Issue Date: June 20, 2011
After The Breakup
Michael M. Morrissey hit the road last summer charged with one of the most daunting tasks in his career: to convince investors and analysts to keep the faith in Exelixis, the South San Francisco-based biotechnology company he suddenly found himself leading. Within a span of 10 days, two major events had rocked the firm: Its most lucrative partnership, a licensing deal with Bristol-Myers Squibb for the cancer drug XL184, had dissolved after BMS shifted strategy, and its chief executive officer, George A. Scangos, had abruptly left to head up Biogen Idec.
Morrissey, previously the head of R&D at Exelixis, was tapped to succeed Scangos. For his first task, the lanky Midwestern chemist had to find just the right tone—a mixture of honesty, humility, and confidence—to keep investors interested in the company. He needed to show them he had a plan to navigate Exelixis through choppy waters.
“My line was basically, ‘Look, BMS walking away and the CEO leaving doesn’t look good. We’re not going to try to sugarcoat that,’ ” Morrissey recalls with a chuckle. What he could offer was reassurance that Exelixis was still focused on bringing to market what he considered to be an extraordinarily promising drug.
But at the time Exelixis had little concrete data to support that claim. At the 2010 American Society of Clinical Oncology (ASCO) annual meeting in Chicago—the Super Bowl of cancer conferences—the company presented evidence of a dramatic response in a single prostate cancer patient in a small clinical trial of XL184, now called cabozantinib. The patient’s tumors had shrunk by more than 40%, and there were signs of improvement in his bone scan, a way of measuring whether the cancer had spread.
“All we could do is show that one slide, with the one patient, and say, ‘We’re going to take this momentum and build upon it,’ ” Morrissey says.
And build upon it they did. Just a few months after BMS gave back the rights to cabozantinib, Exelixis unveiled Phase II data suggesting the compound had major potential to treat prostate cancer. The trial was small, but 19 of the 20 patients saw complete or partial improvement in their bone scans. Further, nearly everyone experienced relief from bone pain, an often debilitating side effect of the disease.
Back in Chicago early this month for the start of this year’s ASCO meeting, Morrissey was eager to discuss the next set of data for Exelixis’ lead drug. Cabozantinib was the subject of three oral sessions at the meeting and received extensive press coverage leading up to the event. The compound still needs to prove its worth in a Phase III trial and make it through the regulatory gauntlet, but these days Exelixis is feeling lucky to be its sole owner.
As they find themselves suddenly in possession of a previously partnered drug, other biotech executives are pointing to the example of Exelixis’ quick turnaround after BMS’s exit. Big pharma companies, under pressure to improve profitability and productivity, are focusing drug development efforts on fewer diseases and fewer compounds. As their priorities shift, the companies are backing away from high-profile drug development deals with biotechs. The challenge for their former partners is to keep the momentum going—a feat that requires financial mettle and clinical expertise not always inherent to small companies.
The dissolution of these partnerships is a direct consequence of the dramatic changes in the pharmaceutical industry, says G. Steven Burrill, head of the life sciences investment firm Burrill & Co. Gone are the days of “me-too” drugs and billion-dollar blockbusters that address large swaths of the population. Big pharma has had to update its approach to R&D, and now “they’re trying to move these ocean liners very fast into calmer waters where they have more sustainability,” Burrill says.
Drug companies have lost their appetite for the kind of high-risk, early-stage deals they pursued in the past, Burrill says. “They’d rather pay more later, when they’ve removed the uncertainty.” In some cases, that means letting go of partnerships for candidate drugs that seem too risky.
Big pharma firms are also taking a hard look at their development pipelines. Many companies have decided to work in fewer therapeutic areas, while also weeding out compounds in clinical trials to focus on those with the best chance of winning.
The cuts can be ruthless. For example, not long ago Sanofi-Aventis had 128 compounds in development, the company’s U.S. chief medical and scientific officer, Paul Chew, told reporters at a recent briefing. After what Chew called a portfolio “stress test,” that number is now down to 58. “That’s allowed us to focus on what we feel are the most viable candidates going forward,” he said.
Other companies have made similar changes. In February, Pfizer said it was winnowing the diseases it focuses on. The firm is ending research on allergy and respiratory medicine, internal medicine, oligonucleotides and tissue repair, and antibacterials (C&EN, Feb. 7, page 5).
Last year, GlaxoSmithKline, amid sweeping R&D cuts, decided to end research in certain areas of neuroscience. AstraZeneca trimmed nearly two dozen compounds from its pipeline and abandoned discovery research in 10 diseases.
In the stringent spending environment, breakups between big pharma companies and their biotech partners are “going to happen more and more,” says Daphne Zohar, managing partner ofPureTech Ventures, a Boston-based life sciences investment firm.
