Assistant Managing Editor

With venture capital getting hard to come by and the arrival of big pharma's dreaded patent cliff, "it seems like a perfect storm" for a burst of licensing and collaboration activity for the biotech sector, said Hemmie Chang, of Foley Hoag LLP's licensing & strategic alliance practice group.

In fact, by Foley Hoag's count, the number of licensing transactions in 2010 rose to levels not seen since 2007, due likely in large part to pharma's growing enthusiasm for reaching outside its own research labs and its increasing unwillingness to pay the higher M&A dollars. Still, current economic forces and changing health care and payer guidelines are making it more challenging than ever for biotechs to land promising partnering or licensing deals.

"It's unrealistic to ignore the changing environment we're in, in terms of pricing and payers," said Ranya Dajani, executive director in the strategic transactions group at Bristol-Myers Squibb Co., during last week's Biotechnology Industry Organization-hosted webinar looking at the state of licensing deals in biotech.

That means it's not enough to have a product that has hit all its Phase III endpoints and cleared all the regulatory hurdles; that product has be commercially viable. Biotechs that go looking for big pharma partners without a clear marketing strategy in hand could find themselves with no takers, regardless of how promising the product might appear in development.

It's a trend that has turned the whole first-in-class-vs.-best-in-class debate on its head. In years past, follow-on drugs could take advantage of the development and regulatory path forged by the first-in-class products and still go on to claim a substantial share of the market for themselves. But "being second to market isn't as easy as it used to be," Dajani noted. (See BioWorld Insight, Feb. 21, 2011.)

Now follow-on products need their own kind of innovation to differentiate them from the first-in-class competitors, offering significant improvements in either safety, efficacy or convenience. "Second to market has to have a story, or it's going to be a very steep hill to climb," Dajani added.

Differentiation is key for marketing in established areas such as the U.S., Europe and Japan. But big pharma increasingly is turning attention to emerging markets such as Brazil, China and Russia, so biotechs also have to think about how the product can work commercially in those areas as well.

Emerging markets are "critical for the future of pharma," said R. Christopher Seaton, senior vice president of global transactions, Bayer Healthcare. "Any company who ignores them does so at its peril."

Trending Toward Realism

So given the changing marketplace and commercialization challenges, what is big pharma really looking for from biotech?

According to BioWorld Snapshots, 55 product-based licensing or research collaboration deals between biotech and big pharma were signed in the first quarter. Those ranged from early stage research collaborations to late-stage out-licensing agreements, but the majority of the deals tended toward the two ends of the spectrum, with 28 deals for programs at preclinical stage or earlier and 14 for Phase III or later. Eleven deals involved Phase II-stage products and only one was for a product in Phase I development.

The traditional biotech strategy has involved getting a drug candidate through the Phase II proof-of-concept study and then finding a partner to handle the larger – and costlier – pivotal trials. But the arrival of the patent cliff has reduced big pharma's appetite for products that are neither near-term nor significantly de-risked. And biotechs hoping to score a high-dollar deal for a mid-stage drug are facing some harsh disappointments.

"It's easy to dream big," Bayer's Seaton said. "The problem is that reality often bites and hurts those dreams."

One of the new realities is that the triple-digit up-front payments of years past has all but disappeared. True, a firm with a promising – and at least somewhat de-risked – late-stage program might still command a hefty initial payment. Cambridge, Mass.-based Aveo Pharmaceuticals Inc., for instance, earned a whopping $125 million up front when it partnered Phase III-stage tyrosine kinase inhibitor tivozanib with Astellas Pharma Inc. in February. That deal, so far the largest of 2011, also includes up to $1.3 billion in milestones. (See BioWorld Today, Feb. 17, 2011.)

Competition for a limited number of promising candidates could drive some more large deals. And stunning innovation might even capture some big pharma attention. But those cases are likely to be few and far between.

Where the declining up-front and milestone payments may hit biotech hardest are the early stage deals. After all, preclinical-stage programs always are "a bit of a crapshoot," Seaton pointed out. But even the technology and research deals – all the rage back in the 1990s and the early part of this decade as genomics burst on the scene – have lost a lot of their luster.

The reason for that is simple, Seaton said. "I can't think of many products that have come out of those deals."

As an example, he pointed to Bayer's own deal with Millennium Pharmaceuticals Inc. (now part of Takeda Pharmaceutical Co. Ltd.) Considered the largest drug development collaboration of its time, the 1998 agreement called for the German big pharma firm to pay Millennium up to $368.4 million in guaranteed funding and performance fees for drug targets identified by Millennium and a license fee for the use of Millennium's genomics technologies. Another $97 million came as an equity investment. (See BioWorld Today, Sept. 24, 1998.)

The five-year deal was expanded in 2001 and then concluded in 2003, at which time Bayer managed to recoup a portion of its investment by selling its equity stake in Millennium for about $300 million. But the collaboration itself was considered by many to be a bust, having produced only one validated preclinical candidate. (See BioWorld Today, Sept. 20, 2001.)

And pharma's once-frantic chase for new technology has slowed to a more cautious pace. Roche AG recently backed away from its work in RNAi, a space that has made scientific headlines, but remains relatively early stage. The Basel, Switzerland-based pharma, which cut about 4,800 members of its work force and left its RNAi-focused partners Alnylam Pharmaceuticals Inc. and Tekmira Pharmaceuticals Inc. hanging, attributed the move in part to technical hurdles to delivering RNAi. (See BioWorld Today, Nov. 18, 2010.)

But not all hope is lost. Firms with validated platform technologies remain in demand. Seattle Genetics Inc., for instance, has about a dozen partners for its antibody-drug conjugate technology, the platform that yielded brentuximab vedotin (SGN-35), which is under review for refractory Hodgkin lymphoma and systemic anaplastic large-cell lymphoma. As of March, the Bothell, Wash-based firm had racked up about $155 million in up-front payments from those collaborations and could receive up to $3.2 billion in future payments. (See BioWorld Today, March 23, 2011.)