Oiling the Engines of Invention

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BioPharm International, BioPharm International-10-15-2004, Volume 2004 Supplement, Issue 4

Big Pharma execs bring to biotech the knowledge of what it takes to make something a commercial success-not getting to market, but to Phase I.

Cohosted by Pharmaceutical Executive and BioPharm International magazines, the first BioPartnerships Roundtable recently brought together some of pharma's busiest and most visible people. Executives involved in business development and licensing sought to uncoverthe elements of success that productive pharma-biotech alliances have in common. This article offers a small sampling of insights gleaned from an edited transcript of the day's discussion, which was surprisingly casual and friendly, considering the participants' ultimate job responsibility—to compete with one another to stock their companies' pipelines with the most promising products. Many of them already knew other participants; a few already had deals in place. Whatever their relationships, though, they are key players in the increasingly critical field of business—and science—and seemed genuinely pleased to allow us to learn from their varied and relevant experiences.

The Dealmakers Sitting: Winston Ko, MBA, chairman and CEO, Genervon Biopharmaceuticals; Carol Fisher, editor-in-chief, BioPharm International magazine; Stan Bernard, MD, MBA, president, Bernard Associates; Ed Broughton, senior vice- president of business development and new products, Eisai; and William H. Koster, PhD, president and CEO, Neurogen. Standing: Herbert S. Ormsbee, PhD, senior director, licensing and development, Pfizer; Barbara Yanni, vice-president and chief licensing officer, Merck; Ron Pepin, PhD, senior vice-president, business development, Medarex; Gary Cupit, PharmD, vice-president, global business development and licensing, Novartis; and Patrick Clinton, editor-in-chief, Pharmaceutical Executive magazine.

An Evolving Impetus

It's no secret that pharma and biotech companies are finding success in their codevelopment arrangements. What might be surprising are the changing reasons for their growth rate.

Stan Bernard, MD, MBA (moderator) Both industries seem to be working together more closely. What's driving the increase in partnering activities?

William H. Koster, PhD [Neurogen] Having lived on both sides, a key issue for biotech today is accessing capital. On the pharma side, we were trying to achieve double-digit growth in the 1990s. But to achieve even 15 percent growth, we would have to put 20-30 preclinical candidates into the pipeline a year just to account for the attrition rate. And since that hasn't changed for large companies, they're still looking at portfolio expansion to meet those attrition rates.

NEUROGEN'S WILLIAM H. KOSTER, PhD (second from left) was on the team that built E.R. Squibb & Sons into a $12 billion business before it became Bristol-Myers Squibb in 1989. PFIZER'S HERBERT S. ORMSBEE, PhD (second from right) was vice-president, scientific assessment for Wyeth-Ayerst Research before he joined Pfizer in 1999. Today, his licensing responsibilities span several therapeutic areas.

Gary Cupit, PharmD [Novartis] There's also the maturation of the biotech industry. Cutting-edge companies did everything internally—built their own manufacturing facilities, developed their own protocols. Clinical endpoints weren't defined for some of the diseases they pursued and the mechanisms they discovered. But over the last 12-15 years, it has developed an infrastructure of its own.

The second thing that's occurred is more cross-fertilization. It's not unusual now for us to interview people from biotech in the Big Pharma jobs and vice-versa. The advantage is that biotech people think "speed." That doesn't mean [Big Pharma's] slow, but they think about taking the most rapid path possible. We add in the moderation—adhering to regulatory guidelines and so forth. That's worked well.

Stan Bernard, MD, MBA is a senior fellow at the Wharton School of Business, where he has been teaching Pharmaceutical Management since 1991.

Senior executives from large companies who say, "I'd like to go out there and really live a dream" bring biotech the knowledge of what it takes to make something commercially successful. It's not getting to market, but getting to Phase I so that when Big Pharma partners come in, they're pleased with the work that's done.

Ron Pepin, PhD [Medarex] As a small company, we're pretty well financed, but it's nice to have someone else share the risk, especially when the partner has expertise and other resources to throw into the mix.

