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Resistant to Antibiotic Resistance: Why is Bankruptcy a Reality for Many Small to Mid-sized Commercial-stage Antibiotic Companies?

by Cara He, BA | June 8, 2020

“We have four bankruptcies and three companies on the ropes, and not many will invest in this space,” says Dr. Ryan Cirz, co-founder of Achaogen. Achaogen is an antibiotic startup that developed Zemdri™ for difficult-to-treat urinary tract infections. Dr. Cirz helped found Achaogen in 2003 during his Ph.D. with his advisor. After spending 15 years developing Zemdri™, Achaogen declared bankruptcy in April 2019, and three other antibiotic start-ups soon followed. Dr. Cirz explains this disheartening situation: “In biotech, you generally believe that if you are scientifically successful and you worked on something that matters, you win. This is one example where you didn’t.” Startups are not the only companies struggling in the antibiotic research space. Larger pharmaceutical companies such as Novartis, GSK, Sanofi, and AstraZeneca have all shuttered their novel antibiotic discovery divisions within the past few years.

What are antibiotics?

The Greek and Latin roots of the word “antibiotic” are against (anti) and life (bios). It is important to remember that the purpose of antibiotics is to stop something living (bacteria) from harming another living organism. Antibiotic medications may either kill or inhibit the growth and replication of bacteria, but can’t treat viral infections such as those caused by influenza or the SARS-CoV-2 virus. Alexander Fleming discovered the first natural antibiotic penicillin in 1928, which is still one of the most commonly used antibiotics today, despite growing resistance. Each antibiotic in clinical use is approved for use in certain indications and against a specific set of bacterial pathogens.  Such antibiotics often target bacterial cell wall construction or proteins involved in transcription and translation of bacterial macromolecules. For some antibiotics to be effective, they are intentionally designed to target a narrow spectrum of bacteria, while some have a broader spectrum of antibacterial activity.

Most bacteria are either Gram-positive or Gram-negative. Commonly known Gram-positive bacteria, characterized by having thick cell walls, cause strep throat, skin and soft tissue infections, community-acquired pneumonia and acute bacterial bronchitis. Generally, Gram-positive bacteria are simpler to treat because they are easily affected by antibiotics. Gram-negative bacteria, which have a relatively thin cell wall, flanked by two cell membranes, can cause urinary tract infections, pneumonia and bloodstream infections. Gram-negative bacteria are considered more challenging when it comes to discovering new drugs because they have two highly distinct membrane layers that more efficiently exclude antibiotics as compared to Gram-positive bacteria.

Although antibiotics are typically prescribed to be taken orally, some conditions require intravenous administration. For example, antibiotics need to be administered intravenously to treat sepsis, which is one of the side effects of untreated bacterial infections. Sepsis is associated with a cytokine storm or massive inflammation that blocks organ function, ultimately leading to organ failure and death. Currently, there is a shift towards using sterile injectables to deliver antibiotics, because the chemical property requirements for oral absorption from the human gastrointestinal tract make it difficult to design an effective antibiotic that can be orally ingested.

However, since most people take generic oral antibiotics, many associate antibiotics with being a cheap, expendable commodity, which impacts their pricing. Experts agree there should be a vernacular change between antibiotics that are taken orally as opposed to through intravenous infusions. A vernacular change could change the public’s perception of a low price for all antibiotics.

Without antibiotics, minor injuries or common infections could become deadly. “A simple way to think about antibiotics is to imagine them as the fire extinguishers of medicine,” says Dr. Rex, an adjunct professor of medicine at The University of Texas Health Science Center at Houston and antibiotic expert. Since overuse of antibiotics can cause resistance, the trick is only to use them when they are necessary. According to the CDC’s Antibiotic Resistance Threats in the United States, 2019 report, there are more than 2.8 million antibiotic-resistant infections in the U.S. each year and more than 35,000 people die as a result.

The economics challenges of antibiotic commercialization

 Since 2009, 5 out of 15 antibiotics approved by the FDA have seen the value of the asset fall to zero. Both Dr. John Rex and Professor Kevin Outterson, Executive Director of CARB-X (Combating Antibiotic-Resistant Bacteria), explained that it costs 600 to 700 million dollars and 10 to 15 years just to get FDA approval for a drug. Many of the antibiotics whose value have fallen to zero were sold for below the development cost. Achaogen’s Zemdri™ and intellectual property recently sold for only 16 million dollars, even though it cost hundreds of millions of dollars for research and development. Even after securing FDA approval, antibiotic companies are struggling to turn a profit. The cost of manufacturing, price of a drug, number of doses per patient and the number of patients who use it ultimately determine a drug’s revenue.

The existing reimbursement structure may contribute to low revenues for new antibiotics. In the United States, Medicare and Medicaid pay less to hospitals compared to private insurance companies. Medicare’s diagnosis related group (DRG) system provides a fixed sum of money per patient per ailment, and antibiotics are included in most ailment bundles. Even if companies charge more for an antibiotic, hospitals must choose between using a cheaper, less effective alternative or absorbing the cost into their own budgets. Additionally, hospitals can keep any portion of the allocated funds not used to cure patients. This system could potentially incentivize hospitals to deliberately not use newer and more expensive antibiotics. Since many newer antibiotics are given intravenously, there is a way for hospitals to get reimbursed for using newer antibiotics through Medicare Part B. For outpatient infusions, Infusion centers are reimbursed for the price of the drug and a small fee through Medicare Part B.

