In Vino Veritas: Truth from the Frazier Dinner at PSA

For the last several years of FDC/Windhover’s Pharmaceutical Strategic Alliances conference, Alan Frazier, the founding partner of the Frazier Healthcare Ventures group, has been hosting a first-night dinner for roughly 30 top business development executives, the majority from Big Pharma.

Given the dealmaking power in the room, it’s not a bad place to sample industry opinion. And so, before too much wine has been poured, the guests fill out a brief survey.

No surprise, perhaps, given the dinner guests, but this year’s crowd was uncharacteristically pessimistic about biotech. Sixty-nine percent felt that Big Pharma’s and Big Biotech’s acquisitions of smaller biotechs were overvalued; 82% felt that the recent decline in acquisition values of private biotechs (you can see a complete analysis of private-biotech acquisitions here) would only get worse; even bigger majorities felt that Big Pharma or Big Biotech would own rights to most of the industry’s late-stage assets (92% for small molecules; 84% for biologics).

The latter answer certainly makes sense given financing prospects for biotech: next to hedge funds, public biotechs without product-based cash flow are going to feel the most pain from the market meltdown, say the Frazier guests … and would thus be more willing to sell control of their key programs.

Not that any of this is particularly good news for pharma. Two-thirds of the dinner guests felt that pharma shouldn’t diversify into generics and OTCs, let alone devices or services – but should “focus on getting innovative drugs to market.” Problem is, nearly the same proportion—61%--felt that “the fundamental rate of innovation across the entire biotech/pharma ecosystem is incapable of sustaining the business at its current size.” [UPDATE: if you'd like to weigh in on the issue, see this post.]

See the issue? Pharmas should focus on innovation…but they don’t themselves have what they need – and what’s available from biotech ain’t worth the sticker price. And even if the economy forces biotechs into discount mode, there still isn’t enough to go around.

Lucky that Alan picked up the check.

Photo courtesy of Flickr user katiew through a creative commons license.

Co-promotes: No Longer Biotech’s Holy Grail

You could see it coming. Well, kind of. Idenix on Friday snuck out the news that it was bailing out of its US and European co-promote with Novartis on its Hep B drug Tyzeka (Sebivo in Europe).

Co-promotes have until recently been most biotech’s holy grail, and co-promote options, at least, a sine qua non of much of recent licensing activity with larger pharma. It’s all part of that fully-integrated, ‘we-want-to-become-the-next-Genentech’ dream; we wrote about whether the dream made real-world commercial sense in IN VIVO in April.

We also pointed to data showing that barely more than a tenth of biotech-pharma co-promote plans become reality. When they do, they can be a nightmare--there was certainly no love lost between ICOS and Eli Lilly over Cialis before that (inevitable) acquisition.

Now of course, Big Pharma would say that co-promotes are a nightmare: they don’t like diluting their control over commercialization—which is, for all the talk of value inflection points throughout drug development, where the actual money comes from. But some of the arguments they put forward are sound: commercialization costs a helluva lot, even for so-called specialist sales forces, it’s increasingly complex as regulatory and reimbursement hurdles multiply, and, frankly, biotechs would make more profits by securing a good royalty share.

Idenix seems to have come to at least some of those conclusions, too. The biotech needed to rein in after the failure of its Hep C candidate a couple of months back, and this move will save it $40-45 million a year, apparently, by laying off the Tyzeka sales staff. “We have changed our agreement for Tyzeka to a royalty stream arrangement,” said Idenix CEO Jean-Pierre Sommadossi in the release outlining a wider re-structuring at Idenix.

In the original deal, outlined here, Idenix received sales-linked payments only in territories not covered by the co-promote. Neither those, nor the level of the new royalty stream, is revealed, but we’re certainly talking levels far from the single-digit tokens that grateful biotech used to have to put up with.

Funny, though, the timing: just a day or two before the announcement, Susan Koppy, SVP business and corporate development at Idenix, was on a panel at Windhover’s Pharmaceutical Strategic Alliances conference in New York. (Read here and here, for examples of what you missed.) She described the co-promote with Novartis as “a true co-promote,” in response to a question about which of the partners effectively had control (don’t forget that Novartis owns 56% of Idenix). But then, she added: “The relationship may well evolve as we go forward.”

Indeed it has. And it’s a fair bet that the evolution of other biotech co-promotes, real or planned, will go the same way. Biotechs are discovering and developing the drugs right now and benefiting handsomely from that. “Stick to what you do best” applies to them, as much as to Big Pharma.

What About Specialty?

We've heard a lot at Pharma Strategic Alliance from the Big Pharma, most especially Bristol-Myers Squibb, about externalization and the attractiveness of speciality markets.

