Biotech grows up
pharmafile | December 4, 2003 | Feature | Research and Development, Sales and Marketing |Â Â alliances, biotech, partnerships, pharmaÂ
Sometimes it is hard to see where the fun lies in running a biotechnology company. Discounting the obvious success stories such as Amgen, Millennium and Celera, there are thousands of small entrepreneurial start-up companies plying their trade from the far flung reaches of Silicon Valley to Europe.
No more than 5% of them can claim to have reached profitability. Relying heavily on venture capital, the investment community and of course the coffers of Big Pharma, the biotech sector has been through something of a cash drought over the last two years.
On the back of a reputation as the most promising hothouse of potential new drug discoveries, over the years biotech appears to have charmed, excited, scared and disillusioned investors in roughly equal measures.
From its role as the darling of the stock market in the early 1980s, biotech now struggles to impress city analysts who tend to look at success based on hard facts. For all their panache and promise, biotech companies on the whole tend to burn cash at a much faster rate than they ever launch money-spinning products.
But despite the obvious risks, the pharma industry now sees tremendous value in biotech. According to a study earlier this year by pharma intelligence firm Cutting Edge, pharma/biotech alliances have risen in value from just under $1 billion in 1997 to more than $3 billion in the last three years.
It also reported that the average number of alliances per pharma company grew from 1.4 per year in the late 1980s to 5.7 in the late 1990s. This represents a massive turnaround from 15 years ago, when Big Pharma turned its nose up at the newly emerging biotech sector, explains Neal Ransome, European pharma sector leader at PricewaterhouseCoopers.
"Back in the early 1990s, Big Pharma was quite disdainful towards biotech and saw it very much as the poor cousin of the industry," he says. "There was always the classic 'not invented here' concept within the pharma sector which felt there was nothing that the biotech companies were doing that they couldn't do itself."
So what made the pharma companies finally sit up and take notice of the locked potential within biotech?
Certainly the 'gold rush' era of the 1980s and 1990s helped stir up interest when the stock market was throwing silly money into biotech because investors thought they had found the holy grail.
Ross Williamson, principal consultant at Cap Gemini Ernst & Young life sciences practice says that biotech became a very attractive sector once investment capital had stopped sinking money into the IT sector and was looking for other investment options.
"My sense is that biotech at the time had to live with expectations well ahead of what was actually possible," he explains. "I think as with most predictions of the future there was a certain expectation that the technology would come of age rapidly and a constant stream of potential niche products would start to flow out of biotech companies."
Biotech's burgeoning reputation as an up and coming and relatively developed technology with the potential to fill pipeline gaps was really what swung it for the pharma sector. But, as Neal Ransome points out, there is now a growing realisation that the existing research and development model within Big Pharma would not continue to be as bountiful as it had been in the past, highlighted by a dwindling number of NCEs launched each year.
Added to this it dawned on Big Pharma that not enough major products were coming through the pipelines to replace blockbusters that were coming off patent and as a result sales lines were becoming increasingly vulnerable. Worryingly, double digit growth, taken as a given in the 1970s and 1980s, was no longer an easily achieved target.
One has only to look at recent drug approval rates at the FDA to understand the furrowed brows of pharma executives. In 2002, a mere 19 drugs were approved compared to 24 in 2001 and 53 in 1996.
A maturing relationship
"Big Pharma started to turn to biotech as a potentially cheaper source of new products when they realised they needed to plug the gaps in their pipelines,says Mr Ransome. "The initial inclination was for Big Pharma companies to snap up biotech companies and try to absorb them within their own vast organisations by outright acquisitions."
However, he goes on to explain that a number of these deals were not successful because firstly these small entrepreneurial companies just didn't sit well within the bigger structure. Also many of them were driven by scientists who had left these pharma companies in the first place because they didn't enjoy the Big Pharma culture.
"Therefore businesses which had looked exciting whilst they were independent became spectacularly unexciting overnight once they were absorbed by Big Pharma," he muses.
There is now a general consensus that both sides are learning from past mistakes. Despite early disappointments, particularly within the investment community, there is the prevailing sense within the pharma sector that biotech still has an important role and exciting future as a source of new and innovative compounds to supplement its in-house research labs.
"We are now back into much more of a sensible and well informed relationship and interaction between pharma and biotech," says Stephen Oxley, head of pharmaceuticals at KPMG UK.
"I think a new reality is dawning. Whereas a while back, companies were perhaps wrestling to get their hands on innovations seen to be leading edge such as biologicals, vaccines and devices, nowadays the rush is over and we are seeing deals which are much more focused."
The 'new reality' that Mr Oxley speaks about is not based on the type of blind optimism which once saw biotech as a cupboard full of blockbusters, but rather on facts.
Analysing data from four sources, including the Windhover Database of Strategic Alliances, a study by researchers at the University of Pennsylvania Wharton School in May 2003 entitled Biotech-Pharmaceutical Alliances as a Signal of Asset and Firm Quality concluded that drugs in biotech-pharmaceutical alliances perform better in subsequent trials than products developed solely in-house by either biotech or pharma firms.
Reassessing biotech
Ross Williamson is of the opinion that pharma companies in their dealings with biotech are now no longer tending to buy to plug holes but are rather actively choosing an additional source for lead compounds in relation to their own drug discovery organisations.