Medicare also has an add-on of a bonus payment for a new drug if it is innovative enough. This bonus payment has been extended for all new antibiotics since August 2019. Any new antibiotic usually receives this payment; however, this bonus payment only lasts for 3 years. Another consideration for intravenous delivery and internal hospital use of antibiotics is the length of time it can take for a hospital to put a new antibiotic on its formulary (drugs approved for use in a hospital which are bought in advance and stored in the hospital’s internal pharmacy). Once an antibiotic is FDA approved, hospitals will test new antibiotics with their own nosocomial strains to see how effective the new drug is. This can take months to do the necessary experiments and then more time to garner the necessary approval by hospital executives. As a result, new antibiotics can take a few years to get on hospital formularies and the lag in sales during that time can ruin a company.

Another financial challenge is that most antibiotics do not need to be taken for more than a few days. However, for some chronic diseases, patients may need antibiotics for the rest of their life. Thus, one way for antibiotic companies to stay afloat is to work on chronic diseases, explains Jeanette Mucha, CEO of SciBac. SciBac, a company using microorganisms to fight antibiotic resistant bacterial infections, focuses on therapeutics for chronic bacterial lung infections common in cystic fibrosis patients. However, as mentioned earlier, even though many antibiotics are used to combat infections for only a few days, in many instances, this shorter use for acute infections is sufficient for patient survival.

New antibiotic products must also contend with physicians’ reluctance to prescribe and patients’ reluctance to pay. Antibiotic stewardship appropriately discourages inappropriate use of new antibiotics out of concern for increasing antibiotic resistant bacteria. Additionally, the wide availability and low price of older antibiotics leads to a public expectation of low price for new antibiotics as well. Although older, generic, and broad-spectrum antibiotics will continue being effective for majority of patients, newer antibiotics are needed in the few rare worst-case scenarios.

Ultimately, this economic model is hard for companies to generate enough revenue to continue to operate. Delinking this model aims to pay for antibiotics based on social value, not volume of drug used.

What are some ways for struggling antibiotic companies to survive?

1. DISARM Act of 2019

The Developing an Innovative Strategy for Antimicrobial Resistant Microorganisms (DISARM) Act is the first step to assist struggling antibiotic companies. Based off the Orphan Drug Act of 1983, this act would ensure that every antibiotic will be reimbursed regardless of its price to allow doctors to make decisions scientifically and not financially. The DISARM Act was first proposed in 2019 and was on the Coronavirus Aid, Relief, and Economic Security (CARES) Act 3.0. Darin Gardner, Vice President of The Conafay Group, a business management consultant company that runs the Antimicrobials Working Group, noted that it was taken off at the last minute.


Another bill being proposed is the PASTEUR Act, which is based on the pull incentives from the UK. Pull incentives are financial incentives to encourage private sector investment. The Pasteur Act would provide a financial reward to antibiotic companies for market entry once the drug gets FDA approval. In the UK, pull incentives aim to grant companies £100 million over 10 years. The UK is hoping this encourages a global adoption of pull incentives of up to US$4 billion. If this bill passes in the US, it could bring investors and big pharmaceutical companies back into investing in antibiotics. This also gives an exit or a method to guarantee the company could be profitable to investors. The problem is that many currently struggling antibiotic companies may not have enough funds to last until this bill passes.

3. Add user fees for current generic antibiotics to fund research for new antibiotics

This could be an easy way to generate revenue for new antibiotics, because general antibiotics are used for many common ailments, from acne to bronchitis. However, it may be hard to pass legislation in order to tax generic antibiotics because it could limit access to these antibiotics for some groups of people.

4. Extend exclusivity for new antibiotics to increase profit

Exclusivity is the time period where a drug is protected from generic drug competition. Currently, there is a five-year exclusivity for most brand-name drugs. Specifically, for antibiotics, there could be a 5-year extension in addition to that. In theory, if the exclusivity time could be extended beyond that, a company could continue to profit off a drug for a longer amount of time before generic competition. However, because the additional revenue is so far in the future, the current impact of exclusivity is minimal.

There are mixed perceptions about all the proposals and ideas to encourage antibiotic research. Many individuals worry that the DISARM Act would increase antibiotic resistance. If doctors choose to use new drugs for all patients, it could increase antibiotic resistance in the population. Another concern is that these proposals would incentivize larger price tags than necessary on new antibiotics.

There is no single solution to fix the problems antibiotic companies face. However, the likeliest path forward involves governments providing antibiotic companies with financial stability to allow scientists to conduct antibiotic research. This need has grown only more acute during the COVID-19 pandemic. Many individuals infected with COVID-19 are developing secondary infections that require antibiotics, and the use of antibiotics especially for patients on ventilators threatens to exacerbate the antibiotic resistance problem. This phenomenon is not without precedence – every viral epidemic has caused infected individuals to develop secondary bacterial pneumonia that require antibiotic treatment. The upcoming CARES Act Bill 4.0 will hopefully provide some needed legislative change to help antibiotic companies stay afloat to continue research and development.

To end on a positive note, here’s a nice comic that Dr. John Rex showed me to simplify antibiotic resistance:

Cara He, B.A. is an Integrative Biology PhD Candidate at the University of California, Berkeley.