M&A Predictions! Fortune Tellers -- They Are Not

Even though the New Year has come and gone, analysts are still making their predictions about what 2011 will bring for the pharma and biotech industries. (Admittedly, it is still early enough to do so, but March would have been pushing it.)

The latest endeavor to predict the future comes from the fine analysts at Morningstar, who released their “2011 M&A Outlook for Healthcare” report this week. The report includes some sound, albeit a little obvious, deductions on what will be moving M&A in 2011 – a move into emerging markets, slowing R&D productivity, and (cue ominous music) the upcoming patent cliff.

Morningstar experts expect further consolidation in Big Pharma; and say Eli Lilly & Co., as well as Bristol-Myers Squibb will be ripe for the picking as the patents on their lead drugs reach their expiration date – but, honestly, who would buy them?

Merck & Co. (Schering-Plough), Pfizer Inc. (Wyeth), Roche (Genentech), and Novartis (Alcon)have all made major acquisitions in the past two years that have added significantly to their debt situations and are unlikely to dump the burden of a major restructuring on top of the issues they’ve already had to bear while trying to make these puzzle pieces fit.

Morningstar analyst Damien Conover suggests Abbott Laboratories could handle acquiring either Lilly or Bristol. He also thinks Sanofi-Aventis and GlaxoSmithKline could benefit from an acquisition of Bristol as well. This sounds all well and good, but Glaxo has made it pretty clear that it is not interested in any large acquisitions and Sanofi has its hands full already with that little Genzyme deal it has been drawing out for months. And let’s be honest, if the past has taught us anything, it’s that bigger is not always better.

So moving on to more realistic prospects for mash-ups in 2011 – let’s take a look at what biotechs Morningstar thinks will offer the best bang for the buck.

They list Biogen-Idec, Seattle Genetics, Human Genome Sciences, Dendreon, and Actelion as their top five take-out targets this year. The reasoning is complex but the basic insight is that these companies have strong pipelines or technology in really HOT therapeutic areas like neurology, orphan drugs, and cancer. Yet, Biogen, Celgene, Gilead, and Merck KGaA will offer an acquirer the most immediate and gratifying (think mid-to single-digit billions) boost to earnings – something every Big Pharma could use right now. These companies also have the nice bonus of having a lot of cash on hand and fairly low burn rates.

While all of these companies have their positives and negatives, it’s important to keep in mind that just because they can be acquired doesn’t mean that they will be. Take the #1 takeout target this year for example, Biogen; it’s been on Morningstar’s take-out list for three years now despite plenty attempts by billionaire shareholder Carl Icahn to get the company on the market.

That said; Morningstar hasn’t done abysmally in its predictions over the last two years. Three companies from the 2009 list were acquired – Trubion, CV Therapeutics, and Medarex, but none of these companies were in the top 15 that year. Another seven got picked up from its 2010 list – Crucell, ZymoGenetics, Talecris, King Pharmaceuticals, OSI Pharmaceuticals, Biovail and Genzyme – with three of these companies being in their top 15 picks.

So what do you think – will this be Biogen’s year to find a suitor or will the Massachusetts biotech continue to dance alone?

Image from flickr user What Makes The Pie Shops Tick? used under a creative commons license

Big Pharma, Polar Bears, and the Need to Specialize

For at least a decade, biotechs have been perceived by many observers as the likely evolutionary winners in the race for survival and prosperity in the drug industry. The credit crunch has drastically altered the environment in which companies operate and the biotech business model now looks much less likely to supply the fat returns on capital, and the price/earnings ratios, that have historically been associated with companies supplying novel medicines.

So, who will the new winners be, and what strategies must they employ to thrive in these challenging times? Scisive Consulting chairman Robert Easton, partner Catharine Staughton and consultant Matt Young weigh in with a naturalist analogy.

Granted historically lousy P/Es, growth, R&D productivity – pick your measure -- Big Pharma has one thing going for it. The current financial crisis has, at least in the short term, reversed the fortunes for still cash-rich pharmaceutical companies and the biotech upstarts that have been—for oh, about 25 years—inexorably learning to beat pharma at its own game.

The financial collapse seems itself to have been a sort of bailout for Big Pharma. Now they are able to buy novel compounds cheaply from smaller companies who are dying to sell them.

