| Over the past two decades, biotech companies have forged thousands of deals with pharmaceutical houses. The specific terms are almost as varied as the individual alliances themselves, but many have contained a co-development clause. That's been a relatively common part of most late-stage deals, granting the biotech partner the right to participate actively in a product's advanced clinical development and commercialization (through profit splits, co-promotions and other variations). Bringing co-development into early-stage deals, however, is another matter. If it appeared at all in the early-stage deals of yester-year, co-development often meant that the biotech got to pay for its own R&D, or that it had the opportunity to participate in late-stage development but not in commercialization. That's all changed now -- thanks to a massive influx of cash into the biotech sector in 2000, together with scientific advances that have shown once and for all that genomics is the key to the future of the pharmaceutical industry. For the first time, biotechs and pharmas stand eye-to-eye, and they're crafting alliances that are true partnerships. Now, we're beginning to see early-stage deals that are built on co-development, with equal risk-taking and equal profit-sharing. |
There's absolutely no doubt that biotech-big pharma alliances have gotten richer. It wasn't so long ago that any deal valued at more than $100 million (pre-commercialization) was something to shout about. Eye-popping price tags -- such as the $125 million that SmithKline Beecham Corp. agreed to pay for access to Human Genome Sciences Inc.'s human gene sequence data and technology in May 1993 -- were as rare as hen's teeth, and continued to be so through 1996 or so. By 1997, however, the rules had started to change: A significant number of new alliances were easily breaking the $100 million barrier -- until Millennium Pharmaceuticals Inc. left them all behind in the dust when it signed a $343 million plant genomics alliance with Monsanto Co. And every year since, one collaboration has come along to break all existing records. In 2000, it was Vertex Pharmaceuticals Inc.'s $815 million deal with Novartis Pharma AG on kinase-targeted drug candidates. In 2001 -- so far -- it's CuraGen Corp.'s mind-boggling $1.3 billion obesity and diabetes alliance with Bayer Corp. Will any deal be able to top that?
Perhaps. But it's important to remember that biotech-big pharma alliances are about much more than money: Fundamentally, they're about the creation of value, and the best deals are the ones that create value for both parties.
The Human Genome Sciences/SmithKline Beecham alliance is a great example: It launched Human Genome Sciences as a company; it financed the development of a very powerful technology; it grew over the years to include other big pharma partners (which can also benefit from the technology); and it's provided plenty of drug development targets for everyone. A number of them are already in the clinic. Moreover, because this deal was constructed around a broad-based technology, rather than a specific product or disease category, it rewrote the alliance rulebook. (If you'd like to read more about the Human Genome Sciences/SmithKline alliance, as well as nine others that helped define the rules, please refer to the Signals article, "Ten Deals That Changed Biotech.")
Since then, technology platforms have been the basis of many of the big-ticket biotech-pharma alliances. Consider, for instance, Regeneron Pharmaceuticals Inc.'s all-technology-encompassing 10 year agreement with The Procter & Gamble Co., valued at $135 million when it was signed in May 1997. Or Millennium's ability to parlay its integrated genomics-based technology platform into one major partnership after another -- first with Bayer AG (for $465 million), next with Aventis Pharma AG (for $450 million), and now with Abbott Laboratories (for $250 million).
As well, the recent deals between Bayer and CuraGen, Novartis and Vertex and Bristol-Myers Squibb Co. and 3-Dimensional Pharmaceuticals Inc. all stand on a broad technology base.
Importantly, while these are all discovery-stage alliances, they vary remarkably in how they've been constructed. There's a common thread -- they all include a co-development component -- but there the similarity ends. For co-development itself is such a tricky concept that it defies definition -- except in the context of each specific deal.
For instance, in Icos Corp.'s 1991 discovery-stage deal with Glaxo Holdings plc on phosphodiesterase (PDE) inhibitors, co-development meant that the companies would share equally all exploratory and full development activities (through and including approval) -- but that each party would pay its own way. Icos received a $1 million upfront payment, a $2 million milestone payment and co-promotion rights for any products resulting from the collaboration, with profit-sharing based on a fixed ratio.
By 1997, the collaboration had yielded a number of promising leads -- especially in inflammatory and cardiovascular diseases -- but it also became obvious to each party that they should go their separate ways. Icos received all commercial rights to the PDE inhibitors that resulted from the collaboration and agreed to pay royalties to Glaxo on commercial sales. This turned out to be a windfall for Icos: In September 1998, it parlayed one of these potential products -- IC351, a PDE5 inhibitor which was then in Phase II trials as an oral therapy for treating male erectile dysfunction -- into a lucrative 50/50 joint venture with Eli Lilly and Co. to develop and commercialize the drug worldwide. (The Icos Lilly joint venture is also a co-development deal, but a bird of an entirely different feather, as you can see from the summary graphic below. As well, Icos' strategy of re-partnering returned product rights has worked exceptionally well for other companies, most recently OSI Pharmaceuticals Inc., as we shall see later.)
