Blockbuster partnerships

pharmafile | October 21, 2005 | Feature | Research and Development |   

Since pharma'ps big wave of innovation during the early 1990s, peaking in 1996 when 131 new drug applications were filed and 53 new molecular entities were approved, R&D productivity has fallen by half.

In 2003, 72 NDAs were filed and 21 NMEs approved – a 45% and 60% decline, respectively, since 1996.

The answer for many companies is to license in products, especially from smaller biotech companies. Alliance evaluation by Datamonitor across the top 12 US and European pharma players has shown that reliance on licensed products and technologies will increase from 21% of sales in 2001 to 25% in 2007.

But as this strategy is used more and more, is big pharma still getting value for money?  Certainly, the strike rate of biotech in bringing new drugs to market is now outstripping that of big pharma. The Tufts Center for the Study of Drug Development estimates that at least 50 of the 250 biotech drugs currently in late-stage clinical trials should win FDA approval, a success rate almost three times better than pharma industry standard.

So how should big pharma choose partners for adding drug candidates to its pipelines?

In a classic textbook case, the business development team is the key go-between in searching out deals with biotech. In big (and medium-sized) pharma, business development helps build corporate value by collaborating with R&D and commercial to in-license, or secure rights, to promising pipeline compounds and marketed products.

It formulates an overall strategy with R&D and marketing, based on the financial goals and therapeutic focus areas defined by top management to fill pipeline or portfolio gaps.  At the evaluation stage, each opportunity progresses through a stagegate process: is the opportunity financially sound, scientifically viable, consistent with corporate strategy, and not unduly risky?   

During the second review, or preliminary evaluation, it develops a profile of the products likely commercial potential and resource requirement. A commercially promising opportunity passing these reviews moves to due diligence: a full technical and commercial evaluation to identify resources required to bring the product to market and confirm its safety, efficacy, and market potential.

This is the classic shape of negotiation. But as the licensing process has evolved, major companies are recognising that the rest of the relationship needs to be equally carefully managed, and that personal relationships throughout the process are the key to success.

Alliance management

Alliance management is the new buzzword, as  Datamonitor's Mark Belsey explains: "With increasing competition in-sourcing high value licensing deals with emerging biopharma companies, big pharma should look to channel significant time and financial resources towards best practice alliance management strategies to ensure that they become the partner of choice."

"Forget what the textbooks say," adds Datamonitor's Dr Duncan Emerton, "successful licensing is about relationships, the kind of relationships you have with your closest and most trusted friends and colleagues.

"Both parties involved in alliances need to invest time and energy into building these relationships and garnering trust and respect, otherwise the deal is doomed from the beginning, regardless of whether the product is good or not."

"Nurturing the relationship requires continuous communication," adds Datamonitor's Alex Pavlou. "It is critical to create an environment of continuous information exchange and risk and return evaluation in licensing deals, to meet the partnerships goals and prevent unpredictable losses or clinical development disappointments."

The devil is, as always, in the detail, and big pharma should leave nothing to chance when  choosing partners, says Steve Poile of Pharmalicensing. "Most companies have increasingly sophisticated processes for partner review, involving personnel from across the company to assess opportunities from a technical and commercial perspective."

As with customer relationships, technology has a part to play. "This is now achieved using networked software allowing research, legal and commercial personnel to evaluate opportunities simultaneously – essential if the company wishes to provide prompt and transparent feedback to the potential partner," adds Poile. "The balance of power is generally with big pharma companies, because of their experience and choice of the opportunities available in the marketplace," he says.

"In general, for any big pharma there are more opportunities than there is money to be allocated to new developments. As such, big pharma is able to name its price for a selected opportunity, or move onto the next opportunity if the gap between big pharma and potential partner is too wide."

The head of licensing for any large pharma company will have a huge budget and will be a target for the smaller biotechs, as emerging drug developers try to catch his attention.