"The approach is more systematic," he comments. "Companies are seeing biotech as a way of extending their reviews of their own in-house portfolios, rather than as a simple 'get out of jail free' card as in the past. They're spreading their investment on both internal and external discovery and making use of biotech's set of skills which they themselves may not wish to develop internally."
He adds that for primarily commercial reasons, pharma companies are now striking deals with biotech either at the discovery stage with a lower financial stake and calculated risk or buying in at the end of phase III, effectively becoming the marketing channel for the drug coming out of the biotech company.
Mr Oxley of KPMG agrees that both pharma and biotech companies are starting to cultivate a greater degree of realism to their partnerships which extends beyond exciting press conferences and contract signing ceremonies much further down the line of the ongoing relationship.
He says that the days of the 'big punts' of deals worth millions of dollars very early in the product lifecycle are long gone and that companies are applying better risk assessment and due diligence in both commercial and financial terms.
"The deals are much more sophisticated now, with pharma companies putting less risk up- front," he explains. "They're still getting in relatively early but with a much smaller and complex deal with components such as equity stakes and options over different therapeutic areas. Big Pharma is placing a fairly small bet but nevertheless securing access to a compound and then ratcheting up the money as it goes through development by way of greater royalties."
Obviously from biotech's point of view, one of its driving needs to form alliances is to secure cash to keep its machines oiled, particularly in the last couple of years when the markets have been little short of dire for the sector. However, despite these pressures, there is the argument that biotechs need to retain as much independence as possible within license agreements forged with Big Pharma, and not least the option to generate further income for the drug development.
Neal Ransome at PwC points to Roche's deal with Antisoma, with Antisoma retaining its independence and therefore its entrepreneurial zest without smothering Roche's ability to benefit from the output should it ever be successful.
"It's my opinion that the alliance, joint venture and licensing type deals are much more appropriate than outright acquisitions.In fact the number of horizontal development deals cropping up around the globe continue to grow: deCode Genetics, an Icelandic firm specialising in DNA-based diagnostics has recently signed a 10 year deal with Hoffman-la-Roche. Weston Medical of the US has formed an alliance with Abbott for its needle-less injection systems and the UK's Cambridge Antibody Technology (CAT) has signed a five year deal with Merck on its therapies and prophylactics against a target linked with HIV related diseases. This shows that rewarding collaborations are being developed.
Mr Oxley says that biotech companies need to ask themselves several questions with regards to a pharma company's motives in doing a co-development deal: Is the drug in question just one of a swathe of back-up products? How does it fit with the pharma company's existing portfolio and what does the company want out of the project in the long-run?
"As a biotech, particularly if you're a small biotech, you're driven by the need to get the licence done so that you can continue in existence and eventually get to see the fruits of your labour," he says.
Of course, pharma/biotech alliances aren't always happy marriages as Celltech, the UK's largest biotech company has recently found out to its cost. Pfizer's insistence on renegotiating the deal for arthritis drug CDP 870 will delay the drug's development by up to a year and has cast doubts on it ever making it to market. This begs the question whether Big Pharma still holds all the trump cards when it comes to forming an alliance.
Mr Oxley contends that Big Pharma may have an advantage when dealing with the blockbuster model but this will be less of a strength for specialist niche areas where biotech companies may turn their attention to.
"I think we're going to see biotechs developing in niche areas that fall under the radar screen of big pharma and that may involve more collaborations between biotechs, device companies and small to medium pharma.There are other examples of collaborations that don't always work: CAT and Abbott's tie-up brought the innovative treatment Humira to market, but they are now in litigation over royalties.
As the relationship between pharma and biotech starts to gain momentum and blur at the edges, it is interesting to note that pharma is learning a few tricks of the trade from its younger cousin.
A niche role for biotech
Mr Williamson gives the example of GlaxoSmithKline which he says has learnt from the innovation, creativity and application of biotechnology and applied it to its own development model. This could be an effort to sharpen up its pipeline.
"GSK is trying to emulate the more entrepreneurial approach by devising the Centre of Excellence model."
Mr Oxley believes that Big Pharm's increasing focus on blockbuster compounds to deliver the medicines of the future is multiplying the already huge number of research candidates it wants to bring in, primarily in the attractive therapeutic areas such as cardiovascular, CNS and gastrointestinal. This could leave an attractive opening for biotech.
"But outside the interaction with pharma in the big disease areas, I can see biotech moving up the value chain and capturing the value in the space that is safely below Big Pharma, perhaps in deals with smaller pharma firms such as Shire, Serono and Novo Nordisk," he says.
"I think it will continue to be a mixed pattern driven by all kinds of drug candidates but with the endgame still pushed by big pharma." All agree that a future scenario where pharma completely outsources its drug discovery to biotech is highly unlikely.
Mr Williamson says the answer to the question of whether biotech will become the definitive discovery hothouse with pharma concentrating on its commercialisation, marketing and manufacturing expertise lies somewhere between the two.
"I think pharma imagines a future situation where they have had a significant number of partnerships with biotech but still retain their own R&D," he concludes.
"I don't think a shift to complete outsourcing of discovery would be wise. A much better idea would be to develop a broader series and network of relationships that plug the gaps in certain areas or give companies an extended portfolio of potential lead products to discuss and choose from."
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