Sunesis

Company Background

Sunesis Pharmaceuticals (hereafter simply called Sunesis) was co-founded in 1998 by James Wells, formerly of Genentech and Associate Professor at UCSF, and Jonathan Ellman, Professor of Chemistry at UC Berkeley. The company employs over 100 employees and has raised almost $95 M in venture funding (series A-C) to date. Some of the early investors have included Venrock Associates, the Mayfield Fund, and Abingworth Management. Sunesis’ corporate headquarters are in South San Francisco.

Sunesis has put together an experienced management team and board of directors from both the pharmaceutical industry as well as from the biotechnology industry (see Table 1). World-renowned scientists make up the scientific advisory board (see Table 2).

Table 1: Management Team and Board of Directors

Sunesis intends to be the leader in the discovery of novel, orally-available, small-molecule drugs. Sunesis has proprietary technologies that allows the company to rapidly screen fragment libraries. The most-promising fragments are eventually used to build drug molecules. Sunesis’ strategy is to apply this technology to targets that in the past have been difficult drug discovery targets, namely enzymes and protein-interaction surfaces. Numerous proteins that fit these criteria are well-characterized potential drug targets, but cannot be addressed with current drug discovery technologies. A more thorough description of the technology is provided below.

Table 2: Scientific Advisory Board

Sunesis’ position in the biopharmaceutical value chain

Figure 1 illustrates the overall value chain for the drug-discovery industry and breaks out the lead-discovery portion, where Sunesis plays. Sunesis’ technology provides novel ways of assay development and new ways of performing drug-discovery screening, as well as lead optimization.

Figure 1: Sunesis in the Value Chain

Sunesis’ proprietary technology

Sunesis focuses on the two major disadvantages to the widely used-technology called High Throughput Screening (HTS), and addresses these problems with its proprietary technology, called Tethering.

In HTS, several 100,000 potential drug compounds are screened against a selected target, using an appropriate activity assay. These result in “hits” that are further investigated using different activity assays. The most promising hits are then optimized for their activity, selectivity, and ADME/Tox (absorption, distribution, metabolism, excretion/toxicity) properties. One method that is often used for this optimization is combinatorial chemistry.

There are two issues with HTS, limiting both its use and ability to find new drug molecules. First, screening 100,000s, or even over 1,000,000, compounds is expensive, due to the amounts of chemicals needed to perform the screens. Secondly, not all targets are amenable to HTS. A recent survey of HTS directors (51 respondents) has shown that less than half of the targets analyzed by HTS led to the generation of lead compounds (J. Biomol. Screening, Vol. 6, 137-140). The targets that had the greatest success rates had well-defined active sites (and therefore identifiable activities), e.g., receptors and certain classes of enzymes, such as kinases.

Sunesis’ technology addresses the first issue by screening fragments instead of whole molecules. The advantage of screening fragments is that fewer fragments need to be screened to cover the same amount of “chemical space” as covered by HTS using whole molecules. This is due to the ability to combine the fragments in later steps to build up a drug molecule. For example, if 1,000 fragments are screened against two binding sites that are in proximity of each other on the protein surface, effectively 1,000*1,000=1,000,000 potential compounds have been screened, because each fragment can be combined with each fragment.

One issue with this kind of approach is that due to the size of the fragments, the affinities for the target are generally too low to detect reliably with current detection methods. Sunesis has successfully developed a novel approach that addresses this problem called Tethering. In the vicinity of the binding site, one amino acid residue is modified to cysteine (CYS), which contains a reactive sulfur group. All the fragments in the library are attached to reactive groups that can react with the CYS residue present near the active site and form a disulfide bond. The fragment will react with the CYS residue when it is in the vicinity of this residue. The bond formed between the fragment and the protein will be more stable when the fragment has affinity for the protein surface, compared to fragments that have no affinity. This difference in stability between binding fragments and non-binding fragments (equal to the strength of the disulfide bond), can be exploited to determine which fragments are active. The most-promising fragments are linked together combinatorially with various linkers to form drug leads.

