Issue Date: March 6, 2006
The Partnership Push
A cynic might say that big pharma-biotech partnerships are basically marriages of convenience: Drug companies need products and technologies, and biotech firms need money and help with clinical trials and regulatory filing. Recent trends, however, hint that although these practical incentives are still big drivers, a more farsighted approach to deal making is starting to emerge.
One indication is big pharma's renewed interest in early-stage deals, those involving biotechs with interesting technologies whose most advanced candidates have yet to enter Phase II clinical trials. Of course, our cynic would say this renewed interest stems from the premium now paid for late-stage compounds, given their scarcity and the competition to snap them up.
It is not as easy, however, to explain away the nuances in the structure of deals, which increasingly call for collaboration in the lab and a more detailed regimen of risk sharing from discovery through commercialization. This desire for closer cooperation has pushed the potential value of deals, including milestone payments and royalties, to an all-time high.
The U.S. biotechnology industry generated revenues in excess of $15 billion last year through partnerships, up from about $11 billion in 2004, according to Burrill & Co., a venture capital firm that specializes in biotechnology.
In fact, many in the industry now refer to a buyer's market for biotech companies seeking partnerships. "They have these big companies lined up outside their doors, and they can compare and contrast," says Barbara Yanni, vice president and chief licensing officer at Merck. "They want to see our development plan for their molecule and our plan to sell their molecule. We take that very seriously."
The current partnership environment has its roots in 2000, when the stock market and drug companies shifted investment away from companies with unproven technologies to those with products in the later stages of development. Such firms, however, turned out to be in short supply. Mark DeWyngaert, senior manager in the health sciences practice at Ernst & Young, says there is now a shift back to early-stage investments in the wake of high prices for late-stage deals and lessons learned by drug companies regarding the need to be involved in drug development.
"The big pharma companies are the experienced partners in these transactions," he says. "They have a lot of experience with the Food & Drug Administration." Several big drugmakers saw drug candidates that were managed in the clinic by inexperienced biotech partners sent back for months of repeat testing. "The big pharma companies want to get involved earlier on to guide the project now," DeWyngaert says. "They've learned some valuable lessons."
One indication of the spike in partnership activity occurred in December and January when two drug companies, AstraZeneca and Wyeth, had big runs on partnership deals. Both firms' strategies, though somewhat different, illustrate current thinking across the sector.
In the late 1990s, AstraZeneca managed the integration of Zeneca and Astra Pharmaceuticals without making significant changes in the traditional medicinal chemistry approach to research and development, according to John Patterson, the firm's executive director of development. Since then, however, the need for change has become apparent.
"Science has been mushrooming in the outside world," he says. "We can no longer expect to stay at the forefront of everything with internal research. And we do have a pipeline weakness. We are out there, like many others, looking for good opportunities."
He says the company has committed to an "ongoing externalization process" that at the turn of the year led to partnerships with Targacept, on a compound in Phase II clinical trials for treating Alzheimer's disease and schizophrenia, and with AtheroGenics, a small-molecule drug discovery company. In addition, last July AstraZeneca formed an early-stage licensing and research agreement with Avanir to discover, develop, and commercialize treatments for cardiovascular disease based on Avanir's reverse cholesterol-transport technology.
In that deal, Avanir will receive $10 million in up-front payments and may receive up to $330 million in development and regulatory milestone payments plus royalties. Targacept will receive a $10 million up-front payment, up to $300 million in milestones, and royalties. In both cases, AstraZeneca will retain rights to develop and market drugs that emerge from the partnerships.
Patterson acknowledges that AstraZeneca is interested in late-stage deals, but they are difficult to come by. "Of course we'd all like low-priced, low-risk, Phase III products with wonderful programs, but there are very few of them, and when they do exist, you end up spending top dollar," he says.
Plus, working with partners in early development has unique benefits. "When small companies work with us," Patterson says, "we can optimize and get the right results instead of waiting another year to get the best molecules on the table."
