Big pharma digs deep to fill pipelines

It’s no secret that pharmaceutical development pipelines are impoverished, and the smell of the money that is on offer to fatten them hung in the air at the BioEurope Partnering Conference in Düsseldorf this week.

Huge premiums are being paid to acquire biotechs – witness the 79 per cent multiple AstraZeneca paid for Cambridge Antibody Technology in May, or the even more eye-watering 100 per cent premium Merck put on its recent acquisition of Sirna Therapeutics.

At the same time there is a growth in licensing deals, with early stage and even discovery programmes coming into play, as more advanced clinical programmes are spoken for. Not only are there more deals, the prices being paid would have been unthinkable five years ago.

Changing landscape

“There has been a change in the landscape: more deals are for acquisitions and they are at higher prices,” Barbara Yanni, Vice President and Chief Licensing Officer at Merck, told the conference. “But although the big deals get a lot of attention, there is still a lot of licensing going on.”

There is both internal and external pressure to do deals, said John Goddard, Vice President of Business Development at AstraZeneca plc said. “Things are bubbling too fast and will slow down but I don’t know when.” He took up his post six months ago with a brief to consolidate all AstraZeneca's M&A and licensing activity and ramp it up to do more deals. “As a comment on how it is now, I’ve never been busier in my whole career,” he said.

Pharma’s neediness is generating lengthening queues at biotech’s table said Rob Willis, Vice President of Alliance Management at Johnson & Johnson. “Clearly, there are more buyers around. Before there would be one or two people, now there are eight, nine or ten in the bidding process.”

Tony Rosenberg, Global Head of Business Development at Novartis fingered the venture capital community as one of the drivers to buy rather than license. “Often when we make an approach to do a licence and we are drawn into an acquisition, the pressure comes because the VCs need exits.”

Goddard agreed, noting that in the thick of a bidding process it is now common to get phone calls from a VC investor saying, “One of the companies looking has put an acquisition deal on the table, what do you think?”

Look for the lead

That call usually comes from the lead investor, who knows that the best exit now is not going to be via an IPO, but by acquisition.

Furthermore, there are cases where VCs are making the approach without the knowledge of the investee company's management, according to Willis. This forces potential partners to make a quick assessment of whether there really is a bid.

“We don’t want to get into the position where investors are trying to sell the company from underneath [the management],” said Willis.

Rosenberg too, said Novartis had been involved in several cases where, “investors and managers had different objectives”.

A people thing

To avoid this difficulty Johnson & Johnson has a firewall between the licensing group and the acquisition group. “Our strategy for acquisition is very different from licensing,” said Willis. “We look at all the assets and all the people – we don’t want to buy a company where we are going to lose all the management team.”

Similarly, this was a key consideration for Novartis when it acquired the UK antibody company NeuTec Pharma earlier this year, said Rosenberg. “We wanted to expand our biologics presence – we hadn’t been at the forefront – and felt it was essential to keep the people on board to work with us.”

For Merck the rationale behind acquiring Sirna, rather than agreeing a license, was that the company's RNAi technology is broadly applicable over many therapeutic areas.

“At first blush you think about oncology, but it [RNAi] is a broadly based mechanism for drug discovery in other areas,” said Yanni. “Our view was incompatible with what Sirna's partnering strategy was.” For example, the company had agreed an exclusive deal with GlaxoSmithKline plc in asthma. “Merck wanted to use the technology broadly, and that led to us discussing M&A.”

Feeding frenzy

In the thick of the feeding frenzy the option on whether to license a product or acquire the company may not be there, said Goddard. “In one case recently we wanted a licence and were then told with 24 hours to go there was an offer [for the whole company]. We didn’t know whether to believe them, until we found out a third party had made the acquisition.”

Willis has had a similar experience. "”A company we wanted a licence from said it was an acquisition target, and we couldn't get there quickly enough and had to let it go.”

Conversely, Rosenberg said Novartis has had acquisition talks where it has ended up agreeing a licence instead.

But James Watson, Head of Merchant Banking at Burrill and Company in San Francisco, cautioned VCs against getting too excited at the prospect of an acquisition. “IPOs currently are low value, therefore there is huge interest in M&A. But you've got to look at the numbers.” To date in 2006 there have been about 20 large acquisitions. “So it is still a relatively rare phenomenon,” Watson warned.

Getting there early

But if being acquired is not on offer, there are more, earlier stage licensing agreements being sealed. “We would all love to be licensing in Phase II and Phase III, but for the most part they have all been licensed,” said BJ Borman, Vice President of Business Development at Pfizer. “So you have to go to Phase I and preclinical, and we’ve even gone as far back as discovery.”

These early stage agreements are commanding the same price as compounds with Phase II proof of efficacy data did five years ago. “It’s amazing the price we are prepared to pay to feed the pipeline,” said Borman.

Pfizer is less and less doing straight licensing, where it gets one or two molecules and a patent estate, and now wants to bring in collaborators along with the technology. “If it is a compelling target we want to have as many shots as possible on it,” said Borman.