LEAD Therapeutics of California has a very unusual business model. “We want to make drug discovery fundable in this environment by taking advantage of the best parts of US and China life science,” says Sofie Qiao, PhD, founding president of LEAD and head of operations. To do that, she first took a hard look at existing state of drug discovery in the US.

“Drug discovery is being cut back in the US, creating opportunities,” she said in an exclusive interview with ChinaBio® Today. “Soon, the industry will experience an even more severe shortage of early stage candidates. Late stage molecules are expensive to in-license,” even though biopharma is willing at the moment to pay up for the safety that late-stage candidates represent.

However, in the US, drug discovery is generally not considered to make economic sense as a business model because it is too expensive and takes too long to reach a “value-inflection point.” When a company is finished with its discovery and early development work, the market value of the result often is about equal to the money invested – no value is added for all the work, risk and costs that were incurred to advance the molecule.


LEAD’s Business Plan

As a way of limiting its risk, LEAD confines its drug discovery to already validated targets for which the company thinks it can design a better molecule, thereby creating a significantly improved new chemical entity.

“A convincing value proposition can be created by shortening the time frame,” declared Dr. Qiao. To keep the time frame brief, the company intends to seek partnership for its molecules at the pre-IND stage. In the biopharma world, the conventional wisdom is that pre-clinical molecules have not reached their maximum economic potential. But LEAD expects to keep three programs going at all times, partnering off the initial candidates quickly, before they have consumed large amounts of capital. LEAD thinks it can take a molecule to the pre-IND stage in as little as just 18 months.

Besides, as Dr. Qiao points out, early stage drug candidates can sometimes elicit very substantial offers. “I worked in Business Development at Syrrx,” she said, “which was acquired by Takeda for $270 million. Syrrx’s drug candidate against a clinically validated target DPPIV was partnered with PPD at a preclinical stage, and still, Syrrx’ share of ownership of the DPPIV program was the major value driver in that acquisition. In other words, early partnering does not preclude an attractive long-term future for the company.”

To enhance the value proposition, LEAD does the chemistry work in China, saving about 70-80% over the cost of doing the work in the US. Because it wants drugs for sizable markets, LEAD will initially concentrate on anti-infectives (resistance almost always develops, according to Dr. Qiao) and oncology drugs. The company does not intend to dethrone the frontrunner in any particular space. Instead, often through a combination product, LEAD will design a new molecule that improves upon the performance of the frontrunner. After all, as Dr. Qiao points out, the most successful product in any particular market niche is not usually the first to market, but the fast-following product. “First to market products take longer and present more risk,” she said.

LEAD’s plan is to combine the best features of US and China life science. “Judgment activities are handled at our San Francisco office,” said Dr. Qiao. “That includes matters such as IP protection and overall strategy. As a chemistry-driven drug discovery company, we consider chemistry a skill-based activity, but we can do that in China if it is closely supervised by our own staff. The in vivo and in vitro biology studies are more of a recipe-following activity, so we can send those studies to a CRO that has the right capabilities,” she continued.

Before writing up the LEAD business plan, Dr. Qiao performed a comparative analysis of life science in the US and China. She found that China was especially strong in chemistry, while biology was improving. China’s market for drugs and the naïve patient populations for clinical trials are both very large, but the clinical-regulatory process is weak, as is the drug discovery and development side of the business. With these points in mind, LEAD’s business plan split the various tasks of its business model between China and the US, seeking to capture each country’s strengths.


The McKinsey Experience

If this sounds like a business school case study approach to drug development, there’s a reason. Dr Qiao never attended business school, but she spent a very formative year working for McKinsey & Company, the management consultants. Her job was to advise biopharma clients on how to run their businesses. Dr. Qiao already had a PhD in chemistry from MIT and two years of experience as a Staff Scientist at Genzyme. Nevertheless, the stint at McKinsey was quite a different challenge.

“It was a military boot camp experience. I complained constantly (to my husband). It was painful,” she said. But the experience transformed her from a scientist into a businesswoman. “I had to learn a company’s business in a week. With each new client, it was like being thrown into river before knowing how to swim,” she said. “Every time, it seemed like a new river requiring new skills. The experience was always traumatic.”

Dr Qiao is very good at describing the problems of being a consultant. But she is equally articulate about the lessons she learned. “It taught me how to think, how to address a problem. As consultants, we had to have an answer. We were taught to form a hypothesis, which would determine our data gathering activities. The data would then prove or disprove the hypothesis. I still use these skills.”

She moved on from there, working at Syrrx and then Discovery Partners International. “I learned at Discovery Partners that the CRO business is not a good industry in the US. On the other hand, starting another CRO in China was not the answer either.”

To decide how to use her skill set, she did her comparative analysis of life science in China and the US. LEAD’s business model was the result. Although the plan made sense to her, LEAD’s model was a strange concept for VCs, who expect to see something bankable in a company. In life science, that usually means a proprietary technology platform or clinical stage assets.

LEAD offered neither of those, and at the beginning, it did not claim any IP either, another difficulty for VCs. Neither does the company own any proprietary platform for the chemistry required to make the model work. “It was a stretch for VCs,” said Dr. Qiao sympathetically. “They were outside their comfort zone because the business model was different from their usual investments. For sure, it was a challenge to convince them.”

Dr. Qiao says, disarmingly, that she was a little lucky. But it was more than that. Because she had been in business development, she knew a lot of people in the industry. And, in place of the usual elements of a bankable business plan, she assembled a management team that would confer credibility on LEAD, something her business plan otherwise lacked. She gathered people who know biology and chemistry, some from big pharma and others from small biotech. She had to have the team in place before she went to the VCs. The VCs knew the team, so they were willing to back the unusual project. In November 2007, LEAD closed a $17 million series A round, led by Pappas Ventures and ProQuest Investments, joined by Mustang Ventures, a VC firm focused on China.


ShangPharma Relationship

LEAD has one other strategic investor: ShangPharma. Through its investment arm, China Gateway Life Science (Holding) Ltd., ShangPharma, made an investment of unspecified size in LEAD. At the same time, LEAD struck a deal with ShangPharma’s subsidiary, CRO ChemPartner, which dedicated a part of its facility, including between 20 and 30 scientists, to doing the chemistry work on LEAD’s molecules. LEAD has representatives on site to help direct ShangPharma’s work. According to Dr. Qiao’s initial analysis, chemistry is one of China’s strengths. Still, chemistry is sufficiently critical to LEAD’s success that the company wants to have hands-on management of its chemistry activities.

LEAD wanted to establish an innovative operational structure for its China presence, and it accomplished that goal with the ShangPharma deal as well as setting up a representative office. “At the same time, ShangPharma is an investor while we have a service relationship with them. They are both shareholders and service partners,” commented Dr. Qiao.

For Dr. Qiao, the ShangPharma relationship is emblematic of LEAD’s approach to life science. Speaking of the ShangPharma partnership, she says “It’s not a full plunge into building a China-based biotech company. LEAD remains a US-based company, incorporated in Delaware. The company has a CRO relationship with ShangPharma, but it is neither a joint venture nor wholly owned. All in all, LEAD has taken a risk-minimized approach to turn discovery net present value positive.”

If that sounds like a management’s consulting analysis, so be it. Dr Qiao believes that a company should not be doing what everybody else is. It must define its own path, seeing the things its competitors overlook. As support for her iconoclasm, she quotes Warren Buffett, “We want to be fearful when others are greedy and greedy when others are fearful.” Given her penchant for independent thinking, it’s no wonder that LEAD Therapeutics has a unique business plan.

See our other articles on LEAD Therapeutics and ShangPharma. 


Disclosure: none.