MARKETING

Bet on One Big Ideaor

Diversify?
by Toby E. Stuart
FROM THE NOVEMBER 2013 ISSUE

BRs fictionalized case studies present dilemmas faced by leaders in real

companies and offer solutions from experts. This one draws on research by Toby
E. Stuart.

The latest clinical trial of the experimental therapy L-39, conducted in India, was finally
completeand the results were thoroughly underwhelming.

Hilde Dach, the former chief scientist at the drug-development start-up Genbac and now a
team leader at the German pharmaceuticals maker Caliska, which had acquired Genbac, could
read disappointment in the face of Johan Greve, her boss. The journey ahead for L-39
suddenly looked arduous.

Johan and the other leaders at Caliska might soon face a tough choice: Allow Hildes unit to
continue honing and testing the potential breakthrough drug, or play it safe by focusing on L39s potentially very lucrative application as a dietary supplement. Hilde strongly preferred
the former. She hadnt thrown in her lot with Caliska merely to sell medical foods, as they
were known in the nutraceutical industry. In the laboratory, L-39 (shorthand for a proprietary
strain of Lactobacillus bacteria that Hilde had spent years cultivating) was so effective in

reducing bowel inflammation in mice that she believed it could become the first probiotic
ever to be approved by the European Medicines Agency, or EMA, as a therapy for a specific
human ailmentthe common gastrointestinal condition known as Crohns disease.

Johan spread out the new study results on his office table. The India trial was the companys
second of L-39. The first, two years earlier, had assessed how well the bacteria in L-39 were
tolerated, and the results were positive, as expected. This time, L-39 was put to the test as a
Crohns disease treatment, but the data showed that it had little success in improving the trial
participants clinical outcomes. Worse, the lead researcher in India had noted that in one
patient, the bacteria appeared to have translocated tothat is, invadedthe spleen,
perhaps because the patient was immunosuppressed.

Johan tapped the page. Thats very troubling, he said.

I know, Hilde said. If L-39 could translocate, survive, and proliferate outside the intestine,
patients could be at risk of bacteremia and, ultimately, multiple organ failure.

And these numbers are so flat, he said.

We can get them up, she said encouragingly. It just means further refining the strain.
Weve already made lots of progress on that, and well make more. Plus, look at this, she
added, pointing to a column of figures. Its a statistically significant increase in blood flow to
the patients lesions. That tells us a lot.

Its not nearly enough for proof of concept in humans, he said. Were up against an EMA
that has rejected virtually every health claim put forward for probiotics. The fact is, we may
have to be more open-minded about L-39. Youve always seen it as a pharmaceutical product.
In the end, that may not be our best choice.

Hilde turned away. She knew he was talking about nutraceuticals.

Hey, he said. One way or the other, were bound to make some real money on L-39.

Good Germs
Hilde scrolled through her in-box, counting the e-mails with L-39 in their subject lines
three so far today. They were from people all over the world, begging to know how and where
to buy the probiotic. Although her research hadnt made the mainstream media, sufferers of
inflammatory bowel disease (IBD) somehow found out about it. She had received some
strange messages over the years, such as the one (now on her office wall) from a man asking
whether the bacteria could help his two ferrets, which apparently had developed IBD after
eating veggie burgers.

Strange or not, the e-mails showed there was demand for a product like L-39 among patients
with IBD. In their own ways, these people had the same hopes that had first motivated Hilde
15 years ago, when she met Georg von Suttner at an Indian restaurant in Cambridge, England.
She was a graduate student, and von Suttner was a famous professor talking about the
mysteries of the human gut.

She had piped up, as was her style, to say that the study of probioticsbacteria that help
maintain the natural balance of organisms in the intestineswas pseudoscience.

Von Suttner wasnt offended by the comment. He lifted a spoonful of pearly white raita.
How many bacteria do you suppose this spoon contains?

A few thousand, she said.

Probably 10 billion, he said. With a look of wonder, he described the microbiota, the
community of micro-organisms that live in and on the human body. You and I have many
more microbial cells than human cells, he said. We ignore them at our peril.