The 20 largest pharmaceutical own a combined war chest of over $100 billion. If current projections hold, their cash and cash equivalents will rise to more than $500 billion by 2014. With these funds on hand, Big Pharma could buy up not only enough candidates to replenish their pipelines, but the majority of the biotechnology industry itself.

On the other hand, according to Burrill & Co, one third of publicly traded biotechs have less than six months’ worth of operating cash.

The outcome of the financial collapse will be that Big Pharma will remain pre-eminent, at least while the capital crunch lasts, albeit with more modest P/E valuations. As a consequence, biotech companies, which had attracted investors with the long-term hope of valuations based on the high P/Es of Big Pharma, are struggling to fund their pipelines and must focus on - and perfect - their business development strategies just to stay viable.

So can Big Pharma do something to make its new lease of life more than temporary?

Superficially, the recipe for evolutionary success seems obvious: the Big Pharma companies use their enormous cash reserves to acquire cash-strapped biotechnology companies. But before launching into the fray with an open checkbook companies need to consider the attractions of the approach, in the light of their own specific situation.

Scisive Consulting has defined drug companies according to six types of animal: those that have adapted to a narrow evolutionary niche, and those that are more flexible inhabitants of their environment.

Consider the polar bear. These beasts are powerful and can move quickly – challenge them at your peril. Nevertheless they must adapt to a shrinking environment, thanks to global warming, in order to survive and flourish. Not a bad analogy, we believe, for Big Pharma.

At the other end of the spectrum, biotechs are rabbits. They eat a lot of green. And their population varies widely according to the availability of food. When rabbits are stressed by predators or lack of resources, they eat their own young. (It’s true, you can look it up!)

Like polar bears, Big Pharma are the top predators in their shrinking world. To stay relevant, however, they need to either figure out how to live in their shrinking environment – or find and adapt to new territories.

In industrial terms, such an imperative translates to the need for a wholesale change in the drug industry’s business model. When this industry began, it was built on a rather simple model. Science created a pill which was manufactured cheaply and marketed by sales forces to a large group of patients. This model led to profit margins that are almost unthinkable today.

The model also allowed all of the Big Pharmas to evolve in very similar looking creatures. For example, AstraZeneca, Novartis, and Bristol-Myers, all operate in the fields of neuroscience, oncology, and cardiovascular health. While some pharmas involve themselves in nutritionals, animal health, infectious disease, and other fields, all of these companies also engage with a mixing pot of therapeutic areas.

The relative strategic uniformity isn’t generally the case with the leading companies in other industries. In the high-tech industry, for example, there is a much higher level of specialization. Google is mainly in the advertising business; Microsoft, software; Research in Motion, in wireless solutions. You aren’t likely to see Facebook manufacturing semiconductors any time soon. (Yes we are aware of Microsoft’s Bing search engine and the new Google Chrome OS, but still.)

It is likely that health care businesses will evolve in a similar fashion. The leaders of the future will be those with unique and complex models which sub-speciate into differentiated forms. Companies will focus nearly all of their efforts on a single therapeutic area, becoming “immunology companies” or “cancer companies”. These companies will also become more integrated across sectors. A cardiology company will sell diagnostics, devices, and therapeutics pertaining to cardiovascular health.

Such a transformation will involve radical changes to their structures. Fortunately, pharmas have a great deal of cash now, which gives them the resources to undergo such a transformation. The winners, ultimately, will be those who recognize this need to adapt, specialize, and develop more complex business models, and subsequently capitalize on their first-mover advantage.

A good example of this can be seen in Astellas’ determination to acquire CV Therapeutics. Although CV’s board rejected the offer numerous times, ultimately fleeing into the arms of Gilead, the attempted acquisition has marked a watershed event in how Japanese companies operate with respect to their American counterparts. Typically Japanese companies have refrained from hostile corporate activity and this fundamental change in Astellas’ strategy shows its willingness to adapt and its understanding of the new reality in the pharmaceutical market.

