This year has witnessed a new wrinkle in the art of the biotechnology deal: Millennium Pharmaceuticals Inc. and The Bayer Group inked the flat-out biggest alliance ever. This nearly half billion dollar pact has yet again reinforced the power and potential of "genes as currency" as SmithKline Beecham's Chief Science and Technology Officer George Poste once so aptly put it. Beyond that, constriction in the capital markets right now is forcing a spate of mergers, sure to test the creative powers of the most hardened investment bankers. It's widely accepted that plain vanilla mergers between biotech companies or outright acquisitions of entire biotech companies by Big Pharma partners are not only hard to pull off, but simply don't work very often. So, right now the need for thoughtful, well-designed alliances is greater than ever.


Happy birthday to us all

On this its tenth anniversary, Recombinant Capital is taking the opportunity to identify and reflect on what we feel are the ten most significant deals in biotechnology over the last two decades. This list is both a summary and an invitation. In ReCap's "rDNA" website, our subscription-only area, would-be breakthrough alliance makers have access to the most complete array of resources related to biotechnology deals anywhere. There, you can peruse ReCap-generated analyses or access SEC-filed, complete contracts for thousands of alliances. For more information about rDNA.com, check out the rDNA information site.

As an additional resource to complement this special report, we have set aside materials from rDNA.com for each of the following ten alliances, in a free site that you can access by pointing your browser to www.recap.com/bday.nsf. In addition, we've created links in some of these deal descriptions to take you to specific "riffs" in the actual deal contracts that we think might prove instructive.

And now, a chorus line of alliances that have helped shape the industry . . .

1) Eli Lilly and Genentech sign a pact to develop recombinant human insulin. 1978.

On a wind-swept patch of San Francisco bayfront in the late 1970s, a scruffy group of young scientists were waging war in between shooting lunchtime hoops and tearing through pizza and beer at their Friday "ho-ho" parties. There was a three-way race underway between these young cloners from Genentech Inc., scientists at the University of California at San Francisco, and Nobel Laureate Walter Gilbert's laboratory at Harvard. The goal: recombinant human insulin, the key protein diabetics must inject to normalize their metabolisms.

The backdrop: Indianapolis drug company Eli Lilly was a leading supplier of insulin. Lilly was purifying the material from pig glands, but internal projections showed demand from the fast-growing diabetic population would outstrip the available material Lilly could produce by around 1992. So it brought a number of researchers together to discuss the possibility of developing genetically engineered human insulin and launched a race to clone the protein. To the winner of the race would go a contract. In 1978, Genentech won the race: It cloned insulin and signed a deal to help Lilly develop "Humulin" as a pharmaceutical product.

The alliance was important in several respects. First, the idea that the team that "won" would get the contract prize. In the early days, many companies were chasing the same relatively obvious proteins -- interferons, interleukins, insulin and growth hormones. This early competition provided a sense of urgency inside the companies that was unheard of inside the big, slow drug houses. And ticking off milestones on the long, slow path to the clinic usually began with cloning a protein. It became one of Wall Street's few "trackable" metrics to try to differentiate one biotech from another over the next half dozen years.

Another element that marked this deal was what it didn't include. "Nobody knew what a biotech deal ought to look like," says one executive who was party to the negotiation. "It really wasn't a tight, well thought-through deal." For example, the parties simply couldn't figure out how to assign a value to some of Genentech's contributions. The bewilderment between the lines of the actual contract is striking: "In view of the nascent state of genetic engineering technology and the uncertainties which attend the development, licensure and commercial exploitation of related technology, the Parties are unable to assign any fixed present value to the know-how and microorganism(s) Genentech is to supply hereunder . . ." There was a price to pay for that uncertainty: Ongoing disputes between Genentech and Lilly about the value of the technology would eventually lead to a lawsuit that dragged on for years.

Those growing pains aside, however, the Lilly deal was arguably most significant as an endorsement of the whole idea of biotechnology. At the time, the pharmaceutical industry was characterized by hundreds of chemists in white coats synthesizing thousands of molecules each year in gleaming, industrial laboratories. But Genentech's accomplishment and Lilly's contract showed that entrepreneurs really could take a run at joining Big Pharma in the drug development business. Had the contract gone to UC or Harvard, the entire dynamic might have been far more traditional -- industry buying "basic" science and pursuing it in its own time. Instead, by placing a bet on the young, scrappy Genentech scientists, Lilly helped launch the biotech industry.

