chosen fields are pattern recognition receptors, epigenetic enzymes, immune memory in lymphocyte traffic into lymph nodes, and regulatory T-cells. The II CEDD’s investment board, with two VCs and two external CEOs, sets out the DPUs’ deliverables, to which investment decisions during and at the end of the three-year cycle are linked. "If we don’t do it [the overseeing] at our level, he continues, "R&D will do it at the company level."

There’s nowhere to hide, in other words. And that’s precisely the kind of setup that Zhi Hong, PhD, wanted to create when he joined as SVP and head of the Infectious Diseases CEDD (ID CEDD), also just under two years ago. With a combination of both pharma and biotech experience (at Schering-Plough Corp. and Ardea Biosciences Inc.) he found within GSK "a common Big Pharma problem," with scientists spread across too many time zones and geographies. The ID CEDD at the time comprised five global sites, each working in viral diseases, bacterial infections, and diseases of the developing world. Although Big Pharma was "for a while, proud to be global and to have people all over the place," the reality was that this created huge operational challenges. "There were lots of places to hide." Hong has simplified the structure down to three therapeutically aligned sites: anti-viral discovery in North Carolina, anti-bacterial discovery in Philadelphia, and Tres Cantos in Spain for diseases of the developing world. And he’s carved the anti-viral group up further into DPUs: one for HIV and the other for HCV, "because I wanted to reduce the size of the teams further still, and put even more focus on deliverables and accountabilities," he explains. Otherwise, he illustrates, if the anti-viral discovery group does well one year, for instance, they could shore up the rest of a (perhaps underperforming) division. The ultimate deliverable for the CEDDs—their exit, if you like—is a beyond-proof-of-concept asset that is ready to transition into late-stage clinical trials, run by GSK’s Medicines Development Centers (MDCs). As in the II CEDD, Hong chairs a CEDD-level advisory board that oversees progress across each of the DPUs.

If it sounds like GSK’s managers and scientists are under the microscope, that’s because they are. But there is, on the other hand, reward to be had—beyond the traditional corporate perks like a pension scheme and gym membership. "We don’t want folks to be fearful, just to understand that the future is in their hands—you own it, it’s not just amorphous and owned by 1,000 people," illustrates Gutierrez-Ramos. And if you get it right, you’ll be rewarded; not, perhaps, with sky-high equity but with a decent slug of cash. "We can’t give options with the same upside as biotech, but I have built an important incentive program for my DPUs—they get significant cash if the programs make it through certain milestones," reveals Gutierrez-Ramos. "Significant" might be more than a year’s salary in a cash bonus at the end of the three-year funding cycle. (And the incentive structure includes milestones much further downstream, too: Witty recently announced he would be rewarding scientists for getting a drug reimbursed, not just approved.)

In theory, the DPU structure introduces the best of biotech in cultural terms and in the degree of focus, but avoids the investor-related downsides: the distraction of having to reach a certain valuation point and having to woo financiers for the next round, the potential logjams with VCs over dilution, business strategy, and exit options. The DPUs’ other advantage over real biotech: they have GSK’s infrastructure and resources; they don’t have to pay rent or electricity. (Not that they have to use GSK resources for everything; "they can go to India if they like," explains Gutierrez-Ramos.) Hence, GSK’s management would argue, it’s entirely realistic that the goal of these units is to be not as innovative and efficient as outside biotech, but more so.

Best of Inside and Out: Hybrid CEDD-CEEDDs

But just as a real biotech is free to do deals, so, therefore, should the highly accountable DPUs and CEDDs, too. Until recently, GSK’s externally focused CEEDD, created in 2005, was the giant’s main dealmaking hub. Size and budget-wise, this unit was similar to any other CEDD, except that with no internal R&D and no particular therapeutic focus, the unit relied entirely on partnerships to drive its share of production. And its virtual status defined the type of alliances it struck, too: deals where the partner does all the work, with GSK usually taking an option on licensing any resulting compounds at proof-of-concept. (See "GSK’s Risk-Sharing Deals to Compete with In-House R&D," IN VIVO, March 2006 (Also see "GSK's Risk-Sharing Deals to Compete with In-House R&D" - In Vivo, 1 Mar, 2006.).) Thus the CEEDD is rather like a VC, managing 20 or so portfolio companies.

