Intellectual Property: Take your partners

"This is a meeting of dinners and diners," said one wag as 1,500 pharma and biotech executives got together at BIO-Europe 2005 in Dresden earlier this month. The theme of the meeting, 'Building value through partnerships' reflects the extent to which licensing and collaboration have become the lifeblood of the drug industry.

And Dresden was an appropriate venue, its Baroque architectural gems reflecting the complexities of contract negotiations, while the massed array of tiny booths in which delegates courted each other had their counterpart in the unadorned regularity of the city's Communist-age buildings.

Pharma companies - the diners - need biotech's innovative products and processes to boost their sclerotic development pipelines. And with the public markets in Europe closed to all but a very select few, biotech companies - the dinners - need licensing deals to survive and build value.

As a result, the number of deals and their value continues to grow, according to James Watson, managing director and head of merchant banking at Burrill and Company, a life sciences merchant bank based in California. "However, at the same time deal making is getting more competitive."

The competition stems not only from the fact that there are more companies in the market, but that everyone wants to find projects at an advanced stage of development, preferably in Phase III clinical trials, which involve randomised controlled clinical trials in patients. "The problem is that there aren't enough whales out there," said Jim Mullen, CEO of Biogen Idec, of Cambridge, Massachusetts. "As Phase III products get more scarce, people will have to fish for Phase II [products still being tested to determine the correct dose]."

Despite the focus on products, it remains possible to do early-stage deals. Two of the largest deals in Europe within the past year - between Astex and AstraZeneca, with a potential value of $275 million, and Cambridge Antibody Technology (CAT) and AstraZeneca, in which AstraZeneca invested £75 million in CAT, are at a preclinical stage.

Klaus Wilgenbus, head of corporate division licensing at Boehringer Ingelheim, said that in the past two years the company had significantly stepped up its early-stage deal making, particularly in the preclinical arena. But he said, "It is not a one-size-fits-all business model. The deals are always different. Don’t try and use one model on another deal."

Blurring the traditional lines

A major preoccupation of the conference was the crossover of interests on the two sides of the industry. Pharma is advancing out of its traditional chemistry space and encroaching on the biotech stronghold in protein drugs. At the same time, the wealth of targets and associated biology arising from the sequencing of the human genome is prompting biotech to desert its roots and embrace small molecules.

This so-called "convergence of modalities" reflects the growing success of protein drugs in the marketplace. "Leadership in any therapeutic area now depends on leadership in all types of compounds," said Watson.

"In some indications, the need for pharma to embrace antibodies is even more marked than in others," said Simon Moroney, CEO of Morphosys, an antibody development company based in Munich. "If you want to be in oncology you have got to have antibody capabilities. Clearly, big molecules are coming of age."

Another reason for the growing popularity of antibodies is that they have a greater chance of making it through development, noted Michael Yeomans, senior vice president of global business development at Biovail, of Toronto, Canada.

Big pharma's arrival in antibodies raises the question of how the larger biotech companies that carved out this market originally can compete. "There is an edge for some companies that have their roots in large molecules," said Mark Wiggins, executive vice president of business development at one such large biotech, Biogen Idec. "However, we are not taking on big pharma in discovering small molecules, but will in-license them." An example is Biogen's deal with the UK company Vernalis Group for a small molecule for treating Parkinson's disease.

"In particular therapeutic areas you need to move between big molecules and small molecules to be able always to hit the targets," said Wiggins.

To license, or not to license?

The need for a broader molecular approach to targets raises the question for pharmaceutical companies of whether they should license or acquire skills and products in protein drugs.

Mike Henry, head of global licensing activities for AstraZeneca, said, “Initially we did deals here and there, but it was such a patchwork it wasn’t a clean play – it makes it difficult when you have so many partnerships to be distinctive.”

A year before agreeing the collaboration with CAT, AstraZeneca made a deal worth a headline $500 million, with Abgenix, of Fremont, California, to develop monoclonal antibodies in cancer.

"With these two collaborations we have established the capabilities we wanted. Valuations are so high it would be hard to justify a full acquisition, and you may lose the key talents – so we think it is best to be partners," Wiggins said.

However, there is a high level of cross-licensing of intellectual property in the antibody arena, which can be an incentive to buy products outright, rather than layering yet another licence on top. An acquisition can also be the killer way to knock out all potential competitors. And collaborations need managing: every time a company sets up a partnership it needs more resources to manage the alliance; an acquisition comes without those overheads.

In the absence of initial public offerings (IPO) as an exit route, investors are facing the fact that merger and acquisition (M&A) is the only way of realising their assets. "Almost 90 per cent all biotechnology entrepreneurs would prefer a trade sale as the exit," Rudiger Herrmann, chair of the Biotech, Pharma and Life Science Practice at the law firm Mayer Brown Rowe and Maw, told delegates.

Morphosys' Moroney agreed. "Five years ago people wouldn't dream of selling out. Now we are approaching the model that applies in software where people build a product and sell it," he said.

Keep your IP unencumbered

The problem is that grooming a company for eventual M&A requires a different growth path from building a company for an IPO.  To be an acquisition target companies need a clean portfolio, free of relationships and licensing deals. This makes for a riskier growth strategy because without deals a start-up is likely to have fewer products.

Biotech companies face the Catch 22 that unencumbered IP and product portfolios achieve the highest valuations, but deal making is often a requirement of venture capital investors, who see it as a way to validate the technology, and hand out follow-on funding only if deals are done.

Diane Romza-Kutz, partner at the law firm Epstein and Becker and Green, said that currently she is advising clients with unencumbered portfolios to try and keep it that way. But with funding in short supply, many biotech companies are running out of time for organic growth, and deals are the only alternative.

In these circumstances it is hard to think strategically, said Wolfgang Schoenfeld, CEO of Eucodis, of Vienna, Austria. "In my experience, I was happy to make a deal at all. The second deal was easier. In many cases there is no strategy - in many cases there is only survival."

Good deals are ones you are not forced into, said Romza-Kutz. Deals fail when biotech goes to pharma hat in hand. "They may get an initial handful of dollars but it will be a disaster a year from now. It will fail because you had the wrong attitude going in the door."

Often smaller companies can make progress if they partner with another small company to co-develop. This enables them to bring a product forward without having to sacrifice too much value. According to Romza-Kutz the shortage of cash means there is resurgence in co-development deals currently. "We did a lot of [this type of deal] ten years ago, but not since," Romza-Kutz said, adding, "We can really see the drivers being more about who and what can be achieved together, and what we can learn from each other."

So pharma and biotech have become deal makers par excellence. But finding a mate, and making a match, remains a fraught and ever-mutating process.