As an analyst who spends a great deal of time researching biotech and pharma companies, I'm well aware of the challenges facing the drug industry in the US today. From onerous regulation and an approval process that has made drug development prohibitively costly and complex to the pending patent cliff that puts more than $35 billion in annual sales at risk to the apparent decline in innovation suggested by the steep drop in patent applications from big pharma – all portend an increasing inability to replenish shrinking pipelines with new products… i.e., to produce drugs that improve and save lives.

But the news is not all bad. Scientists and entrepreneurs (often one and the same) are fighting back. With computer-aided drug discovery, the rise of backyard biotech, and virtual R&D, developers are experimenting with numerous ways to cut costs and time from the arduous process. One new and particularly interesting effort in this area is a play on the well-known system-on-a-chip (SoC) technology from the world of computers, that can be described as human-organs-on-a-chip. I guess we can call it HOOC for short?

Scientists have been experimenting with this concept of creating living systems on chips for more than a decade – cutting tiny grooves into silicon and plastic substrates, introducing living cells into the spaces, and hoping the end result will mimic a particular biological system, like a human organ. The idea is not to make replacement organs for transplant, but to replicate enough of an organ's functions to make the chips useful in testing substances for toxic and therapeutic effects. Now the technology has finally advanced to near the point of practical application, and that could be a game-changer in drug development.

As you no doubt know, in order for biotech and pharma companies to market their drugs in the US, they first must receive FDA approval. I won't go into a lengthy description of that approval process here, but I will note that bringing a drug from the pre-clinical or discovery phase all the way to market can easily take more than a decade and cost significantly more than $1 billion. (Only about 1 in 10,000 compounds evaluated in the pre-clinical stage will ever successfully navigate the entire process.)

A big part of that pre-clinical phase involves assessing safety and biological activity in the laboratory – especially in animal studies. (It's difficult to access reliable figures, but it's safe to say that billions of dollars a year is spent on animal tests.) The problem with these animal models (without even touching on the various potential ethical issues involved) is that, although they have historically been one of the most trusted tools in drug development, they are not actually all that predictive of the human situation. Not only do animal models fail to identify numerous drugs that are toxic to humans, they also derail drugs that would have been good treatments for patients.

Of course this makes sense. We see it all the time in nature. The Sydney funnel-web spider is one of the most deadly spiders in the world to humans; but apparently its bite has little effect on the family dog or cat. At the same time, the venom of Australian tarantulas is deadly to dogs but relatively harmless to humans. Different animals evolved differently and have different biologies. Nevertheless, we continue to rely on expensive, time-consuming, and unreliable animal models in the drug development process because they're the best we have. But what if something better came along?

That's where human organs on chips come in…

We noted that scientists have been experimenting with the idea for some time. But a breakthrough came in mid-2010 when researchers from the Wyss Institute for Biologically Inspired Engineering at Harvard announced they had successfully developed a lung-on-a-chip. The device, which is about the size of a rubber eraser and is made using human lung and blood-vessel cells, actually mimics a living, breathing human lung.

Prior to lung-on-a-chip, tissue-engineered microsystems were limited either mechanically or biologically. According to Judah Folkman, professor of vascular biology at Harvard Medical School, the Wyss group used a novel microfabrication process employing clear rubbery materials and took a new approach to tissue engineering "by placing two layers of living tissues – the lining of the lung's air sacs and the blood vessels that surround them – across a porous, flexible boundary. Air is delivered to the lung lining cells, a rich culture medium flows in the capillary channel to mimic blood and cyclic mechanical stretching mimics breathing."

Basically, you have a porous membrane with human cells from the lung's air sac on one side and human capillary blood vessel cells on the other side. There's air flowing through the channel on the lung side and a medium (like blood) with human blood cells in it flowing through the channel on the capillary side. The whole thing stretches and relaxes like our lungs do when we breathe. And it does a good job replicating the natural responses of living lungs to various stimuli. Just as the living lung-blood interface recognizes invaders such as inhaled bacteria or toxins and activates an immune response, so too does lung-on-a-chip. The researchers tested this by introducing E. coli bacteria into the air channel on the lung side of the device while concurrently adding white blood cells to the channel on the blood vessel side. The lung cells detected the bacteria and, through the porous membrane, activated the blood vessel cells, which in turn triggered an immune response that ultimately caused the white blood cells to move to the air chamber and destroy the bacteria. I'm pretty sure you don't even have to be a nerd like me to think that's cool.

Lung-on-a-chip was just the beginning. The Wyss Institute also has kidney-on-a-chip, bone-marrow-on-a-chip, and its newest creation, gut-on-a-chip – a silicon polymer device about the size of a flash-memory stick that mimics complex 3D features of the human intestine – was just announced at the end of March. All could prove to be valuable diagnostic tools in the development of safe and effective new therapeutics.

The bottom line: In theory, since these human-organs-on-a-chip use human cells and mimic both the mechanics and biology of the organs they represent, they would be more predictive than animal models, so drug failure rates would be lower. Modeling with these chips would cut costs and reduce the time involved in the drug-discovery process. The technology is so simple that scientists without any engineering background could easily use it to screen for things like toxicity using much smaller amounts of the test drug.

It's still too early to tell how successful this field of research will be. But the recent advancements make the thought of doing away with animal models for drug testing entirely and replacing them with tiny micro-engineered devices that incorporate human cells and reconstitute organ level functions seem a little less crazy today.

Ultimately, the goal is to integrate the various organs-on-a-chip into a whole microsystem-like human-on-a-chip, as well as to develop personalized chips that could predict a specific individual's drug response. Amazing. But this is still years away.

I usually like to conclude these pieces by discussing potential investment opportunities related to the technology I've introduced. Much of the best work in the field, however, is still tied up in private or taxpayer-funded labs like the Wyss Institute. And while companies like CellASIC, Hurel, and Hepregen have successfully transitioned from academic labs to producing and marketing chips or substrates that grow primary cells in ways that have functionality for pharma testing and validation, they are not publicly traded. So, to invest in this technology, we're just going to have to wait a bit longer.

How long we'll have to wait is unknown. We do know that pharmaceutical companies are interested in the chips, but for the most part they're proceeding with caution. The concern, of course, is that the chips may not capture certain necessary aspects of living physiology the way whole-animal models do.

It's also important to recognize that the FDA has to get on board with the idea that the chips are a valuable research tool before the technology can really take off. The good news there is that they're at least already considering the idea. According to Jesse Goodman, chief scientist and deputy commissioner for science and public health at the FDA, the agency is preparing guidelines on how to replace animal tests with chips or related technologies, including computational and cell-based screening.

So stay tuned. I'm quite certain we'll be hearing a lot more about these human organs on chips soon.

The brilliant minds behind such technological advances are the heart and soul of every company… vitally important to the bottom line. Don't let the resulting tech war for these people dent your portfolio's profitability.