That conversation was the start of Hildes long, productive professional relationship with von
Suttner. Working in his lab in Karlsruhe, Germany, she had a knack for growing strains of
bacteria. Dubbed the Microbe Whisperer, she had developed strain after strainL-39 was her
39thand had worked with her staff of drug-delivery experts to find a way to keep the
bacteria alive without refrigeration. She and von Suttner published several articles in
scientific journals, and they caught the attention of a team of entrepreneurs and investors
specializing in biotech start-ups. They soon persuaded Hilde and von Suttner to launch a firm
focused solely on the pharmaceutical aspects of L-39. The nascent company, Genbac, raised
2 million; then, as Hildes ongoing experiments showed that L-39 could reduce
inflammation in mouse intestines, 7 million.

After the first human trials were complete, Big Pharma began to hover. At first, Hilde and the
rest of the team politely hinted that they would retain control of the company indefinitely.
But then Caliska, a global firm with businesses selling generic, off-patent medications and
nutraceuticals, but with a well-respected R&D unit, approached Genbac with a 40 million
offer. Hilde had initially resisted, worrying that Caliska might fancy L-39 more as a dietary
supplement than as a pharmaceutical. But von Suttner and the rest of the start-up team
persuaded her that the deal was too good to pass up, given the uncertain prospects of all
therapies during the research phase.

Now Hilde was leading Caliskas pharmaceutical-probiotics research team, which employed
some of the scientists who had been with her at Genbac. Von Suttner was long gone, having
retired happily, and the initial investors and entrepreneurs had moved on, too.

The market for L-39 as a pharmaceutical was modest by Big Pharma standards. Of the
estimated 5 million IBD sufferers worldwide, a third or so had Crohns. The market size was
nothing like that of diabetes patients, who numbered in the hundreds of millions. But L-39
was relatively inexpensive to produce, and as a pharmaceutical it could be sold for at least 5
per daily dose.

Still, Caliskas enthusiasm for L-39 was about more than numbers. As company executives
watched the EMA reject health claim after health claim from probiotics luminaries such as
Nabisco, Chr. Hansen, and DuPont Danisco, they grew obsessed with becoming the first
company to get the agencys approval in this area. Anticipating huge positive publicity from
such a breakthrough, they poured millions into Hildes research.

Given the recent trial results, Hilde wondered whether Caliska would now rethink that
investment. She noticed Johan in the doorway, looking unusually serious.

Pressure from the Top

I just got off the phone with Oskar, said Johan. Hilde knew that Oskar, Caliskas CEO, would
want to know about the latest findings.

Hes not upset, Johan continued. Hes been in this business a long time, but hes leaning
on me hard to see cash flow from your team, and the board is with him on that. Hes a big
proponent of the nutraceutical idea and cant wait to get your strain of Lactobacillus into the
medical foods market with the Caliska name on it.

Caliska may have a split personality as a pharma and a nutraceuticals company, but my team
doesnt, Hilde said curtly. We do biotech, not medical foods.

As you know, he said, even if nutraceuticals dont have to jump through the same
regulatory hoops as pharmaceuticals, they still can be highly effective for patients. We sell
many sophisticated compounds, and were well respected in the industry and among
investors for that business. Nutraceuticals make a big difference to our bottom linetheyre
our fastest-growing segment. In fact, they pay for our R&D. Think about it: Using your
existing work, we could manufacture an over-the-counter L-39 tablet for 25 cents, which we
could then sell for more than 1 per pill at retail.

Wed be competing for an unpredictable,

fad-influenced customer base against
nonscientific companies that make all kinds
of exaggerated claims.
But wed be competing for an unpredictable, fad-influenced customer base against
nonscientific companies that make all kinds of exaggerated claims. Remember that study we
saw, saying that half of 50 probiotics tested didnt even contain the specified strain or stated
concentration? Id rather stay out of that market, at least for now. After weve developed the
Crohns therapy and shown the world L-39s value as a pharmaceutical, finethe
nutraceutical people can then do whatever they want.

The company cant wait that long, Johan reasoned. We have a chance now.

What would we claim? she asked. That the bacteria increase blood flow to bowel lesions?
That they reduce inflammation in mice?

You want to unlock the potential of L-39? Johan said. Selling it as a nutraceutical is just
another way to do that.

But what about safety? Hilde asked. If the bacteria translocate, if someone dies

We wont let that happen. Well solve all the safety issues before we take the product to
market.