The CEEDD is still in place, but it no longer has a dealmaking monopoly across the GSK R&D organization. The Immuno-Inflammation and Infectious Diseases CEDDs both now do their own dealmaking—in other words, they’re charged with internal R&D and picking the best external partners in their area of focus. "Based on the success of the CEEDD, I wanted to try to create a hybrid CEDD-CEEDD," recounts Gutierrez-Ramos. (See "GSK: Seeding more CEDDs?," The IN VIVO Blog, April 2007 .) He claims that half of the II CEDD’s programs are now external, reflecting the fact that for all the DPUs’ efforts and ambition, in many areas the best science will remain outside GSK. "We identified 10 strategic areas we wanted to get into. In four of them, we felt it was early enough in the game for us to tackle internally," Gutierrez-Ramos says, given that they are mostly small molecule–based. In the other six areas identified as critical but where GSK is not at the top of the game, such as in kinases or nucleic acid–based drugs, it has partnered.

So for instance, Germany’s Cellzome AG, with which GSK signed an option-based deal in September 2008, is effectively a kinase-focused DPU within the GSK II CEDD. [See Deal] Similarly, Archemix Corp., with which GSK teamed up in December 2008, provides what GSK considers best-in-class in nucleic acid–based drugs. [See Deal] In Toll-like receptors, an area where "we came a bit late in the game," according to Gutierrez-Ramos, the Big Pharma has teamed up with Dynavax Technologies Corp. [See Deal]

In the ID CEDD, the external programs don’t quite make up 50% of the total (although the February 2009 licensing deal with Idenix Pharmaceuticals Inc. around a group of non-nucleoside reverse transcriptase inhibitors for HIV/AIDS will have brought the figure closer). [See Deal] That’s mainly because a 1999 alliance with Genelabs Technologies Inc. evolved into an acquisition in 2008, turning GeneLabs into a Hepatitis C DPU within Hong’s unit. [See Deal] [See Deal] There may be more such deals as the economic climate hits biotech companies. "Our company’s model relies on the biotech’s ability to raise funds and share risks. If they lose that ability, it may make sense to acquire them, given market conditions," Hong says. He won’t give details on how such acquisitions are funded, but it’s fair to assume that most of the acquisition cost comes from GSK central. The Idenix deal (unusual these days in not being an option deal but a straightforward license, complete with $17 million in up-front cash and the same-sized up-front equity investment) was funded centrally, but will be budgeted through the CEDD and the corresponding MDC (since the lead asset is already in Phase II).

The control these CEDDs have over their own deals provides focus and the ability to swap expertise with partners. It also allows the ID CEDD to manage its more unusual partnerships—for instance with public-private foundations and governments. But doesn’t having internal and external programs within one tight-knit unit re-introduce potential rivalry and prioritization challenges? One of the advantages of—and indeed the key rationale behind--the stand-alone CEEDD is that it minimizes any risk of "not-invented-here" syndrome infecting any deals because it has no internal R&D to compete. Still, Gutierrez-Ramos and Hong claim to have carried over that advantage into their hybrid CEDD-CEEDDs thanks to the incentive structure. "You tell the DPU heads, if the alliances are successful, that counts as your success," Gutierrez-Ramos explains.

They’re sufficiently confident in the new setup to predict that the other CEDDs will follow their lead in becoming accountable for their own dealmaking, possibly within the next two years, according to Gutierrez-Ramos. (There are eight CEDDs in total; the other six are oncology, metabolic pathways, biopharmaceuticals, neurosciences, respiratory diseases, and R&D China, though oncology is broader in scope. See sidebar "End-to-End Oncology.") Already, though not officially hybrids, "most of our CEDDs now have a significant external focus," Adrian Rawcliffe, SVP worldwide BD and R&D finance, told IN VIVO. "The CEDD and DPU heads view themselves as masters of particular areas of research. If they can be best at that internally, or at a piece of that, great; if not, then they should be partnering," he summarizes.