Today, IC351 is known as Cialis: In April 2001, Lilly Icos LLC reported that treatment with Cialis significantly improved sexual function as compared to placebo across all primary and secondary endpoints of a Phase III trial in men with diabetes-related sexual dysfunction. So far, Cialis appears to be a winner.
Co-development meant something quite different in Regeneron Pharmaceuticals' alliance with P&G. The companies had originally agreed in December 1996 to discover and develop drugs for treating muscle diseases and disorders. Then, in May 1997, they folded the original agreement into the new one, which redefined the relationship as well as the meaning of co-development. For access to all of Regeneron's current technology -- save those programs it had already partnered -- P&G ponied up $75 million to support Regeneron's research programs over the first five years. It also bought $60 million in equity. In the second five years, the companies were to begin sharing all costs equally. Clinical testing and commercialization expenses are shared equally throughout the entire 10 years. The partners will also jointly develop and market any resulting products on a world-wide basis, as well as splitting the profits.
In August 2000, Regeneron and P&G replaced this agreement with a new one, which extends P&G's funding of Regeneron's research through 2005 but narrows the collaborative research to focus on therapeutic areas that are of particular interest to P&G. The partners divided the rights to those programs that didn't make the cut. Thus, Regeneron gets continued R&D funding, some advanced research programs and one product candidate -- the VEGF Trap (an antagonist to vascular endothelial growth factor) -- that it's planning to bring into clinical trials for cancer this year.
For Millennium Pharmaceuticals, co-development has only recently become part and parcel of its big-ticket deals. And it's a big part. For instance, Millennium and its pharma partner Aventis S.A. will work together to identify drug targets for treating inflammatory diseases, develop those targets into drugs and commercialize them. They will share equally development, marketing and manufacturing costs, as well as profits and booking of revenues in North American markets. Aventis gets the rest of the world, with a royalty obligation to Millennium. As well, under this agreement Aventis gets broad access to Millennium's genomics and bioinformatics technologies -- technologies that it can bring in-house to bolster its own drug discovery efforts.
The structure of this alliance was a first for both partners. For Aventis, it signified a bold step in its strategy to expand and enhance its drug discovery and development programs. According to Elmar Konz, the head of technology licensing and alliances at Aventis Pharma. "A paradigm shift has to take place to cope with the information coming out of genome sequencing." As a result, Aventis is "undertaking a major restructuring in its approach to drug discovery," he said. "One part of that is the Millennium alliance," through which the partners intend to "create the best inflammation pipeline in the market."
"No other [pharma] company has done this kind of alliance before, where the partners share the rewards from the first day to the last," Konz said. "If you give both sides the same reward, you'll get the maximum [return] out of a collaboration. It's the highest motivation you can have."
According to Joseph McCracken, who was the VP of technology licensing and alliances at Aventis when this deal was negotiated, it was a "very strategic move for Aventis. It really evolved from the integrative process following the merger of Hoechst AG and Rhone-Poulenc S.A. in late 1999." The newly formed pharma "looked at its combined assets to determine what it had, what it needed and the best way to get there," McCracken explained. The best way, apparently, was to "sign a large deal with Millennium to link [the partners'] technologies together." Aventis wanted to build a center of excellence in inflammation, he continued, and it wanted to do it quickly. Millennium -- its technology as well as its own expertise in inflammation -- fit the bill. "This is a partnership of equals," McCracken said. "There's a bona fide incentive for the parties to work together. Their interests are aligned." And, because this alliance "really meets the needs of both parties, there's a high probability of success."
The Aventis alliance may be the first time that Millennium has fully participated with a pharmaceutical partner -- but it's definitely not the last. In fact, less than a year later, Millennium struck a 50/50 deal with Abbott Laboratories, focused on therapeutics (especially small molecules) for treating obesity and diabetes. This alliance, signed in March 2001, also involves the joint discovery, development and commercialization of products -- but now those products include molecular diagnostics as well as drugs. The partners will also share profits worldwide as well as commercialization activities in the U.S. Abbott will commercialize products in the rest of the world, but Millennium has co-promotion rights in major European markets.
Millennium's not the only biotech firm to break new ground in early-stage co-development deals. So did CuraGen, through its monumental two-part alliance with Bayer to discover and develop small molecules for treating obesity and diabetes. Briefly, the partners will jointly fund R&D and commercialization activities up to $1.34 billion over 15 years, as well as split the operating income from resulting products (56 percent to Bayer, 44 percent to CuraGen). CuraGen has U.S. co-promotion rights. Once again, the structure of this alliance is based on broad risk and reward sharing, from research to commercialization.
