United States: 2006 Trends In Life Sciences Partnering, Collaborations And Strategic Alliances

Last Updated: September 28 2006
Article by Sergio Garcia

Rising drug development costs, uncertain capital markets, and increased regulatory hurdles continue to drive life sciences company strategies during 2006. In 2005, major trends observed in the life sciences sector included tight public markets resulting in fewer IPOs and a dramatic increase in capital raised through strategic partnering—an astounding $17 billion.

While the capital markets have loosened up somewhat in the early part of 2006, with $9.1 billion in funds raised during first quarter 2006 and $9.5 billion raised during second quarter, the first half of 2006 demonstrated that alliances are not slowing down. In fact, strategic alliances in the first quarter raised $6.5 billion versus $2.1 billion in the first quarter of 2005—an impressive 200% increase year over year!

During the second quarter, alliances slowed down somewhat with only $1.8 billion raised. Nevertheless, overall deal value in 2006 is up over 34% versus deals in the first half of 2005—$8.3 billion in 2006 vs. $6.2 billion in 2005.

The major story from last year was "more deals and bigger deals" between biotech and pharma, and this continues to be the key trend during 2006. This trend is characterized by an increasingly balanced approach to deal terms between small biotechnology companies and larger biotech and pharma companies. Biotechnology companies generally are retaining more rights and more control over development and commercialization, as evidenced by the deal highlighted later in this article; Nastech Pharmaceuticals/Procter & Gamble Pharmaceuticals.

IPOs Still A Tough Market

During the first half of 2006, eleven biotechs entered the public markets, raising- on average -$49 million. As of mid- August, the share price for these eleven IPOs was down- on average - 15%. Only two of this year’s IPOs are currently trading above issue price – Novacea (up 19%) and Omrix BioPharmaceuticals (up 26%). The other nine companies range from trading 8% below issue price (BioMimetic Therapeutics) to 50% below issue price (Iomai Corp).

Biotech Drivers

A number of challenges are driving biotechnology companies toward partnering (and, increasingly, M&A deals) including capital and infrastructure constraints. The cost of drug development continues to rise, while the regulatory approval process is increasingly uncertain. As important, unexpected clinical trial results can be devastating for abiotech—especially an early-stage company. The most dramatic example occurred in March when TeGenero ImmunoTherapeutics AG reported that six healthy volunteers in a Phase I trial for an immunomodulator drug, TGN 1412, were hospitalized after experiencing severe adverse effects. TeGenero ceased development of the drug and subsequently announced that it would shut down operations and file for bankruptcy.

Biotechnology company executives also must contend with the uncertainty of going public. The cost and burden of compliance with Sarbanes-Oxley requirements makes being a public company more expensive than ever—130% more expensive according to a recent Goldman Sachs estimate. In addition, companies that would once have pursued an IPO are finding that the IPO bar is set much higher than in the past—with IPO investors demanding to see a path to revenue and profitability (or at least toward regulatory approval of a lead compound in the near-term). Meanwhile, those few biotech companies that have taken the IPO plunge this year are struggling to maintain their offering share price. (See "IPOs Still a Tough Market".) As a result, biotechnology companies are more inclined to consider two avenues to increasing enterprise value: strategic partnering or M&A. Biotechnology companies are finding that partnering continues to be a viable strategy to mitigate market and regulatory risk, and to maximize the probability of success for their development programs.

Big Pharma’s Cash And Thin Pipelines Drive Deal-Making

What factors are driving pharma to continue to devote substantial resources to strategic transactions with biotechnology companies? One driver is that a significant number of blockbuster drugs will soon lose patent protection. Patent expirations continue to fuel the demand for innovative technologies and products to fill pharma’s thinning product pipelines. This is driving an extraordinary push to in-license biological products (primarily, recombinant proteins and monoclonal antibodies) or to acquire biotechnology companies. During the second quarter alone, pharma companies spent over $2 billion in acquisitions, including Merck’s acquisition of GlycoFi and Abmaxis and Pfizer’s acquisition of Rinat. In each of these acquisitions, the large pharma company and the smaller biotech company had entered into an earlier strategic alliance. While Merck has actively collaborated with biotech companies in the past—16 deals since 2000 –its May 2006 acquisitions mark the company’s first deep, longterm commitment to building an infrastructure for the development and manufacture of biological products.

Drugs With Expiring Patents Include:

2007

  • Effexor
  • Fosamax
  • Zyrtec

2008

  • Advair
  • Keppra
  • Severant

2009

  • Inspra
  • Comtan

Merck is not alone—a number of pharmaceutical companies have been snapping up companies with biologics, especially antibodies, the hottest class of molecules in development today. Pharma companies are pursuing M&A and large molecule-based partnering deals to make sure they are not left out of disease markets where it may be possible to attack disease pathways with both small molecules and large proteins. Also, in seeking faster and cheaper pathways to regulatory approval, pharma companies are accepting the fact that the small molecules they have in their pipelines clinically fail at almost twice the rate of large molecules (especially antibody drugs) being developed by biotechnology companies.