(Editor's note: For a letter from Genentech's then attorney Thomas Kiley regarding this alliance and taking issue with elements of this interpretation, click here)


2) Kirin and Amgen link up to develop erythropoietin. 1984.

George Rathmann, CEO and President, Icos

Tottering on the edge of oblivion, its stock trading for less than a six-pack of imported Japanese beer, Amgen was in tough shape in the early 1980s. But in 1984, CEO George Rathmann established another kind of model with Japanese suds giant Kirin Brewery. Amgen had run pell mell down several paths that didn't pay off, including projects to use biotech to make chicken growth hormone and indigo blue dye. Those dead-ends drained cash out of the company's coffers, but by 1983, its technical prospects were brightening. Its scientists had cloned EPO, the red cell growth factor that was one of the first commercial proteins cloned outside of Genentech. Several other competitors dropped out of the race to develop this anemia treatment. Kirin had decided it wanted to enter the pharmaceutical business via biotechnology and identified EPO as a promising molecule. And the Abbott veteran Rathmann ironed out a deal that would set yet another critical milestone for the industry: It showed that a start-up's technology contribution to a joint venture had tangible value for both near-term funding and downstream participation in profits.

Although the Japanese brewer contributed $12 million and Amgen just $4 million, they agreed on a joint venture that gave Amgen control of the U.S. market (for a 5% royalty to Kirin), gave Kirin control of Japan (for a 5% royalty back), and reserved the rest of the world to be thrashed out later. "The key to the best deals has to do with how much downstream value you retain," says Rathmann. "This was a wonderful deal. It gave us the financing to roll ahead at flank speed on EPO. If we'd done it with an American firm, we would have had to split the U.S. market at best or give it up entirely at worst."

Many people thought Amgen turned to Kirin based partly on its fermentation expertise. Not so, says Rathmann, who'd actually spent time at Coors in Colorado and realized that beer fermenting processes were not nearly precise and controlled enough to apply to pharmaceutical production. What's really interesting, though, was that Kirin did end up making a beer-related technology contribution to Amgen, but from a most unlikely source: bottle handling. Unlike Genentech which had to make large quantities of drugs like TPA, EPO was delivered in microgram quantities and Amgen made the decision to make it in roller bottles instead of large-scale fermenting tanks. As Amgen struggled with its scale-up issues, however, a Kirin executive saw Amgen's facility and thought immediately of his company's own automated bottle-handling equipment. He offered to make some inquiries on Amgen's behalf. "God, it was amazing," says Rathmann. The technology made a huge contribution at a critical time -- and was never anticipated in the deal.

One measure of the deal structure's value is that the parties simply expanded the scope of the original joint venture to include G-CSF (then known as Pluripoietin) in July 1985. Another measure is that Rathmann used this structure again in his 1997 alliance between his current company, Icos, and Japan's Suntory, for rights to commercialize a therapeutic, anti-inflammatory agent, rPAF-AH (recombinant platelet-activating factor acetylhydrolase). This time, Rathmann's a lot happier with the up-front terms: Suntory put up $30 million versus $0 from Icos in forming a 50-50 joint venture company to manage the product; Suntory will market product in Japan, Icos in the U.S. and the joint venture will sell everywhere else.


3) Glaxo and BioChem Pharma ally to develop 3TC. 1990.

Sometimes what a great deal has to teach is simply the art of the possible. One of the knocks on biotechnology is that when financing gets really tight and companies sign alliances to survive or to develop products they don't have a prayer of developing alone, they sell off the upside. As Rathmann puts it, downstream control is ultimately how great deals are judged. But in this deal, inked at a very early stage of the Canadian biotech company BioChem Pharma's development of the nucleoside analogue 3TC for the treatment of HIV infection, BioChem became the first biotechnology company to achieve a $1 billion valuation without retaining most of the rights to its blockbuster product.