“Almost every company is making lists of all their programs” as they prioritize their research dollars, she says. “They have to draw the line somewhere. There are some good programs that are going to get cut.”
Even programs within priority therapeutic areas are at risk as organizations are overhauled. For example, a consequence of the vast layoffs at big pharma companies is that programs get transferred from one manager to another, notes Needham & Co. stock analyst Alan Carr. “Whoever may have done the deal up front may be gone, and someone else has inherited it,” he says. “You may not have a champion for that collaboration within the pharma partner anymore.”
Indeed, in addition to the BMS-Exelixis partnership, several big pharma-biotech deals—between Pfizer and Rigel Pharmaceuticals, AstraZeneca and Targacept, and Merck & Co. and Aveo Pharmaceuticals—have fallen by the wayside in the past year.
The biotech partners who suddenly find themselves with a drug program back in-house face several challenges: how to convince investors that the deal was terminated for strategic, rather than scientific, reasons; how to maintain a drug development program at the same pace and with the same breadth as they did with the backing of a big pharma firm; and where to find the money to continue the program in an efficient and expeditious way.
“One of the things you have to be careful about as a biotech is that there’s a time stamp on value,” says J. Donald deBethizy, president and CEO of Targacept, which in the past few months has had drug candidates returned by GlaxoSmithKline and AstraZeneca. If a biotech firm can’t move a compound forward quickly enough, or has to shelve it due to lack of resources, he says, “there’s a risk that the need for it will go away, or that somebody else will discover the same thing and do it faster.”
Yet Biotech executives point out that they are getting back a more advanced compound, developed largely on big pharma’s dime. Furthermore, their companies have likely matured significantly since signing the partnership, which for some firms may have been their first significant deal.
For example, when Aveo partnered with Schering-Plough in 2007 for the antihepatocyte growth factor antibody AV-299, it was the first time a big pharma firm had swept up one of Aveo’s internally discovered molecules. At the time, the antibody was still in preclinical studies, and the deal was structured so that Schering-Plough footed the bill while the biotech pushed the drug through clinical trials to treat lung cancer.
Since then, “the world has changed significantly for us,” says Elan Ezickson, Aveo’s chief business officer. The company has gone public and has formed other partnerships that have brought in significant payments. It also gained experience from putting AV-299, along with another compound in its pipeline, through the early stages of clinical development.
Thus when Merck, which bought Schering-Plough in 2009, returned the rights to AV-299 last October after a revamp of its portfolio, Aveo was happy to take back the reins. The antibody was in the midst of Phase II trials, making it “a much more valuable program today,” Ezickson says. “And as a company, we are also in a much better place in terms of our ability to move this forward.”
Whereas Aveo learned the clinical ropes with Schering-Plough’s funding, Rigel benefited from a partner that could take on a project that was beyond its capacity. Rigel licensed its inhaled syk inhibitor program for asthma and allergy to Pfizer in 2005 largely because it didn’t have the capability to develop the compound, explains Raul R. Rodriguez, the company’s president and chief operating officer. To be successfully and safely delivered to the lung, the compound needed to be formulated as a salt and then wedded to an inhalation device.
Out of a basket of syk inhibitors handed over by Rigel, Pfizer chose R343 to move into clinical development. The big pharma firm completed Phase I studies of the drug but never published the results, and when it decided to exit research in allergy and respiratory diseases earlier this year, the Rigel program fell victim.
For Rigel, the timing couldn’t have been better, Rodriguez says. The company had just licensed its lead compound, fostamatinib, to AstraZeneca, which took over responsibility for clinical development. As the most advanced drug candidate in its internal pipeline, R343 suddenly became Rigel’s top priority. “It’s a great opportunity for our company because we now, unlike in 2005, have a lot more capabilities and financial wherewithal to develop it,” Rodriguez says.
Because the company has already conducted a Phase II clinical trial for fostamatinib involving more than 700 arthritis patients, it has the experience to design and carry out the next set of studies for R343, Rodriguez notes. Meanwhile, Pfizer put in the medicinal chemistry elbow grease to turn Rigel’s lead compound into a drug candidate that is well characterized from a safety standpoint, he says. “That took a lot of work on the Pfizer side to get to this point.”
Rigel plans to publish, with Pfizer, R343’s Phase I safety data at an upcoming meeting on respiratory diseases. In addition to a clean safety profile, Rodriguez says, the drug shows signs of working in humans exactly as it does in animal models.
After the end of its deal with AstraZeneca, Targacept also finds itself with a new lead internal compound, TC-5619, an alpha7 neuronal nicotinic receptor (NNR) modulator in midstage development for schizophrenia. But unlike other big pharma companies that terminated deals because of pipeline revamps, AstraZeneca appears to have given back TC-5619 in a risk-mitigation move.