Big pharma’s historical focus on small molecules will do little to assist them in large molecule process development and manufacturing—where finding the optimal product stability profile and development process is key to success. Through acquisitions and strategic alliances, pharma companies are getting into the game. Given that biotechnology companies have built deeper expertise in biologics than has pharma, this trend is shifting the expert/novice paradigm.

Additionally, big pharma companies have amassed substantial cash reserves primarily due to the American Jobs Creation Act of 2004, legislation that has led U.S. businesses to repatriate billions in foreign earnings at a fraction of the 35% corporate tax rate so long as these earnings are invested in the U.S. It is estimated that large pharmaceutical companies—like Merck with over $15 billion in eligible earnings—have repatriated over $100 billion in earnings eligible for repatriation.

Deal Structure Changing

Big pharma’s dwindling product pipelines and rich cash reserves are major drivers for the intense deal activity, but what else is making alliances so attractive? One answer lies in the key terms in the deals themselves. Both big pharma and small biotechnology companies have become more flexible in exploring deal terms that help both parties achieve financial and strategic business objectives. Recent deals include balanced responsibility splits in key product development and commercialization decision-making, as well as cost-and profit-sharing arrangements.

Pfizer Uses War Chest To Target Acquisitions

Pfizer’s second quarter 2006 announcement that it would allocate $17 billion over the next 30 months to acquire products and technologies to drive long term growth is yet another indication of big pharma’s strategy of growth through partnering. As of July 31, 2006, Pfizer had already inked deals with 6 partners worth well over $2 billion. This strategy enhances Pfizer’s ability to participate in today’s changing healthcare marketplace, where, according to Pfizer’s vice chairman, David Shedlarz, " ..our future depends on discovering and developing new medicines".

Life sciences companies, especially early-to mid-stage companies, who are evaluating their capital raising alternatives are well-advised to review the deal terms and structures of recent strategic partnering transactions and consider how best to negotiate key contractual terms to meet their business objectives. See Putting the Co in Development and Promotion—The New Biotech-Pharma Collaborations; by Sergio Garcia; Fenwick & West (www.fenwick.com) for a detailed discussion of deal terms in strategic partnering and collaboration agreements.

One of the more significant deals so far this year is Nastech Pharmaceuticals’ product development deal with Procter & Gamble Pharmaceuticals.

Case Study Analysis

Nastech / Procter & Gamble

Deal type: Worldwide co-development and co-promotion deal for Nastech’s Phase II intranasal product in osteoporosis

Summary: In February 2006, Nastech entered into a worldwide alliance with Procter & Gamble to develop and commercialize Nastech’s Phase II Parathyroid Hormone (PTH1-34) intranasal product for the treatment of osteoporosis and other indications. With a potential value of $577 million over the life of the product, the deal includes a $10 million upfront payment, up to $22 million in milestone payments in 2006, and an undisclosed "escalating double-digit" royalty upon product approval. In June, Nastech announced that it had received the first milestone payment from P&G—a $7 million payment for attaining an undisclosed development milestone. Nastech expects to begin later this year a six-month Phase III trial for PTH1-34, a trial that will test the intranasal product against Porteo, the injected form of PTH manufactured by Lilly that had 2005 sales of $389 million with expectations of continued growth. Nastech intends to prepare a 505(b)(2) new drug application based on Lilly’s approved injectable PTH product.

Co-Development Terms:

  • Nastech and P&G will co-develop PTH 1-34 but P&G will pay all development costs, reimbursing Nastech for its development activities.
  • P&G will be responsible for clinical and non-clinical studies, and for obtaining regulatory approval.
  • Nastech will be responsible for the chemistry, manufacturing and controls (CMC) sections of regulatory submissions.
  • Under the parties’ separate supply agreement, Nastech has exclusive manufacturing rights, and will be responsible for supply of clinical and commercial product to P&G. Under the supply arrangement, Nastech will receive manufacturing revenue in addition to revenue from the commercialization of the product.
  • P&G will direct worldwide sales, marketing, and promotion activities.