GENERVON'S WINSTON KO, MBA (center) founded that company as a subsidiary of another one he founded, KM Biotech, whose focus is the discovery of proprietary trophic factors and their genes.

Ed Broughton [Eisai] For Japanese companies, it's the tremendous urge to globalize. Not just to generate sales outside of Japan, but actually grow businesses through partnerships that can take on new opportunities.

Barbara Yanni [Merck] We're seeing that same trend with small-and midsize European companies that want to enter the US market, and one way to do that is through a partnership. That's been true for a long time, going back as far as the Astra-Merck deal struck in the early 1980s, but the trend has picked up a little.

Yanni and Ormsbee

The kinds of deals done today are perhaps different from those done in the past with biotech companies, many of whom started out thinking they were a discovery house but now want to bring things all the way through. They often look forward to mounting a sales force and commercializing and marketing their drug. [Biotechs] know, generally, that that is not something they'd be able to do on their own, which is why they take on a partner. They look for a deal—and this is particularly true for the Japanese companies—that can help them launch into a new territory, or launch them into the development or commercialization phase of their product.

Winston Ko, MBA [Genervon] Just to follow up on the cross-fertilization point, I find myself traveling from the West Coast back here to "Pharma Country" all the time because, like many biotech companies, we buy the expertise we don't have in-house. We're very good at discovery, we can do that in our laboratory. But we need outside expertise for product development, and all the CROs, CSOs, and CMOs are here, a product of Big Pharma downsizing.

Medarex’s Ron Pepin, PHD (center) was responsible for building research collaborations as executive director, external science and technology at BMS before he joined Medarex as vice-president of business development in 2000

Marching Closer Together

At Cupit's suggestion, everyone agreed that today's deals are more about relationships than products, an idea that's illustrated by the companies' growing emphasis on alliance management.

Koster Ten years ago, large pharma was focused on licensing. But in the research labs, the biotech deals that were being done were primarily around platforms, intellectual property, and pulling things out of academia. That created a different type of relationship, in many cases for access to intellectual property. You got that and went on with your business. As we realized that platforms were not going to be the end-all for biotech and that we needed to have business plans to be profitable, we moved to the product end of the spectrum and started playing closer to Big Pharma.

At that point, the "not invented here" syndrome necessitated that more attention be paid to alliance management, which is why you now see a lot of large pharma companies building formal processes to manage those relationships and look into what goes wrong. We're now marching closer together than we were in the past and aligning around products.

Eisai's Ed Broughton (far right) was a key leader in the 1997 launch of Eisai's first US product, Aricept (donepizil), which is copromoted with Pfizer and indicated for the treatment of mild to moderate Alzheimer's disease.

Bernard What are your thoughts about a dynamic described in recent research from the Wharton School of Business that suggests products co-developed by a pharma and biotech company are more likely to be commercialized than those that are developed by a single entity?


Broughton From a smaller company's perspective, specialization in one area can sometimes lead to a true expertise that exceeds that of larger companies. The larger company may have breadth and experience across an entire therapeutic area, but you take people who worked for years on a particular disease and that can be a great contribution to the partnership. Couple that with the tremendous breadth of resources and experience in a large company and you have a winning team that can often accomplish something that—and do it more quickly than—neither company could do alone.

Ko and Koster

Herbert S. Ormsbee, PhD [Pfizer] Big Pharma tends to be looked at for their breadth, but what's lost on occasion is our depth. You can capitalize on the expertise from the biotech company bringing in the discovery. But it's critical to understand the science when it comes in, or it's a lot harder sell. That's why when biotech companies come in and talk to us, they're obviously looking for people who understand what they have. They want to see the internal champion. They're always looking at our processes and how they're going to work, and who's going to be responsible, because they want to make sure that their baby is well taken care of when it comes in the door.

Having said that, you can't be all things to all people. There are areas where the science is simply better on the outside—those are the areas where you want to create relationships.