Currently there are approximately 1000 FDA approved drugs, but these drugs target only about 500 protein targets. The total number of actual protein targets is likely on the order of 10,000. The difference in the number of targets addressed by current therapies and the number of targets available is not a function of the number of proteins that have been identified as viable drug targets, but is due to the limited applicability of current drug discovery methods. For example, HTS only works well with targets with well-defined active sites, as described above. Thus Sunesis’ Tethering technology also addressed the second limitation of HTS. Tethering can be applied to all proteins, including enzymes without well-defined active sites and protein-interaction binding sites.

In summary, Sunesis’ proprietary technology, “Tethering,” constitutes of three steps:

· Screen the fragments

· Screen the linked fragments

· Optimize molecules

This technology addresses two major drawbacks of the widely accepted HTS: cost and limited applicability. Tethering hopefully will allow Sunesis to quickly identify novel potential drugs against a wide variety of drug targets, not just protein receptors.

Patent position and proof-of-principle

Sunesis has been awarded one U.S. patent that protects their core technology (US 6,335,155) and has a license to another patent from UC Berkeley that relates to its technology (US 6,344,334). The first patent covers fragment-based screening, where binding can be detected by the occurrence of covalent bond formation between the fragment and the target of interest. The second patent covers (a) a method for identifying binding of fragments to a target protein, where the fragments can in a later step be cross-linked to form a larger molecule and (b) methods for chemically cross-linking the best-binding fragments.

Two other patents have been awarded to Sunesis. These patents can be viewed as proof-of-principle patents, since both of them describe compounds that have been found using Tethering. One patent (US 6,376,524) covers inhibitors of interleukin-4, the other patent (US 6,143,776) covers thymidylate synthase inhibitors. The work on thymidylate synthase was published in a paper in Proceedings of the National Academy of Science, Vol. 97, 9367- (2000). The methodology has also been applied to cysteine proteases, and led to novel, non-peptidic inhibitors of this class of enzymes. The cysteine proteases are potential targets for drugs in a number of diseases, but finding non-peptidic inhibitors for these proteins has proven to be difficult. The experiments described in the patents and the publication thus provide proof-of-principle of this technology, and confirms the wide applicability of the technology to targets that were difficult to address in the past.

Current Partners

Although Sunesis received Series A funding from respected venture capitalists in 1998, since then, it has established only one major partnership. This partnership, established in October 2001, was created with a small Italian pharmaceutical company, Chiesi Farmaceutici S.p.A ($350 million Year 2000 revenues, mostly in the European Market). The partnership is structured as a research collaboration to develop small molecules that inhibit a validated protein-protein target involved in immunological diseases. Using its proprietary discovery technology, Sunesis will generate development candidates and Chiesi will have an option for an exclusive license to develop and market resulting products in Europe and Latin America. Sunesis will retain exclusive rights in North America and Japan.

Under the terms of the agreement, Sunesis will receive upfront payments, research funding, research and development milestones, and royalty payments. The total value of the deal is estimated at $22 and $30 million, and could exceed this depending on the number of indications and compounds, excluding royalties.

This partnership provides several benefits for Sunesis:

· It provides some external market-driven validation of their proprietary drug discovery platform

· It provides what is likely much needed capital to continue the research and development efforts associated with their drug discover platform

· It has a potential upside beyond the initial fees associated with future royalties

· Because the product marketing terms are geographically exclusive, it allows Sunesis to potentially profit from early products that are developed under the agreement by marketing those products in North America and Japan, while their partner markets elsewhere

For Chiesi, the partnership agreement provides access to important technology in a therapeutic area for which they already enjoy some market presence in Europe. Chiesi, on their corporate web site, acknowledges the U.S. dominance in pharmaceutical R&D and states a goal to gain access to the fruits of U.S. innovations. The partnership with Sunesis thus certainly provides a milestone for that stated goal if only from a perception standpoint.

Since Chiesi is a relatively small regional pharmaceutical company, they have likely found it difficult to compete for access to key U.S.-based technology due the size of competing U.S. pharmaceutical firms. By relinquishing the marketing rights to drugs developed under the Sunesis partnership in North America and Japan, Chiesi likely paid less for the technology than a U.S. based pharmaceutical company would have.

The partnership between Sunesis and Chiesi does not address two particularly critical issues for Sunesis – how these drugs get through clinical trials and how to market novel drugs in the U.S. Chiesi will not be marketing drugs developed by Sunesis in the U.S. market so will provide little benefit to Sunesis in this area. Sunesis does not have the internal financial or organizational resources to take a drug through clinical trials and/or to market a drug.