The product has been hugely successful (selling $675 million worth in 1997, more than any other HIV therapy including AZT or Merck's Crixivan). Meanwhile, BioChem's stock performed just as nicely: The (Can)$55 million in equity that Glaxo purchased between 1991 and 1993 at an average price of $7.01 per share, has traded as high as the low $40s this year, before settling back to the low $30 range recently. (To view the schedule of equity payments explicitly laid out in the alliance contract, click here.)

Also significant: BioChem managed to get Glaxo to surrender a 15% royalty share for a compound that was only in preclinical testing at the time of deal signing. That is a standard to which most biotech companies aspire, but few deliver.


4) Roche Holding Ltd. buys 60% of Genentech for $2.1 billion. 1990.

For many in biotechnology, Roche's majority acquisition of Genentech marked the upstart industry's loss of innocence. Up to this point, biotechnology pioneer Genentech had signed plenty of alliances with collaborators, but Genentech founder Robert A. Swanson over and over had characterized them as a means to another end. His dream was to ultimately build a standalone, independent pharmaceutical company.

Genentech had overcome so many challenges in its first decade and set so many firsts -- including getting human growth hormone approved in 1985, and thus becoming the first biotechnology company to develop and actually market a gene-spliced product. Just a few years later, Swanson would again celebrate a product approval, but this time for a drug the company boasted would be a billion-dollar blockbuster -- the heart attack drug TPA. It was TPA that Genentech was counting on to throw off the cash Swanson hoped would let Genentech truly stand on its own two feet. He hoped to fund an ever increasing pipeline of new and amazing products for conditions as diverse as cancer and difficult childbirths.

Swanson remained true to his conviction that superior R&D would keep Genentech in the game, but when sales of TPA fell short due to its expensive price, resistance from doctors who feared bleeding side effects, and difficulty getting the drug to patients in the necessary "window" of time, Genentech's ability to keep funding its R&D looked grim. The Big Pharma executive he'd recruited to help launch TPA, former Abbott honcho Kirk Raab, began lobbying to cut back on R&D and tend to the bottom line. The board ultimately backed Raab's plan to also look for a deep-pocketed partner.

After little interest from American drug houses, Swiss drug house Roche Holding Ltd., which was intensely frustrated with its own research productivity, became a serious suitor. The challenge, though, was to provide Genentech with the backing and cash to keep its science juggernaut rolling -- without running off precisely the hard-charging, rule-breaking young molecular biologists who'd brought it so far. Former top Roche R&D executive Jurgen Drews, a well-known believer in biotechnology, was a key negotiator for Roche and a staunch advocate of coming up with a creative structure designed to inspire Genentech's hotshot gene-splicers to further heights. "We serve the company best by leaving Genentech alone," Roche Chief Financial Officer Henri B. Meier vowed when the deal was announced.

The structure they came up with, a 60/40 acquisition for $2.2 billion by Roche with options to buy out the company at later dates, was pioneering in its day and would later be studied closely and liberally cribbed by such players as American Home Products and Genetics Institute. Roche took only two of 13 Genentech board seats (one of them to Drews), and held themselves to a strict governance agreement which is still in force today.

In 1995, the extension of this agreement trimmed Genentech's marketing ambitions back to a U.S.-only base, but also gave Genentech the rest of the launch pad it needed to fly on its own again. (For details click here.) Recently, with the stock well above investors' put price of $60/share, Genentech is basically free-standing again, or will be when Roche's call option at $82.50/share expires on June 30, 1999 and then the investors' put expires thirty business days from July 1, 1999.


5) Allergan and Ligand do a joint venture to develop retinoid compounds. 1992.

As time passed, biotechnology deals became more finely nuanced. For one reason, more and more companies competed for alliance dollars with increasingly fragmented technology. For another, while big pharmaceutical companies steadily warmed up to the notion that biotechnology represented the future of all drug development, the sheer volume of deals began to create a new set of issues for Big Pharma. Among them: Talk of health care reform and managed care's increasing pricing pressure on drug companies meant Big Pharma needed to do deals for the future, but also manage its bottom line for the next quarter.

