By Jennifer Van Brunt
If the first half of 1998 is any indication, there could be some real changes occurring in the underlying structures of new research and development collaborations between biotechnology companies and big pharmaceutical houses. For one thing, the frantic pace of partnering that has prevailed for the last five years may be starting to back off a little — or at least reach a kind of steady-state momentum. For the first six months of 1998 (through June 15) 101 new alliances between biotech companies and big pharmaceutical houses were announced. By the end of the second quarter, there will probably be another handful, bringing the total figure to the same level as in 1997 (when 106 new deals were announced between Jan. 1 and June 30).
For another, the number of new deals with stated pre-commercialization values of at least $100 million has dropped dramatically in the last year. In the first six months of 1998, there only have been three collaborations to hit that level; in 1997, for the entire year there were 12
R & D deals that met or exceeded the $100 million mark.
But since so few of this current crop of partnerships have actually disclosed any financial details at all, it's difficult to ascertain whether, in fact, the deals are becoming less lucrative for the biotech partner than they have been in past years. In the first six months of 1998, only about 29 percent of all collaborations disclosed dollar values. This is an all-time low; between 1994 and 1996, the potential pre-commercialization value of a new collaboration was disclosed in anywhere from 45 to 55 percent of the cases. In 1997, it dropped to 42 percent (although it had only been 33 percent at mid-year in 1997).
Together, these results indicate that changes are a-foot in the partnering arena. This is not surprising, given the fact that both small and large drug discovery and development companies are facing increasing pressure to perform. Wall Street has come to count on big pharma's earnings growth — quarter after quarter. If those firms don't perform, their stocks get punished. It goes without saying that publicly traded biotechnology companies are at the mercy of Wall Street. As such, biotechs have come to rely more heavily on financial support from the pharmaceutical industry — in the form of collaborations — than from the investment community.
But it's obvious that the environment has changed — and that biotech companies might have to re-think the structures of their partnering arrangements. According to Dennis Purcell, managing director of investment banking at San Francisco-based Hambrecht & Quist LLC, biotech companies need to "become as financially innovative in their interactions with pharmaceutical partners as they are scientifically innovative." Speaking last week in New York City at the International Biotechnology Meeting and Exhibition (BIO '98), Purcell suggested that one strategy might entail negotiating rights to products that have become ancillary to the big pharmaceutical company's portfolio — rather than seeking a straight upfront cash outlay or even an equity investment.
Indeed, more than one biotech company over the years has adopted the strategy of in-licensing mid-to-late-stage drug development candidates from big pharma firms for continued development. In most cases, these potential drugs — although performing respectably in early clinical trials — were not sufficiently compelling to remain on the big pharma's active list. But they remain attractive product candidates for biotech companies in search of near-term revenues — especially if the biotech has a way to improve the drug's performance through reformulation.
This is one of the angles that NeXstar Pharmaceuticals Inc. used in negotiating its recently announced deal with Glaxo Wellcome plc. The deal, announced in late May, is actually composed of three separate parts. Each of these three represents a different business strategy, as well — both for NeXstar and for London-based Glaxo. First, there was an equity component, with Glaxo buying $10 million in NeXstar common stock (NASDAQ:NXTR) for a 3.5 percent stake in the future of the Boulder, Colo. biotech firm's fortunes. Unlike some other biotech-big pharma alliances with an equity component, Glaxo did not pay a premium for the stock. The price of $10.39 per share was based on the average trading price of the stock over 30 days.
The second aspect centered on Glaxo's licensing of non-exclusive rights to NeXstar's drug discovery technology, Selex (for systematic evolution of ligands by exponential enrichment), which NeXstar founder and chief scientific officer Larry Gold began developing 30 years ago. Selex is a combinatorial chemistry technology that allows for the very rapid identification of specific inhibitors of targets involved in development or progression of disease. The compounds identified by the technology, called aptamers, can even be developed on their own as therapeutic agents. Glaxo intends to apply the Selex technology to its genomics program, in an effort to validate targets for potential drug development. This is the first time that NeXstar has partnered its Selex technology in quite some time, explained chief financial officer Michael Hart, and as such is an opportunity to validate the technology. The earliest Selex-based collaboration was probably the 1993 agreement with German pharmaceutical giant Schering AG — a deal that "was put in place before the merger [of NeXagen Inc. with Vestar Inc. in 1995]," Hart said.
Third — and perhaps the most important consideration for the biotech firm — was the in-licensing by NeXstar of one of Glaxo's former anti-cancer drug candidates, a topoisomerase I inhibitor known as lurtotecan. Glaxo had found "encouraging" anti-tumor activity in Phase II clinical trials, but opted not to pursue product development because its performance was not significantly better than a similar compound — topotecan — already on the market, Hart said. By encapsulating the drug into liposomes — NeXstar's proven strong point — the company intends to increase lurtotecan's efficacy and therapeutic potential. In fact, NeXstar has already demonstrated that this is possible in preclinical studies.
Having a promising liposomal oncology drug works right into NeXstar's product portfolio, as well. The company is already on the market with DaunoXome (a liposomal formulation of the chemotherapeutic drug daunorubicin) as well as AmBisome (a liposomal formulation of the anti-fungal drug amphotericin B). In acquiring the exclusive rights to Glaxo's lurtotecan, "We were looking to leverage our marketing infrastructure," Hart continued.
The negotiations on the Glaxo deal took about 15 months start-to-finish, Hart said. Much of that time was taken up by NeXstar's evaluation of the potential of Glaxo's oncology drug. NeXstar had to "come up with a [liposomal] formulation of lurtotecan we were relatively comfortable with and we had to do the animal tests" before the final details of the in-licensing part of the collaboration were ironed out, he explained.
NeXstar has inked a number of other collaborations over the years — including a marketing agreement on AmBisome with Fujisawa USA in 1995, an R & D agreement with Roche Molecular Systems Inc. of Branchburg, N.J. on PCR application of aptamers in 1996 and a development and marketing agreement with Osaka-based Sumitomo Pharmaceutical Co. Ltd. on AmBisome in 1996.
As compared to five years ago, Hart said, "it's a lot more difficult to stand up and be counted in this market. There's so much technology out there...that big pharma is not willing to bet as much on a single technology [as it used to]." According to Hart, big pharmaceutical companies today are inclined to do more collaborations than in the past — each for less of an investment. But the backlash for biotech firms is that they also have to do more deals than they used to in order to generate the equivalent amount of financial support. "The perception five years ago was that big pharma companies were flush with cash," Hart said. But these days, big pharmas are very conscious of their earnings and are "more judicious in how to structure any collaboration than they have been in the past."