Senior Staff Writer

LONDON - While mergers and acquisitions are a viable exit option for biotech investors, they represent a low percentage of overall transactions with pharma companies.

"We can't put all of our chips on the golden fleece of being purchased," said Barclay Kamb, a partner with Cooley Godward Kronish LLP in Palo Alto, Calif.

On the second and last full day of BioPartnering Europe held here at the Queen Elizabeth II Conference Centre, participants gathered in the Whittle Room on the third floor to listen to a panel discussion on "Partnership Transactions - Now More Than Ever."

The benefits to both the biotech and pharmaceutical industries are clear. Biotech companies need validation, nondilutive financing and infrastructure, as well as access to products and technology - all necessities to achieving liquidity for investors. Big pharma, on the other hand, needs to fill its pipelines with new, innovative products.

When Seattle Genetics Inc. partnered its lead oncology drug, SGN-40, with Genentech Inc., "it enabled us to do more with this program," said Eric Dobmeier, the company's chief business officer. The deal provided $60 million in up-front cash, as well as more than $800 million in milestone payments. The partnership also provided validation for a 10-year-old company that had not yet partnered any of its products.

"Our stock has more than doubled since we made this deal," Dobmeier said.

But there was a downside. Seattle Genetics lost control over how the product is developed. It reduced its possibilities of doing an M&A. It relinquished some of its value in the product. And, Dobmeier said, "supporting collaborations can distract internal teams from other proprietary programs."

At times, for smaller biotech companies, partnerships may seem like a necessary evil. But at Amgen Inc. they are viewed as tremendous opportunities. The 26-year-old company once had a little more than a dozen active projects in the late 1990s. Today, it has 106 active projects. "Of those active projects, over half of them were acquired or in-licensed," said Thomas Bliss, the company's executive director.

Bliss said Amgen has set up a financing vehicle, Amgen Ventures, to invest in early stage companies that are too early for partnership. It also considers acquisitions, and bought both Ilypsa and Avidia for $420 million and $290 million, respectively, following lengthy partnership discussions.

Graham Brazier, vice president and head of business development at Bristol-Myers Squibb Co., said his company is looking at earlier-stage products, as well as other pharmaceutical companies to fill the pipeline gap. But even though there is a huge demand and a huge supply of partnership opportunities, there are few deals that actually are completed.

The opportunities are changing, he said, noting that many marketed compounds would not be available today for licensing because companies have built infrastructure. Japan as a source has diminished, and there is doubt among big pharma that biotech can fill the gap.

The biotech industry spends one-third of what big pharma spends on research and development, and of the top 140 products - those with sales of more than $750 million a year - only 22 of them are biotech products. Of the 22, eight were discovered by Amgen or Genentech, and only one is a small molecule. "I think there needs to be more consolidation, more critical mass within these" small companies, Brazier said, adding that it could lead to more visible benefits of small molecules.

Partnerships Impacted By Patent Law Decisions

But if good partnerships, few as they may be, are to have any success at all, companies must draft solid contracts, taking into account recent changes in patent law.

A workshop held Monday afternoon dealt with the inconvenient truths of recent patent law decisions. The courts have made an effort to reign in patents in response to increasing litigation.

The U.S. Supreme Court, for instance, has accepted "a record number of patent cases" in the past two years, said Thomas Meyers, of the Boston office of Cooley Godward, a law firm that incorporated companies like Genentech Inc. and Amgen Inc. and that worked on a number of deals such as one between Seattle Genetics and Genentech.

The U.S. has become a litigious society that is not merely focused on right and wrong. "It's about achieving a certain business objective," said Cooley Godward's Richard Sanders, also of Boston. In fact, "one of the earmarks of success in the U.S. is being sued," he added.

In 1982, President Reagan formed the Federal Circuit Court of Appeals, an appellate court focused on patent issues. Until recently, the Supreme Court has stood aside, focusing mainly on constitutional issues. But that changed, possibly because "they think the federal circuit is getting it wrong," Sanders said.

The Cooley Godward attorneys highlighted some recent cases that went before the Supreme Court, including the patent dispute between MedImmune Inc. and Genentech. The court clarified that a company does not need to stop payment on one license in order to litigate against the other. It didn't "think a licensee should have to risk their whole business just to challenge a patent," said Barclay Kamb, a partner located at the Palo Alto, Calif., office.

As a result of increasing litigation, Meyers predicted that companies will bargain in partnership discussions "for the right not to challenge," meaning they will pay less for a license if they choose to put the language in the contract.

Another recent Supreme Court decision set the precedent that it is not a violation of antitrust laws when a patented product is tied to a nonpatented product, as was the case with Illinois Toolworks v. Independent Ink concerning a patented printing device and unpatented ink. The court decided that "patents by themselves don't create market power," Meyers said. But, he warned, a company could back its way into antitrust issues if it gets marketing power later.

"It's probably still risky to do this, but it's not, per se, illegal," he said. "It becomes a fight among the economists."

Meyers stressed that companies need to deal with the tough issues when licensing technology, figuring out the little details, such as how rights may flow downstream, and what should happen upon worst case scenarios.

The companies that get into trouble are the ones that ignore the tough issues when forming the deal. "They knew they were there, but they wanted to get the deal done," Meyers said.

The conference ended Tuesday.