RaQualia's New Spin on the Startup

In most cultures, fire and water serve as emblems of destruction. But in the distinctive Japanese mindset, harnessing these two unpredictable elements of the natural order can also seed a stronger, more rooted revival.

This is the guiding premise behind RaQualia Pharma, a rising Japan-based venture whose corporate logo taps the latent energies of the sun and sea to highlight a new approach to product development in the local life sciences. Primed by the spectacular flameout of industry's biggest recent development failure—Pfizer's torcetrapib—and positioning itself as a game-changing alternative to Japan's "lost decade" of parched growth, the RaQualia business model finds virtue in adversity. Simply put, failure is the stimulus for radical changes in how the research enterprise initiates and executes its mission. President and CEO Atsushi Nagahisa calls it his "stealth advantage" against the competition, noting that, besides being commercially viable as a source of high-value treatments, RaQualia wants to become the alternative to Big Pharma's blinded and bloated path to drug development.

Atsushi Nagahisa

The strategy is also geared to making RaQualia exceptional in the eyes of investors and the larger policy community. The company wants to stand out as an innovator in the process of invention, committed to building a distinct global model from Asia of customized product development geared to the region's unmet medical needs. The message from management is, "Think big." RaQualia is not just another small-cap enterprise struggling to build a product portfolio with other peoples' funds. The additive element is the pressure its very presence places on the conventional wisdom that Japan lacks an entrepreneurial culture, where new ideas fail because the only choice is between the "salary man" culture of bureaucratic malaise or the "samurai code" of winner take all. RaQualia is carving out a third way focused on teamwork, trust, and partnered collaboration to achieve a level of R&D productivity that exceeds what has been possible in Japanese life sciences to date.

Whether it works or not, the RaQualia model poses a subtle challenge to its industry peers—and to Japanese industrial policy writ large. The question is whether Japan's best days as a pace-setter in medicines innovation are behind it. Or is RaQualia a breakthrough precedent that must be allowed to succeed?

The Phoenix Portfolio

From a purely commercial standpoint, RaQualia carries the advantage of a running start. Established in 2008, the company began as a spinoff from the decision of Pfizer to shut down its R&D facility in Nagoya. Richly endowed with a staff of more than 400 scientists, the Nagoya operation stood out as a symbol of foreign investor commitment to Japan and at the time was on the cusp of delivering its first global first-in-class medicine, under Pfizer's veterinary franchise. What sealed its fate was the fallout from the collapse of the company's top development target, torcetrapib, a next-generation statin replacement for the $11 billion global blockbuster Lipitor.

As the on-site head of Nagoya, Nagahisa became a point man for a wave of domestic criticism about the merits of the decision, which came only weeks after top Pfizer management had told local officials that the company planned to increase its investments in Nagoya as one of three global hubs for research. "Pfizer is here to stay" was the ironic PR message before the torcetrapib trial's bolt from the blue.

With Crisis Comes Options

Says Nagahisa, "In the midst of realizing I would have to empty the physical plant and lay off 90 percent of our research staff, I thought of the conversations I had with [former Pfizer CEO Jeff] Kindler and the R&D leadership team about the unrealized potential of our portfolio. Specifically, I estimated 70 percent of Pfizer's IP holdings were sitting on the shelf, being neither reviewed or used. In that simple statistic, I detected a potentially useful new business model where we and Pfizer could exploit these IP assets through a spinoff venture in which it holds a minority share while booking royalties from any successful product commercialization." The risk for both parties was low, and the Japanese knew that even the perception of risk pushes many otherwise good deals off the tracks.

Nagahisa also realized that the closure would create a rare opportunity to selectively choose some of the best scientific talent in the country. In Japan, the turnover that creates a dynamic, flexible base of human assets is missing—workers are protected and employment mobility is discouraged. Participating in a startup was certainly a change from the resource-rich but bureaucratic culture imposed at a distance by a US company like Pfizer. "I started talking to staff and asked them about their experience as Pfizer employees. The common thread was a sense of disengagement. We had scientists spending most of their time doing things mandated by a global rulebook, or because the US management wanted it or it was perceived as our party line for the local constituencies. I said to myself: Where is the accountability? Who carries ownership? Success was defined internally, by meeting targets that guaranteed the annual salary bonus but had little to do with delivering value to the customer."