Analysis: This collaboration is one of the largest single-product collaborations in the biotechnology industry over the last several years. The deal also underscores the continuing trend of small biotechnology companies negotiating balanced product development and commercialization terms in deals with large pharmaceuticals. The deal provides Nastech with critical access to P&G’s clinical development and commercialization expertise in the worldwide osteoporosis market. By early June 2006, Nastech had already received its first milestone payment and had secured a supply agreement to exclusively manufacture PTH1-34 for P&G at an agreed upon transfer price. The development and commercialization alliance, together with the supply agreement, validates Nastech’s research and product development strategies and its manufacturing and CMC capabilities. Meanwhile, P&G, a global leader in the osteoporosis market (with Actenol revenues of $1.7 billion/ year), has gained access to another innovative therapy to add to its pipeline. The deal presents P&G with an opportunity to further penetrate the osteoporosis market, with a promising alternative to Porteo. Additionally, the supply agreement with Nastech locks in manufacturing capacity for P&G to meet global product demand upon approval and commercialization of the nasal spray product.

Implications For Biotechnology Companies

When considering partnering arrangements or strategic alliances with large biotech or big pharma, early to mid-stage biotechnology companies should consider the following:

Focus on Building Long-Term Value: When considering any partnering relationship, biotech companies need to address long-term objectives. Financial modeling and analysis should address how a proposed alliance with a larger partner may impact company value. Internal dialogue addressing such questions as "How does this deal help us to achieve our strategic business objectives? What does each partner bring to the table? Can we achieve our objectives without a partner?" will assist the management team in determining how best to structure a proposed alliance to build value.

Keep Options Open: Even if a small biotechnology company currently lacks product development and commercialization infrastructure, it remains important for the company to consider retaining key downstream rights. Cost- and profit-splitting arrangements have many advantages over a product royalty model. Consider and build a financial model to evaluate the difference between a 10%-20% royalty on net sales and a 50/50 cost and profit split. Determine which structure is more aligned with the company’s long-term objectives. While biotech companies may not currently have the infrastructure in place to fully develop and commercialize a drug product, retaining downstream economics often is critical to building the value of the enterprise—for investors and the company’s employees. Understanding the pros and cons of a cost—and profit-sharing arrangement early in the process will assist in negotiating the optimal partnering deal terms.

Understand the Financial Risks: Biotechnology companies considering cost-and profit-sharing arrangements that balance the risks and rewards of continued product development and commercialization between the parties must be willing to assume the financial risks associated with this structure. If the company wants to be treated as an equal partner in regard to decision-making processes, then it is likely that the company will be asked to assume a proportionate share of the risks of continued development.

Leverage Expertise: Biotech companies increasingly are gaining competence in areas of traditional pharma expertise such as drug development, product formulation and manufacturing. Additionally, in many cases, the directors and members of the biotech executive team have pharma backgrounds and strong expertise in development, commercialization and manufacturing. Recognizing and leveraging this expertise in deal negotiations will help to balance the playing field with larger biotech or pharma companies and can be critical in negotiating favorable deal terms.

Conclusion

Strategic alliances between biotech and pharma are off to a strong start for 2006. This trend likely will continue throughout the year and into 2007. Biotech companies increasingly are well-positioned to negotiate attractive, balanced deal terms that will build long term value for the company and investors. Retaining commercialization and development rights can significantly enhance long-term company value.

Resources

Big Pharma’s Large Molecule Future; June 2006, In Vivo

Biotech on a Downward Slide in 2Q 06; July 3, 2006, Burrill and Company Quarterly Reports

Biotech Turns in Mixed Performance in Q1 2006; April 11, 2006, Burrill and Company Quarterly Reports

Building on Our Success—Nastech Annual Report 2005; May 2006, Nastech Pharmaceutical Company Inc.

GlycoFi and Merck & Co., Inc. Enter Into Broad Strategic Alliance for Research and Development; December 12, 2005, GlycoFi Inc., Press Release

Know Thy R&D Enemy: the Key to Fighting Attrition; January 2005, In Vivo

Merck Buying GlycoFi for $400M, Abmaxis for $80M; May 10, 2006, BioWorld Today

Merck & Co., Inc. to Acquire GlycoFi, Inc.; May 9, 2006, Merck Press Release

Nastech Enters Into Supply Agreement with Procter & Gamble for Parathyroid Hormone (PTH1-34) Nasal Spray; June 6, 2006, CNNMoney.com

Nastech Pharmaceutical Company Inc. and Procter & Gamble Announce Collaboration to Develop and Commercialize Parathyroid; February 1, 2006, PRNewswire

Nastech Receives $7 Million Milestone Payment from Procter & Gamble for Advancement; June 8, 2006, Reuters

Pfizer Delivers Strong Second-Quarter 2006 Results Driven By Performance of Major In-Line and New Products; July 20, 2006, Pfizer Press Release

Pharma’s Shopping Continues, With Focus on Antibody Firms; June 16, 2006, BioWorld Today

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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