For centuries, people around the world knew that chewing on the bark of certain willow trees could ease the pain of a toothache or a migraine. By the mid-19th century, scientists in France and Germany had isolated the chemical, salicylic acid, responsible for willow bark’s analgesic and anti-inflammatory qualities, but it proved too harsh on the stomach to be of real medicinal value. Then, in 1897, a German chemist named Felix Hoffmann synthesized a purer, less irritating form of the natural compound. This new chemical, acetylsalicylic acid – better known as aspirin – became the best-selling drug of all time and is still the foundation of the multibillion-dollar corporation we now know as BayerAG. In a modest way, a similar story may be under way in Hawaii.
Twelve years ago, scientists at Cardax, a small biotech company nestled in the Manoa Innovation Center, synthesized a form of astaxanthin, a naturally occurring chemical found in shellfish and micro-algae and, like aspirin, a powerful anti-inflammatory. The natural form of astaxanthin is already a well-known dietary supplement – sometimes called a nutraceutical – believed by many to reduce the threat of heart disease. Kona-based Cyanotech, for instance, is a major manufacturer. But CDX085 – the latest in a suite of similar Cardax-patented compounds – is so much purer and more potent than natural astaxanthin, and the number of potential uses so much larger, that Cardax’s team believes it may become the next billion-dollar drug. They could be right.
Despite all this promise, Cardax’s path to success has been long and complicated and is far from over. Like so many startups in the life sciences in recent years, Cardax has been in a life-or-death struggle to find enough money to continue to operate. For the company to follow the traditional developmental route for startup drug companies, investors may have to pony up more than $100 million to conduct the expensive Phase-2 and Phase-3 clinical trials necessary for FDA approval of a pharmaceutical drug. So there are still many hurdles for Cardax.
But, last April, the German pharmaceutical giant BASF finally exercised a longstanding option to become the exclusive licensee of Cardax’s nutraceutical. Then, in October, Cardax announced it would use an arcane device called a reverse merger to go public. That succeeded in attracting millions of dollars in new investment for the company, setting in motion a plan to have a still unnamed nutraceutical product on the market by the end of 2014. So the company may finally have turned the corner.
All of which makes the ongoing saga of Cardax and its promising family of anti-inflammatory compounds a good introduction to the current state of biotechnology, venture capital and the evolving world of drug discovery.
To make sense of the Cardax story, you have to understand a little about inflammation. Almost all chronic diseases are inflammatory, including heart disease, osteoarthritis, diabetes and even some cancers. But inflammation itself isn’t a disease. It’s the body’s natural response to heal damaged tissue and defend against unknown pathogens. The redness and swelling associated with an infected cut or a case of strep throat is just the body’s attempt to isolate that infection and promote healing. In a tip of the hat to Celsus, the Roman encyclopedist, medical science still characterizes inflammation by the four cardinal signs: tumor, rubor, calor and dolor –swelling, redness, heat and pain. (The Greek physician Galen, no poet, added a fifth characteristic: “functio laesa” or loss of function.)
Inflammation may cause discomfort, but it’s an essential function of our immune system. There are two kinds of inflammation, though. Acute inflammation, despite the name, is the normal swelling and pain associated with minor infections. Physiologically, though, it’s astonishingly complex. When tissue cells are damaged, they release histamines and other chemical signals that mediate the body’s inflammatory response. This causes cytokines, small proteins in the bloodstream, to induce a dilation of the veins, bringing more blood to the injury. That makes an infected cut turn red. The dilated veins also become more porous, which allows plasma to leak through the vascular walls into the surrounding tissue. That causes swelling. Along with the plasma comes a flood of cells from the immune system called leukocytes, including bacteriophages that directly ingest bacteria, and enzymes that attack the structure of the pathogen. As the infection or injury abates, the body returns to normal. This type of acute inflammation is typically brief and effective.