Merck's Barbara Yanni held a variety of legal and financial positions, including executive director of corporate development, before earning the title of vice-president and chief licensing officer.

Ko The idea of champions is very important, and it gets lost in big organizations. It's not that [Big Pharma] people aren't committed; they are. But in the corporate culture structure, you can't really be a champion. That's where the biotech people come in, and their commitment only costs the pharma company a limited investment. All they have to do is let [the biotech people] work their tails off to push their product, which needs a lot of care and intense nurturing to bring it to a stage where you can actually bring the drug to a partner. After all, who is a better champion of a drug than the one who invented it?

Pepin One thing that adds to partnership success is the cherry picking going on. When you're developing your own compounds, you have to live with what you come up with. But if you can go out and shop around, you can find the gems out there and access the whole world of R&D rather than just what you have internally.

Yanni When I saw the Wharton study's statistics, it crossed my mind that it was the cherry picking, the ability of companies to license in something they had already seen a little bit about. It's less random, say, than your own discoveries. But on the other hand, do you really have that ability? The probabilities of success are so low at those early stages that it might be hard to argue that you actually do a better job in that situation.

Pepin and Broughton

Pepin It depends on the stage when the product is brought in. You can cherry pick late or you can cherry pick early. It depends on the strategy.

Yanni That's true. If you were looking at a product that a biotech company brought all the way to Phase III and you're going to have to lay out quite a lot of money to license it. Presumably you know a lot about it and you want to many more questions answered at that time, and maybe you're willing to take the risk.

It's always interesting to me when the biotech companies think that if they keep their product until Phase III they'll get more money so it's obviously the right thing to do. But if you think about that economically, maybe you're not going to get to Phase III or maybe there'll be some other problem that will crop up that you might be able to solve if you had a partner. If the pharma company is looking at it and saying that the upfront payments are going to be very large and so is the total value of the deal, it is not taking into account that's because most of the risk has fallen out of the system by then, which is why it is paying less. So on a risk-adjusted basis, those deals might actually be more expensive or about the same as the earlier- stage deals.

Novartis’ Gary Cupit, PHarmD held positions in business development, sales, product management, and new product development at a variety of pharma and biotech companies. Before pharma, he held academic faculty positions at major medical centers and teaching hospitals around the country.

Cupit For a biotech company to get to Phase III, it is probably going to focus on a single indication whereas the partner will probably take it to three or four, so that if the lead indication doesn't succeed, you have that hedge.

Ormsbee That gets back to the point of getting there as fast as you can.

Ko Pharma companies are very reluctant to go in on preclinical drugs. But I encourage them to look at Phase I—which is a fraction of the cost. You put in your investment and then let them run the shop for you. Within two years, you'll have the Phase II data, which is worth it.

Yanni That's absolutely right. Although there have been a bunch of Phase II deals that have gotten attention, there are also many deals that are done at the Phase I level and at the preclinical level. Certainly if you look at Merck's partnering history—and I'm sure this is true of everyone—we've done far more deals at the basic research level, at Phase I, than we've done at Phase III. It's just that the ones you hear about, of course, are the big ones with the huge amount of money paid at Phase III. But I would argue to the biotech companies that partnering earlier is an advantage for both companies.

Cupit If I could send one message to a biotech company that's going to partner with Big Pharma, I would say that if you're going to be the first product on the market in a new therapeutic area, you've got to set a high hurdle to be as competitive as possible. You want to have all the drug interaction studies and all the disease interactions. You want to do some kind of monitoring that shows that safety is better than anything else that may come later.

Let's say you're second to market. Now you've got to work even harder to overcome the position the first-to-market product has in the marketplace. You've got to do a more robust clinical development package. So either way you look at it, you've either got to be the first, or the second with better. That all speaks to time, money, and opportunity.