Let me see if I understand, Hilde said. You want me to tell my scientists, some of the best
in their field, to spend their time and energy developing this nutraceutical instead of trying to
improve L-39 so that it can help patients with Crohns and other serious conditions? You want
me to postpone that dream, probably for years, so that we can get the European Food Safety
Authoritys approval of L-39 as a supplement? That would require strong, positive results in

two full-scale, randomized, placebo-controlled trials. Once Oskar sinks all that money into the
supplement and starts getting a nice stream of income from it, why would he continue to
invest in L-39s pharmacological promise?

Im not trying to force you into anything, Johan said. The company values your expertise.
But we must be practical. Some form of diversification might prevent your team from losing
its standing within Caliska during the long journey toand throughthe clinical trials for the
EMA.

You know how I feel, she said resolutely. We should go for broke on making L-39 work as a
pharmaceutical.

A Chilling Premonition
Hilde was trying to get into her suite of offices and labs, but chains were on the doors. Her
employees were outside with her. Whats happening? she asked. Someone told her that the
clinical trials in Europe had failed, L-39 was causing organ failure, Caliska had disbanded the
team, and everyone was out of a job.

She woke up with a start and glanced over at her husband. Are you awake? she said. I had
a terrible dream.

What about? he asked sleepily.

Ever since the latest trials, Ive been worrying that L-39 might turn out to be a complete
failure, she admitted.

It wont be, he said. But even if it is, at least youve already made your money on it.

I didnt get into this to get rich, she protested.

Maybe your dream is telling you something, he said.

What do you mean?

Your single-minded focus on the pharmaceutical aspect might ultimately be, I dont know,
self-destructive?

How can you say that?

If L-39 fails as a drug and youve got nothing else, sureCaliska might shut it down. But if
you have a separate, thriving nutraceuticals line, theyd think twice. And you could bring
Genbacs scientific expertise to bearand change the whole probiotics field. Educate
customers about the science of probiotics.

He did have a point, Hilde thought later that morning on her way to work. Shed never get a
chance to change the world if Caliska halted her work on L-39. But developing a dietary
supplement would undoubtedly be a big distraction for the members of her teamand would
certainly delay their work on the drug. Hilde was torn.

What Would You Do? Some advice

from the HBR.org community

Should Caliska market L-39 as a nutraceutical?

The vast majority of alternative medicines turn

out to be ineffective or even dangerous. If the
goal is for L-39 to make money, then by all
means Caliska should consider marketing it as
a nutraceutical. But if the goal is to improve
health, the only defensible route for it is as a
pharmaceutical.Brian Jackson, MD, associate
professor of pathology (clinical), University of
Utah

The Experts Respond

If Caliska introduced a safe nutraceutical

version of L-39, people with Crohns disease
could try it immediately, yielding anecdotal
results on its potential as a pharmaceutical.
This inexpensive proof of concept would help

Jonathan Lewis is the

CEO of Ziopharm Oncology, a Boston-based

biopharmaceutical company.

the company decide whether to invest more

into developing it as a treatment.M.
Voionmaa, educational outreach coordinator,
Finger Lakes Independence Center, Ithaca,
New York
The balance between diversification and
straight-line focus is what produces results.
Hedging is the same as wearing a harness
while climbing a rock wall. When you go to
new destinations, it is wise to hedge
proactively and have alternatives as
safeguards while you still focus on the main
goal.Jeremy Reinbolt, private wealth
manager, Vancouver, Canada

I have nothing against nutraceuticalsmany

therapies outside the strict limits of Western
medicine are highly effective. But I do have
something against losing focus, and thats the
danger for Caliska.

Theres a right way and a wrong way to do

drug development. The right way starts with a
well-planned strategy thats approved by all of
the companys stakeholders. Equally
important is a singular focus on perfecting
new drugs and bringing them to market. Im
not talking just about targeting your resources

its also about having the unwavering discipline to ignore the many daily distractions you
face on the path to the marketplace.

One potential distraction that Ziopharm encountered was a project involving information
technology. IT holds enormous promise in the world of cancer therapies; networking
capabilities and big data will be transformative. But getting involved in IT would have meant
losing our main focus on bringing new, effective cancer medications to market. So we didnt
pursue that approach.

I dont mean that a company should stick to a narrow objective, such as developing a single
therapy, at all costs. That approach is fraught with risk, given that drug development is
inherently unpredictable. Several years ago Ziopharm began collaborating with Intrexon,
which had figured out how to use synthetic DNA components to control cells. The Intrexon
collaboration was well within our focus, but it also allowed us to broaden our optionsto
hedge our bets, in a sense. That hedge helped us recover earlier this year, when experimental
data showed that a molecule Ziopharm had been developing wasnt having the effect wed
hoped for.