So does all this put the original CEEDD out of a job? Apparently not. Indeed, the CEEDD has just had its own injection of biotech spirit in the form of entrepreneur Christoph Westphal, PhD, formerly CEO of Sirtris Pharmaceuticals Inc., which GSK acquired in April 2008. [See Deal] Westphal now runs the CEEDD and Sirtris, which remains almost as it was within GSK as a stand-alone DPU, and he reports directly to Patrick Vallance. (See "Is Biotech Running GSK?" The IN VIVO Blog, December 2008 .)

The CEEDD is now more likely to do broader platform-based deals that might span multiple therapeutic areas, explains Westphal, rather like the August 2006 deal with ChemoCentryx Inc. focused on chemokine-targeting drugs.[See Deal] Or it might sign deals outside the specific remit—or particular interest—of the CEDDs. So for instance, this unit signed a cancer-stem-cell–focused option deal in December 2007 with OncoMed Pharmaceuticals Inc. [See Deal] There are CEDDs in biotherapeutics, and in oncology, but their priorities are focused on other areas. Most recently, Westphal and his team (Michelle Dipp, MD, PhD, previously director of corporate development at Sirtris, runs the US arm of the CEEDD, with Shelagh Wilson, PhD, in charge of the European side) expanded a five-year, wide-ranging CNS deal with Denmark’s NeuroSearch AS to include several novel compounds. The original alliance, struck up in 2003, was amended three years later, placing increased responsibility on NeuroSearch for pre-proof-of-concept work. [See Deal]

That change captures what the CEEDD is about: sharing risk. The 20-person team now has "four years’ experience accessing GSK as a client for biotechs, while leaving them independent," says Westphal; and four years’ experience designing option-based deals, allowing GSK to retain rights to potentially important products without fully fronting the costs.

Option-Based Alliances: The Ideal Deal?

Indeed, just as the CEDDs have grabbed some of the CEEDD’s dealmaking, so they’ve also adopted its preferred option-based deal structure. Such deals pre-date the CEEDD—they go back to, for example, GSK’s 2002 alliance with Exelixis Inc. [See Deal] But option-based deals have increased so significantly in the last five years as to have become a hallmark of GSK dealmaking. (See Exhibit 1.) "We’ve been a perfector of such [option-based] deals," declares Rawcliffe, although he is quick to emphasize that these are not the only kinds of deals GSK does. (The Big Pharma in January did a regular licensing deal with Biotica Technology Inc., for instance, around anti-inflammatory erythromycin candidates—this deal was signed with one of the stand-alone DPUs, focused on macrolides [See Deal].)

Nor indeed are they the only ones doing them—Merck & Co. Inc.’s metabolics deal with Galapagos NV is just one recent example elsewhere. [See Deal] The characteristics of such deals are simple: the partner generally remains in charge of driving the timing and nature of R&D pre-proof-of-concept, and of paying for it. To fund those R&D expenses, GSK buys an option that it can exercise, generally for a significantly larger amount of money, at proof-of-concept (or before, in some cases). If it exercises the option, GSK takes the compound through later-stage development and commercialization.

The advantages to GSK: no long-term funding commitments, but guaranteed access if the assets turn out well. And sometimes, GSK can capitalize its option fee--sparing its P&L while loading the accounting expense onto the biotech, which, with no earnings to worry about, isn’t particularly concerned about the loss, either. The biotech gets non-dilutive funding to carry on with its work largely as before, plus it retains the freedom to license on any assets that GSK doesn’t option in. And increasingly, it seems, a passed-over asset retains little tarnish these days, as Exelixis discovered recently when it was able to license, on handsome terms, to Bristol-Myers Squibb Co. a compound passed over by GSK in October 2008. [See Deal] In sum, the biotechs get the kudos and validation associated with a Big Pharma partnership but in theory avoid getting embroiled in Big Pharma bureaucracy. Indeed, the key facet of these deals isn’t the option bit, argues Rawcliffe, "although that’s what everyone focuses on. It’s the fact that you’re enabling the other party to grow its research base in an independent fashion and explicitly putting responsibility for that onto the partner."

That suits the partners, too. "The genius of the structure is that we proceed as before, but obviously now with the additional financial resource, plus the advice, of GSK," effuses Dynavax’s VP, CBO and general counsel Michael Ostrach. Dynavax in December 2008 received $10 million up front and up to $200 million in per-program milestones in exchange for granting GSK’s II CEDD an option to license endosomal Toll-like receptor drug candidates in four autoimmune and inflammatory disease areas, including one preclinical compound, DV1079. Dynavax does all the research and early clinical development, and if GSK takes the option at proof-of-concept, the biotech is promised tiered royalties (and can co-develop and co-market one pre-specified product). If not, it can license the candidate to someone else.

