BOSTON – Even with a solid strategic fit, quality assets on the table and the likelihood of reimbursement by payers, intellectual property (IP) glitches can hurt a deal, warned Sanjeev Munshi, director of worldwide licensing and acquisition for Merck & Co. Inc.

Munshi’s remarks came during a panel talk called “How to Position Your Early Stage Company for Success” at Biopharm America, a three-day event focused on partnering. He cited Whitehouse Station, N.J.-based Merck’s July 2012 deal with Chimerix Inc.

The arrangement gave Merck exclusive worldwide rights to CMX157, a Phase I-stage lipid acyclic nucleoside phosphonate for HIV infection.

Chimerix, of Research Triangle Park, N.C., got $17.5 million up front and up to $151 million in potential milestones payments, plus royalties on future sales.

“It was a good deal,” Munshi said, but Merck spent six months ironing out a problem with Chimerix’s licensing of the technology from the University of California. “Something was not paid attention to,” he said.

IP problems can turn out significantly worse, said panel moderator Sandra Kuzmich, partner with Frommer, Lawrence & Haug LLP. Arthur Hiller, CEO of Scifluor Life Sciences Inc., of Cambridge, Mass., said he “made a decision early on” to hire only the best IP counsel. “There are a lot of ways of getting cost-effective – I’ll use that term nicely, diplomatically – IP counsel,” he said, but it’s a bad idea, especially when an eventual deal is planned.

“You can rest assured that the buyer will have high caliber, gold standard IP counsel, and unless you have an individual across the table who can have an intelligent conversation and gain the respect of the buyer’s IP counsel, then you have probably added a layer of complexity and problem into your discussions that you didn’t need to add,” Hiller said. And this will most likely mean more cost.

He said he “went to bat” against an investor who wanted “cost-effective” lawyers, instead of the firm chosen by Hiller, whose firm uses fluorine to modify the chemical structure of a drug, with the motive of improving potency, selectivity, tissue penetration, half-life and metabolic stability. (See BioWorld Today, Oct. 26, 2012.)

“I’m sure I could have saved 20 percent, 30 percent, whatever, by going with less expensive IP counsel, but in the long run I think it would have come back to haunt us,” he said. “That’s my philosophy, and it’s held true up to this point. I don’t think there will be any surprises going forward.”

Hiller also pointed to hazards when licensing IP, which often, “especially out of universities and tech-transfer offices and that sort of thing, has lots of warts on it. I’m not talking in terms of the way it’s drafted. I’m talking in terms of the way you can actually execute – whether it be a product, a platform, or whatever – against that IP.”

Expect “speed bumps,” Hiller said. “What comes out of a university is much different from what the needs are commercially. Even if you get sign-off from a great IP attorney [who] says everything is in order, the i’s have been dotted and the t’s have been crossed, that doesn’t mean that IP is ready for commercial application.”

Best in Class, First in Class?

Even IP, of course, isn’t everything, or even the main thing, for sellers to consider, though it’s “way up there,” allowed Merck’s Munshi.

“No matter how good the asset is, if it’s not fitting into the strategy we have – if it doesn’t serve a certain need that I’m looking for – then obviously I’m not the right partner to be talking to,” he said. “That, to me, is priority number one,” followed closely by the proven – insofar as possible – merit of the candidate itself. “More often than you’d like to see, some key, killer experiments have not been done,” he said.

Once all, or most, of the elements are in place, it’s still not easy to value a deal or predict its chances. “If you think about some transactions over the last couple of years, some of them are kind of hard to put in perspective,” said Scifluor’s Hiller. “We could start with Gilead and Pharmasset, and try to figure out how a company justifies paying $11 billion for an asset that just has a handful of [data from] patients around it.”

In late 2011, Foster City, Calif.-based Gilead Sciences Inc. forked over $137 per share in cash for Pharmasset Inc., of Princeton, N.J. The move was based on “a dream that you could treat hepatitis C virus without interferon,” Hiller said – a dream that could be on its way to realization. (See BioWorld Today, Nov. 22, 2011.)

“Or, if you look at some of the recent [initial public offerings (IPOs)] that have been tremendously successful, in many cases oversubscribed – again, handfuls of patients, in companies like Epizyme, for instance,” Hiller said. “I have tremendous respect for [CEO] Robert Gould at Epizyme, and I think highly of the company, but they have something like eight patients’ worth of data, and their market cap is $1 billion.”

Cambridge, Mass.-based Epizyme Inc.’s IPO this summer hit the top end of the pricing range and added more than a million more shares than expected, with a next-day aftermarket performance that seemed to prove how thrilled investors remain with epigenetics. The firm had completed Phase I work with EPZ-5676 in mixed lineage leukemia, a particularly virulent subtype of the most common forms of leukemia. (See BioWorld Today, June 3, 2013.)

Often, Hiller said, companies in the mood for buying “don’t want best in class, they want first in class,” and sellers need to know where their asset stands. “Unless you do that homework, you’re going to be wasting a lot of resources as a small company,” he said. “John Wayne used to say, ‘We’re burning daylight.’ Well, as a small company, every day that goes by, when you’re paying the resources to support a staff and other overhead and such, and not getting a partnership deal, is a shorter day in your runway to life, essentially. Because the company’s going to run out of cash.”

Value is Sometimes a Riddle

The picture grew even more complex when Thomas Hanke, director of biopharmaceuticals innovation sourcing for Novo Nordisk A/S, of Bagsvaerd, Denmark, pointed out that first in class vs. best in class may be a “somewhat artificial” distinction, since buyers mainly want superiority over standard of care.

“While, for first in class, this may surface early on, for best in class it may surface later, because the differentiator may be something more subtle,” he said.

“Are we speaking game changer or are we speaking incremental improvement? Is my platform technology product-specific?” The latter, he said, is “not necessarily a bad thing, but you want to be aware of it” before making a pitch.

Gilead came up again. An audience member puzzled over how the company could pay $510 million for YM Biosciences Inc., of Mississauga, Ontario, just three years after YM gained the lead drug candidate, CYT387, in its buyout of the Australian firm Cytopia Ltd., for just $10 million. (See BioWorld Today, Oct. 7, 2009, and Dec. 13, 2012.)

How could the myelofibrosis therapy CYT387 gain so much perceived value in such a short period of time?

An oral Janus kinase (JAK)/JAK2 inhibitor formulated for once-daily dosing, CYT387 proved impressive in a Phase I/II with 166 patients who have the progressive, chronic bone marrow disorder, showing not only improvement in spleen enlargement and constitutional symptoms of the disease but also a strong, unexpected effect on anemia. (See BioWorld Today, Dec. 14, 2011.)

“There are components of the continuum in product development that have more and less luster around them,” Hiller said, adding that a “novel, hot target” brings the chance of a surprising deal. He used the example of PCSK9, which he allowed was “probably a little dated.” But then, maybe JAK inhibitors are, too, and the Gilead takeover of YM – laid alongside YM’s of Cytopia – would stay a mystery.

“There’s always a dance with the potential buyer around whether you can get them to bite before you get to the next level of data,” Hiller said, adding that a “really challenging balancing act” is complicated further by reimbursement concerns.

Those, according to Merck’s Munshi, figure strongly. “It’s not [about] the science anymore,” he said. “It’s the payer’s perspective. If you have doubt in that equation, all bets are off.”

The Biopharm America conference, sponsored by the EBD Group, ends today.