Caliska should resist the allure of easy

money in the nutraceuticals market.

That brings me to another, vital aspect of drug development: You must be guided by the data.
We put a lot into that molecule. The laboratory findings and the early rounds of human
testing were compelling, but the big randomized, double-blind, placebo-controlled trial told
us that the molecule didnt work, at least in the setting we had chosen. We were brutally
honest with ourselves, and we stopped immediately. The pain and grief were enormous.

But you cant be emotionally attached to any one treatment. The human response to
therapies is just too hard to predict. Things that work in the labon inbred, identical mice
living in controlled conditionsoften dont work in people. Human beings are very different
from one anotherthere are so many variables.

Hilde Dachs story illustrates the inherent tension between those two elements of doing drug
development right: maintaining a singular focus and following the data. The crucial question
for Hilde is whether the data, at this point, are definitive. I dont think they are. A preliminary
human trial was a disappointment, but she admits theres room for improving the strain of
bacteria. On safety, she doesnt yet have enough data to make a decision. So she should
persevere, and the company ought to support her.

For now, Caliska should resist the allure of easy money in the nutraceuticals market.
Distracting Hilde from her singular focus would be too great a risk.

Colin Hill is a professor at the School of Microbiology, University

College Cork, in Ireland. He is also the president of the International Scientific Association for
Probiotics and Prebiotics.

Hilde mistakenly thinks she faces a zero-sum game. She assumes that if Caliska markets her
strain of Lactobacillus, the company will lose interest in possible pharmaceutical applications,
and shell become a mere purveyor of dietary supplements. That reflects a simplistic view of
the probiotics industry.

Probiotics is an enormous, under-researched field. No one knows where todays studies will
lead. Our bodies are superorganisms that host vast numbers of microbesthe human gut
may be the richest ecosystem on Earth. Some of those microbes produce neurotransmitters
that affect brain behavior; others prevent infection. When five people eat contaminated
chicken, why do three get sick while the other two shrug it off? It might be because distinct
populations of microbes interact differently with each human host.

The path for Caliska is fraught with

uncertainty, whether it takes the
pharmaceutical or the nutraceutical
approach.

The microbes can be manipulated in various waysby diet, by probiotics, and by prebiotics
(which stimulate microbial growth). Taken together, they may constitute a treasure trove of
novel therapies. Someday, for instance, we might be able to use a microbe as a vehicle to

deliver drug treatment to a specific area of the body.

Given that promise, Caliska would do well to take on multiple dimensions of this largely
unexplored field at the same time. It would be shortsighted to focus only on pharmaceutical
applications of L-39 when its greatest potential may lie in medical foods.

It would also be very difficult to get approval for a probiotic-based pharmaceutical, though
not impossible. I can envision approval for one that, for example, prevents recurrence of a
bacterial infection. For now, though, no probiotic pharmaceuticals exist. The big hurdle is
understanding the mechanism of action: How does a probiotic produce its effect? What
metabolite interacts with what receptor? The interaction between a microbe, which might
have 3,000 genes, and a human body is very complex.

Thats not to say that the nutraceuticals road is easy. The European Food Safety Authority has
very high standards for approving probiotics as medical foodsand for good reason. In the
early years, a lot of smoke and mirrors surrounded probiotics. A company could put
Lactobacillus into a product, call it a probiotic, and make all kinds of vague claimswithout
doing any research to back them up. That wasnt good for consumers or the industry.

Nowadays, the EFSA requires rigorous proof of efficacy merely to approve low-level health
claims. That means companies like Caliska have to sink millions of euros into research and
clinical trials just for the glimmer of a possibility that theyll win the right to make very bland
claims for a probiotic nutraceutical. Some firms may wonder whether that investment is
worth the trouble.

Clearly, the path for Caliska is fraught with uncertainty, whether it takes the pharmaceutical
or the nutraceutical approachor pursues both simultaneously. But I believe that the risk and
hard work will eventually pay off in the creation of therapies that we cant imagine today. To
my mind, the science of probiotics is the most exciting area in the field of biology.
A version of this article appeared in the November 2013 issue of Harvard Business Review.

Toby E. Stuart holds the Leo Helzel Chair in Entrepreneurship and Innovation at the University of California
Berkeleys Haas School of Business.

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