For Ostrach, the deal balances the two cultures in a way that takes advantage of the best of both—biotech’s ability to find the most rapid and efficient way to reach an objective, and the "extras that a pharmaceutical company can add." And those extras, he argues, are things like clinical experience, resources, and capabilities, not multiple committees and complex decision-making lines typical of traditional deals with Big Pharma. Indeed, the only committee that Ostrach’s group must consult is the joint steering committee, which has scientific reps from both sides. As such, he concludes, "it’s as if we’re dealing with a smaller, tightly knit group" rather than a large pharma. And there’s enough experience among the folks on GSK side—given that many now come from biotech--that they "get it," he continues.

And although GSK’s official role in such partnerships is just as overseer, the reward structure within the CEDDs means that scientists are incented to provide their partners with as much help as possible. Anacor was one of the first to sign a deal with CEDD ID in its hybrid form, and its CEO, David Perry, was initially skeptical. He feared process overload, not-invented-here syndrome, and impossible standards. But in fact, "we found the ID CEDD to be engaged, open to new ideas, and helpful beyond what they have to be contractually," he says. "In my view that’s because they’ve done a great job of aligning the incentives of their employees with ours." So they’re very available for weekly meetings, to talk through next steps, and generally provide input, Perry continues. "If we want to test against a particular resistant strain of bacteria, GSK may have that strain…or may have biochemical screening tools that we need," he illustrates. In other words, there’s a willingness to share assets, rather than the more typical scenario to date: tension between largeco and smallco.

The risk of such tension may also be minimized, in some cases, by the flexible entry points that GSK has built into some of its partnerships. Option-based deals aren’t always centered around proof-of-concept, or even proof-of-mechanism, cautions Gutierrez-Ramos. "In some deals we have several option points. It might be Phase Ib, for instance, when I know I’m hitting the mechanism that we’re going after in humans. If I know I’m doing that, and I understand the drug’s pharmaco-kinetic activity, I’d rather bring it in then and spend the resources I need to, than force a POC [proof-of-concept trial] on a biotech where the tendency will be to make it [the study] as small as possible and I will have to force them to design a larger one," he explains. In the case of its April 2008 deal with Regulus Therapeutics Inc., GSK has an earlier opt-in, at selection of clinical candidate stage.[See Deal] "We decided to do it [POC] ourselves, to get to the clinic faster," explains Gutierrez-Ramos. Meanwhile, Regulus accesses GSK’s clinical expertise and understanding of the pathophysiology, and even if it loses the first candidate pre-POC, "there would still be three more in the waiting to advance further," notes president and CEO Kleanthis Xanthopoulos, PhD, who expects the first candidate in the next year to 18 months.

But if many of GSK’s option-based deals appear to have survived and even benefited from the transition from CEEDD to CEDD, it may be too early to declare this the ideal deal. Most haven’t yet reached proof-of-concept or anywhere near the stage where disagreements on how to proceed become likely. Anacor just received a milestone payment in January; "we’re lucky; the programs are working—that’s why everyone feels so positive about the deal," admits Perry. Galapagos’ CEO Onno van de Stolpe has, via a first, 2005, deal with GSK, lived through changing structures at the Big Pharma since before the CEEDD was set up. (See sidebar "Galapagos: A Partner for All Structures.") [See Deal] He’s happy with the latest switch, over to the II CEDD, given the increased expertise that provides him. But when it comes to the degree and nature of cooperation, "we don’t [yet] depend on GSK for tools or capabilities," he explains; so far "it’s mainly about discussion." In terms of Galapagos’ contribution to the partnership, therefore, "we’re still in our comfort zone," declares van de Stolpe.

Culture Shock

Indeed, the entire GSK R&D setup is still in its honeymoon period. For those at the top, driving change, it’s an exciting and inspiring time, especially given the high degree of buy-in from Witty, Slaoui, and Vallance. Most of the CEDD heads have been replaced over the last year. And since the majority of the fresh lot are, like Gutierrez-Ramos and Hong, ex-biotech, it’s no surprise that they, in turn, are hiring in ex-biotech folk to run the DPUs.