The two companies have worked together on small molecules targeting NNRs since 2005, but their partnership on TC-5619 ended after a Phase II trial produced mixed results. The drug showed signs of improving cognitive function and alleviating negative symptoms, such as lack of emotion, experienced by schizophrenics. Existing drugs primarily address positive symptoms, such as hallucinations and delusions, meaning TC-5619 could be uniquely positioned in the marketplace. Both parties agreed another trial was needed, but they could not come to terms on its scope and timing, Targacept’s deBethizy says.
Analysts say the British drug firm was wary of the economics of continuing to develop TC-5619. The next clinical trial would have cost up to $12 million, but AstraZeneca also would have had to pay Targacept a $30 million fee for continued access to the drug, Needham’s Carr notes.
“Big pharma is not interested in taking on more clinical-stage risk,” Carr says. “In this case, it makes sense for Targacept to spend the $10 million to $12 million, learn what they can, and then try to find a partner.” Carr says he wouldn’t be surprised if AstraZeneca bought into the program “at a substantial premium” if the next round of data turn out to be solid.
For Targacept, getting the rights back to TC-5619 “was a real windfall,” given that all of the firm’s other advanced clinical candidates are partnered, deBethizy says. He adds that the company would like to hold on to the rights to the compound “as long as we can,” with the idea of signing another deal after it has generated more data.
Like deBethizy, most biotech executives view a newly reclaimed molecule as a windfall. However, it’s one that comes with caveats, because not all firms are equipped, financially or scientifically, to move a drug candidate forward on their own.
And although biotech companies are eager to spin a deal breakup as good news, losing an important funding stream can have painful short-term consequences. Exelixis, now reveling in full ownership of cabozantinib, felt the sting when BMS walked away from the compound. Its stock price dropped by 16% the day the news broke and continued to decline throughout last summer. And to support the development of cabozantinib, Exelixis has cut about 75% of its staff and stopped working on all its other internal projects.
“We did the same prioritization that BMS did,” Exelixis’ Morrissey says. Every investment decision needed to be spot-on, he adds. “We couldn’t afford to miss.”
The thinking at Exelixis after the restructuring was, “This was do or die,” he says. Everyone knew that “we’ve got to make these next four months really count.”
Not all biotech executives are as frank as Morrissey about the sense of urgency they felt when a partner exited the scene, but many companies that have regained the rights to a drug have had to adjust their strategies. Some immediately went to the public markets to raise the cash to fund their newly expanded pipelines.
For example, at the end of May, Rigel raised more than $130 million in a public offering so it could initiate Phase II studies for R343 and keep previous plans to begin Phase I trials for two new compounds.
Even with cash in hand, biotechs might still find questions lingering over the value of returned compounds. “The problem, I think, is perception,” PureTech’s Zohar says. Even though investors and potential partners are well aware of the changes happening across the industry, abandoned programs can still carry “a taint,” she says. But as more of these projects are returned for strategic, rather than scientific, reasons, “it’ll become less traumatic.”
Each situation is different, but “in general, there can be a taint,” Needham’s Carr agrees, adding that the later-stage the drug candidate is, the more ominous a deal breakup can appear. Carr, who covers Targacept, notes that many investors still worry about the value of TC-5619.
“Obviously investors want to know why [a partner] gave it back, and they are inherently skeptical,” Targacept’s deBethizy concedes. “They’ll triangulate on this.” At the same time, he says, investors appreciate the potential upside to having the full rights to an asset.
Moreover, not every company can produce the kind of data that helped Exelixis rebound so quickly. Biotech executives acknowledge that the pressure is on to execute their next clinical trial flawlessly and, ultimately, offer data that will entice a new partner or investor. “Eventually the compound will need to speak for itself,” Rigel’s Rodriguez says.
Even good data aren’t always enough. Although Exelixis walked into this year’s ASCO meeting with confidence in its latest trial results for cabozantinib, the company’s stock took a drubbing on news that a competing prostate cancer drug being developed by Bayer might be better at prolonging patient survival and on worries over a potential safety concern in one cabozantinib study. By the end of the conference, the company’s stock price had fallen by 20%, although most analysts felt the response was overblown.
Still, Exelixis has more leverage when negotiating with potential partners than it did a year ago. The company plans to start a Phase III trial for cabozantinib later this year. In the meantime it is considering a deal that will give it rights to the compound in the U.S. and Europe, where it had previously shared rights with BMS, but that will allow it to partner in Asia, where it lacks a presence. “It’s a hard road,” Exelixis’ Morrissey says. “It’s all in the data. If we had had ‘me-too’ data, no one would have ever cared.”
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