In 1992, one of the first so-called "P&L sparing" deal structures was struck between Allergan and Ligand Pharmaceuticals. The P&L statement being "spared" was Allergan's, meaning the parties devised a way to fund Ligand's research without the cost of the funding hitting Allergan's earning per share growth as would occur if the parties signed a more traditional sort of pay-as-you-go alliance.

The parties went to a combination of equity investment (initially $15M, but eventually $24M in total), plus "round-tripping" of some of the money -- meaning Allergan gave money to Ligand, which Ligand then used, in part, to fund research at Allergan. Most significant was the parties' allocation of cancer products in North America to Ligand, eye and skin products worldwide to Allergan and reservation of all other products and markets to a 50/50 decision-making process. (For details of that structure, click here.)

Three years later, the deal evolved into a special purpose financing vehicle dubbed Allergan Ligand Retinoid Therapeutics, Inc. which sold $32.5 million in units to investors to fund further research, and collected $17.5 million from Ligand and another $50 million from Allergan. See the Signals story "Retinoid Renaissance" for more details on the buyback and the scientific background of Ligand and Allergan's relationship.

David Robinson, chairman, CEO and president, Ligand

Ligand Chief Executive David Robinson recalls the 1994-1995 time period with anything but fondness: "The capital markets were completely closed and the cost of capital was extremely ugly, if you could raise capital at all. At the time we did ALRT, we'd been in a joint venture for several years that needed a rapid ramp-up of funding to realize the value of the products to both parties." Absorbing more P&L burn "was not attractive to Allergan to or Ligand."

Robinson credits both companies, as well as the two investment banks advising on the deal, Lehman Bros. and Merrill Lynch, for the deal's creative structure. In retrospect he calls it a "blow away success." But if he had to do it over again? Well, Robinson confides with a chuckle, "I'd have two underwriters on the transaction rather than one." As a small company, working with one underwriter (Merrill Lynch) that was so close to the Big Pharma partner, Robinson says he thinks he could have perhaps lowered the cost of the capital at least a bit (Ligand had to give buyers of the vehicle a 30% rate of return).

But the deal remains a tribute to biotechnology's notorious ability to use creative financing in even the worst times. As Lerner notes, this deal's contribution to that legacy was in "securitizing" a joint venture, creating a security that was tied to the ability of the alliance to succeed, not the bottom line of either company per se.


6) Lilly pursues a lost cause with Centocor's Centoxin -- but picks up ReoPro. 1992.

With apologies to the Royal family, think of this deal as the "heir and a spare" approach to compound licensing. The time was the early 1990s, shortly before a slew of biotechnology companies including Xoma, Synergen and others, were thwarted in trying to take on the miserably complex problem of sepsis. Centocor needed help in developing its antibody-based compound, Centoxin, which was in Phase III trials and at the time still promising. But former Eli Lilly business development executive and now industry consultant Ronald Henriksen recalls a weekend in Indianapolis as Lilly and Centocor got closer and closer to consummating the deal, when nagging worries about the complexity of sepsis were giving Lilly executives the cold sweats.

"If Centoxin worked, it would have been a great product for the Lilly sales force" because of Lilly’s experience in selling antibiotics, says Henriksen. "But so many people had lingering doubts about whether it could work. I said, ‘You know, they've got another product about 18 months behind, and it's a little cleaner. Maybe we ought to get a back-up in case this sucker doesn't work.’"

To Centocor's chagrin, this deal was inked with that back-up provision in place. "If both parties in their respective sole discretion are satisfied with the working relationship, Lilly shall have the option …" the contract language began, innocently, to rights to a promising but early stage compound then known as CentoRx (now known as ReoPro). Give Henriksen a medal: Centoxin bombed out, but ReoPro would become one of biotechnology's more successful drugs, a cardiovascular agent approved for preventing reocclusion after angioplasty. On Oct. 29 of this year, Centocor projected ReoPro would post global sales of $350 million in 1998 and $400 million to $440 million in 1999. It also stated that ReoPro could ultimately generate annual sales of $2.2 billion (although it didn't speculate when).

