Dealmaking getting more creative
“We are not going to bother with how we got into the current situation but to ask what has changed,” said Denise Pollard-Knight as she opened the first plenary session at BIO-Europe 2009 entitled, ‘Rethinking the Drug Development Business Model.’
The Managing Director for Nomura Phase4 Ventures, Pollard-Knight continued her direct approach launching a blunt question for executives joining her on the panel, “what has been the biggest change at your company in the past 18 months?”
The panelists took up the challenge with straightforward, and revealing responses.
“Unfortunately there has been a shift in our focus to short-term, late-stage projects,” said Hakan Bjorklund, CEO of Nycomed. “It would be easy for us to fund five or six early stage deals in the next six months, but that is not going to solve our problems over the next five years.”
Arlene Morris, the President and CEO for Affymax said, “The biggest change is that we have abandoned all discovery programs in R&D, moving all our resources to one project.”
“We have twice laid people off,” she continued, “including our discovery team of scientists but also administrative staff.”
On a happier note, she said that in spite of reports that it is difficult to find funding, Affymax raised USD 100 million with an initial public offering (IPO), a private investment in public equity (PIPE) and a source for non-diluting income that she said serves as an insurance policy “in the event the rebound in the market is not sustained or against anything else we can not predict.”
Dan Zabrowski of F. Hoffmann-La Roche Ltd
According to Dan Zabrowski, Global Head of Pharma Partnering for F. Hoffmann-La Roche Ltd, “We have moved to more creative dealmaking, finding new ways of working with biotechs with a focus on late-stage to mid-term assets.”
“This does not mean we will not step in and develop early stage,” he added, explaining that in August, Hoffmann-La Roche concluded a deal with the Israeli venture capital firm Pontifax to identify both seed-stage and later-stage biotech firms for products and technologies.
“We are in a period of transition,” he said. “We are working through our requirements to develop how we can manage deals. For us to join with a firm sooner is important, but only where we find patients who respond favorably to a drug, and with a company capable of keeping up the fast pace to drive a first-in-class introduction.”
Chroma Therapeutics of which Ian Nicholson is CEO, is precisely such an early stage biotech, but one that has been fortunate in the past 18 months.
“We have revitalized the company,” he said, “which for a small, privately held company means we have reduced headcount by 20 percent from 50 people to 40 people. We have had to find ways to conserve money in operations.”
Yet he also reported a financing round completed in June that was successful because of the participation of GlaxoSmithKline (GSK), both as an equity partner and in a licensing deal.
“The participation by GSK in the program was a validation, but the participation in the equity round was also part of a concern for the long term sustainability of the company, which encouraged our VC investors and now takes our cash runway out two years,” he explained.
“Venture capitalists are investing, yes, but only on a very selective basis,” he said. “We see that VCs welcome investments by pharma. Yet it makes me ask whether this combined funding is really going to make up for the wide hole that has opened in financial markets for biotechs.”
“We are struggling as an industry,” he said, “and even with the many new funds stepping in, it is not enough.”
Morris from Affymax described a series of new pressures that have emerged for smaller companies.
“We are being pushed by regulatory concerns that are increasing costs,” she said. “For smaller companies, it is increasingly difficult to take a product beyond phase II in order to create the late-stage program that pharmas want to buy today.”
“Unless the capital markets change dramatically, smaller companies moving forward will not be able to take their products to phase III or into commercialization,” said Morris. “One model might be pharma companies putting an investment into development with compensation on the back end. But this also means a long time until there is a payback for the biotech.”
Beyond this concern she hears from other CEOs about the need to ‘de-risk’ an asset against regulatory issues. “Now there is a new hurdle of the commercial risks that asks how fast the uptake will be in the market. This is the next hurdle for us,” she said.
Nicholson with Chroma offered what he called two ‘biological perspectives’. The gloomy perspective is the survival of the fittest argument. This says those companies left standing will be the best companies.
“Yet in biology, there is another model that says early stage companies need to be funded in order to cultivate the feed stock for big pharma,” he said.
“The industry is evolving right now, and it is only going to be the drugs or technologies that are truly innovative, and that shows the potential to truly be reimbursed when they reach the market, that are going to find the funding,” said Nicholson.
Hákan Bjorklund, CEO Nycomed with Denise Pollard-Knight
Bjorklund of Nycomed said, “We are open to flexible solutions, but the proposals must be based on risk-sharing.”
“We all know the majority of preclinical programs are going to fail and we are too small to gather failures,” he said. “We also know that a biotech company only has two possible exits right now, to be acquired or else to establish their own sales and marketing organization.”
“A creative way of thinking about a deal might include breaking out regional rights where the biotech retains some rights in certain geographies,” Bjorklund suggested. “For US-based companies the opportunities for breaking out regional rights could be an interesting strategy to pursue. I would be happy to make this kind of a deal.”
Zabrowski with Hoffmann-La Roche suggested another opportunity. “With the number of patents expiring right now, and the fact that R&D for pharma is funded as a percentage of sales, it is not hard to do the math for big pharma R&D spending,” he said. “The possibility that pharma will respond by creating a more entrepreneurial model for discovery R&D internally actually creates a more even field and more opportunity for biotechs.”
Bjorklund agreed, suggesting that for anyone rethinking the drug development business model, “I would give a lot of thought to what is going to happen to R&D in big pharma.”