"Occasionally, the balance of power can change when a biotech emerges with a truly novel opportunity or way of doing things. In this case, with appropriate marketing, the biotech can name its price, with pharma companies queuing up to pay. However, often in the past the promise did not translate to reality, so even these deals are heavily framed around success payments for key identifiable milestones."

Identifying the good deals

So, in a tight market, are there still good deals to be done and which biotech companies should big pharma watch out for?

Market practitioners are cautiously optimistic, as Poile says: "As with most things, the good deals always appear to have already been done. The new emerging biotechs often come to prominence as a result of a deal announcement as opposed to the other way round. Most big pharma will be connected to the channels necessary for tracking new and emerging companies and their activity."

Information is the key: particularly valuable are services like Partneringweek's tracking (pharmalicensing.com/desk/partneringweekinfo.php) service which provides a comprehensive update of the deals and financings announced during the previous week. Many companies use services like these to monitor who is getting the funding as a measure of where the next biotech opportunities might be emerging.

The pharma industry is still in a cleft stick between backing low cost but unproven early stage ideas, and buying into lower risk but often very expensive late-stage products. In February 2005 leading consultant Wood Mackenzie  released analysis of licensing deals struck by the top 20 pharma companies.

Its LicensingInsight analysed over 700 deals entered into since 1989 by companies representing 66% of the world's pharma sales. In the second half of 2004, this group concluded 25 new product-specific deals – in line with the average rate of deal making over the last 15 years. Of these, 13 were in-licensing of projects in phase I, II or III clinical development.

"We would have expected to see more of an increase in late-stage in-licensing activity," says Dr Keith Redpath, Wood Mackenzie's head of life science research. "There are two possible explanations: either there are no phase II/III projects out there worth licensing, or companies are so confident of their late-stage pipelines that they would rather spend money augmenting their early-stage programmes internally and by entering strategic alliances with biotechs."

"When your internal research and development cannot maintain your pipeline, in-licensing of development candidates is the only way to support growth," says Dr Sian Renfrey, principal consultant and co-author of the report.

"In 2003, licensed products accounted for more than $70 billion in revenues for the top 20 pharmaceutical companies. By 2008, we forecast that figure to exceed $100 billion. There are over 250 unlicensed active phase II/III novel drug candidates in the portfolios of emerging companies.

"However, the cost implications of development beyond phase II means that many of today's unpartnered phase III drugs could just be too much of a risk to take, or alternatively are so desirable that the originator company is acquired."

Should big pharma have an exit strategy or a recovery plan? The proportion of deals which break down, the attrition rate, is very high. In an article in Nature (April 2005) Datamonitor's Alex Pavlou and Mark Belsey quantified the attrition rate, and suggested how to avoid it.

"A survey of industry executives has found that the attrition rate is currently between 21% and 50% – 38% of executives stated that it was between 41% and 50%."

There are a variety of reasons for these failures, as Pharmalicensing's Poile points out. "In-licensing can often go wrong post-agreement signature, when the potential for the parties' focus to diverge increases with time.

"This can be due to change in clinical focus, problems with compound development, competition for resources with other internal/external programmes, change of programme management, or conflicts arising from these.

"Most big pharma companies will have an exit built into the agreement, whereby in the event of certain milestones failing to materialize the partnership can be terminated. Escalation procedures within the agreement should also ensure smooth resolution of agreement disputes, avoiding litigation.

"In terms of recovery plans, these should be a series of contingencies to ensure that alternative in-licensing opportunities are tracked in readiness for plugging existing and emerging pipeline gaps.

"To improve attrition rates, pharma companies must take a number of steps: commit resources to proactively search for licensing opportunities; consider cultural differences and other non-tangible factors before committing to a licensing deal; and assess an alliance's performance regularly and implement improvements to help both partners deliver the required results," adds Pavlou and Belsey.

Cultural sensitivity may seem hardly worth bothering about, but it can be the crucial deal breaker. Cultural differences are a significant hurdle to successful alliances, with 72% of senior executives from large pharma companies interviewed by Datamonitor citing this as a key challenge in technology licensing agreements.

