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Partnering Goes Back in Time

Early-stage deals, once the norm for biotech/pharma alliances, are making a comeback

August 30, 2004 | A version of this story appeared in Volume 82, Issue 35

These days, it seems, early-stage biotech/pharma alliances are making a comeback. At IBC Life Science's 9th Annual World Congress on Drug Discovery Technology meeting in Boston earlier this month, a special session on business strategy and partnering offered a peek behind the stage in an industry with few backstage passes.

While the total number of deals between biotech and large drug companies remains steady at approximately 450 per year, today's deals more closely resemble the way business used to be done, said Michael G. McCully, director and senior analyst at the consulting firm Recombinant Capital, who chaired the session.

At the turn of the millennium, optimists believed that having a gene was almost a surefire way to a drug. Biotech companies, flush with money after accessing the capital markets between 1999 and 2001, were able to push drugs into Phase II and III clinical trials on their own. They partnered with pharma companies seeking to license drug candidates at these phases, and thus deals of the late-stage variety blossomed. McCully calls 2002 the year of the late-stage deal.

However, those alliances were oriented toward blockbuster drugs, and they "are all bust," he said. "None of them delivered any compounds." So companies are now returning to discovery-stage partnerships of the type that prevailed before the genome boom.

The hard reality of early-stage deals is that the vast majority of them will fail, McCully said, yet when executed well they can work for both partners. The bust has made large drug companies cautious, and hence they are finding tools to hedge their risks. That hedging might take the form of structuring deals with equity, loans, or convertible bonds, a setup, McCully said, that "stimulates biotechs into behaving."

Deals are more loaded with milestone payments that govern relationships.

As McCully watches alliances take shape, he sees up-front payments rising. In general, however, alliances are being formed with better defined chapters. They are more loaded on the back end with milestone payments that govern relationships. It was a six-year drug development/target validation deal signed in 2002 between GlaxoSmithKline and Exelixis that opened the door to the risk-sharing, value-sharing kinds of agreements seen currently, he explained. Roche and ArQule signed a deal this year with terms that can be canceled very quickly, McCully said.

Christine Fischette, executive director for global business development and licensing at Novartis, said during the partnering session that "big pharma/biotech collaborations are the future of the industry." At the same time, deals must be tailored to the needs and interests of both partners in terms of funding and control, governance, noncompete agreements, intellectual property, and exit provisions. "Deal complexity is rising," she said. While product failure can sink an alliance, it is not the only stumbling block. Poor communication between partners is often "the stone around the neck of the deal," Fischette said.

"We are very open to partnering, now more than ever," said Barbara Yanni, chief licensing officer at Merck. New areas of interest for Merck are diabetes and oncology. She explained that one-third of the company's revenue is attributable to licensed products and patents. To date in 2004, Merck has signed 26 deals and has more than 40 in the pipeline for the year, compared with 47 deals for all of 2003.

Merck, Yanni explained, still holds fast to its in-house development efforts but also realizes that partnering with biotech firms ensures strong research capabilities. To this end, the company has recently refined and significantly accelerated the negotiation process for alliances, making the voyage from first meeting to signature happen in two to five months with senior management committed to timely decision-making. At the same time, deals have become more expensive and the jostling among big drug companies for partners, more competitive. "Partners tell us about the other deal offers they have on the table," Yanni said.

In one alliance outlined at the session, it was the technology platform at the biotech firm Sequenom that caught the eye of Procter & Gamble Pharmaceuticals. Sequenom has DNA analysis capabilities to do whole-genome scans and comparative sequencing. "We are interested in that approach," said Don Lucas, who is responsible for worldwide strategic alliances, discovery, and early development at P&G. "They are good at genomics, and we are good at drug discovery," he said, joking that the public may not be familiar with the drug discovery division of the "soap company."

ESSENTIALLY, Lucas said, P&G is building a medical business out of its core detergent franchise. In particular, bisphosphonates have grown out of the chemistry of creating soapsuds to reveal their potential for osteoporosis treatment. P&G's Actonel (risedronate sodium) is a bisphosphonate that regulates bone metabolism. Fosamax (alendronate sodium) by Merck and Aredia (pamidronate disodium) by Novartis are other bisphosphonate-based osteoporosis medications.

P&G is not interested in expanding in the crowded space of current treatments, Lucas said. The ideal drug candidate would be a small molecule that promotes bone growth and has a profile "better than a bisphosphonate." P&G had identified this strategic need internally when Sequenom approached it with an idea for an alliance. A $30 million collaboration ensued and has been in place for six months. The companies are currently working on expanding genomic validation of targets and expect three to five compounds to be ready for in vivo validation experiments soon.



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