[CRL] Charles River
A few announcements:
1) I’ll be in Omaha this year, hanging out on the 2nd floor of Upstream on Friday night sometime around 8pm (I tend to find myself at Mr. Toad’s eventually). If you’re around, come say “hi”!
2) MBI and I discussed Adobe in the most recent episode of Never Sell (Spotify, Apple, YouTube, RSS Feed)
I’ve written about life sciences companies that make things you can see and touch – the assays and instruments used to identify proteins, the bioreactors used to proliferate cells, the chromatography columns used to separate proteins from host cells. Those products are sold into a “services” layer, which can broken down into three broad buckets: 1) preclinical, where drug candidates are discovered and tested in cell cultures and animals; 2) clinical, where drug candidates are tested in humans; and 3) manufacturing, where approved drugs are produced, packaged, and tested for contamination before release. You can think of the first two phases – preclinical and clinical – as a series of filters that a candidate must pass through, a process that typically takes anywhere between 10 to 15 years and costs up to $2.5bn. Roughly 60% of the time and 70%-75% of the cost is concentrated in the clinical stage. CROs (contract research organizations) like IQVIA, PPD (Thermo Fisher), Medpace, and ICON test a drug for safety and efficacy through progressively larger human trials before an application is submitted for regulatory review (for more, see my August 2021 post on IQVIA). But a number of things need to happen before the drug makes its way inside a single human body and those things are increasingly outsourced to preclinical CROs, the largest of whom is Charles River.
The preclinical phase of drug development can be disaggregated into two sub-phases: discovery and regulatory safety testing. In the earliest stages of discovery, high-throughput screening evaluates millions of molecules against human cells to identify those that show the most therapeutic potential. Through ADME-Tox tests, those hits are evaluated for Absorption (how well the drug is absorbed by intestines and skin), Distribution (how the drug spreads through the body, whether it reaches the right tissues), Metabolism (how the drug is broken down by the liver), Excretion (how the drug is cleared from the body) and toxicity, their molecular structure iteratively optimized in the process. Candidates that clear in vitro tests – where a drug is tested on cells in test tubes or multi-well plates – are subsequently evaluated in vivo, where small research models like mice and rats are used to assess the physiological effects that result from a drug’s interaction with the complex systems of a living organism.
Drug developers can outsource parts of the discovery process to Charles River, who will do things like: run high throughput screening to find candidates, evaluate the binding potential of compounds, graft cancer cells into immunodeficient mice to test the efficacy of cancer therapies, identify antibody variants and link them to cancer-fighting drugs, and run ADME tests, among other things. But, for the most part, drug companies and academic labs handle discovery in-house, especially the really early parts, like identifying targets and screening preliminary compounds. Charles River’s most prominent role at this stage lies in supplying cells and small animals to drug companies and academic labs, who run experiments on their own.
Early discovery is the Wild West of drug development…exploratory, dynamic, and unregulated. It is often more efficient for drug companies to exert control over this fast moving, iterative stage than to pawn it off to a third party (though, even here, CROs have been growing their presence). But as a molecule progresses through the development pipeline, testing procedures become more standardized and subject to regulatory oversight, rendering them more amenable to outsourcing. Safety Assessment, which takes place after a lead candidate has been identified, marks the first stage where things are outsourced by default and Charles River plays a more all-encompassing role.
The purpose of Safety Assessment is to test a drug candidate for toxicity before it makes its way to clinical trials1. Tox testing for a drug can last anywhere between weeks and a year. It is typically conducted on larger animals, like dogs and non-human primates (monkeys), that are more physiologically similar to us than the rats and mice used in discovery. The choice of which mammal to experiment on is determined by how closely its biology mirrors that of the corresponding human biology being assessed – pigs are used to study drug metabolism and excretion as their liver and kidney functions resembles ours; non-human primates are used to study the impact of drugs on the brain and immune system for the same reason.
General toxicology tests the acute and chronic effects of a drug candidate on an organism’s DNA and key organs, and evaluates whether it interacts with unintended targets. It makes up about half of Charles River’s tox menu. The other half comes from higher margin specialty evaluations that study a drug’s impact on fetal development and young organisms, along with harmful effects on bones, muscles, kidneys, lungs, and the nervous system. ADME tests are also done at normal doses (pharmacokinetics, or “PK”) to sees that the drug moves through the body as it’s supposed to, and at much higher doses (toxicokinetics, or “TK”) to correlate drug concentration to toxicity, ultimately for the purpose of determining optimal doses for human trials2.