A Startup's Steady Footprint

A combination of factors resulted in some useful contributions from Pfizer that led to the launch of the new company in February 2008. RaQualia was able to rely on the credibility bestowed by Pfizer's 19 percent equity stake, which brought in two other major investors—Japan's SMBC Ventures and Coller Capital of the UK—and a group of smaller ones for a total cash infusion of just over $100 million. In addition, Pfizer gave RaQualia access to the IP from Nagoya's six discovery and development programs as well as local marketing rights to two of its leading US products, including the blockbuster anti-psychotic Geodon (ziprasidone). In fact, some 95 percent of the new company's pipeline was drawn from the Nagoya file. In a negotiation that took only nine months, Pfizer opted to retain some parts of the Nagoya development portfolio, dividing up the pain franchise while divesting from the entire GI field, which became the centerpiece of the RaQualia research program. Pfizer received the equity stake as well as first-look rights on two early-stage projects.

Capitalizing on this insider perspective, RaQualia was able to build a development program that connects to the needs of both the local Japanese market—where many common patented medicines are still unavailable to patients—and to broader opportunities in Asia and globally. In March, RaQualia completed negotiations with Meiji Seika Pharma on a license to market Geodon in Japan for the treatment of schizophrenia.

Wresting Value from a Willing Workforce

The biggest asset obtained was human capital. With over 400 scientists at Nagoya effectively out of work, RaQualia was able to vet a strong team of experienced investigators, absent all the management and associated transaction costs associated with the launch of a new venture. In a process that was largely self-selecting, Nagahisa assembled a team of 70 professionals drawn from the 400. The new organization was launched from scratch, drawing in people comfortable with the idea of eliminating the traditional hierarchical divide between boss and subordinate; where there are no mandatory assignments, with voluntary participation on teams; and transparency is the basis for all communication, both inside and outside the company. Nearly four years later, the structure is still very lean, with the original 70 melded into a total work force of just 79 people.

According to Nagahisa, "What binds this together is a consistent focus on delivering value at every stage of development, from idea to proof of concept and beyond. There is no certification of a colleague's success unless this takes place, whereas in most Big Pharma organizations, your bonus is built around easy-to-grasp metrics like generating five leads in a calendar year. But what does this really have to do with finding and delivering a drug to a patient and payer community that wants it? So all our people work around a very simple standard of performance: creating value outside the company. Value has to be recognized—and as a commercial enterprise the proof point is always with the customer."

Looking Beyond Boundaries

RaQualia has made this outward—and outgoing—approach to new drug innovation the basis of its appeal to investors. "We call it the Integrated Open Collaboration Model," RaQualia strategy adviser Andrew Saidel tells Pharm Exec. The main elements are 1) a flat management structure, with only one layer of reporting relationships; 2) a single joint approach to the use of internal and external resources; 3) voluntary selection and participation in teams, with employees free to join development groups that interest them; 4) transparent communication and open access to information, especially in relations with outside partners; and 5) consistent, regular monitoring of progress in delivering an agreed value proposition to a defined external audience, at every stage of licensing or development.

Specifically, the model shuns Big Pharma's tendency to divide work into "high value" and "low value" activities, where the latter is contracted out. Instead, any activity financed through the company is seen as high value. "We just won't do them, under any framework, if they're not," says Saidel.

In addition, there are no internal "owners" of an innovative idea at RaQualia. Extensive research was conducted on how to institutionalize a culture that encourages innovation based on collective creativity, which led Nagahisa to embrace the work of a leading Japanese organizational expert, Professor Kunio Ito of Hitotsubashi University. Ito's thesis builds on the importance of the "inadvertent encounter" in forcing people to act outside their comfort zone in a decision environment that is constantly refreshed.

The Dependable Partner

At first glance, this model seems at odds with the ingrained practices of Japanese business culture, which emphasizes group conformity and a low tolerance for risk. But Nagahisa begs to differ, contending that historically Japan is a nimble, adaptive culture with an unusual ability to absorb—and improve—on ideas regardless of source. "Japan has experience in ruthlessly integrating best practices from multiple channels and using that combined knowledge to create new sources of value for the market, a process I call the 'Five I's:' importing, imitating, improving, internalizing, and, finally, innovating."