Koster A McKinsey study about two years ago actually references this issue. It claims that if large pharma started moving back toward preclinical and Phase I, and then looked at the price of current deals and actually doubled them, they would still come out ahead versus going for Phase II and III deals. An issue, though, for biotech is that the Street is pushing back the opposite way. And if you just look at price-to-book on various companies, you'll see that as you get into Phase II or III, the multiples start going up dramatically. So it's a difference between getting a partner to come in and help you do the heavy lifting, and help you be competitive, versus actually increasing the shareholder return as quickly as possible by taking your own compounds downstream. The right balance has to be found and struck.

Low-Hanging Fruit?

At one point, the conversation looked as if it would turn to some early negotiations between licensees and licensors. That was when the topic of hot therapeutic areas came up.

Bernard What are the exciting, appealing, strategically fitting types of compounds or technologies out there today?

Ko One that is approvable and sells.

Pepin It has to be antibodies.

Koster The answer depends upon what your portfolio and your sales force look like, where you think you can sell, and whether you're selling to a specialty group or to primary care. The answer crosses over many therapeutic areas and indications.

There are areas of unmet need that still require a lot of attention. Pain is very underserved. Inflammation is another area that, broadly speaking, has been underserved and offers a lot of interesting opportunities. But in many cases we're talking about pretty heavy-duty anti-inflammatory agents that are generally immunosuppressive. There's a lot more opportunity for more specific agents.

In the CNS area, we felt we had a full armamentarium for depression and anxiety five to 10 years ago, and now we're saying there are many problems with side effects; the issues with SSRIs that are being debated right now, whether adolescents should really be taking these or not. That's a huge area. Cancer certainly has received a lot of attention and will still require more. But development of new drugs is going to be quite confusing, especially with more than 400 oncology clinical trials with all sorts of agents for different targets.

Corporate Matchmaking: Find Your Partners

Yanni Baby boomer issues: diabetes and obesity. And metabolic syndrome.

We have an extremely active group looking at potential oncology targets, and since there are so many, we have to place our bets, as it were, somewhere—there are only so many that you can do. Many of those that we look at are not going to be within our "strategic direction." We see a lot of opportunities every year, and the number that we actually go forward with is quite small. So there is going to be a high percentage of noes versus the percentage of yeses.

Ko Why can you only go after a small number? Why not a lot?

Cupit There are hundreds of reasons, but I'll try to distill a couple. Sometimes the data is so early that there's really not a lot to talk about, and you can wait six months. And that's what we'll do. Instead of turning somebody down, we'll say, this looks intriguing. When you get to the next phase, please let us know. The other thing is that we've got to make sure that the patent estate is appropriate, because sometimes the patents haven't cleared yet and they're not willing to share them with us. Sometimes we can't get a CDA [confidential disclosure agreement] in place.

There are many very good reasons, and easily half of them are involved in a similar milieu. The things we actually take forward are the ones that require a lot of investment. To do a due diligence, 12-15 people from line management on up get on an airplane halfway around the world and spend three days. And we do 35 or 40 of these a year—it's a significant commitment. And these are guys who sometimes have to take resources from their regular jobs to go out and work twice as hard when they get back. But everyone from the chairman and the CEO all the way down, has as his or her goal to do business development deals. That's why the process gets attention.

Ko Instead of taking forward a few that require a lot of investment because the due diligence is time consuming, costly and involves many line management people, for much less money and with a few discerning medical experts, Big Pharma should identify and sign up the option rights of a few hundred promising drug candidates. It will take no more than one or two years to get human data and find out how many are potential winners. It is almost a mathematical certainty the batting average will be better than the present system of deal making.

Koster Cardiovascular is another area that has to be considered because a lot of resources have been spent looking to treat dyslipidemias. But the other half of that equation is the inflammatory process that occurs in vascular disease. If we're going to make progress we've got to have biomarkers that allow us to develop drugs. Once that occurs, a whole range of possibilities open up in treating vascular disease, which is still one of the biggest killers.

Ko CNS diseases are still some of the most difficult therapeutic areas with unmet needs. It is a worthy challenge that requires the discovery and speed of the biotech companies and the capacity of Big Pharma to commercialize the coming generation of biologic drugs.

