Partnering for Success...and Survival
Pharmaceutical and biotechnology companies are continuing to forge creative licensing and partnering arrangements as they pursue their respective goals. For Big Pharma, this means acquiring rights to products with the greatest potential for commercialization to help counter revenue erosion from generics and fill anemic development pipelines. For biotechs, it means obtaining funds to continue research activities—and often to just keep the doors open.
Employing a strategy that has been evolving over the past several years, Big Pharma is continuing to forge option-based agreements with biotech companies in an effort to reduce both risk and cost. Option-based agreements give pharma companies the right, but not obligation, to execute an exclusive license on a drug candidate while providing biotech companies with operating capital to continue developing their programs. Compared to straight licensing arrangements, upfront cash outlays from option-based agreements can be reduced and milestone payments pushed further down the development pathway.
"Big Pharma can secure more deals with options than with upfront payments, and often pay much less to secure the options," said Steve Poile, chief executive of Wildwood Ventures Ltd., a U.K.-based firm that tracks pharma deal-making. "And clearly, options are attractive to biotechs because they can get funding from committed partners." But the downside for biotechs is being unable to command more money should their compound turn out to be more promising than expected. And biotechs will find it harder to obtain additional sources of financing, such as through venture capital, if their products are tied up in exclusive deals with other partners. "But in the current economic climate, biotech companies have to choose between doing the unpalatable and going out of business," Poile observed.
In option deals, the biotech takes on a greater risk of development, but if the compound overcomes development hurdles, both sides benefit. "Option deals are risk-share deals," said Jeffrey Brennan, senior vice president, Targacept Inc., in October at a biotech forum sponsored by the Council for Entrepreneurial Development in North Carolina.
"These aren’t nice-to-have deals, but rather need-to-have deals," said Ali Tehrani, PhD, president and chief executive of Zymeworks Inc., a privately held biotech in Vancouver, Canada that is developing antibody therapeutics for oncology, autoimmunity, and inflammatory diseases. The need is on both sides. Pharma companies "have a problem to address and are looking for solutions," Tehrani told a Biotechnology Industry Organization (BIO) Investor Forum in San Francisco in October.
In August, Zymeworks signed a research collaboration with Merck, granting them an exclusive worldwide license to develop and commercialize bi-specific antibodies generated through the biotech’s Azymetric platform. Zymeworks received an undisclosed upfront fee and may receive research, development, and regulatory milestones totaling $187 million (Table 1).
Checking the scorecard
For 2011, the number and financial value of research-based collaborations and partnerships between Big Pharma and biotech companies are likely to remain similar to last year’s levels. The number of deals worth more than $20 million is expected to increase slightly from around 59 to about 65 this year, while the average value of these deals is projected to drop from around $395 million to about $371 million (Figure 1). As a result, total announced deal values will exceed $24 billion in 2011, slightly more than 2010’s $23.3 billion (Figure 2, page 14). (See the sidebar, "Handicapping the Scorecard," for more on the metrics.)
The average announced upfront cash payment in pharma-biotech partnerships remained unchanged from last year at $27 million, according to Deloitte Recap LLC, New York, (Figure 2). But the average upfront R&D investment (which typically accompanies an upfront cash payment and/or equity investment) jumped from $11 million to $57 million in 2011 while the reported average milestone payment amount fell from $284 million to $213 million during the first half of 2011. "The milestones are probably reduced because a lot of the multi-product programs have already been licensed out and what we’re seeing is more representative of what single products would be worth," said Christian Dokomajilar, a senior biotech analyst at Deloitte Recap.
Big Pharma has tended to favor partnering for products that have already been through at least some early stage testing, if not Phase 1 or Phase 2 trials. Later-stage compounds, of course, can command larger premiums than can earlier-stage products. Today, however, many later-stage compounds have already been licensed and most biotech companies find it difficult, if not impossible, to finance clinical trials on their own. The result has been a shift in collaborations and licensing from Phase 3 to earlier stages, said David Thomas, BIO’s director of industry research and analysis. Nearly half of all pharma-biotech collaborations in 2011 involved discovery and preclinical stage products (Figure 3).
"It’s a buyer’s market now because biotech companies are so desperate for capital," said Mark Kessel, senior adviser, Sagent Advisors investment bank and cofounder and partner, Symphony Capital private equity firm. "There may be more deals upfront, but the total value may very well be less," he said. But totals from early-stage deals remain impressive. Of the 23 collaborations in 2011 valued at $500 million or more, 14 involved discovery, preclinical, or Phase 1 products, according to the Current Agreements database maintained by Wildwood Ventures. In fact, three of the seven deals valued at $1 billion or more in 2011 were for preclinical or discovery stage work. In July, for example, biopharma giant Amgen Inc. signed a collaborative R&D agreement with Rockville, Md.-based biotech Micromet Inc. to develop antibodies against three undisclosed solid tumor targets. Micromet is eligible to receive more than $1 billion in clinical and commercial milestone payments plus double-digit royalties on worldwide net sales.