What leavens and turns it into the bread of commerce is another Japanese characteristic: shinrai, or trust. It also translates as being dependable. The self-selected team created from the Nagoya shutdown has largely delivered that, reflected by the group's collective experience in suffering the jolting shock from Pfizer's abrupt reversal of commitments to the local operation.

Putting the philosophizing aside, a collaborative organizational model helps underpin RaQualia's commercial plan, which is to leverage the inherited Pfizer IP portfolio in small-molecule GI, pain, and anti-infectives, largely by priming them through to confirmed "proof of concept" for shopping among potential local and foreign licensees; then using the revenues from this base to fund original work in other promising therapeutic segments such as cancer, Alzheimer's, and autoimmune disorders. It's a signal that an ambitious agenda built around explicit metrics to show customer value cannot be executed in a silo or bunker.

Signposts of Success

And what are those metrics?

First, to produce two new development compounds per year, a target that so far has largely been met.

Second, to establish strong partnerships in multiple markets: RaQualia has inked some 400 collaborations over the past three years in 17 countries. Earlier this year, the company scored a significant breakthrough with another Big Pharma, joining Eli Lilly in a multiyear collaboration that will explore ion channel chemistry as a springboard for the synthesis of new molecules and ultimately new medicines. "Prospects are obviously long-term, but it's a vindication of our model, as Lilly decided it could pursue this target faster and at lower cost if they did it with us," Nagahisa says.

Third, securing an adequate capital base to root the company's independence and finance future expansion. Progress toward this metric was secured in July, when RaQualia successfully floated a 4 million-share IPO, earning a payout of just under $80 million that will keep the company solvent for at least the next three years.

This is vital, as for now the company relies entirely on licensing, milestone, and royalty income to underwrite its operating costs; it has not commercialized a product for sale on its own. But the fact the company now trades publicly on the JASDAQ growth market exchange in Osaka puts it on a surer footing than many other startups in a high-risk business.

Nagahisa expressed confidence in RaQualia's portfolio, as evidenced by the successful share offering in July: "We are very excited about the response to our public launch," he said. A pair of EP4 receptor antagonists, RQ-7 and RQ-8, are the most exciting early-stage compounds, with established proof of concept for osteoarthritis pain (RQ-7). Additional proof of concept testing on other indications for both compounds is "ready to start," according to Saidel.

No Guarantees

Still, most of RaQualia's product offerings must confront a crowded therapeutic field—and face significant pricing pressures, as the small-molecule, primary-care delivery model is mauled by payers. Partnerships geared to overcoming these hurdles are critical to softening the burden. So Nagahisa points to a new alliance with a prominent, diversified, and fast-growing Korean company, CJ CheilJedang, to license its in-house drug candidates, an acid pump antagonist (APA) and a 5-HT4 partial agonist, for gastrointestinal reflux disorder (GERD) and other gastrointestinal diseases. The deal capitalizes on CJ Cheil-Jedang's size, market clout, and resources to drive the manufacture and promotion of this novel therapy to a potentially wide market in Korea, as well as eventually in China, Taiwan, India, and Southeast Asia—the other countries where RaQualia has transferred marketing rights.

In return, RaQualia will continue to build value for the two compounds by conducting studies in the US and Europe. For example, clinical studies using APA have been shown to improve the standard of care within the PPI class, including better patient response at first dosing, improved efficacy when taken at nighttime, and tolerance on an empty stomach, without common side effects. RaQualia is interested in exploring similar deals in China, as well as other countries in Asia and the developing world.

RaQualia's organization is a visible experiment that challenges the notion of Japanese reticence toward an entrepreneurial class. But there's not a lot of risk involved, and that won't tickle the fancy of some analysts and investors. "The pipeline agents RaQualia possesses are either a rank below first-in-class in their respective spaces, like ziprasidone, or very small product franchises in geographies outside Japan, like Eraxis," says Raghuram Selvaraju, senior VP and senior biotechnology analyst at Morgan Joseph TriArtisan. "I don't believe that these drugs are likely to become blockbuster franchises in the Japanese market," where drug approvals are slow and regulators are focused on increasing generic drug utilization. Even so, the company's commitment to quality and steady, continuous development may clear the path for innovation. Ultimately the market will decide.