Exelixis says there is more to come after three stunning deals
CEO George Scangos and dealmaker Fran Heller
George Scangos, President and CEO of Exelixis, re-energized a troubled biotech industry, according to the Wall Street Journal, when he announced earlier this year he had licensed two cancer drugs to French pharmaceutical giant Sanofi-aventis with an upfront payment of USD 140 million.
The news came on the heels of a string of deals for Exelixis over the past year led by Fran Heller, the company’s Executive Vice President of Business Development, who is on her way to becoming an industry legend for finding upfront cash that has given the company a solid financial footing at a time when others are scrambling.
Scangos will be a featured panelist in the opening plenary discussion at BioPharm America 2009 in San Francisco centered on the theme : “After the Dust Settles: Does the Industry Need an Entirely New R&D Strategy?”
In this exclusive interview with partneringNEWS, Mr. Scangos talks about adapting strategies to fit the challenging environment for biotechnology, and is joined in the interview with Ms. Heller.
“The old model for biotechs of meeting milestones and then going back to capital markets is over, or perhaps only broken, according to other people,” he said. “For us meeting milestones was not causing our stock price to appreciate, so we needed to find new sources of revenue. We have managed over the years to make several interesting discoveries with compounds that are moving through middle- and late-stage clinical trials with a solid body of data. So we took that data and were able to generate some substantial partnering revenues.”
“Fran would be too modest to say this, so I will say it for her. She joined the company late last year and within several months of arriving put several important deals in place. While she will be the first to say she did not do it single handedly, it is also true that she led each of those transactions. She has a reputation as one of the best business development people in the industry and here at Exelixis she has further strengthened that reputation.”
Fran Heller explained, “With the window for doing any public equity closed, many companies have been forced to re-evaluate their strategies for negotiating licensing and collaborations, revisiting their positions on guaranteed upfront payment, near-term milestones and the financing at what is called the back-end of the deal.”
“We made it clear in our discussions with potential partners that what is most important to us is maximizing the upfront terms of the deal and R&D reimbursement,” she said. “Every deal is different and each side has objectives for cash flow, diligence provisions and for buying something that has the right pipeline fit. So there is more than just financial considerations with non-financial parameters also shifting around at this time. For the last few deals we have sought more guaranteed dollars, yet in some deals we may be willing to look at other non-financial goals that are important to us.”
George Scangos added, “We were also able to retain in these licensing agreements longer term equity participation downstream through profit-sharing and royalty rates, so we were pleased with those terms as well.”
“In a different capital environment, maybe Exelixis would not have sought so many partnerships, but we need to keep gas in the tank,” he said.
According to Fran Heller, “As a mature biotech we need to keep that ‘gas in the tank’ because we are on a planned trajectory with a momentum that needs to be maintained. From where we sit, we do not need a big strategy shift. But for others in an earlier stage of development, there is a great difficulty right now for planning and they are living 12 months at a time.”
“When the industry shifted away from the public markets, a lot of companies found funding with venture capitalists. This is a very different approach where, instead of receiving a bolus of money from public equity based on clinical assets, the money trickles in based upon performance.”
“Our industry is a programmed pipeline where as one asset advances and matures we need to be looking for what will be next. Under the VC model with these aliquots of funding there is less care and feeding of the development process and these companies are feeling the sharpness of the different times we are living in.”
George Scangos emphasized this point, saying, “It is the drug discovery process at Exelixis that has led to our recent successes, and one thing we have been able to do is keep the discovery group cranking where other companies have simply had to shut down that process to focus on compounds in clinicals. The result is that we have in our pipeline a steady stream of discoveries. The Exelixis discovery group has shown an ability to turn out high quality compounds and has won a credibility with the pharmaceutical community. We are not done releasing compounds. There is more to come.”
Addressing the theme for the upcoming plenary discussion at BioPharm America, Scangos said, “We have talked for years about whether the pharma model for drug development is working and we have all seen the data: R&D spending over the past 20 years, compared to the numbers of drugs winning FDA approval, is costing more and more and drug discovery is getting harder and not easier.”
“This leaves an open question as to whether the pharmaceutical industry is properly structured to sustain itself. Sanofi-aventis said that recognizing these issues, it intends to spend more on outside groups to discover compounds, and our deal with them in part helps to realize this strategy.”
“The discussion today is about what is the best way for biotechs and pharma to work together to apply the speedy and risk-taking of biotechs with the scale and scope of pharmaceutical companies. We believe that with the collaborations we have put in place with Bristol-Meyers Squibb and Sanofi, we have a basis for answering that question.”
Asked about the sustainability of the biotechnology industry itself, Scangos said, “You can not operate a pre-commercial biotech company without a source of capital. And the cost of capital has gone way up, to the point where it has become an unattractive way to finance the company. I do not know what the new model will be, if there will not be a return at some point to public equity or an improved environment for private equity. It is likely that many companies will be in trouble.”
With strong cash reserves and the potential to earn more, does Scangos forsee a biotech-to-biotech acquisition for Exelixis in the near term?
“We keep an open mind and try to stay unbiased and data driven,” he said, adding, “We do keep an eye on opportunities and especially so at this moment when there are distressed companies available for what are fire-sale prices. But we have not yet seen something that fits with our internal R&D.”
Fran Heller added, “We would be opportunistic, absolutely, with the right combination of science and pricing. But, as George says, we have not yet seen that opportunity.”
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