But the inflammation associated with chronic disease is a different story. Rather than stem from a specific event, like a wound, chronic inflammation appears to be the result of the low-grade irritation of whole bodily systems, such as the cardiovascular system in the case of heart disease or the respiratory system in the case of asthma. Similarly, chronic inflammation isn’t a reaction to a specific pathogen; rather, it seems to arise from more or less permanent stimuli, such as smoking or chemicals in the environment. That may be why diseases associated with chronic inflammation are so much more prevalent today than in the past.
Modern medicine has done a good job dealing with the infections and communicable diseases that used to be the primary causes of death. In 1850, the life expectancy of an American at birth was only 38 years – largely because of the high level of infant mortality associated with childhood diseases. But, because of the advent of antibiotics and vaccinations in the 20th century, the average life expectancy today is over 74 years. As we’ve begun to live longer, though, chronic diseases have overtaken infections as the leading causes of death.
It’s unclear though, whether inflammation is a cause or an effect of chronic disease. “That depends,” says Deepak Bhatt, executive director of cardiovascular programs at Brigham and Women’s Hospital in Boston and a member of Cardax’s scientific advisory board. “For arthritis, I think it’s largely the cause of disease, because inflammation in the joints can cause pain, damage or even disfigurement in the joint space. In that case, an anti-inflammatory drug would be expected to directly influence the disease process. In cardiovascular disease, it’s a little less clear, but I think the majority of cardiovascular experts think there’s a causal relationship between inflammation and the disease, as opposed to inflammation being some kind of ‘innocent by-stander’ effect.
“My own feeling is it’s probably a little of both. There are cases where smoking or high cholesterol, for example, can damage the inner lining of the arteries – what we call the endothelium. That can certainly lead to inflammation in the arteries and the accumulation of plaque, which can cause heart attacks. But there are also people who are exposed to all those risk factors but exhibit no signs of inflammation or cardiovascular disease. So, sometimes inflammation may be the result of cardiovascular disease, and there are cases where inflammation is the primary bad actor.”
At the cellular level, chronic inflammation is the result of something called “oxidative stress,” the buildup of an excess of molecules called “reactive oxygen species.” These so- called “free radicals” are a normal product of the metabolism of cells. “Under healthy conditions, the body has ways to deal with free radicals,” says Cardax CEO David Watumull. “Some reactive oxygen species are even used by the immune system to attack and kill pathogens. But with chronic disease, an excess of free radicals begins to cause inflammation and, ultimately, cellular damage.”
This is what’s now thought to happen in athereosclerosis, a common form of cardiovascular disease. Oxidative stress causes inflammation of the cells lining the arteries, which induces the buildup of plaque. It’s plaque that causes heart attacks and strokes. Antioxidants like astaxanthin appear to provide a vehicle to remove free radicals from the cell, although the use of antioxidants to prevent disease is still controversial.
What makes Cardax’s compounds differ from other antioxidants is how efficiently they work. In highly magnified X-ray diffraction images of cell membranes, it’s possible to compare the antioxidant activity of Cardax’s compound with other antioxidants. In a 2007 paper in the journal Biochimica et Biophysica Acta, scientists reported that they found that, while other antioxidants damage the integrity of the membrane, or provide only a partial membrane spanning, CDX085 bridges the cell membrane completely, dramatically reducing the number of free radicals inside the cell. Just as important, CDX085 appears to be incorporated in the mitochondrial membrane, the most important site for free-radical production in the cell.
This might explain the unusual effectiveness of the Cardax compounds in animal studies. Although there are plenty of anti-inflammatory drugs available today, including some of the most profitable pharmaceuticals on the market, most of these compounds can be surprisingly toxic, especially when taken in high doses or for long periods of time, as is usual for chronic disease. That’s why the TV ads for pharmaceuticals, even blockbuster drugs like Lipitor or Viagra, can be so scary. On the other hand, in pre-clinical tests, the Cardax compounds appear to have had no side effects. In the industry lingo, they’ve shown “no known dose toxicity.” If that holds true in clinical trials on humans – and, given the long history of astaxanthin as a nutraceutical, there’s no reason to think it won’t – this new class of anti-inflammatory drugs could treat a wide range of diseases. That’s part of whyCardax looks so promising.
