BioWorld Today Columnist
For a majority of the biotech sector, corporate partners play a crucial role in keeping the smaller companies alive.
Even in post-ImClone times, that "Good Housekeeping" seal of approval that comes from consummating a big deal gives execs and investors alike a warm fuzzy feeling.
So what’s the news in deal terms? Clearly the infamous "BioWorld dollars" are one measurement - much like estimating the net worth of Anna Nicole Smith before her stepchildren (the ungrateful wretches!) sued to retrieve their father’s estate, but then having to live on her post-suit income.
I went to the king of deal analysis, Mark Edwards at Recombinant Capital, for the scoop.
Money Follows Reduced Risk
Hot off the press, the 2005 Report on Alliance Trends from Recap’s Mike McCully showed that up-front fees and milestone payments escalated in the past 12 months. Milestones more than doubled from a median of $42 million in 2004 to $87.5 million in 2005, while the median up-front fee jumped from $5.8 million to $9 million. Those two deal terms show the most dramatic up-ticks since the 1996-97 time frame, with R&D payments and equity making strides, as well.
Medians tend to smooth out the big numbers on either side of the average, like the $50 million up-front fee that AtheroGenics got from AstraZeneca plc for AGI-1067, a drug for atherosclerosis in Phase III trials. (My personal favorite deal was the $21 million Almirall paid up front for European rights to GW’s Phase III Sativex, derived from cannabis.)
Not surprisingly, Recap reported that the closer the program gets to the market, the higher the price commanded. The firm breaks down development progress into early stage (discovery), mid-stage (some efficacy in animals and perhaps some clinical data) and late-stage (Phase I and Phase II trials). The up-front and R&D terms increase as programs progress from that early stage (median = $2.5 million up-front fee, $7 million R&D funding, $116 million milestones and $15 million equity) to late-stage deals ($16.5 million up-front fee, $24.5 million R&D funding, $60 million milestones and $11 million equity).
Then there are the late-stage, Phase III deals that are "so close to revenues, you can taste it." Those carry an 85 percent increase in up-front fees to a median of $18.5 million, 80 percent increase in R&D funding and a 44 percent jump in milestones from the median terms in Phase II deals.
2006 shows every sign of following the 2005 trend. January saw some amazing up-front fees paid for Phase I/II compounds ($20 million to KAI Pharmaceuticals from Sankyo for a cardiovascular drug; $40 million to Trubion from Wyeth for inflammation program) and Phase III candidates ($50 million up front to Nuvelo from Bayer for their novel thrombolytic).
Partners Know What They Want
With empty pipelines for big pharma, it’s no surprise that late-stage programs are becoming more popular. Of course, that also is a side effect of the biotech industry being around long enough to generate more late-stage deals.
Nonetheless, late-stage compounds were the cool clique in 2004/05, generating around 30 percent of the deals, vs. 19 percent in 2001. Early stage programs dropped from 73 percent of the deal flow in 2001 to 59 percent in 2005.
Biotech companies themselves became more frequent consummators of partnerships with other biotechs. Of the 653 deals completed in 2005, 396 (60 percent) were biotech-biotech deals. Back in the 1996-97 time frame, only 34 percent of the deals were biotech-biotech.
Finally, partners continued to access a broad range of technologies. While genomics-based deals have taken a big hit since their peak in 2001, they have started returning to popularity as pharmacogenomics (now called personalized medicine, and a big favorite with FDA and insurance companies!) finds its niche.
The number of screening deals has dropped since 2001. Small-molecule deals have risen to dominate the scene, representing about 35 percent of deals in 2005. Programs based on monoclonal antibodies, recombinant proteins, new formulations and oligonucleotides have tracked pretty steady since 2001.
Fear Makes A Great Driver
Edwards pointed out that true demand is driven by the oft-lamented limited quality opportunities coming from big pharma R&D pipelines and the accelerating rate of patent lapsing.
In addition, he sees three big forces behind the rising deal terms:
• The sheer amount of cash that flowed into biotech during the past five years - for instance, Abgenix Inc. packed in at least $1.3 billion since its 1998 IPO. That overall war chest has allowed lucky companies to hold back from partnering and do another trial if they don’t like the bids they got with Phase I data. That cash infusion helped drive deal prices up by giving biotechs the ability to build in-house assets that added significant value to the programs.
• The fear factor: With prices going up, potential partners worry that they will get outbid if they wait too long for more data. More data tend to give programs higher visibility, bringing in more sharks. Or the biotech firm might decide to go it alone, with market launch enticingly close. If you go in early with a compelling bid, much of the cost is loaded into milestones that never get paid, if the program fails.
• Finally, Edwards said that biotechs are getting better at synchronizing bidders, pursuing several in parallel instead of in series.
Edwards also said that the only thing that will pull prices back down would be if active players like Pfizer Inc. and J&J suddenly have remarkable success in their internal pipelines. That would allow them to go back to viewing biotech as supplemental, instead of crucial to revenue growth.
"If big pharma had a year like Genentech’s, that would crush partnering," Edwards said.