Cupit In the industry there are few advances in development for hypertension, thromboembolic disease, and arrhythmias. Benign arrhythmias in adults affect about 10 percent of the population. It's very difficult managing those and there aren't a lot of products out there in that space right now.

Koster There are many exciting things happening out there. But I guess I've become a little bit more cynical as we start to go into these new targets and don't have a full understanding of what the disease actually is.

Today we have a broad definition of, for example, what asthma is. But asthma is a progressive disease—it's defined as reversible airway disease. If you look at the way it generates and its etiology, there are a whole bunch of different steps involved. But how do we treat it when we get into the clinic? We treat it as a single entity and look at it very simplistically.

We have to start understanding what is disease. What is diabetes? Diabetes has several syndromes associated with it as it starts to develop. When you start, you get into insulin resistance, going down to frank pancreatic failure. But there's a continuum in between that we should look at more closely in order to be successful.

That's one of the biggest problems we're going to face in this genomic era—a lot of these targets that we get very excited about have no validation behind them connecting them to the pathophysiology of disease.

Preferred Pharma Partners

What makes a pharma company an attractive choice for a partnership? It's about flexibility, expertise, chemistry, and . . . money? The group answers that question with a collective nod.

Broughton Many companies have great capabilities, fantastic resources, and good people. But I have found in our negotiations with the larger pharma companies that some are more flexible than others. Each product, company, and alliance is different. So a cookie-cutter approach will greatly limit the ability to accomplish a lot of things—especially what the smaller company wants to do. Flexibility is the key as is the openness to change the rules and discuss new types of arrangements rather than ones that have just been done before.

Patrick Clinton Large companies have a lot of money, but in dealing with vendors and others, they're often unwilling to let the other partner have any. Do big companies vary a lot in their willingness to let smaller partners make money?

Pepin It's a balance between that and the other factors we were talking about. I'll be damned if the CEO of any biotech company wouldn't want his business development person to bring in a deal with good financial terms. That's part of the business.

Koster It's a critical part. And how the finances play out, again, plays to a particular point in time. And that is the cost of capital. When your stock price is low, then cash—a front-end loaded deal—becomes important. But for ultimate value for the investor, you need good participation in the royalty stream or whatever profit sharing structure you build into the deal.

Ko I'm an entrepreneur through and through. The bad thing about entrepreneurs is that they don't work well with big companies. The good thing about them is they know their limitations. I don't know how to deal with Big Pharma, but I know that I need partners and help in the areas I'm not good at. Once I get the product approved, I just want to turn it over and not even look at it.

Ormsbee You're articulating a vision, because you're the entrepreneur. You're bringing science to the table. And you're looking for a partner who's going to take care of the commercialization. The debate is where in the middle do you want to play, and when.

Kicking the Tires

The first thing to come to mind for most of the participants when asked about due diligence was "cost." After that, the answers were mixed.

Bernard Describe the due diligence process from both the biotech and pharma sides .Who's involved? What's the timing?

Cupit The first hurdle is always intellectual property. First we identify where [the product] fits in our portfolio. Then we get CDA covered. If the attorneys can get a read on patents early, it can save a lot of time because if there's a problem, reviewing everything else might make it a little dicey.

The next step is we get every line function to send questions in advance—and we don't do it by paper. We pick up the phone two weeks in advance and say, "Here's what we'll need. Do you anticipate any problems?" That kind of stuff.

Bernard What are some of the primary reasons that products fail in the due diligence phase?

Yanni Intellectual property is big.

Pepin Freedom to operate.

Cupit Too narrow a therapeutic window for the efficacy and safety.

Carol Fisher Is there anything companies can do in the beginning to address these issues and avoid some of these failures?

Ormsbee You can't always predict the nature of the compound or changes in the market or the new competitors. Sometimes you get lucky. But that's why you have to structure the deal to pay for the performance of the asset as milestones are met.