But as bigger players look to fill their pipeline gaps with smaller, niche drugs, they're beginning to compete in a market long dominated by the so-called "spec pharma" players, who've traditionally built their businesses by acquiring and selling under-valued late-stage or marketed assets.

"There's a lot of capital chasing the same assets," notes Jeremy Goldberg, Managing Director of Corporate Development at Endo Pharmaceuticals, which has a handful of products for the treatment of pain. "It's measurably more competitive than it was three years ago," he says.

But Goldberg is confident that his company, at least, won't get shut out of the deal-making game thanks both to its focus and it's smaller size. A new product, notes Goldberg, can make a tremendous difference to his company's growth and top-line, an effect that wouldn't be seen in in a big pharma with a $25 billion revenue stream.

When looking to license, "biotechs need to ask who is the right partner for my asset? In pain, it's Endo," says Goldberg.

Okay, fine. But spec pharmas are certainly under pressure to expand into additional therapuetic areas. Look at Shire's willingness to pay $1.6 billion for TKT in 2005 to move beyond its ADHD franchise via access to biologics. How does a company like Endo become the partner of choice in a therapeutic area that isn't pain?

And will a big deal scare off investors who are presumably very focused on the reliable earnings-per-share returns that a typical spec pharma provides?

It's too soon to say. More than likely we'll be discussing a new business model at next year's meeting.

PSA Day 2: Buying into Biologics

AstraZeneca's $15.6 billion acquisition of MedImmune may well go down as the deal of the year. Though it has been described as overly expensive, David Mott, MedImmune's CEO who remains at the helm of the "operationally independent but strategically aligned" biologics business, begs to differ. Think of it this way, he suggested this morning at our Pharmaceutical Strategic Alliances conference: AZ paid 20% of their market cap to secure 25% of its pipeline going forward, a target for AZ's biologics output.

Still, if AZ investors had sticker shock, well, it was a seller's market. Still is. "Fully built biologics capabilities are rare," says Mott. Acquiring MedImmune gave AZ the whole biologics package; it was too late for the Big Pharma to build those capabilities through collaboration.

Building biologics expertise and capabilities piecemeal, says Mott, will be a long, slow and high-risk proposition, thanks in part to the dearth of biologics industry talent in key areas like regulatory affairs.

To get the most out of MedImmune, AZ will have to keep the group at arms length, while at the same time fostering a sort of collaborative independence in R&D as well as sales and marketing between the Big Pharma's traditional small molecule business and its biologics business--which (Cambridge Antibody Technology included) is being transferred in practice if not in geographical terms, to MedImmune.

For example, "juxtaposing the biologics commercial business with a traditional pharma primary care commercial business will help us take the best of both worlds to create a new commercial model" with a lower cost base--something in line with, instead of twice as big, as R&D costs.

Mott noted that the biggest challenge arising from the integration of MedImmune has been subsuming CAT into the organization. "CAT was in a difficult position" after AZ bought MedImmune, having been sidelined only a year after it was itself acquired by AZ to become its biologics arm, explained Mott. Becoming part of MedImmune "was not the vision that CAT had for itself." That said, "what we can do together is actually quite persuasive, and it's striking how non-overlapping" the companies' technologies and strengths really are.

Beyond bringing CAT into the MedImmune fold, the biotech is taking the lead in AZ's venture activities through its own MedImmune Ventures business, as well as ownership of AZ's existing large molecule collaborations and programs such as those with Silence Therapeutics in RNAi and Abgenix in antibody development.

We're taking a look at the state of the industry's biologics efforts in the next IN VIVO.

Smaller Big Pharma and the Hybrid Future

Two R&D Heads are better than one

[Updated below.] Today's final panel at PSA featured the heads of R&D at two of the industry's smaller Big Pharma, Tom Koestler, PhD, EVP and president of Schering Plough Research Institute and Elliott Sigal, MD, PhD, EVP, CSO, and president of R&D at Bristol-Myers Squibb Co.

Sigal suggested the industry's challenges in R&D would be best met by a best-of-both-worlds solution: "Some people in large pharma say, 'I want to be a biotech company', but that's not necessarily a good idea. You need to pick the best of pharma and the best of biotech and move on to a next-generation model," he said. Big biotech, like Amgen and Genentech, similarly need to adopt small-molecule strategies to thrive in the longer term, he noted.

BMS has employed this very strategy, embracing biotech risk hedging strategies in its blockbuster deals with Pfizer and AstraZeneca this year (we wrote about those deals here and here). Tom Koestler noted that Schering-Plough has maintained a handful of joint venture agreements to spread risk--notably that company's cardiovascular partnership with Merck, an asthma and COPD deal with Novartis, and its large-molecule JV with Johnson & Johnson (think Remicade).