Then, of course, there’s the size of the potential market for Cardax compounds. CDX085 was patented as a treatment of cardiovascular disease – specifically, it reduces the level of triglycerides in the bloodstream, a precursor to heart disease – but CDX085’s sister compounds have been tweaked to treat osteoarthritis, diabetes, cognitive decline and other inflammatory diseases. These are all enormous markets. For example, in 2013, the pharmaceutical giant AbbVie (formerly Abbott Laboratories) sold more than $10 billion of Humira, a popular anti-inflammatory that originally targeted rheumatoid arthritis.
There’s also the nutraceutical market, which includes unregulated products like vitamins, enzymes and herbal remedies that are mostly sold over the counter. Nutraceuticals have some restrictions. Because they lack FDA approval, only limited claims can be made about their uses and efficacy. This makes them less lucrative than pharmaceuticals, which can make specific therapeutic claims. As Watumull points out, “If the FDA allows you to put ‘for pain associated with osteoarthritis,’ your market penetration will go way up.”
Nutraceuticals don’t have that option. But that doesn’t mean nutraceuticals are small potatoes, especially if they have a history of safe usage. “As a dietary supplement,” Watumull says, “we think the best comparison for Cardax is chondroitin/glucosamine, a nutraceutical commonly used to treat osteoarthritis. It’s marginally efficacious at best, but it still sells about $2 billion a year, because it’s safe. So, you have these enormous markets out there for safe anti-inflammatory drugs.”
As a pharmaceutical, he says, the numbers for the Cardax compounds are even more eye-opening. “We asked the members of our scientific advisory board, a panel of unpaid medical experts who serve as independent third-party advisors, ‘What percentage of your patients do you estimate would take this drug?’ We thought that something like 10 percent would be great; the smallest number anyone gave us was 90 percent. They told us, ‘You don’t understand how desperate we are for a safe, effective treatment.’ So, if you’re asking, ‘Who is the market for our compound?’ the answer is: Anybody who has an inflammatory problem.”
The question is: If Cardax is such a good bet, why aren’t they already a big success? The answer, as always, is money.
It’s expensive to be a biotech company. If you’re developing a new drug, those costs can stop a company in its track. For example, the natural next step for Cardax would be to subject its compounds to human clinical trials. But Phase-2 clinical trials, usually conducted on just a couple of hundred individuals, can cost as much as $20 million. Phase-3 trials, which can involve thousands of individuals, can bring those costs to more than $100 million.
“Big Pharma,” the giant pharmaceutical companies that have dominated drug development for the last hundred years, will often buy or invest in companies with promising Phase-3 drugs. The Phase-2 part of drug development, though, has traditionally been funded by venture capital, and the VC world is in flux.
“They just aren’t funding life sciences anymore,” Watumull says. “They used to fund pre-clinical trial companies and take them through clinical trials, but they stopped doing that about five years ago to any meaningful extent.” In part, he says, it’s because of the risk. But it’s also because of changes in their own incentives as VC funds have grown.
“Back in the 1980s and 1990s,” Watumull says, “the largest funds raised like $200 million. If you’re a VC, you collect 2 percent of that as your annual fee. That’s just $4 million a year for expenses.” Divvied up among all the fund partners, that’s not a lot of profit for such a risky investment. Thus, to get the high rate of return that investors and the VCs themselves expected, they had to gamble on early-stage companies. That used to be the essence of the VC model: If you invested in 10 startups, five would fail, three would break even or make a modest profit, but one or two would be home runs and generate the 15X or 20X yields that made venture-capital investment viable. It was a numbers game.
“But, if you have $4 billion under management,” Watumull says, “that 2 percent management fee is now $80 million a year. That’s without doing anything. So now, VCs are less interested in investing in small, early-stage companies like Cardax. Why take the risk? Most of the companies they invest in today are Phase-3 deals.”