Surprisingly, and despite the fortunes paid for genomics deals, this two-for-one license is still the richest deal that any pharmaceutical company has paid a biotech for a late-stage compound, with Centocor collecting a $50 million up front fee, $50 million more in equity at a 100% premium to the market price, $25 million more in ReoPro milestone payments, a transfer price for product supply, plus 50% of the ReoPro profits. At least to date, it doesn’t get any better than that.


7) SmithKline and Human Genome Sciences establish 'genes as currency.' 1993.

"This is the deal that changed everything. It was the shot, the deal that has transformed the life sciences. Now, you see a shift away from an industry based on chemistry to an industry based on genes . . .What we did -- me personally -- I was the first one to realize the practical application of this new gene discovery." -- William Haseltine, CEO and founder, Human Genome Sciences

Humility may be a virtue, but Bill Haseltine has little use for it. And truth be told, the 1993 alliance between Human Genome Sciences and SmithKline Beecham, really did change everything. It prompted biotechnology companies to look at genes in a whole new way, not as single blueprints for their future products, but as a new underlying context in which to approach disease. And it set drug, chemical and agricultural companies on to a path marked by a conviction that assembling fundamental, basic knowledge about genes would be the foundation for their 21st century businesses.

Bill Haseltine, CEO and founder, Human Genome Sciences

Prior to this deal, Big Pharma and biotechnology companies had a limited set of types of deals, mostly involving specific products or specific disease areas. In this deal, Haseltine put together a package approach that involved technology, products and the vast expanse of unmapped genetic code, in an alliance that essentially launched a company instead of just propping it up or getting it over a rough spot. It established the underlying appreciation for the value of information about large numbers of genes to inform product development in the life sciences, whether that be of gene-spliced proteins, traditional small molecule drugs, diagnostics, large-scale genetic screening arrays, gene therapy, etc. Contends Haseltine, "The value is now from the ability to work with genes. There's a new unity emerging. It's the difference between the metal industry and the silicon industry."

The way this deal came about is a bio-raconteur's dream come true. Haseltine said he first approached Lee Rosenberg, then President of the Pharmaceutical Research Institute of Bristol-Myers Squibb, with the basket of gene sequencing technologies and approaches that Haseltine and former NIH scientist Craig Venter had put together. It was Rosenberg who cautioned Haseltine, he says, "You'll have to package it, you can't chop it up." Haseltine knew many large pharmaceutical company CEOs thanks to past consulting relationships from his days as a Harvard professor and entrepreneur. In the spring of 1993, he says he contacted most of them, at least a dozen, to show them the package approach he'd assembled involving the fundamental rights to products resulting from HGS' planned large scale sequencing effort. Most intrigued, contends Haseltine, was Max Link, then a top executive of Sandoz. Link was dying to do a deal, Haseltine claims, and as one week of discussions drew to a close, Haseltine says Link told him big changes were afoot within Sandoz: "If I'm CEO of Sandoz after this weekend, I'll pay you $100 million" for the package.

Well, "he didn't get the job, he didn't do the deal, but he did price the deal," says Haseltine with a happy grin. Next, SmithKline Beecham's George Poste stepped up to the plate, and Haseltine told him that for a $1 million, non-refundable deposit, he'd sell SmithKline the right to negotiate the same deal Link was offering. Eventually, they agreed on a $125 million alliance.

Interestingly, in a series of renegotiations that commenced soon after of the deal's signing, SmithKline gradually sold off one exclusive right after another, to the point that the deal was ultimately free to SmithKline. Haseltine said from the beginning that Smithkline "didn't want the fruit to rot on the plate" and realized it couldn't take advantage of the huge amount of genomic data spewing out of HGS.

Haseltine contends that the SmithKline/HGS deal is remarkable not only in immediate size but in the downstream royalty arrangements. Where companies such as Incyte, which sells access to a database of genomic information, for example, will get less than 5% royalties on any future products resulting from those deals, HGS stands to grab as much as 20% in downstream profits from SmithKline home runs. HGS has backed off some of its early and boisterous claims to owning so much genetic information everybody else might as well just pack up and leave town. But in terms of ushering in a new era, biotech executives agree this was a pivotal deal. "It put genomics on the map," says Rathmann.