Secondly, Pharma’s polar bears must acquire the best candidates from their prey, the cash-strapped biotech rabbits of the world. However, there is an issue of timing at play here. Although biotech assets are cheaper than ever before, they have probably not yet hit rock bottom. It is clear that these cash-eating biotechs will get more desperate as this crisis wears on and hence the pickings for the polar bears will get better.

The astute will watch and wait, and the true art will be in knowing when to pounce: before competitors do and the opportunity passes.

For the full article, including the likely fate of the duck-billed platypuses and other animals of the pharmaceutical world, see www.scisive.com.

Burst Bubbles and Bailouts: Big Pharma and the Financial Mess

In Washington, there is a distinct undercurrent of gloating when it comes to the Panic of 2008.

No one is happy, exactly, about the incredible turmoil in the financial markets, nor can anyone be said to be thrilled that taxpayers will be putting up something like $700 billion to rescue Wall Street.

But in a town filled with people who work for the federal government, there is an undeniable sense of vindication. See, we are needed after all. Free markets don't take care of themselves. Sometimes you just have to turn to Uncle Sam to see you through.

Or, as Washington Post columnist Steve Perlstein puts it, "It will no longer be an easy applause line for a politician to declare that government is the problem and that markets always know better than regulators and politicians."

We've already pointed out that it may be naive of industry to think that the financial storm will spare it any damage, since the biotech industry is, in a sense, nothing more than an amazingly complex form of derivative finanicial instrument: a way for investors to tap indirectly into the immense profits of Big Pharma blockbusters.

We've also written about Big Pharma's own bubble problem: the fact that the industry is built to support an unprecedented--and apparently unsustainable--spike in approval of large, primary care brands in the mid-1990s, generating a need for infrastructure--and expectations for growth--that now present a terrifying cliff at the end of this decade. If Merrill Lynch can vanish, why can't Pfizer?

But it is not just loss of confidence in creative financing or in the stability of mega-cap companies that is a threat: there is also the renewed confidence in central government interventions in the economy to think about.

If the government must intervene to save Wall Street itself, then why can't it intervene elsewhere in the economy--like, for instance, in setting the price of life saving medicines?

As tough as it has been to be a Big Pharma company the last three years, it would have been even tougher without the Medicare Part D program, a massive new insurance program to subsidize the purchase of those previously mentioned blockbusters--and one that relies on the principle that free market competition is the ultimate path to efficient, economically effective health care.

This is the program that famously prohibits the federal government from "interfering" in the negotiation of prices between the private drug companies and the private drug insurance plans--and at the same time commits the public to pay whatever the price ends up being.

Its fair to say that the events of the past week will strengthen the hand of those who don't like the Part D model. After all, if the free markets don't work for mutual funds, will anyone believe that they work for Medicare?

Count both Presidential candidates among those with strong misgivings about the Part D program, albeit from very different perspectives. Democrat Barack Obama thinks it relies too much on private contractors, and favors given the government more power to act--especially when it comes to the price paid for medicines. Republican John McCain objects to the program for the opposite reason, saying that taxpayer funding shouldn't be commited to a new healthcare entitlement. But he too wants the government to get a better deal on any medicines it ends up paying for.

Obama has already begun hammering McCain for his free market approach to health care in general. Expect that to continue until election day.

But no matter who is victorious in November, the events of September will ripple into the pharmaceutical sector. After all, if Washington can set the price for AIG or Fannie Mae, surely it can decide how much Avastin is worth...

Is Big Pharma Ready For Minibusters?

Some things are easier said than done.

That’s the opinion of one biotech CEO commenting on claims by some large drug companies that they are moving towards smaller, more targeted drug products. While the strategy may sound good, they can’t do it, he says.

“Once you’re invested in a big model, you’re invested in it,” the biotech CEO maintains. The biotech CEO based his arguments on two key points:

1) The enormous scale of large pharmaceutical companies invested in R&D through to sales and marketing dictates they must sell large products aimed at broad patient populations.

2) The long and established blockbuster culture of large pharmaceutical companies creates an imposing hurdle to retooling business strategy to focus on smaller, niche products.

On the first point, the biotech CEO compared the total size of an average biotech company to just one product sales force of a big pharma company. On the second point, he said size impedes agility. “Big companies move slowly.”

In addition, he says a culture of assumed successorship—“my father worked there, I work there, my son will work there”—is a challenge to creative thinking and leads to complacency.

