Case Study: Bet on One Big Idea or Diversify?

HBR Blog Network

by Toby E. Stuart  |   1:22 PM September 3, 2013

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

Hilde Dach, the former chief scientist at drug-development start-up Genbac and now a team leader at German pharmaceuticals maker Caliska, which had acquired Genbac, could read disappointment in the face of Johan Greve, the Caliska division head who was her boss. The journey ahead for the drug, developed through Hilde's research on probiotics, suddenly looked arduous.

(Editor's Note: This fictionalized case study will appear in a forthcoming issue of Harvard Business Review, along with commentary from experts and readers. If you'd like your comment to be considered for publication, please be sure to include your full name, company or university affiliation, and e-mail address.)

Johan and the other leaders at Caliska might soon face a tough choice: Allow Hilde's unit to continue honing and testing the potential breakthrough therapy, or play it safe by focusing on L-39's potentially very lucrative application as a dietary supplement. Hilde hadn't 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 ailment — the common gastrointestinal condition known as Crohn's disease.

Johan spread out the new study results on his office table at Caliska's German headquarters. The India trial was the company's 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 Crohn's 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 to" — that is, invaded — the spleen, perhaps because the patient was immunosuppressed.

Johan tapped the page. "That's 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 refinement of the strain. We've already made lots of progress on that, and we'll make more. Plus, look at this," she added, pointing to a column of figures. "It's a statistically significant increase in blood flow to the patients' lesions. That tells us a lot."

"It's not nearly enough for proof of concept in humans," he said. "We're 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. You've 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, we're bound to make some real money on L-39."

Good GermsHilde paged through her inbox, 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 hadn't made the mainstream media, IBD sufferers 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 developed inflammatory bowel disease (IBD) after eating veggie burgers.

Strange or not, the e-mails showed there was demand for a product like L-39 among IBD sufferers. 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 grad student, and von Suttner was a famous professor talking about the mystery of what goes on in the human gut.

She had piped up, as was her style, to say that the study of probiotics — bacteria that help maintain the natural balance of organisms in the intestines — was pseudoscience.

Von Suttner wasn't offended by the comment. He lifted a spoonful of pearly white raita. "How many bacteria do you suppose this spoonful 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 Hilde's 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 strain — L-39 was her 39th — and 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 Hilde's 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, with its existing nutraceuticals business, 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 Caliska's 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 Crohn's. 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, Caliska's 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 became obsessed with becoming the first company to get the agency's approval in this area. Anticipating huge positive publicity from such a breakthrough, they poured millions into Hilde's 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, of course, that Oskar, Caliska's CEO, would want to know about the latest findings.

"He's not upset," Johan continued. "He's been in this business a long time, but he's leaning on me hard to see cash flow from your team, and the board is with him on that. He's a big proponent of the nutraceutical idea and can't 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 unit doesn't," she said curtly. "We do biotech, not medical foods."

"As you know," he said, "even if nutraceuticals don't have to jump through the same regulatory hoops as pharmaceuticals, they still can be highly effective for patients. We sell many sophisticated compounds, and we're well respected in the industry and among investors for that business. Nutraceuticals make a big difference to our bottom line — they're 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."

"But we'd 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 didn't even contain the specified strain or stated concentration? I'd rather stay out of that market, at least for now. After we've developed the Crohn's therapy and shown the world L-39's value as a pharmaceutical, fine — the nutraceutical people can then do whatever they want."

"The company can't 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 won't let that happen. We'll 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 Crohn's and other serious conditions? You want me to postpone that dream, probably for years, so that we can get the European Food Safety Authority's approval of L-39 as a supplement? That would require strong, positive results in two full-scale, randomized, placebo-controlled trials. And 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-39's pharmacological promise?"

"I'm 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 unit from losing its standing within Caliska during the long journey to — and through — the 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 PremonitionHilde was trying to get into her suite of offices and labs, but chains were on the doors. Her employees were outside with her. "What's 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, I've been worrying that L-39 might turn out to be a complete failure," she admitted.

"It won't be," he said. "But even if it is, at least you've already made your money on it."

"I didn't 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 don't know, self-destructive?"

"How can you say that?"

"If L-39 fails as a pharmaceutical and you've got nothing else, sure — Caliska might shut it down. But if you have a separate, thriving nutraceuticals line, they'd think twice. And you could bring Genbac's scientific expertise to bear — and change the whole probiotics field. Educate customers about the science of probiotics."

He did have a point, she thought later that morning on her way to work. She'd never get a chance to change the world if Caliska halted her work on L-39.

Question: Should Caliska market L-39 as a nutraceutical?