Compared to preliminary tox tests that take place during Discovery, those conducted during Safety Assessment are highly structured and must conform to GLP (Good Laboratory Practices) standards set by regulators, which require that the sponsor: specify the molecular structure of the drug candidate, evaluate how it behaves under various environmental conditions, confirm that drug purity is consistent across batches, monitor the welfare of test subjects, and extensively document experimental observations and raw data from blood and tissue samples. Moreover, the research lab must staff an independent Quality Assurance (QA) unit that validates the accuracy of raw data, audits lab facilities and equipment, and ensures that those running the study adhere to approved protocols and regulatory guidelines. Basically, the drug sponsor needs to nail down and document every aspect of their study in an extremely rigorous and formal way. You can understand why 60% of tox testing is outsourced. Just as dedicated compliance firms that wade through regulatory paperwork every day can better manage state and Federal reporting requirements than fund managers who are preoccupied with picking stocks and raising money, so too are CROs, who have developed repeatable and well-honed GLP procedures and interact with regulators on a frequent basis, better equipped to run tox studies than drug companies, who are primarily in the business of discovering and marketing drugs.
With Safety testing successfully concluded, an IND (Investigational New Drug) application is filed with regulators, accompanied by extensive documentation demonstrating that the drug candidate is safe enough to be tested in humans. Assuming the IND application is approved, the drug proceeds to Phase 1 clinical trials, at which point clinical CROs step in to create protocols and recruit patients. But Charles River doesn’t disengage completely. After all, someone needs to test that the drug consumed during the trials are free of bacterial contamination. Charles River does this through two divisions: Microbial Solutions and Biologics Solutions Testing.
Products and services from Microbial Solutions test for the presence of endotoxins – toxic substances, released when bacteria die or divide, that can trigger adverse immune reactions – at critical stages of the drug manufacturing process. There are three brands of note: Endosafe, Accugenix, and Celsis. Endosafe is a family of instruments and reagents used to detect endotoxins on drug manufacturing equipment (bioreactors, filtration systems) and in drugs, medical devices, IV fluids, and other products that come into contact with blood. The reagent, LAL (Limulus Amebocyte Lysate), derived from horseshoe crabs, creates a clotting response when it comes into contact with these bacterial byproducts. Celsis (acquired in Jul. ‘15 for $215mn) tests for microbial contamination, primarily in “non-sterile” products like cosmetics, pills, ointments, and other consumer products. Its enzyme, luciferase, derived from fireflies, produces light (bioluminescence) when interacting with ATP produced by viable microbial cells. Accugenix (Aug. ‘12; $17mn) differs from Endosafe and Celsis in that it not only detects the presence of contamination but specifies its identity it as well. Customers collect microorganism samples from raw materials, cleanroom equipment surfaces, and finished drug products, and send them to one of Accugenix’s 10 labs, which matches the genetic sequences of those samples against a proprietary database of microbes.
Biologics Testing Solutions ensures that large molecule drugs (biologics) are safe for consumption. This means: 1) validating that the instruments and testing methods used to measure the purity and potency of a drug are accurate and produce replicable results (analytical support); 2) selecting high-performance cell lines, confirming their genetic identity and stability, and checking to see that they reliably produce the protein of interest; 3) testing cells and other intermediate materials for viruses, microbes, and chemical contaminants (biosafety testing); and 4) testing that the process for removing viruses is effective (viral clearance). After the manufacturing process is complete, the drug is “release tested” to be sure it is free of microbial and viral contamination, has been purged of impurities like host cell proteins, contains the right concentration of the therapeutic protein, binds to its intended target, produces the desired effect at a particular dose, and does so consistently across batches. All these steps (and more) are mandated by regulation.
With Charles River testing biologic drugs on their behalf, biotech clients wondered why it couldn’t manufacture those drugs as well. But, in fact, Charles River had once tried its hand at this. The 2016 acquisition of WIL Research, a competing CRO, came with a CDMO attached. But management soon discovered the CDMO it picked up operated in a crowded space with hundreds of players, many of whom had spent billions developing facilities. To build a top 3 presence, Charles River would have had to commit to an aggressive M&A program and, even then, the business would pull through few other services that Charles River had at the time. So, it divested the CDMO for $75mn soon after….only to spend more than a $1bn getting back into manufacturing four years later!
But through WIL, Charles River had inherited a subscale business in a mature modality (small molecule) that had few synergies with its existing portfolio. By contrast, the two CDMOs it acquired in 2021 – Cognate (cell therapy) and Vigene (viral vectors and plasmid DNA) – addressed cell & gene therapy (CGT), a nascent domain that meshed well with biologic testing and where Charles River could build a leading position.