We’ve argued that the creation and implementation of FDA’s postmarket powers in the form of risk evaluation and mitigation strategies (REMS) means companies will be pushed more towards well-defined, marketable populations as a result of tighter controls. To read more, click here.

It’s not that the blockbuster drug, one with a billion dollars in annual sales, is dead, but those products will become increasingly rare and will be found in more specialty markets as opposed to primary care.

That means more products with annual sales in the $200 million to $500 million range, or minibusters.

So who is ready for the move towards more targeted, minibuster products? Well, biotech, of course.

The biotech CEO says the size and culture of biotech companies allow them to be more focused and reshape their strategies without scrapping the overall framework of their businesses. In other words, more agile and less exposed to complacency.

That leaves a conundrum for large pharmaceutical companies. It’s not enough to downsize and shed jobs, he maintains. That just reduces your size and cuts costs. The expectations from shareholders will remain the same. The question, he says, is “now what do you do?”

He highlighted blockbuster products as the great “gift” and “curse” of Big Pharma. It brings great long-term success to a company but also conditions management to overly rely on that product, focusing little attention anywhere else.

Can pharma companies make the minibuster model work? The jury is still out, and will be for quite some time. But at least one executive is skeptical.

JP Garnier's Farewell Address: The Lessons of Avandia (Part 2)

The Avandia disaster is probably not what JP Garnier imagined he would spend most of his time talking about in his swan song as CEO of GlaxoSmithKline.

But give him credit: Garnier is using GSK's setback to draw attention to some important trends that we think, at least, will indeed be ever more critical for the biopharma sector in the years ahead.

Earlier we laid out Garnier's argument that the drug safety pendulum will never swing back. So what is industry to do? Here is the outgoing GSK CEO's six-step program.

(1) If you have important new safety information, get it out as soon as possible (even if the regulator wants you to wait.)

“You should do the meta-analysis as we did with Avandia,” Garnier said. “But then you should absolutely demand that this would be issued and put in context by the appropriate authority. That didn’t happen in every country. That’s why we had a problem in the U.S. where the FDA wanted to do the work first.”

Indeed, one underappreciated benefit to industry from the new FDA safety law is that, by giving FDA the authority to mandate warning labels, it also creates deadlines that will help ensure that sponsors do get new safety information out sooner.

(2) Be proactive with payors.

“Payers don’t necessarily wait for the FDA,” Garnier said. “Think about it. If you’re an insurance company reimbursing Zetia and Zelnorm and products like this including Avandia, you will also get the phone calls from the patients. What you’re going to do? Say I’m waiting for the FDA, maybe in six months I will have an answer for you?”

“So we have seen payers jump in and take a stand while the dust has clearly not settled and before the body of scientific evidence has been really reviewed in appropriate way, and that is also something that needs to be managed very carefully. You could quickly lose formulary position for reasons which are not solid.”

GSK is hardly the only company to learn that lesson in 2007. (EPO anyone?)

(3) Don’t rely on labeling to communicate warnings to prescribers.

“Black boxes are becoming trivial. It used to be a very rare event to get a black box on your product, [but] they have tripled in the last four years. So now there is so many of them that frankly they don’t make the same impact with the medical profession, which is a pity, because sometimes we really need to warn our physicians.”

“We’ve already adjusted to this and we’re taking on now the role of communicating … to the physician who is not waiting for FDA. We have sent physician letters because in some cases we do want to alert them to what is likely to come out based on what we know about the products.”

(4) Expect to do more outcomes studies.

“There will be more demands for outcome studies. People are even questioning whether hemoglobin A1c is a good indicator for diabetes. It is very easy to say well why don’t you do outcome studies and show us that over five or six years you can reduce the rate of gangrene and heart attacks and the like. Well, if we have to do that, it is going to be a long time before the product can hit the market. So we’re going to have to deal with this issue.”

Once again, it is not just Avandia that supports that argument. Look at ENHANCE.

(5) Get ready for the “Progressive Blockbuster.”

“The development of new chemical entities and new biologicals is going to change,” Garnier says. “One way is to slice the patient populations, not to try to put the drug on the market for all the patients that could benefit, but focus on the easiest slice, the ones where they would be the least amount of controversy from a safety efficacy standpoint.”