"A strong deal does not guarantee a successful product," says Pavlou, "but poor candidate or market selection guarantees a deal's failure. Companies must therefore work to uncover the partnered products hidden innovation risk levels in the form of technological, drug delivery and manufacturing complexities."

Despite these complications, what is the future for in-licensing and biotech partnerships?

It's all bound up with the finance for biotech, which depends on the stock market's view. In that sense, according to Ernst & Young's 2005 global biotech report, Beyond Borders, European biotech is back on track.  

Total revenues in 2004 held steady at E11 billion, while funds raised by public and private companies increased by over 14% compared to 2003, reaching E2.8 billion, making 2004 the European industry's second best funding year ever. After a two-year drought, 2004 saw nine IPOs raising E300 million for European companies, mainly in Germany, Switzerland and the UK.

William Powlett Smith, leader of Ernst & Young's UK Biotech Team, says: "In 2004, the European biotech sector showed some recovery from years of market storms, falling investor interest, and product disappointments, and showed that it is now better placed to move forward. The European biotech sector has gained momentum and the financial performance improved in comparison with 2003. In particular, public companies performed well as a result of success with product approvals."

UK leading the way

Germany still has the most biotech companies in Europe, but the UK remains the dominant player. Five out of the top ten venture funding deals in Europe involved UK companies raising E164 million, bringing UK funding in 2004 to E372 million.

However, investors remained highly selective about the companies they backed, and continued to invest large sums in later-stage companies whose risk profile is clearer.

Six UK biotech companies went public in 2004 – total revenues of UK public companies were E1.8 billion with a net loss of E186 million. Public companies invested E560 million in R&D and UK companies have 165 new products in the pipeline of which 30 are in phase III clinical trials.  

The outlook for the European sector is mixed: 2005 should see more consolidation, a few IPOs and difficulty raising capital in early-stage, but more companies than ever have products in phase III, which is critical to success.

"Focusing on strengths in science, global networking and building on management experience are essential going forward. However, it is crucial for the sector's success that Europe's structural imperfections and regulatory challenges should not obstruct the industry's recovery and its tremendous potential," concludes Powlett Smith.

Target validation is set to be the main focus of licensing deals made by pharma companies with biotechs during the next three years. Licensing deals for target validation technology accounted for more than 50% of technology deals made by top pharma companies in 2003, compared with 32% in 2000.

Despite the high costs, accessing late-stage products through licensing will continue to be the priority for pharma companies.

One particularly promising technology is monoclonal antibodies, whose market will treble in size to $30 billion by 2010, according to Datamonitor. They are increasingly proving themselves to be safer and more effective than existing treatments in cancer and immune disorders such as rheumatoid arthritis.

Key drugs include cancer treatments like Roche and Genentech's Avastin (bevacizumab) and BMS's Erbitux (cetuximab) as well as Johnson & Johnson's rheumatoid arthritis treatment Remicade (infliximab).

Recent deals including Roche's alliance with Antisoma and AstraZeneca's agreement with Cambridge Antibody Technology (CAT) have highlighted their growing importance.

Datamonitor healthcare analyst David Evans says: "Big pharma is finally moving upstream and getting involved in early-stage product development. This kind of investment by industry leaders will add the financial muscle and experience needed to fully exploit the exciting potential of antibodies.

"Antibody companies now have the choice either to go it alone and take on the higher risks and potential rewards of drug development, or to take a more measured, risk-averse approach and rely on a pharma partner experience and financial backing to grow more gradually."

"Big pharma continues to be reluctant to do speculative deals for early stage technology and compounds where at least data sufficient for progression to IND is not present," says Poile.

"Relationships will seek to drip-feed payments for successful programme development as opposed to significant upfront payments, as part of a means of managing programme cost and risk. For many biotechs, this will match their desire to share significantly in the long-term rewards of successful drug development, including participation in the sales of the marketed product."