But the cultural change required to instill biotech-like entrepreneurialism and innovation throughout the GSK R&D enterprise doesn’t happen with empowered ex-biotech staff and new structures alone. Indeed, acknowledges Gutierrez-Ramos, changing mind-sets is the "biggest challenge that we have." Sources from within pharma and in the investment community report real disgruntlement among some GSK scientists; "morale is appallingly low," says one executive with close ties. Gutierrez-Ramos reports that about 30% of his group—75 people--have left, and he’s still actively recruiting replacements, a process he describes as "painful but good."

Hong points to the huge legacy issues faced by those coming into GSK, particularly among the more junior staff. "Many have change fatigue," he sums up, reflecting the various iterations of CEDDs, CEEDDs and DPUs. "There is a lack of trust and urgency. Restructuring creates additional anxiety."

And that’s why rallying the remaining staff is all the more important. To begin to address this, Hong has created a small team of self-starters from within his CEDD, at the scientist level, to identify and discuss the cultural challenges that the re-organization presents, and to figure out how to communicate these more widely within the group. "We’ve gone further than any other CEDD," in our communications, he notes, with a touch of competitiveness. "We have a quarterly newsletter where I will communicate directly with the entire staff, signal the issues that we’re facing, and suggest how to address them."

At the heart of a biotech-like culture, though, is the risk-reward balance. As Hong points out, "entrepreneurship means reward, too. You take the risk and you will be rewarded if successful." Without reward, the experiment doesn’t work—and GSK must be prepared to provide continued incentives if the CEDDs and DPUs are successful in meeting their milestones and pursuing their pre-agreed strategic plans.

Carrots, Sticks…Can Pharma Really Be Like Biotech?

It’s highly unlikely, statistically, that all the DPUs will succeed, though. Which leads to perhaps the more pertinent question: what will happen if or when a DPU or CEDD fails to meet its milestones, as per the neatly detailed business plan? Will GSK have the nerve to shut them down? Westphal reckons it would, "though without necessarily firing people." For him, it would amount to "punishment for an idea, not an individual."

Talking to a range of executives on this question suggests it’s not absolutely clear what would happen in the case of unmet milestones. When pushed on whether the GSK mother-ship would provide a safety net, "I hope we always have that," says one. The company spokesperson line: "It’s obviously in a CEDD’s interest to have demonstrated significant progress." That said, "we do not believe it is helpful for a creative environment to be using threats."

Some argue that having a safety net undermines a key facet of the biotech-like environment. "In the real world, how to raise the next funding round drives so much of the decision-making [in biotech]. That is what GSK has failed to understand or even care about," says one senior biotech executive and ex-GSK employee. "You can’t focus your mind in biotech without the reality of where you get your next money from," the executive continues. GSK "just doesn’t get this concept of the ability to run out of money."

But does it matter if GSK’s A or B rounds are slightly larger than your average real-world biotech fund-raising, particularly these days? Is the specter of running out of cash a necessary ingredient for drug discovery? Likely not. As Chris Viehbacher, formerly president, North American Pharmaceuticals at GSK and now CEO of Sanofi, said at the French group’s results meeting in February: "In biotech, if your project dies, the company dies. We can’t create that same thing in pharma." (See "We’re Not the Beast You Thought We Were," The IN VIVO Blog, February 2009 [A#753871112533070262.) Indeed, GSK argues that the whole point of this "biotech-within-pharma" model is that you remove the pressure that real-world biotech management faces to secure funding and achieve the next market-driven, often rather random valuation point and instead allow more focus on product discovery and development.

Pfizer, also biotech-izing its R&D, would appear to agree that instilling a fear of failure or the threat of withdrawn funding isn’t a key ingredient for success. It has split its new-found biologics R&D into smaller, autonomous and accountable units, each run by its own CSO, which form part of a biotech federation known as the Biotherapeutics and Bioinnovation Center (BBC). Corey Goodman, PhD, co-founder of Exelixis and Renovis, runs the BBC from the headquarters of Rinat Neuroscience, which Pfizer acquired in 2006. [See Deal] (See "Welcome, Wyeth, to Pfizer’s Biotech Federation," The IN VIVO Blog, January 2009.)