8) Ciba-Geigy picks up half of Chiron and funds a shopping spree. 1994.

Of all the early biotechnology pioneers, Emeryville, Calif.-based Chiron marched more than most to the beat of its own drum. Its respected scientist founders/managers, William Rutter and Edward Penhoet, allowed many different types of research programs to flourish within the company. They seemed to care only half-heartedly what Wall Street or the media thought of their complex strategy and far-flung projects. And they remained committed to the diagnostics business long after many other biotechs realized its low margin pay-offs were more distracting than helpful in funding the blockbuster drugs they needed to really join the big leagues.

Like Genentech in the early 1990s, Chiron saw the writing on the wall by 1994. Its current products weren't likely to sustain the enormous expense required to keep a diverse R&D shop percolating. And just two years into Genentech's foray with Roche, it seemed as if a big drug company really could be trusted to link up with a biotech partner without rolling like the Russians into Prague. So, in 1994, Chiron announced with great fanfare that it had sold 49.9% of Chiron for about the same money for which Genentech had been forced to give up 60% of itself to Roche -- $2.1 billion.

Soon, however, there were key differences in what seemed to be the goals of these alliances. Clearly, Genentech's mission was to be Genentech, to keep pushing its cloners onward and upward, doing the most cutting edge biotechnology in the industry and coming up with new and innovative products. In Chiron's case, however, Ciba was encouraging the company to evaluate and buy up new and interesting opportunities, as well. Ciba explicitly extended to Chiron a $425 million line of credit -- handed Chiron its charge plate if you will. And Chiron, whose deal with Ciba involved certain covenants about boosting its stock price, looked to manage its earnings per share ratio as much by acquisition as by internal product development.

Chiron crossed a very difficult and dangerous chasm into which it might easily have slipped. If it hadn't done this deal, hadn't been able to pick up new business opportunities to grow its bottom line, the company's valuation could have fallen dramatically and it could have lost control of its considerable technology stores for a far less attractive price. However, Chiron did go out and pick up a hodge-podge of businesses that ultimately added little to its profitability even though they puffed up its size and revenues to billion dollar levels. Gradually, it's been selling them off and has invited a seasoned pharma hand in to try to get the company refocused on profitable products again (See Signals’ "Reinventing Chiron" and ”Chiron sells diagnostics to Bayer for $1.1 Billion” stories).

9) Monsanto invites Millennium down on the farm. 1997.

Millennium stars in the two most recent "deals that changed biotechnology," but they are significant for two different reasons. The first alliance that is notable is Millennium's breakthrough deal with Monsanto in agriculture. For the full story of the behind-the-scenes negotiations between Monsanto and Millennium, see Signals’ article, "Big deals on the farm." Realize, for starters, that this deal is emblematic of a widespread recalibration of strategy in the agrochemical industry, where Monsanto, Dow, Du Pont and others have been scrambling to make sure competitors don't lock up the genetic “roots” to their franchises.

Beyond that, though, the vehicle the two companies came up with to carry on the agricultural genomic work, Cereon Genomics, is truly innovative. Rather than ramp up so-called FTEs or "full time equivalent" employees inside Millennium to carry on the work Monsanto wanted done, and then risk having a cadre of unfunded employees should the project finish, Monsanto and Millennium actually set up a subsidiary of Monsanto next door to Millennium. The mandate, says Millennium chief business officer Steven Holtzman, was to infuse it not only with technology but also with entrepreneutialism in the best sense -- with compensation incentives, small company urgency, and strong cultural ties to Millennium that will promote aggressive technology development and transfer back to many different business units at Monsanto.

"The Parties recognize that Millennium has an interest in ensuring that meaningful incentive programs are implemented at MAGI inasmuch as a significant portion of its compensation is derived from the achievement of the Annual Milestones, and therefore the setting of such Annual Milestones shall take into consideration the level of such incentives. Accordingly, MAGI and Monsanto agree to consider in good faith recommendations made by Millennium with regard to cash and/or stock incentives to be provided to MAGI employees." Joint Venture (10/97) Section 3.9 - Employee Incentives