Biotech brings silver lining to pharma cloud

January certainly wasn’t “the month of empty pockets” for Pfizer. By the end of the month the world’s leading pharmaceutical company had received simultaneous FDA approval for two new drugs. Yet neither drug was invented by the company.

The first drug was Sutent, a multi-tyrosine kinase inhibitor against gastrointestinal stromal tumors and advanced kidney cancer, approved on 26 January. A day later Pfizer got the FDA and European nod for its inhaled insulin product Exubera. Both drugs were originally developed by small biotechs and were in Phase III trials when Pfizer took them over, illustrating just how heavily pharma relies on in-licensing to maintain profit margins.

It is widely acknowledged that the pharma industry faces testing times. As companies presented their end-of-year financial results throughout January, Pfizer CEO Hank McKinnell said, “2005 was one of the most difficult years in memory…it will be seen as a pivotal year in Pfizer's history – the last year of the old Pfizer. [We have to] change our company to meet changing times.”

Pressures on the industry include looming patent expiries – Pfizer alone will lose patent protection on four of its big-selling drugs over the next three years. And they also face uncertain pricing due to the introduction of Medicare Part D in the US and fragmented markets across Europe, and product setbacks exemplified by Vioxx, the anti-arthritis drug that was withdrawn in September 2004 following adverse side effects, and other COX-2 inhibitors.

Approvals stagnating

Perhaps most worrying of all is that new drug approvals have stagnated and the total number of drugs in the pharma pipeline has shrunk for the first time in five years. Productivity in terms of new active substances launched improved only marginally on the previous year’s record low – up to 28 from 23, according to the industry newsletter Scrip.

IMS Health, an information resource company, predicts that global pharmaceutical growth will remain constant at 6 to 7 per cent this year. In-licensing new drug candidates is a key strategy for the top 10 pharmaceutical companies anxious to keep pace with this growth estimate.

“It’ll be pretty tough to replace Lipitor, a $10 billion product—that’s 10 blockbusters that you have to introduce,” says Bruce Booth, an analyst with Atlas Venture in Boston, Massachusetts. “No matter how big they are, they just don’t have the manpower to be able to develop and discover all these, even if the new in-house technologies deliver. Most still have to in-license one for one with internal research leads.”

Indeed, pharma has overcome its traditional “not invented here” hang-up to such an extent that Schering-Plough’s CEO, Fred Hassan, believes that 50 per cent of his company’s new drugs need to be in-licensed – a position endorsed by many other large pharma CEOs. And pharma’s readiness to in-license is born out in the latest figures: out of 31 new active substances launched in 2004, 22 were the subject of at least one licensing deal.

Shift to early licensing

A report this year by Goldman Sachs reveals the extent of pharma’s dependency on in-licensing. It shows which companies need preferentially to buy-in late stage compounds to plug the top end of their pipeline quickly, such as Pfizer and Merck, and those who can afford to wait longer and in-license early stage compounds, such as Novartis and GlaxoSmithKline (see Figure 1, right).

“A few years ago pharma was only interested in late stage products, meaning those after phase II. They grazed off the market and now they’ve realised there isn’t anything of quality left and that they have to come earlier if they want their pick,” says Christian Rohlff, CEO of Oxford Genome Sciences. “That’s why there are some bigger dealscoming through for early programmes that are attractive to pharma.”

Examples of early stage deals include AstraZeneca’s Christmas buyout of KuDOS Pharmaceuticals, a privately owned biotech company spun out of Cambridge University in 1997, for £121 million in cash. KuDOS develops anti-cancer therapies based on the inhibition of DNA repair and the lead product based on the technology, KU 59436, an oral poly-ADP-ribose polymerase (PARP) enzyme inhibitor, is currently in Phase I trials.

Earlier in December Novartis, signed a deal with a headline value of $520 million with UK-based Astex Pharmaceuticals for preclinical and Phase I cell cycle inhibitor oncology drugs, while the leading US biotech Genentech agreed a $230 million deal covering preclinical small molecule inhibitors of certain kinase enzymes with PIramed, another private UK company. Elsewhere, GlaxoSmithKline bought into a preclinical pain compound and its back-ups, discovered by Vertex Pharmaceuticals, for $20 million.

And underlining the extent to which big pharma now relies on biotech, the KuDOS deal was one of four completed by AstraZeneca at the end of 2005 as its new CEO David Brennan took control with a promise to strengthen the pipeline.

One of these was with another UK company, Protherics, for its polyclonal antibody product for treating sepsis. The price tag on this agreement, £195 million, was a significant contribution to the most successful month in the history of the UK sector, with deals totaling more than £725 million signed in December.

The deals illustrate a significant shift for the biotechnology industry, too. Whereas many biotech companies used to trade either on a platform technology or a single clinical product, they are now bargaining with related assets. “KuDOS had a Phase I product that had come out of proprietary technology, so AstraZeneca was buying a clinical product along with a clear understanding of the technology and the potential for a series of related follow-up compounds coming through. That’s the next step up in maturity,” says David Kennard, CEO of Neurotargets Ltd.

The current climate is also prompting biotech companies to look elsewhere in terms of where the funding comes from. “Whereas big pharma is looking earlier and earlier, venture capitalists won’t invest in companies unless they have later-stage products,” says Martyn Postle, Director of Cambridge Healthcare & Biotech. “I’m telling my clients now that their business plans should include a much higher percentage of funding from corporate partners, in the expectation they will get a much lower percentage from VCs,”.

Pharma’s desperation to stock its pipelines also means that biotech companies can force their hand with more creative agreements. Pfizer has been at the forefront of this new style of deal-making. Back in December 2002 it signed deals with two small biotechs – Eyetech and Neurocrine Biosciences – to co-develop their late-stage compounds for macular degeneration and insomnia respectively, while at the same time training the companies’ sales forces to co-promote leading Pfizer medicines.  

Others could learn from the example. “I see this as the way forward for many of the smaller European pharma companies,” says Postle. “The smaller Italian or Spanish companies that are privately owned and want to in-license products need to be more creative in their deal structure to win deals away from big pharma. “

If you’re a company only active in southern Europe how do you make yourself look attractive to a west coast biotech company? “Offer them a tailored deal for a part of Europe because that’s your specialty.”

According to Goldman Sachs, Pfizer’s January drug approvals are worth peak sales of $1 billion each. The company has other blockbusters primed for launch in the next 18 months – Champix, Indiplon, asenapine and torcetrapib. Half are in-house developments and half are licensed in.