National Editor

SAN FRANCISCO - Given the reliance of some start-ups on biodefense contracts, it might be understood as ironic that Julian Chick, senior business development manager of Amrad Corp., borrowed phrases from U.S. Secretary of Defense Donald Rumsfeld in a presentation here.

Chick, in a panel on deal valuation, said the factors at play in deciding the worth of products or platforms offered by biotechnology to pharmaceutical firms are the "known knowns," the "known unknowns" and the "unknown unknowns."

Chick made his remarks Monday at the BIO 2004 International Convention, and played on the widely mocked effort by Rumsfeld last year to clarify himself during a Defense Department meeting.

In the "known known" category, he put such factors as patent life, development path, cost of development, risks, manufacturing costs and patient numbers.

The "known unknown" column has to do with the market - the impact of competitors, the acceptability of formulation, pricing, and so on, he said.

Unclear by its nature is the "unknown unknown" category, though it could include such matters as the political environment and unforeseen intellectual property issues, he said.

"I'm sure we could all come up with a dozen or so," Chick added.

Amrad, of Melbourne, Australia, seems to have found a way to reach agreement, at least in one much-ballyhooed instance.

The company in November accepted its first $3 million milestone payment under the license and research collaboration with Merck Sharp & Dohme Pty. Ltd., the Australian subsidiary of Merck & Co. Inc., of Whitehouse Station, N.J. In June 2003, the companies entered one of the larger biotechnology collaborations in Australia's history with potential milestones of up to $112 million, plus royalties.

Their deal is to develop drugs with therapeutic potential in areas such as asthma and other types of respiratory disease, as well as oncology.

"In many ways, it's rather surprising that, given that the biotech industry has been around for nearly four decades and is populated with some of the smartest people in the world, that we're here today talking about how to get the right valuation for a deal," Chick said.

But two main influences are at work, said Dick Haiduck, director of strategic partnering services for San Francisco-based Burrill & Co., who moderated the panel.

One is that pharma companies are spending more on research and development, but coming up with fewer new chemical entities.

"They're spending more, getting less, and that creates an innovation gap, which creates the demand for doing partnering transactions, especially with biotech companies who can help them fill that gap," he said.

The other influence, which is "very dramatic on a company-by-company basis," has to do with patent expirations, Haiduck said.

"Over the last two years and the next three, the pharmaceutical industry is seeing revenue disappear at a level that has never happened in their industry," he said. "The R&D is less productive at a time when revenue is crumbling with patent expirations."

John Zawad, vice president of Aventis SA, spoke from the pharma side of a fairly recent major deal: the agreement between his firm in Strasbourg, France, and Tarrytown, N.Y.-based Regeneron Inc.

Last fall, Aventis and Regeneron entered a potential $485 million deal, focused on the latter's VEGF Trap technology for development in oncology and ophthalmology indications such as age-related macular degeneration and possibly others. (See BioWorld Today, Sept. 9, 2003.)

"If you look at the way the biotechs come to us and talk about deals, they usually start off with comparables," Zawad said. "Biotech is looking at what they think they can get vs. what their neighbor got," even though no two deals are alike, he added.

"Pharma doesn't look at comparables at all," he said. "Generally what we like to do is look at those known unknowns. We have no idea what those are going to be, but we think we're really good at that, and so we'll make up numbers. That's where we start."

Zawad said pharma firms don't have infinite patience, and want a return fairly quickly.

"We expect to get our money back in the first three years," he said. But if the product is worthwhile - as VEGF Trap was deemed to be, though only in Phase I - then pharma will act, and quickly, Zawad said.

"We did that deal in 19 days," he said. "Aventis was very motivated to get that product."

The BIO meeting continues through Wednesday.

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