So what's it take to embrace this hybrid model? A realization that complete vertical integration is not only not necessary, but perhaps detrimental. Co-development and co-commercialization deals, targeted approaches to geography and customers, streamlining manufacturing, and innovative sales and marketing approaches are all part of the model, according to Sigal. If you've got enough opportunities, why not de-risk the portfolio in high risk or expensive areas like metabolic disease?

"We need a new business model, an evolving business model, and R&D needs to evolve in that direction," Sigal said. "You're never too big that you can't benefit from a good collaboration."

UPDATE: For a look at the WSJ Health Blog's coverage of Koestler and Sigal's talks, click here.

Merck: Embracing Externalization, From the Top Down

Updated Below. One business magazine greeted the tenure of Dick Clark as Merck's new CEO in 2005 with the instruction to "say hello to boring," Roger Longman reminded the audience today at PSA. Investors will be clamoring for more boring if that's what has spurred Merck's shareprice onward and upward over the past two years.

Our Pharmaceutical Strategic Alliance conference kicked off this morning with Roger's Q&A with the Merck CEO, in a discussion that focused on the changes implmented by Clark over the past two years and the challenges faced both by Merck and the industry as a whole.

Clark said many of the things you'd expect a CEO to say. He talked about putting patients first, talked about unmet needs and striving to discover and develop strongly differentiated products. He acknowledged the industry's regulatory challenges and difficult reimbursement environment. And he deflected much of the credit for Merck's recent success to the pharma's employees in general and the interdisciplinary, horizontal and empowered teams that were behind the success of recent launches of Januvia and Gardisil in particular, as well as the timing of his appointment, suggesting his predecessor Ray Gilmartin had put necessary processes in place that have helped the company succeed today, not least hiring Merck's current research head Peter Kim.

And while the executive has spent his entire working life at Merck, he credits his several years at Medco--then Merck's PBM subsidiary--with providing him an external perspective on the company that once felt that the only good science was the science done in its own laboratories.

Externalization, both as an industry meme and in practice at Merck is becoming more important. "Medco allowed me to take an outside-in approach at Merck," Clark says. It's an approach that has more or less been embraced company wide. Only a few years ago, Clark noted, Merck did only a handful of licensing deals per year. "Last year we did something like 53," he said, pointing out acquisitions like the recent NovaCardia deal, and large molecule platform building moves like buying GlycoFi, Abmaxis, and Sirna. Scientists and managers within Merck are no longer rewarded based soley on what they can develop and create in-house, but for what they can bring into the company from the outside as well.

And there is still a ways to go, says Clark. "It’s important to understand that Merck hasn’t declared victory yet, that we’re about 40% of where we want to be and there’s still a lot of work to do." The danger, he says, is to revert to an internal focus.

Commenting on the $1.1 billion acquisition of Sirna in the RNA interference space, Clark emphasized the importance of continuing to augment its platform with the best available technologies. "I don’t think it ever ends, the external focus has to continue. If you raise your hand and write a billion dollar check," you need to make sure you're putting the right tools to work to execute your strategy.

UPDATE: The WSJ's Health Blog dropped by this morning. You can read their take on Clark's talk here.

IPOs: Just Another Facet of the M&A Auction

It's pretty much official now: filing an S-1 is just another part of an M&A auction.

BMS' acquisition of Adnexus, like Merck's recent acquisition of NovaCardia, demonstrates that Big Pharma, when nudged a bit by the prospect of a target hitting the public markets, is prepared to pounce.

We won't get into the details of the $415 million (plus earnouts) BMS/Adnexus deal right here--plenty of other blogs have covered the deal well (see the WSJ Health Blog or Pharmalot). Plus we're going to cover the Big Pharma biologics (and next-generation biologics) land grab in depth in the next issue of IN VIVO. And on top of all that, we're going to have Bristol's CSO and president of R&D Elliott Sigal, MD, PhD, up on stage at this week's Pharmaceutical Strategic Alliances shindig, and we'll surely get into the deal then.

But lets take a peak into the near future (tomorrow's PSA talk from Roger Longman) and look at both flavors of biotech exit; acquisitions and IPOs.

In 2007, M&A continues to climb in both total value and number of deals, while IPOs seem to have reversed a downward trend both in terms of valuations and pre-money step ups.

So which companies in the IPO queue are teeing up M&A exits simultaneously? Adnexus and Bristol's previously struck $240mm deal made BMS the biotech's logical acquirer--BMS' lack of a large molecule discovery engine greased the skids a bit for sure. Who else is angling for a public exit that could provide pharma with a similarly lacking discovery platform?

Maybe Archemix, the aptamer play without any significant Big Pharma ties could fill that kind of hole. And while Ablynx has yet to file for an IPO, its recent broad strategic alliance with Boehringer Ingelheim both gives it the pharmaceutical validations prerequisite for public investors and sets BI up as a logical acquirer should the biotech go that route.

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.