There's plenty of risk/reward sharing in Vertex Pharmaceuticals' year-old alliance with Novartis, too, but with a different angle. The partners have joined forces to discover, develop and commercialize small molecule drugs targeting protein kinases. Novartis will fund the research -- $15 million initially and up to $200 million over six years -- and Vertex will be responsible for drug discovery and clinical proof-of-concept testing of drug candidates (which Novartis will also fund, through loans to Vertex which will be forgiven once Novartis accepts a drug candidate). Novartis gets the worldwide development, manufacturing and marketing rights to eight of these candidates and Vertex gets co-promotion rights in the U.S. and Europe.
But there's more: If Novartis doesn't accept one of these drug candidates, Vertex can continue the clinical trials up to the point of a pivotal registration study. At that point, Novartis has a second chance to accept the product -- and if it does, it will reimburse 150 percent of Vertex's clinical costs.
"Vertex has a very specific role in product development," explained Joshua Boger, the company's chairman, president and CEO. "Vertex has total control from the inception of a project through to the selection of a compound by Novartis for full development." As each compound comes to the proof-of-concept stage, Novartis has the opportunity to decide whether to accept it for full development. "The proof-of-concept point occurs in either Phase I or early Phase II trials, after it's been administered to man and has the biochemical effect that it's been designed to have," Boger continued. For instance, since the compound has been designed to block a specific kinase, it has to be proven to do so by testing patient samples. It's also necessary at this stage to demonstrate that the compound is well tolerated at the selected dosages, he said. "If Novartis accepts the compound at this point, then everything after that is their responsibility. It's a neat, clean baton hand-off."
Until this stage has been reached, "Novartis pays for everything and Vertex gets a substantial royalty and co-promotion rights," Boger said. However, "if Novartis doesn't take the 'first bite of the apple,' then Vertex takes the compound through Phase II trials on our own money. After we complete Phase II trials, we present the compound to Novartis again." If Novartis decides to bite the apple this time, it becomes much more expensive for the pharma. "Novartis reimburses greater than 100 percent of Vertex's costs, and our take of the downstream [profits] doubles. We have co-promotion rights in the first bite and the second bite may involve a joint venture (among other options)," Boger explained. The second bite "probably won't happen," he said, "because it would be very expensive for Novartis." And, if Novartis doesn't go for the second bite, then the product is "completely ours," he added.
Even though the structure of the Vertex/Novartis alliance is quite different from that of any other deal, it still bears the hallmark of today's early-stage co-development alliances: "The incentives are very well balanced for both parties. We're all on the same side of the table," Boger said.
Being on the same side of the table, in fact, is even possible when there are three partners -- as OSI Pharmaceuticals, Genentech Inc. and Roche Holdings Ltd. demonstrated so elegantly in January 2001. The companies have agreed to co-develop and commercialize OSI's lead cancer drug on a global basis. Genentech and OSI will share costs and profits on an essentially equal basis for commercialization in the U.S., while Roche will take the rest of the world and pay royalties to OSI. The three companies will also split equally the overall costs of the development program.
This three-way co-development deal epitomizes how a biotech company can capitalize on the promise of a clinical-stage product. But it goes much deeper than that, for OSI's cancer drug OSI-774 -- now called Tarceva -- has been 16 years in the making. The product's emerged from pioneering studies on the molecular biology of oncogenes, and its development is a tribute to the power of alliances, both early- and late-stage.
In 1986, when OSI (then Oncogene Science Inc.) was only three years old, its research on oncogenes grabbed the attention of pharmaceutical heavyweight Pfizer Inc. -- and landed the young company not only its first pharma alliance but its longest. Over the course of the next 10 years, OSI's high throughput screening technology identified a number of small molecule anti-cancer compounds that targeted tumor suppressor genes, angiogenesis and apoptosis. And, by mid-1997, Pfizer had started Phase I clinical trials on the first of these -- OSI-774 (Tarceva), an orally active inhibitor of the epidermal growth factor receptor (EGFR). Three years later, Pfizer had advanced the drug into Phase II trials in ovarian cancer, non-small cell lung cancer and head and neck cancer -- and probably would have taken it further if it hadn't been required to divest the drug, completely and absolutely, as part of its merger with Warner-Lambert Co.
Thus, in June 2000, OSI regained full development and marketing rights to Tarceva. Armed with a strong drug candidate -- one that represents the cutting edge in cancer therapy -- and a fresh infusion of $430 million from a follow-on public offering, the company partnered its prize possession into a major -- and lucrative -- deal with Genentech and Roche.