Unlike GSK, Pfizer hasn’t put in place funding cycles or investment boards. That said, the unit CSOs still have budgets (though these are flexible), goals and milestones, whose achievement (or not) "will affect their funding in the future," says Goodman. Push this philosophy too hard, though, and it may become counter-productive. Art Krieg, MD, ex-CSO of Coley Pharmaceutical Group Inc. (which became part of Pfizer in 2007 [See Deal]), who now runs the Cambridge, MA-based Research Technology Center, one of the BBC members, explains: "Unlike in a biotech where you have to advance a program into the clinic by a certain date or they’ll pull funding….if we get to that [IND] stage and the science doesn’t support the program, we are not going to file it." This, he says, is one of the BBC’s advantages: it operates like biotech, but has pharma resources, "so we can make smarter decisions, sometimes."

By and large, then, Goodman prefers "to motivate with a carrot rather than a stick." And for most scientists that go into biotech, "the ability to get stuff done fast, and to be close to decision-making," is a key carrot, he claims—and that’s the culture Pfizer’s trying to create, complete with accountability and ownership, where workers can "do terrific science without the bureaucracy."

The BBC is also hoping to design a system that would give employees an extra incentive when they hit positive proof-of-concept or any point at which, were they in a biotech, "their stock options would take on more value." That means some kind of customer-based validation, not simply a reward for putting something into the clinic. Thus it might be when a compound is picked up by one of Pfizer’s business units to go into pivotal trials, or if an orphan drug, for instance, when it is spun out and picked up by outside investors.

The Plan B

GSK is trying to go even further in terms of external validation and reward: inviting VCs to put money up to fund internal GSK programs. Unable to find an existing biotech with the program it wanted, the II CEDD team is attempting to seed-fund a company based around the work of three Boston-based academics, sharing risk with the VC community directly, rather than with an existing start-up. VCs will come on board for a later B round, with the offer of a pre-determined exit. "We’ll buy them back at a certain return," says Gutierrez-Ramos--based on clinical milestones.

Gutierrez-Ramos describes this as GSK "pushing entrepreneurialism to the limit," with external investors potentially "forcing these guys to deliver." And indeed, it’s hard to criticize GSK for a lack of dynamism or creativity in its approaches to R&D. But both the external DPU, and this whole latest re-structuring, is an experiment, and one on which GSK itself has imposed a three-year time frame. The outcome is far from guaranteed, but "the lessons will be enormous," says Gutierrez-Ramos. "We’ll be able to compare internal with external DPUs, self-standing DPUs with those within CEDDs," he enthuses, plus CEDDs which have deal-making arms, and those without. "January 2012 will be a very important period for us."

Three years is not long in R&D though. "They need to give it 10 years," says one ex-biotech CEO with Big Pharma experience. "They keep changing their plans and that’s why morale is so low."

Witty doesn’t have 10 years. Even three is a long time from an investor perspective. Advair, which accounts for about a fifth of the company’s net income, faces generics in the US next year and in Europe in 2013. The follow-on, once-daily inhaled corticosteroid/long-acting beta-agonist combo, known as Beyond Advair and being developed with Innoviva Inc., is not expected to be launched in time and will face competition anyway.[See Deal] And although GSK executives still insist that CEDD version 1.0 led to vast improvements in R&D productivity, these still don’t appear to be showing up in the late-stage pipeline: that houses only one drug, ofatumumab (Arzerra, filed with the European authorities in February), with blockbuster potential, according to analysts at Citigroup (and even that’s not a GSK child, it’s from Genmab AS [See Deal]). The rest is "not considered transformational," they say.

Hence although analysts are interested in the R&D re-organization, they’re not exactly excited. "We’ve had CEDDs; we’ve had other reorganizations. But the market won’t give them any credit unless they give deliverables," spells out one London-based analyst. Since those deliverables are missing, the conclusion is that R&D is part of Big Pharma’s equation going forward, but not the key driver. "You can’t put all your eggs in one basket and say ‘we’ll come up with the right model,’ because nobody has in recent years. So you have to have a plan B," the analyst continues.