Then you “get the drug on the market because there you will have … an easier file for the FDA to react to.” And “then build up your product as you would an oncology drug” by adding more and more slices of the potential patient population. “By that time you have developed a lot of knowledge about your drug anyway, so it becomes easier to do the right development.”

“You are not going to get instant blockbuster with this kind of technique, you are going to get progressive blockbusters.”

That, to us, seems spot on—though we would argue that there is also room for “minibusters,” products that never reach traditional blockbuster sales levels, but still generate healthy returns because they deliver high value to patients (and correspondingly high gross margins to the manufacturer) without requiring the conventional Big Pharma sales and marketing infrastructure.

(6) Innovate, innovate, innovate.

“If you had any doubts, with this kind of environment, we need not just new products, we need breakthrough new products. We need added value. We need best-in-class and first-in-class, nothing else. Line extensions are on the decline, there is no question about it.”

Once again, Garnier is hardly alone in stressing the importance of first in class products in Big Pharma pipelines. But we haven’t heard anyone in pharma say quite so clearly that line-extensions are passé.

We’ll give the last word to Garnier:

“In a fast changing environment, you can’t fight the government agenda. You can’t fight the environment. You have to fit to the environment, take advantage and ride the wave.”

JP Garnier’s Farewell Address: The Lessons of Avandia (Part 1)

“This is here to stay.”

“This” refers to what outgoing GlaxoSmithKline CEO JP Garnier sees as a vicious cycle of safety signals damaging blockbuster brands--the phenomenon that he says caused a $1 billion decline in sales of GSK’s Avandia. (See diagram.)

Garnier’s message: the safety-first regulatory climate of 2007 is not going away. “This is long-lasting. This is not a bad year and then the statistics even out.” And the need to adapt to that reality was a major theme of Garnier’s final year-end presentation as the company’s top exec on Februay 7.

Here is how Garnier sees the new reality:

“In the past these meta-analyses were conducted among scientists with not much interest from the media. Things have changed. Those kinds of desk researchers want their publications to get some play. So the news is then digested by the media, and I can’t expect the media to know the subtle points about hazard ratios and confidence intervals and the like.”

“If you think about Avandia, the signal was if you compare Avandia to placebo out of 10,000 patients, five more in the Avandia group will have some kind of cardiovascular event, versus not treating a patient—which is not exactly realistic. When you compare Avandia to other type 2 diabetes agents the signal goes away.”

“That is what the FDA put in the labeling.”

Nevertheless, “that signal was publicized by the newspapers in America as saying there is a 43% increase in the risk of heart attacks if you take Avandia.”

In case you missed it, that was a dig at Steve Nissen, the Cleveland Clinic Cardiologist whose meta-analysis triggered the Avandia safety scare, along with a healthy dose of blame-the-media, always a popular explanation for unexpected safety disasters.

But the more important point is Garnier’s assertion that, like it or not, the Nissen effect is not going away anytime soon. And as we wrote here, industry has no choice but to adapt.

Or, as he put it, “It’s always going to be with us, because as you can see the fundamental parts of mechanisms are with us now. And we better be ready as a company to deal with this.”

Check back later today for six lessons Garnier learned from GSK’s unwitting experience as the guinea big for the new meta-analysis driven safety model.

Bayer-Schering Biz Dev: Reorganized and Ready to Deal

We wondered aloud last autumn, in the wake of four multi-billion euro deals, about the impact that Europe's mid-sized pharma mergers could have on Big Pharma. Could the invigorated middle class of pharma, with its specialist bent and flexible dealmaking, eat Big Pharma's lunch?

Some of them certainly think so. Less than six months after joining Bayer-Schering Pharma as the newly-merged group’s SVP global business development and licensing, Michael Yeomans already has a clear message for the rest of the industry: look out, we’re coming—and we’re coming with aggressive deal terms (read: $$$$), an reorganized, 40-strong business development team across corporate and therapeutic-area-focused units, a love of specialist products and ambitions in biologics, too.