Meanwhile, Wyeth, which has a relatively well developed biopharmaceutical operation and bills itself as the world's fourth-largest biotech company, is targeting a 25% contribution to revenues in 2006 from biopharma-based drugs, says Cavan Redmond, executive vice president of the firm's biopharma business. Partnerships have been a strategic thrust for the company.
"We've been successful in biotechnology by being able to go from discovery to development, manufacturing, and commercialization on a global scale, with partnerships where partnerships make sense," Redmond says.
Wyeth recently signed deals with biotech firms Progenics, Exelixis, and Trubion Pharmaceuticals. Trubion, which has a rheumatoid arthritis candidate in Phase II clinical trials, will receive $40 million up front and can earn up to $800 million in milestones, plus royalties.
Redmond acknowledges that Trubion's Phase II candidate was attractive, but in describing the deal, he emphasizes access to technology and the drug discovery partnership. "We've been looking at a number of technologies and companies: the next generation of proteins or antibodies that would allow us to have unique discovery targets and enable us to go after the market to meet unmet needs in a different way. That's where Trubion fits in," he says.
Most other major drug companies make similar claims in regard to their incorporation of partnership and licensing into research and business development.
GlaxoSmithKline, which several years ago divided its R&D into seven Centres of Excellence for Drug Discovery, or CEDDs, last year added the Centre of Excellence for External Drug Discovery, an eighth CEDD that specifically targets access to outside technology through partnership, joint research, and licensing.
Merck, which has a reputation for a heavy emphasis on in-house innovation, has significant outside collaborations dating back to the early 1980s, according to Yanni. During that decade, the firm formed the joint venture with Astra AB that produced the heartburn-treatment drug Prilosec, and it licensed its Fosamax osteoporosis drug from Italy's Istituto Gentili.
More recently, Yanni says, Merck has stepped up efforts to access outside technology, but she says it has bucked the trend of pursuing late-stage compounds in favor of the technology-platform-based research collaboration.
Last year, for example, it formed a partnership with BioXell, which specializes in drugs for urological and chronic inflammatory diseases, to develop TREM (triggering receptors expressed on myeloid cells)-targeted therapies for sepsis. As part of the deal, Merck will obtain rights to BioXell's lead candidate, a preclinical compound targeting the TREM-1 receptor. BioXell received an unspecified up-front payment and can receive up to $150 million in milestone payments, including $55 million for the successful development of a first product.
In 2004, however, Merck broke from form, doing six deals involving products in late-stage development. "We were able to satisfy ourselves that these were interesting candidates," Yanni says, "and we were happy to partner with those companies at the stage those products happen to be at." All are still in clinical development.
The changing nature of alliances is also reflected in new business practices. For example, Roche set up a formal infrastructure for pursuing and managing partnerships five years ago, according to Nigel Sheail, global head of licensing. He says the group's formation reflects "a significant change in philosophy" in which partnerships have become more collaborative. "They are not just transactions to gain access to specific intellectual property," he says. "They have become collaborative relationships with long-term agreements to work in flexible ways to maximize the value of assets."
He says a 2005 deal with Maxygen to develop therapies for acute bleeding illustrates this new approach. The partnership includes codevelopment, cost sharing, and copromotional aspects that go beyond the standard licensing arrangement, in which the biotech partner is usually not involved in later stage developments and promotion.
Roche and Maxygen agreed to codevelop recombinant Factor VIIa products for multiple indications including intracerebral hemorrhage and trauma. Maxygen will lead early-stage clinical development and will have the option of cofunding marketing activities, receiving royalties commensurate with profit sharing. Maxygen, which could receive payments of $95 million in addition to royalties, retains rights to develop and commercialize subsequent recombinant Factor VIIa products for hemophilia.
Sheail notes that Roche, like Merck, has prototype deals that date back many years. Best known is its long-standing relationship with Genentech. Roche currently holds a 55.7% stake in the company, and 10 products in Roche's pipeline stem from collaborative work with Genentech.
New ways of thinking about partnerships have heavily affected biotech firms. Cambridge Antibody Technology (CAT), formed in 1990, is a pioneer in the development of fully human antibodies. CAT existed on licenses for more than 10 years, CEO Peter Chambré says. These were standard licensing deals in which a big drugmaker supplied a target and CAT used its antibody technology to provide an optimized drug candidate. The pharma partner took over development, and CAT was paid royalties.