Furthermore, Sunesis’ low number of partnerships may indicate that its platform is not competitive or is more risky than those of the large number of firms attempting to develop high quality preclinical leads through their own proprietary technologies. A sampling of young platform companies is provided in Table 3. Most companies in this space have considerably more and better quality partnerships than Sunesis.

Table 3: Sunesis and Select Competitor Partnerships

Firm	Founding Date	Technology Platform	Number of Alliances/Partnerships
Sunesis	1998	Fragment Tethering	2 – Chiesi, J&J
Syrrx	1999	Structural Proteomics	6 - including Pharmacia, Celera, Novartis
Structural Genomix	1998	Structural Proteomics	8 - including Aventis, Millennium, Celera
3D Pharma	1993	HTS/Structure based design	8 - including BMS, Schering, Dupont

Recent Developments and Potential Future Partners

On May 6, 2002 (last week), the company announced a new research collaboration with Johnson and Johnson (J&J). It is perhaps not surprising that J&J is the first major collaboration Sunesis has garnered. James Young and Daniel Swisher, Sunesis’ CEO and CFO, respectively, held executive level positions at Alza, a biopharmaceutical company now owned by J&J.

The research collaboration with J&J covers the development of enzyme inhibitors for inflammatory disorders and autoimmune diseases. As with the Chiesi collaboration, Sunesis will receive unspecified research funding, milestone payments and royalties associated with products developed under the agreement. Unlike the Chiesi deal, J&J will retain worldwide marketing rights of any products developed under the agreement.

This new deal with J&J is a significant and positive development for Sunesis, validating the promise of its technology platform with a large U.S.-based pharmaceutical company. Sunesis will need to continue to develop these types of relationships to survive. These collaborations will help to ensure that the company remains attractive not only to current and future investors, but also to high quality researchers, which Sunesis will need to attract as employees.

Comments from Sunesis’ CFO regarding the J&J deal suggests that this is the first in a series with big pharma for Sunesis (BioWorld Today, Volume 13, Number 87). Given the background of the management team, we believe these deals will likely include collaborations with other former employers of the management team, such as Genentech, Bristol-Myers Squibb, and Eli Lilly. The Table 4 indicates likely matches between Sunesis’ discovery platform and potential partners.

Table 4: Potential Future Partnerships

Competition

Lead discovery is a fragmented and highly competitive part of the drug discovery value chain. Many pharmaceutical companies and biotech companies attempt this part of the value chain on their own simply by using technologies already implemented or by buying novel tools from tool providers in the area. In addition, biotech and pharmaceutical companies that would likely partner with companies like Sunesis may believe that other areas of lead discovery research are as or more promising than these protein-protein interactions. These likely partners and customers must recognize the value of Sunesis’ tethering approach.

Therefore, any player in the lead discovery area, regardless of the technology used, is a competitor for Sunesis. The most common, current method is High Throughput Screening (HTS). The limitations of this method have been addressed earlier, but it is important to note that there are many strong players in this area. In addition to HTS, there are competitors utilizing structural proteomics and structure-based design. A small sample of some of these competitors and their approaches are found in Table 5.

Sunesis does not appear to have any direct competitors that generate small molecule leads against protein-protein interaction targets. In addition, the Tethering approach focuses on a difficult niche within the market, where a solution has long been called for. The pathways that Tethering addresses have not been exploited due to the difficulty in modeling protein-protein interactions, as well as designing the small molecule drugs that affect them. If Sunesis’ hot-spot technology can efficiently discover molecules that are relevant to these interactions and their IP sufficiently erects direct barriers to entry, Sunesis can create a sustainable differentiation from competitors.