Bayer Pharma and Schering have pretty much sat out of the deal-making pool party since Bayer bought Schering in the middle of last year, distracted by re-structuring and spring-cleaning; just as other Euro mid-caps including UCB Group and Nycomed and Merck KGAA have done, too, as they digest Schwarz Pharma and Altana Pharma and Serono, respectively.

Now the slimmed-down, not-so-mid-cap Bayer-Schering reckons it's ready to dive in. Bayer-Schering isn’t just going to be supplementing internal R&D efforts with deals, it’s going to be replacing R&D efforts with deals, at least in some business units. “There are several areas where we'll emphasize in-licensing and acquisition rather than internal R&D", Yeomans told IN VIVO blog. The R&D budget won’t decrease in absolute terms, but Schering’s historical 18-19% of sales R&D spend will look more like 15-17% in the new group, albeit of a bigger revenue pot.

Sounds like it’s turning into spec pharma, right? Right. But that acquire-and-market model’s a bit out of date, given the cost and rarity of late-stage assets, and given that most niche drugs really aren’t that niche anymore. (Interested in discussing whether the spec pharma model is broken? Wait for September's IN VIVO.)

Still, Yeomans claims the company will have a competitive edge, in part thanks to the new BD structure he has spent the summer building. Each of Bayer-Schering’s six business units will have a team of licensing guys that decide in the first instance what to pursue; a corporate group will get involved only for selected deals “to add expertise, not as a hand-off,” Yeomans clarifies.

In other words, Bayer-Schering is creating a business development answer to GlaxoSmithKline’s R&D-focused CEDDs--centers of excellence for drug acquisition (CEDAs: our label, not theirs). They’re small, nimble, TA-focused, autonomous teams, although they don’t, apparently, have budgetary independence like GSK’s CEDDs. (Need a refresher? Recap on GSK’s CEDDs here, and indeed on GSK’s own attempt to extend the concept to business development here and in a previous blog-post).

Bayer-Schering says it has a winning combo of small-company advantages encouraged by the new structure—focus, flexibility, speed—and the financial clout of Bayer’s corporate coffers. “For the right projects, we can certainly be competitive,” he asserts.

That competitiveness may include something that most Big Pharma lack: a willingness to out-license. We hear that there are a few assets in the discovery and development pipeline that Bayer-Schering may like to part with.

The Most Important Deal of the Last 12 Months

In preparation for our Pharmaceutical Strategic Alliances meeting in September, we decided to send the same question to 35 of our smartest friends in the business: what deal signed in the last 12 months said the most about the drug industry’s current situation?

The answer (caveat: responses are still coming in) was AstraZeneca’s acquisition of MedImmune.

We suppose the choice shouldn’t have been surprising. At $15.6 billion in cash, it was arguably the biggest biotech acquisition ever. (Amgen’s 2001 buyout of Immunex looked bigger, but what was worth $17.9 billion in a combination of cash and stock at the deal’s announcement had, thanks to the dip in Amgen’s shares, dropped below AZ/MedImmune all-cash price by the time Amgen/Immunex closed in 2002.) And you can read what IN VIVO said about AZ/MedImmune at the time by clicking here and scrolling down to the sidebar (“AZ Spends Big on MedImmune”).

At the PSA meeting, we’ll interview in front of the assembly the man who engineered this remarkable deal—MedImmune’s CEO David Mott, who is now going to run AZ’s combined biotech efforts. And we’ll ask him what appetites at Big Pharma drove that astonishing price —since the auction he ran allowed him peeks at a variety of companies and their challenges.

By and large, our polltakers (a mix of heads of Big Pharma R&D and business development organizations, a few biotech CEOs, a couple of bankers, and a handful of VCs) figure the deal’s real driver was product panic.

One typical comment came from a Big Pharma R&D chief: “The deal shows the magnitude of the desperation of the pharmaceutical industry, and how badly things are going right now.” Or from a Big Pharma’s head of business development: the deal’s price “illustrates the general paucity of pipelines in many major companies. Over time I believe this is a value destruction deal and if replicated too often will lead to trouble.”

But the price also reflected, said our respondents, the capability AZ badly wants – large molecules and specifically antibodies. Relatively representative was the comment of one biotech CEO (whose company is pursuing small molecules). The price, he said, represented the fact that “biologics are likely to represent 30% of any Big Pharma’s future product portfolio and that they have to get in the game now, not via this or that product but, rather, by acquiring a soups-to-nuts biologics capability.”