In 2003, Chambré says, the company started vetting a list of six major drug companies interested in forming a more comprehensive partnership that included codevelopment and comarketing. The following year, it signed a five-year alliance with AstraZeneca in which AstraZeneca paid $130 million for a 19.9% stake in CAT.
The alliance, which focuses on inflammatory disorders and respiratory diseases, specifies the initiation of a minimum of 25 separate programs; the partners will split the cost. CAT has the option of copromoting one in five products launched from collaborative work.
Donald L. Drakeman, CEO of Medarex, which also specializes in antibodies, says biotech companies are leveraging their improved bargaining position to form more comprehensive partnerships. "Ten years ago, biotech companies were delighted to get any royalties on commercialized products, and they didn't necessarily get any," he says. "Now people have 50% profit-sharing plus post-commercialization milestones."
In 2004, Medarex signed an agreement with Bristol-Myers Squibb to jointly develop and commercialize an antibody therapy for melanoma. The terms included a $50 million up-front investment, half of which was an equity investment giving BMS a 2.6% stake in Medarex and a potential $480 million in milestone payments. Medarex also would receive 45% of the profits on copromoted products in the U.S. plus royalties on sales elsewhere. The most advanced compound in the program, MDX-010, is in Phase III clinical tests.
Medarex also recently signed a deal with Pfizer to produce 50 antibodies for research over the next 10 years. "If all the drugs they work on are successful, we could end up getting payments of over $500 million," Drakeman says. "But, to be fair, that would require a lot of success."
Although partnerships with big pharma have evolved, Drakeman sees even the more nuanced ones as driven by pragmatic considerations. "Partnerships happen because both sides need badly what the other has in relative abundance," he says.
Michael Morrissey, executive vice president of discovery at Exelixis, has a similar view. Exelixis recently signed a licensing agreement with Wyeth involving compounds to treat metabolic disorders and a deal with BMS based on cholesterol-lowering drug candidates. Both, Morrissey says, featured late-stage assets that fit well with the drug firms' pipelines.
The company's most innovative partnership, a five-year-old collaboration with GSK on cancer drugs, is based on joint target discovery and development. Currently, 12 programs are in the works, and GSK has an option to license three compounds in Phase II.
"The cool thing is that we retain ownership of the compounds that GSK does not select," Morrissey says of the alliance. "It's a great method by which GSK can augment its pipeline." The collaboration, he says, will also support Exelixis in its ambition to become a cancer drug firm. The partners have seven compounds in the clinic and expect to file three Investigational New Drug Applications this year.
Like Morrissey and Drakeman, Joern Aldag, CEO of the drug discovery and contract research firm Evotech, sees partnerships directed more by the market than by any grand philosophy. In particular, he says the abandonment of early-stage technology companies by the venture capital community has created a bottleneck in recent years. Pharma companies, prompted largely by the competition for late-stage compounds, are conveniently footing the bill to keep early-stage development under way in the biotech sector.
Evotech recently signed an agreement with Boehringer Ingelheim to expand their joint-venture development deal in central nervous system drugs to include those for metabolic disorders, influenza, and other therapeutic functions. Aldag describes the partnership as "success based," with research funding matching incremental costs and a schedule of milestones and royalties. "And if Boehringer Ingelheim doesn't progress a compound," he says, "we retain the intellectual property."
Some would prefer the term "risk based" to "success based" to describe the more collaborative nature of pharma-biotech partnerships, but the general agreement is that a great deal of strategic thinking has focused in recent months on developing the necessary incentives to make deals work.
Most of it, however, is done on a case-by-case basis and can be hard to generalize. "Deals have become much more complex," says Ernst & Young's DeWyngaert. There are many variables to the equation-codevelopment, comarketing, contribution of late-stage compounds, and marketing support agreements, to name a few. It can get confusing, and playing the cynic, DeWyngaert notes that there is always the big pharma model: "When in doubt, buy it."
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