"The Pfizer alliance was a regular, plain vanilla research collaboration," explained Geoffrey Cooper, OSI's vice president of business development. "Pfizer funded the research and got worldwide development and marketing rights to the products." The deal was also an opportunity for Pfizer to build its own cancer program. "They came to us [about forming an alliance]. In 1986, Pfizer was not in the cancer field at all. They saw this collaboration as a way to start from ground zero," he said. Pfizer was right, too: By the time it handed back the rights to Tarceva, the collaboration had provided Pfizer with six targets in its pipeline (three of which are in preclinical development) and three in the clinic, Cooper continued.
It didn't take OSI long to find its new partners -- propelled forward by a "confluence of factors," he explained. "The market was very buoyant, the clinical data from the Phase II trial of Tarceva were just about to start flowing and the competition [ImClone Systems Inc. and AstraZeneca, both of which are also developing EGFR inhibitors for cancer] had published good results which tended to clinically validate the target. We met the wave at the right time."
And, among the many ardent suitors for OSI's hand (all of which, apparently, were sympathetic to OSI's needs to retain a major role in product development while building its own clinical and regulatory expertise), Genentech stood out because of its clinically and commercially successful monoclonal antibody-based cancer therapies. Herceptin and Rituxan are targeted drugs (as is Tarceva), and as such they represent an entirely new approach for managing cancer -- one that's gaining acceptance by the day. "At least half of Genentech's focus for future growth is in oncology," Cooper said, "and we wanted [to partner with] a company that had that focus." Moreover, given the fact that "Genentech wants to diversify its portfolio and move in the direction of small molecules…Tarceva fit perfectly with Genentech's portfolio."
How, then, does Roche fit into this alliance? According to McCracken, who joined Genentech as its VP of business development in August 2000, Roche had established an independent interest in doing a deal with OSI. "OSI received a proposal from every serious player in oncology that didn't have FTC concerns," he said. Tarceva was a hot property in a competitive field. (Clinical trial results reported at the American Society of Clinical Oncology meeting in mid-May were encouraging -- and showed once again that Tarceva is both safe and highly active against various cancers --but apparently not as robust as many investors had hoped.)
When Genentech and OSI got down to serious discussions, Genentech "offered a deal architecture just for U.S. rights. OSI could retain all product rights outside the US, which OSI could then choose to do on its own or with a series of partners." However, McCracken continued, "OSI wanted to put a global plan into action immediately." And that's when Roche was brought into the discussion as the ex-U.S. partner.
"If OSI had entered into a global deal with Genentech, Roche would have had the opportunity to pick up the rights [to Tarceva] through its pre-existing agreement with Genentech," McCracken explained. "But that wouldn't necessarily have happened for a while, and OSI was uncomfortable with the uncertainty of that. It was very important for OSI to have a global partnership in place immediately. The Phase II trials on Tarceva were finished and OSI needed to organize global clinical trials."
The three companies then agreed to this unique alliance, which actually consists of three separate agreements: The tripartite agreement, one between OSI and Genentech, and another between OSI and Roche, McCracken said. And the way it's structured, he added, provides "a lot of motivation to be successful."
"To have an equal say in development decisions and full participation, a company has to put its money where its mouth is," he explained. "OSI was willing to match expenses dollar for dollar. There's value in that kind of deal for Genentech. This is a wonderful way to align the interests of the parties."
Indeed, aligning the interests of the companies involved in today's alliances is the key to success. The new breed of collaboration isn't for every biotech firm, but for those that have sufficient resources -- especially cash -- they become true partnerships in every sense of the word. The new deals provide for equal risk-taking and equal profit-sharing, creating huge incentives on all sides to make these partnerships work -- and work well.
"This trend is on the upswing," according to Aventis' Konz. "Formerly, young [biotech] companies licensed out their technology and gave away almost all rights. [Those deals] didn't create a large amount of value." On the other hand, alliances in which the partners "participate together also create value for the small company." This type of alliance -- where the partners share the risks as well as the rewards -- will increase in the future, Konz said.
Vertex's Boger also believes that we'll see more of these sorts of partnerships. "There's been a realignment of the economic equation. Previously, the pharma partner kept most of the rewards. Now, biotechs are treated as peers and we share the downstream rewards in an equal fashion…A value shift has occurred."
That certainly seems to be true for the early-stage collaborations, but what about the clinical-stage deals, such as the OSI/Genentech/Roche alliance? "The balance of power has shifted a little, but it depends on the quality of the product," according to OSI's Cooper. "Companies that have a quality product at Phase II are in a strong position to get a cost- and profit-sharing deal."
"Platform technologies have value and they're important, but the really competitive deals right now have a product focus," added Genentech's McCracken. In order to achieve a sustainable growth rate, "Big pharmas need to have late-stage products."
Overall, however, he believes that "Big pharma and biotech are getting better [at negotiating deals]. They're learning how to partner with each other effectively," a strategy that can't help but result in more success -- and more important therapies coming onto the market. |