Later this week, we’ll detail some of the other deals selected by our respondents -- every single one analyzed at the PSA meeting by the executive responsible for it.

Bristol Continues Late-Stage Asset Sale

Bristol-Myers Squibb continued selling off pieces of its late-stage pipeline this morning with a monster deal with Pfizer worth up to $1 billion in upfront payments and milestones.

The move demonstrate's Bristol's biotech-like strategy of monetizing its assets prior to commercialization. Deals like this allow the Big Pharma to hedge its development bets while at the same time, perhaps, providing takeover insurance against the overtures of its most likely acquirer, Sanofi-aventis, its commercialization partner on the blockbuster Plavix.

Pfizer gets a piece of Bristol's Phase III anticoagulant apixaban, in exchange for $250 million upfront cash and up to $750 million in development and regulatory milestones. The companies will share profits and commercialization expenses equally and Pfizer will fund 60% of any development costs from January 1, 2007 onward. Apixaban is being studied in prevention of venous thromboembolism and prevention of stroke associated with atrial fibrillation.

Separately the companies said they would also work together in metabolic disease, in a deal centered on a Pfizer discovery program with potential in diabetes and obesity. There, BMS is paying Pfizer $50 million and the companies will split profits/losses and all expenses 60/40--with Pfizer picking up the lion's share of the tab and rewards.

Pfizer clearly hopes to fill the void left by the failure of torcetrapib, its HDL-raising compound that was yanked from Phase III trials last year. Bristol on the other hand is slimming down, placing its commercial emphasis in specialist marketing and partnering off its late-stage assets in a company-wide hedging process. Until today it's biggest move was partnering 50% of its most advanced diabetes programs to AstraZeneca, in a deal worth up to $750 million in pre-commercial milestones. Bristol also moved today to solidify James Cornelius' position as CEO, who has been the company's interim chief since last year.

AZ-BMS Diabetes Deal: Two Paths for Big Pharma

If there is a schism among Big Pharma it is between those companies clinging on to the notion that pharma's future role is--as it is today--as a massive marketer of mass-market drugs, and those that see specialism as a means to avoid imploding under the weight of their own infrastructures.
The diabetes deal announced yesterday by AstraZeneca and Bristol-Myers illustrates the pursuit of each strategy: AstraZeneca, eager to play in what one pharma CEO described this week as "the disease of our epoch," has paid BMS $100 million upfront for worldwide (except Japan) co-development and co-commercialization rights to two late-clinical stage diabetes projects. For BMS the move is another big step back from primary care marketing and confirmation that the company's future lies along a specialist path.

AZ will fund the majority (75%) of development costs through 2009, the companies said, after which costs will be split 50-50. Should each of the two drugs--saxagliptin, a DPP-4 inhibitor currently in Phase III and dapagliflozin, a SGLT2 inhibitor in Phase IIb--reach global markets BMS will earn $650 million in pre-commercial milestones and could land an additional $300 million per drug in sales milestones. Post launch expenses and profits will be split evenly on a global basis and BMS will manufacture both products and book sales.

Acquisition of diabetes projects to shore up its primary care portfolio has been high on AZ's agenda since the PPAR agonist tesaglitazar (Galida) crashed out of clinical trials in May 2006; ironically the decision to yank Galida was based on thought-leader and regulatory reaction to BMS's own PPAR, muraglitazar (Pargluva) and intimations that Galida was in for similar treatment. Pargluva was killed after analysis published in JAMA by Cleveland Clinic CV chair Steve Nissen, MD, questioned the safety of PPARs and FDA said further long-term clinical studies would be needed to approve the product. (See "Anything but Academic: Lessons from the PPAR Failures," The RPM Report, June 2006.)

By the time saxagliptin hits the market the best AZ and BMS can hope for is only two entrenched competitors: Merck's Januvia and Novartis' Galvus will likely await. Dapagliflozen is a sodium glucose co-transporter-2 inhibitor, which blocks the re-absorption of glucose from urine in the kidney; a more novel, yet riskier prospect.