Watumull doesn’t think this is sustainable. The VC model depends on the high returns provided by those high-risk startups. If you remove the riskiest investments, you also remove most of the reward, and the returns on the less risky investments just don’t justify the risk. He explains it this way: “A 7 percent upside for a successful company, against a 100 percent downside for a company that fails – that doesn’t work. The amount of risk the VCs perceived was just wrong. If you wait until a company’s in Phase-3 trials to invest, you have to put up at least $100 million, so there’s no way you can make 10 times or 20 times on that Phase-3 company. But you can still lose 100 percent of your investment.”
Watumull says this miscalculation is reflected in the recent financial performance of the major venture-capital funds. “Their returns have been mediocre at best over the past five years. That means VCs also haven’t been able to raise as much money. Now, it’s all going to private equity capital.”
Nevertheless, Cardax tried to get VC funding. Like executives at most promising startups, Watumull and his team traveled around the country, making pitches to dozens of VC firms. Cardax even had some success, attracting interest from Ivor Royce, an icon in the VC world whose own life science companies, Hybritech (bought by Eli Lilly and Co.) and especially IDEC (merged with Biogen), more or less created the San Diego biotech community, one of the largest in the country. But the VC model had already begun its decline.
“He really wanted to do a deal with us,” Watumull says. “He even gave us a term sheet, but he was unable to raise money for another VC fund. Here’s a guy who’d made literally hundreds and hundreds of millions of dollars in biotech, but he was unable to do it. That was two years of our time that we spent going in the direction that he wanted to go, but it didn’t lead to anything. That was very discouraging.”
Cardax is far from alone in its VC woes. In fact, it’s become a kind of parlor game among biotech company executives to try to explain the flaws and failures of the VC model. And, although there are signs of improvement, VC money remains tight.
Watumull cites Bill Hambrecht, the billionaire founder of Hambrecht & Quist, the investment bank that underwrote the IPOs of Apple Computer, Genentech, Adobe and Amazon: “I was at a meeting in New York where he gave the keynote speech, and he said, ‘If you’re a biotech company today and you are not already VC funded, the probability of you getting VC funding now is probably almost zero.’ ” That means biotech companies like Cardax aregoing to have to come up with a new mechanism to bring their drugs to market.
Historically, the exit strategy for most biotechs has been Big Pharma. A company like Cardax will come up with a good product, VCs will fund its early development, then a giant pharmaceutical company like Merck, Pfizer or GlaxoSmithKline will either buy the company outright or license its technology. Even when biotech companies go public, as more than 30 did last year, they tend to partner with one of the Big Pharma companies to market their product. So, Big Pharma has always been the ultimate cash cow for emerging biotechs.
But the view is different from Big Pharma’s perspective. The centerpiece of drug development for these big companies used to be their enormous research and development departments. Some of the larger companies employed tens of thousands of chemists, doctors and engineers in R&D, and for decades, these departments churned out incredibly successful drugs. Right up through the 1990s, Big Pharma was one of the most profitable industries in the country.
In the last decade or so, though, all that began to change. The R&D departments became increasingly bureaucratic and slow to develop new ideas; promising drugs that the companies invested hundreds of millions of dollars in failed in clinical trials; and, while the pipeline for new products became weaker and weaker, the patents on some of their most profitable drugs began to expire. Something had to change.
Many people, including Cardax’s David Watumull, blame Big Pharma’s woes on something called “targeted drug development.” Instead of developing drugs from promising compounds that already exist in nature – salicylic acid, astaxanthin, curare, etc. – targeted drug development looks at the molecular pathway of a disease or a medical condition, and uses sophisticated technology to invent artificial compounds that interfere with or enhance that pathway. For example, cholesterol is produced through the regular metabolic activity of certain cells in the liver. An enzyme called HMG-CoA reductase regulates the rate of cholesterol production by binding to specific receptors on the membranes of these liver cells. Lipitor, a popular statin used to reduce blood cholesterol, works by binding to that same cellular receptor, preventing the HMG-CoA enzyme from binding there and stimulating more cholesterol production.
In other words, instead of looking at the whole animal, targeted drug development focuses on the structures of single enzymes or proteins. The idea is to create small organic molecules that either stimulate or inhibit the function of the large biological molecules in some metabolic pathway. It’s all about understanding the architecture of these molecules.