Areas of therapeutic interest
Based on total deal numbers, oncology is by far the leading area of therapeutic interest, followed by central nervous system diseases, anti-infectives, metabolic diseases, dermatology, and cardiovascular diseases (Figure 4). Similar trends are observed in the number of one-on-one pharma-biotech company meetings convened at BIO’s international convention in June, where oncology, immunology, and CNS therapeutic areas were hottest. While the number of these meetings has increased by about 40% from 2006, the number of resulting alliances has declined by about the same percentage. "There’s a lot more dating, but fewer marriages," quipped BIO president and chief executive Jim Greenwood.
Oncology and immunology have maintained persistent interest because they’ve been more resilient to pressures on valuation, said Ben Bonifant, senior vice president, Campbell Alliance, a Raleigh, N.C.-based pharma-biotech consultancy. A survey conducted earlier this year found that potential pharma dealmakers were now looking within subsets of cardiovascular, metabolic, and dermatology areas. "It’s not that the dealmakers have returned to the large, primary care products of the past, but they’re actually looking for isolated areas of large unmet needs, with a high number of specialists prescribing, in a less-competitive space," Bonifant reported in a BIO analysis.
There are about 300 publicly traded biotechs in the United States. More than half have market valuations of less than $200 million and a third trade for less than $100 million. The combined valuation of the five largest public biotechs—Amgen, Gilead, Celgene, Biogen Idec, and Vertex—does not equal that of one Big Pharma company, according to BIO’s Thomas.
It’s no surprise, then, that biotechs, especially smaller private ones, are nearly always searching for funds. One traditional source has been venture capitalists, who take equity stakes in a private company with an eye toward cashing in by selling or taking the firm public. But like other investors, venture capitalists tend to favor companies having products closer to market. This trend increased in 2011: venture capital investments in life science companies, including biotech, shifted from seed/early stage companies to later stage companies, according to third quarter results released by PricewaterhouseCoopers LLC and the National Venture Capital Association in October.
Big Pharma’s problems
Layoffs resulting from pharma megamergers, such as Merck-Schering Plough and Pfizer-Wyeth, have afflicted thousands of research scientists worldwide. Ongoing pressure from investors has pushed companies including Merck, AstraZeneca, and GlaxoSmithKline to cut back on internal R&D. These events contribute to Big Pharma’s inability to successfully innovate back from the patent cliff. Even Sanofi, which acquired Genzyme in February, is not exempt: The company is downsizing its global R&D and shifting to an "open innovation" structure in which it teams with biotech partners and academia. All this is potentially good news for smaller biotechs as Big Pharma (and Big Biotech) come to rely more on external partnerships and less on in-house labs and research staff.
For instance, Eli Lilly and Co. recently rolled out a new "Open Innovation Drug Discovery" platform designed to boost the company’s pipeline. Scientists outside the company are encouraged to submit potential therapeutic molecules for Lilly, whose scientists will evaluate and return data to the submitter at no cost. But in exchange, Lilly retains first rights to negotiate collaboration or licensing agreements. "We recognize that there are many untapped sources of ideas and molecules outside of Lilly that would otherwise go unnoticed with initiatives like this one," said Jan Lundberg, PhD, Lilly’s executive vice president, in a statement.
Handicapping the Scorecard
Caveats are in order when quantifying pharma-biotech deals. First, total announced deal values include the sum of all upfront cash, equity, and R&D payments, plus potential milestone payments, future sales commissions, and other outlying revenue streams. These totals are rarely achieved, but they provide a baseline for comparison.
Second, drug-biotech deals number in the thousands when acquisitions, terminations, promotions, marketing, manufacturing, equity investments, contracts, loans, litigation, and other business activities are counted. By these measures, the number of pharma-biotech partnerships in 2010 exceeded 3,500, according to the Current Agreements database maintained by Wildwood Ventures. Excluding mergers and acquisitions, out-licensing from pharmas to biotechs, and certain other metrics, Deloitte Recap comes up with 266 pharma-biotech deals in 2010. This article relied on information published by Burrill & Co. and Windhover. According to those companies, there were 59 deals between Big Pharma and biotech companies exceeding $20 million in 2010 and about 65 deals projected in 2011, based on results through the third quarter of the year. (Figures 1 and 2).
About the Author
Contributing editor Ted Agres, MBA, is a veteran science writer in Washington, D.C. He writes frequently about the policy, politics, and business aspects of life sciences.