Table 5: Sunesis Competitors

Company	Technology and Approach
3-Dimensional Pharmaceuticals, Inc.	DiscoverWorks technology identifies drug candidates by using such features as target protein production, high-throughput screening, a library of some 200,000 chemical compounds and 2.5 billion novel analogs, and 3-D protein structure analysis to expedite the process.
ArQule, Inc.	Synthesizes molecular compounds and identifying characteristics that it and other drug developers may find useful in their development efforts.
Keryx Biopharmaceuticals	KinAce™ drug discovery platform technology. This technology, which links bioinformatics with innovative protein chemistry, allows for rapid and rational development of drug candidates that target a vast range of protein kinases associated with numerous diseases.
NeoGenesis Pharmaceuticals, Inc.	Its Automated Ligand Identification System (ALIS) screens for the small molecules that bind to disease-associated proteins, thus pinpointing targets for potential drug candidates.
Pharmacopeia, Inc.	Uses combinatorial chemistry and HTS to develop drug discovery programs. Its Accelrys subsidiary makes molecular modeling and simulation software for pharmaceutical, biotechnology, and chemical firms.
Signature Bioscience	Radio frequency and microwave spectra (its core Multipole Coupling Spectroscopy or MCS technology) along with other technologies to analyze the structure and elucidate the function of proteins and cells and develop drug leads it plans to license to druggernauts and up-and-coming biotechs.
Structural Genomix	Uses integrated experimental and computational technologies including advanced bioinformatics tools for target/anti-target selection and structure-based functional annotation, automation of molecular biology and protein biochemistry, high-throughput crystallization, protein structure prediction by comparative modeling and ab initio methods, synthetic and computational chemistry, and rapid co-crystal structure determination.
Syrrx, Inc.	Intends to leverage high-throughput structure determination, high-throughput screening, combinatorial and medicinal chemistry together with computational methods to discover novel small molecule preclinical drug candidates.
Vertex Pharmaceuticals	Multidisciplinary approach to discover the structure of malfunctioning molecules associated with a disease and to design compounds that alter those molecules' functions.

Challenges

To ensure the identification of short and long-term challenges, an analysis of strengths, weaknesses, opportunities and threats was conducted. Table 6 summarizes this analysis.

As a result of this analysis, we have identified the main challenges facing Sunesis as:

· Establishing the value of Tethering technology

· Successful, efficient drug discovery

· Identifying areas of needed expertise

Table 6: Sunesis SWOT

Sunesis will only establish value in its company technology by forming critical partnerships, validating the proof of concept, differentiating themselves from their competitors, and negotiating favorable deals for future growth. The new relationship with J&J is an important step in the right direction. Sunesis will need J&J and other strategic partners to validate proof of concept of its technology. Hopefully these deals will generate positive press, validate the value of its Sunesis’ technology and establish barriers to entry to competitors by making Sunesis the established player in its space.

Sunesis needs to be effective at capturing the value of their technology when creating partnerships by establishing themselves as a critical value-added part of the drug-discovery chain. But the most important validation of Sunesis’ technology will come from their success with drugs and drug candidates. First-mover advantage may not be absolutely critical to Sunesis, but in order to establish a reputation, get ahead of competitors, and generate revenues, Sunesis must soon generate successful drugs and drug candidates. Sunesis will need to get at least one of their drug candidates into clinical trials within a few years.

As with many small biotech firms, Sunesis has a substantial lack of expertise in critical aspects of the drug discovery business. While Sunesis does have an impressive team and group of advisors, they still show some lack of business experience. For example, Sunesis appointed a CFO and Chief Business Officer in January of 2002, three years after Sunesis’ founding. The new business officer was likely responsible for the J&J deal and should have been added earlier. In addition, although we do not know how fast Sunesis’ is spending money, we know that it has 100 employees and no revenue. The trick of maintaining a lean operation while growing quickly enough to remain competitive is a difficult balance that requires business expertise and experience. If mutually beneficial deals are not negotiated or its molecules do not make it into drug trials soon, Sunesis may face a depletion of capital resources and lack of further investment interest.

Sunesis also suffers from a lack of clinical trial, manufacturing and marketing expertise, as many small biotech firms do. While Sunesis may not be looking to become vertically integrated upwards into the value chain any time soon, it still needs this sort of expertise to be able to tie into future revenues, which come from upwards in the chain. Sunesis does have a unique value proposition that has shown preliminary success. It has obtained significant revenues, an excellent team, a reasonable patent portfolio, and the start of significant partnerships. If, over the next two years, Sunesis can establish and execute a well-thought out strategy combining future partnerships and the appropriate use of their resources, they can create a company with value to the biotech community.

The Business of Biotech