Witty’s Plan B is diversification, and he’s pushing it aggressively. "Grow a diversified global business" has been his first strategic priority since his promotion. Sure, he’s doing the usual efficiency drives and cost-cutting: £1 billion of annual cost savings are expected by 2010, including sales force cuts and a recent further 6,000 job cuts announced at the company’s annual results in February; several R&D sites have also been closed down. But it’s diversification, both geographic--bolstering GSK’s presence in emerging markets, where 2008 sales grew by 12%--and operational--through building out into vaccines, generics, and the more reliable, if less sexy, earnings provided by consumer health—that analysts and investors want to see. (See "Pharma’s Strategic Divide: Focus or Diversify," IN VIVO, September 2008 (Also see "Pharma's Strategic Divide: Focus or Diversify" - In Vivo, 1 Sep, 2008.).) These are lower growth areas, "but they offer a stable, visible source of cash-flow," says one analyst, and it removes the company’s reliance on single large products. As Citigroup bulleted in its January report: "New CEO committed to developing a more stable and predictable business for shareholders, with a pragmatic approach to the returns from R&D."

The suggestion, borne out in reality, is that R&D returns are insufficient to fuel Big Pharma in its current form. So to the more controversial question: should Big Pharma do R&D at all? It doesn’t require a huge leap of imagination to extrapolate today’s plethora of risk-sharing deals a step further and see Big Pharma simply part-funding and overseeing external research—and indeed development. Already, executives such as Zhi Hong speculate that in the future, development as well as discovery may increasingly be done outside Big Pharma, in cost-sharing partnerships.

So Big Pharma isn’t about to shut down R&D, even though Witty’s diversification, and Pfizer’s Wyeth acquisition, point in that direction. But it knows that R&D can’t continue in its current form. In three years’ time, GSK might know more about how to—and whether it’s possible to--capture the best of both biotech and pharma in a cost-effective fashion. So might Pfizer. Chances are that neither will have found the ideal solution, though. Which is why, as Pfizer’s Goodman points out: "The industry needs more of these experiments."

SIDEBAR: Galapagos: A Partner for All Structures

Dutch biotech Galapagos NV has experienced, and survived, almost all the R&D structures at GlaxoSmithKline PLC—old CEDDs, CEEDD, and new CEDDs. In late 2004, Galapagos signed a target discovery service deal with a CEDD that covered both inflammation and respiratory diseases. Then came the CEEDD, which took over the Dutch group’s deal because Galapagos had in the meantime acquired target-to-candidate capabilities that meant it could deliver proof-of-concept assets to GSK. [See Deal][See Deal] In 2006, the partners signed an osteoarthritis option-deal, which has been expanded twice.[See Deal]

In 2007, the RI CEDD was split up and Gutierrez-Ramos arrived. So it was back to the CEDD. "He wanted to move the alliance into his II CEDD," recalls Galapagos’ CEO Onno van de Stolpe. That means more in-depth expertise, he continues, although he sees the CEEDD as playing a key role in initiating partnerships given their "independence" and lack of NIH "If a CEDD sees value consequently, it’s a good deal for both sides," he says. There were no contractual changes, just a new joint steering committee. Galapagos also has an entirely separate deal with the Infectious Diseases CEDD, based around GSK targets (the arthritis deal works on Galapagos’ targets.) [See Deal]

SIDEBAR: End-to-End Oncology

GlaxoSmithKline PLC in September 2008 announced it was combining the discovery units in this field with a specialized downstream oncology development group that manages clinical trials and regulatory approvals (though not marketing or sales). The idea is to capture the growth of personalized medicines in this area, to more effectively feed back patient response information from clinical trials into early research, and to align strategies and communication across the spectrum from discovery to market. GSK was clear, however, that the DPU structure and spirit within this new oncology organization will remain intact.

GSK’s not the first to create an end-to-end oncology operation—Novartis AG has had one for nine years, and Pfizer Inc. announced its Oncology Business Unit in 2008. Both those include commercial activities, too. (See "GSK’s New Oncology R&D Structure Reflects Personalized Medicine Emphasis," The Pink Sheet, September 2008 (Also see "GSK’s New Oncology R&D Structure Reflects Personalized Medicine Emphasis" - Pink Sheet, 22 Sep, 2008.).)