Photographer: Tomohiro Ohsumi/Bloomberg

Failed Guitarist Seeking Life’s Roots Makes $3 Billion Drug Firm

  • PeptiDream has inked deals with world’s biggest pharma firms
  • Shares in the company have risen ninefold since 2013 listing

When he realized he wasn’t going to make it as a guitarist, Hiroaki Suga set out to find the origin of life, and ended up creating a new way to develop medicines.

Many years spent fiddling with the building blocks of the universe -- combining molecules to form compounds -- led to Suga developing an enzyme that opened the door to a faster method of discovering drugs. PeptiDream Inc., the company he co-founded, has inked deals with many of the world’s biggest pharma firms, and shares have surged more than ninefold since listing in 2013.

Kiichi Kubota, right, and Hiroaki Suga.
Kiichi Kubota, right, and Hiroaki Suga.
Photographer: Tomohiro Ohsumi/Bloomberg

“Everybody comes to PeptiDream,” Suga, 53, said in an interview from his office deep in the main campus of the University of Tokyo. An electric guitar hangs from his wall. “Everybody probably accepts now that the technology we developed is very, very smart, very efficient,” he said. “I might go back to looking for the origin of life after I retire.”

PeptiDream is part of a handful of Japanese biotech ventures that have grown into billion-dollar companies, which also includes Sosei Group Corp., the drugmaker that now accounts for about 14 percent of the Mothers Index of smaller shares, and Euglena Co., which is trying to make jet fuel from algae. Like Euglena, it originated within Japan’s equivalent of Harvard, where Suga is a professor. In fact, PeptiDream is still based there today.

The path to becoming a $3.2 billion company started when Suga’s lab developed an artificial ribozyme, which he named flexizyme for its “promiscuous” ability to help amino acids couple to form peptides. Libraries of peptides -- proteins made from a small number of amino acids -- had been used by health-care companies for years to facilitate drug discovery, but they hadn’t been effective because they were unstable.

Armed with flexizyme, the self-described research heretic Suga turned conventional wisdom on its head by making new libraries of a different type of peptides, often shaped more like a hula hoop than the spaghetti-type ones employed in the past. The steadier structure made them better at blocking the interactions between proteins that cause many diseases, according to Suga.

“People thought I was crazy, because it’s a very difficult thing to do,” Suga said. “I spent 10 years on this. I had many failures, but then I had two successes but they weren’t really useful, so that means failure for me. And then finally I came up with this flexizyme prototype, and I thought ‘this is it.’”

Business Brain

Enter Kiichi Kubota, the business brain and co-founder who runs PeptiDream today. Together, they nailed down patents on the technology and worked on ways to make the process of discovering “hits” -- the starting point for developing drugs -- more efficient. By reducing the number of steps, the company cut the average time needed to discover them from about three days to four hours, according to Patrick Reid, PeptiDream’s chief science officer. That also lowered the potential for human error, he said.

PeptiDream’s lab at The University of Tokyo.
PeptiDream’s lab at The University of Tokyo.
Photographer: Tomohiro Ohsumi/Bloomberg

The Peptide Discovery Platform System has had strong interest from big pharma. Already, 16 of the most established names in the industry have signed agreements to work with PeptiDream to find hits for various diseases. The system can help discover drugs for pretty much anything, from cancer to neurological disease. Three firms, Bristol-Myers Squibb Co., Eli Lilly & Co. and Novartis AG, have gone a step further by licensing the technology to use in-house. PeptiDream’s revenue rose to 2.5 billion yen ($24 million) in the fiscal year ended June 2015.

Weird Thing

“These guys are different,” said Brian Heywood, chief executive officer of Taiyo Pacific Partners LP, which holds a 5 percent stake in PeptiDream despite being generally suspicious of biotech shares. Heywood says that PeptiDream doesn’t burn funds like some of its peers and is cash-flow positive. “This is one of those weird things where someone has something special that nobody can imitate. And it’s patented.”

Not only that, PeptiDream kept part of its discovery for itself. Its system can create three types of drugs -- peptide therapeutics, small-molecule medicines and what’s called peptide drug conjugates. The first is mostly used for extracellular medicines, while the second, which are smaller, can permeate the cell. PeptiDream’s partnerships cover only those two.

The third, PDCs as they’re called, are envisaged as a kind of smart drug. The peptide part will be used, for example, to home in on a cancer cell, which the conjoined drug will then attack. This contrasts with conventional treatments such as chemotherapy that kill other cells as well as the cancerous ones, resulting in hair loss, nausea and other symptoms. Reid and his team are focusing on this area within the company.

“We carved that out,” Reid said. “The market is growing very rapidly. It’s one of the most rapidly growing areas of therapeutics.”

Risk Factor

Analysts, who are predominantly bullish on the stock, say one risk for PeptiDream is if big pharma starts to lose interest. They point to Pfizer Inc. canceling an agreement in 2013, and how shares tumbled on the news.

“They have several partners, but we don’t know if the contracts will be extended indefinitely,” said Kiyokazu Yamazaki, an equity analyst at Ichiyoshi Research Institute Inc. who rates the shares a buy. “What people evaluate highly isn’t their creation of drugs in-house. It’s their contract revenue.”

Shares surged 175 percent from November to a peak at the start of this month, capped by a 14 percent jump on June 3 after PeptiDream raised its annual profit forecast by 84 percent and said it got a second licensing payment from Novartis. Since then, the stock tumbled 17 percent through Friday amid a broader selloff of biotech companies. It slid 1.2 percent in trading Monday. Even after the decline, it trades at 166 times earnings and 37 times book value. PeptiDream posted profit of 1 billion yen in the 12 months ended June 2015.

The company moves to a new building near Tokyo Bay next year. Professor Suga remains an independent director and adviser, while his lab has moved on to other pursuits. His 8.6 percent stake is worth about $278 million, and he says he’s bought a house and filled it with guitars.

Kubota, the president, now spends half his time talking to investors, and says he hopes Suga will win a Nobel Prize for his discovery one day. Meanwhile, across the corridor, Reid’s at work testing the boundaries of the new world of peptide drug conjugates.

“We’ve developed a once-in-a-generation hit-finding platform,” Reid said. “It’s like sitting in a stack of gold every day.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE