STRATEGY

Deal making in biotechnology continues its torrid pace

Peter Winter, Editorial Director, Burrill Life Sciences Media Group

The world of biotech is changing. Companies have to deal with global challenges, dramatically increasing drug-development costs, and contentious safety and regulatory issues. Success in this new environment requires substantial financial and human resources, so it’s no small wonder that the industry is witnessing a huge upswing in partnering and mergers and acquisitions (M&As) as companies look to “bulk up” to successfully tackle these issues with the help of strategic partners.

Not surprising then that partnering activity in the biotechnology industry has been on the increase for the past two years. The biotech industry generated almost $20 billion through partnering in 2006 – an all time record amount for partnering in biotech's 30+-year history, surpassing the previous record of $17 billion total in 2005 (See Table 1). Fueling this change is big pharma, which sees biotech as a lifeline to its own pipeline challenges and therefore remains very enthusiastic about making deals with biotechs. Faced with a daunting $1.2 billion to $1.8 billion price tag and long 10 to 15-year development cycles to bring a new drug to market, pharmas are willing to pay substantial premiums, even for drugs not yet in the clinic.

Our analysis shows that there has been an increase in the number and median upfront value of Phase II or earlier deals involving co-promotion illustrating the maturation of the industry and ability of smaller biotechs to command these terms. Significant average upfront payments for Phase I and preclinical opportunities illustrated the focus and competition for access to earlier stage opportunities.

Leading the pharma deal makers in 2006 was Novartis, with 26 disclosed deals — up almost 24% from its second position in 2005 with 21 deals. A review of the deals they made in 2006 shows a relatively balanced (from a developmental stage) approach to licensing, with approximately half of them focused on Phase II or later assets and half on preclinical and discovery. After leading the pack in 2005 with 22 deals, Johnson & Johnson dropped back to fourth in line, along with Pfizer (See Table 2). With 831 industry-wide alliances forged in 2006, versus 741 in 2005, the industry demonstrated the ongoing importance of strategic partnerships. One of the most interesting observations of 2006 was the significant increase in the number of marketed product deals. The total number of deals in 2006 increased substantially over 2005, and the percentage of marketed product deals grew from 9.6% in 2005 to nearly 13% in 2006.

One area that has shown impressive growth in the last year has been large molecules, growing approximately 45%, from 128 in 2005 to 185 in 2006, reflecting the importance of large molecule therapeutics and the industry’s desire to participate. In 2006, the average total upfront payments for Phase I candidates increased by more than 70%, from $12 million in 2005 to $20 million in 2006. In fact, while there were no Phase I upfront payments greater than $25 million in 2005, in 2006 there were four, including Actelion’s immunology deal with Roche, which included a $75 million upfront payment, and Infinity’s cancer deal with MedImmune, which included a $70 million upfront payment.

Monoclonal antibodies a hot commodity

The largest licensing agreement for 2006 (and the largest biotech licensing agreement signed to date) with a total value of $2.1 billion was announced in December 2006 with GlaxoSmithKline partnering with Genmab for HuMax-CD20, a fully human antibody in Phase III trials for CLL and NHL. This deal not only provides a dramatic conclusion to 2006 antibody partnering and M&A transactions, but also sets the stage for heightened activity in 2007. In December 2005, Amgen paid a similar price, $2.2 billion, to acquire Abgenix and panitumumab, which was then at the BLA filing stage. Now, for a similar price, Genmab stays intact with a 10% equity investment from GSK, and it will be able to partner additional products such as its HuMax-EGFR (zalutumumab). In addition, Genmab has the option to co-promote its own and selected GSK products. Following a number of high-value antibody transactions on the partnering and M&A side, this deal shows that antibody companies with strong assets will be courted by the industry’s leading players.

As more antibody-based products become blockbusters (Synagis, Rituxan, Avastin, Herceptin, Remicade, Humira), the potential for nextgeneration products appears stronger than ever. Worldwide sales of therapeutic monoclonal antibodies are forecast to almost double between 2005 and 2010. This is due, in part, to a robust pipeline of antibodies in late-stage development; equally important is their expansion into a variety of non-oncology disease indications such as RA, IBD, psoriasis, MS, asthma, and macular degeneration, for which patients must remain on therapy indefinitely. Antibodies are in development even for traditional small-molecule strongholds like chronic cardiovascular disease. Of course, oncology continues to be an important focus for the 150 antibody products in the pipeline, with many companies now investing in therapies for both oncology and autoimmune/inflammatory diseases (Genentech, Biogen- Idec, Millennium Pharmaceuticals, and MicroMet).

Smaller and/or more potent antibody structures are highly valuable platforms to further expand addressable indications. GlaxoSmithKline acquired Domantis and its preclinical-stage domain antibody technology for $454 million in cash. Cambridge Antibody Technology’s acquisition by AstraZeneca carried a higher value of just over a billion dollars due to its proven track record with marketed products such as Humira. At the end of 2006, all of the leading pharmaceutical companies had invested in antibody technology and, in many cases, were doing so through multiple alliances with biotech companies, where much of the industry’s innovation in this sector exists.

In the antibody space, the total deal value of an M&A exceeded $5 billion in 2006. In contrast, the total partnering deal value, even with GSK/Genmab, was approximately half that at $2.5 billion. The pace of M&A activity is expected to continue through 2007 as major players seek to lock up key technologies and late-stage products. There is still a strong pipeline of unpartnered antibody products in later-stage trials. Those companies with positive proof-of-concept data and antibody-related drug candidates in Phase II and beyond will likely steal the deal-making headlines in 2007.

This was emphasised with Genentech entering into an exclusive worldwide license agreement with Seattle Genetics. The deal involves the development and commercialisation of SGN-40 a humanised monoclonal antibody currently in Phase I and Phase II clinical trials for multiple myeloma, chronic lymphocytic leukemia and non-Hodgkin’s lymphoma. Seattle Genetics will receive an upfront payment of $60 million, potential milestone payments exceeding $800 million and escalating doubledigit royalties on annual net sales of SGN-40. Genentech also struck another antibody deal with Swedish company BioInvent to develop and commercialise its proprietary antibody candidate, BI-204, for the potential treatment of multiple cardiovascular conditions. Genentech will make an upfront payment of $15 million and potential milestone payments of up to $175 million as well as royalties on sales in North America.

Technology

An analysis of alliances by technology shows there has been a decline and then stabilisation in deals involving drug discovery tools, from 191 in 2004 to approximately 100 in 2005 and in 2006. The significant drop and subsequent steadying is consistent with the evolution of platform companies that, over the past several years, have shifted their focus toward product development. An analysis of deals by therapeutic category showed that immunology recorded the greatest year-over-year growth, up more than 50%, with 58 deals in 2006 compared with 38 in 2005. Also strong were deals involving ophthalmology and CNS products and technology, which are growing 38% and 32% respectively.

There was an increase in the number of significant-sized licensing deals between biotech and their much larger pharma counterparts that specifically excluded major territories such as the US and Europe. For example, J&J’s Janssen-Cilag obtained ex-US rights to MGI Pharma’s Dacogen for $10 million up front, $25 million in R&D funding, $47 million in milestones, and 20% to 30% royalties. Regeneron announced a deal with Bayer involving the former’s VEGF Trap-Eye product, of which Regeneron will retain sole US rights; it will also receive $75 million up front and as much as $245 million in milestones, and share development costs and profits. In the past, big pharma was a primary partner for biotechs wishing to out-license product candidates in multiple regions around the world, but that is no longer the case. A maturing industry with evolving business models has produced a number of qualified partnering candidates:

Japanese pharma (Astellas, Takeda, Eisai) are further expanding into Europe and the US and can increasingly provide the geographic reach of the big companies.
Specialty pharma (Pharmion, Norgine, Salix), which are focused primarily on sales and marketing and often specialise in one or two therapeutic areas, can provide the commercial expertise, focus, and priority treatment that some of the larger partners may not provide.
Mid-tier regional pharma (Cephalon, UCB) provide some of the expertise and experience of the big pharmas with the flexibility of a much smaller management infrastructure.

Big pharma getting into the regional game

The significant demand for products by the above companies, combined with the relatively smaller supply of products from innovative biotechs that are increasingly wanting to maintain regional commercialisation rights, has created a situation in which even Big Pharma is conceding key regions, such as the US or Europe, for the ability to at least get access to the rest of the world. As long as the demand and competition for novel, innovative products is great and the supply relatively limited, those companies holding such products will be in a very strong position to command the deal terms and structures that meet their strategic growth plans. Overall there will be:

Increasing number of alliances that contain only regional, not worldwide, rights — driven by maturing biotech companies and the availability of multiple, capable partners.
Increasing global deal activity, including India and China.
Increased out-licensing by big pharma as it restructures and is forced to monetise assets that are not being fully exploited.
Heavy activity in partnering deals; a significant portion of the $20 billion that we project will be raised in 2007 will be directed at gaining access to technology at an earlier stage of development as companies strengthen their product indication franchises. The partnering landscape in Q1 07 has, indeed, been notable for the increasing number of preclinical and discovery- stage agreements, with deal values up to $500 million.

Many of these transactions were in the same value range as those for clinical-stage products. The largest total deal value went to Argenta Discovery’s preclinical COPD compound licensed to AstraZeneca for $500 million, but BioInvent’s $190 million license to Genentech of a preclinical antibody for cardiovascular indications also brought the Swedish company a 43% increase in share price two days post-announcement. Genentech’s interest clearly provided technology validation in the absence of clinical data for any product in BioInvent’s portfolio, although they were slated to enter Phase I early this year. Also, about half the Q1 07 deals were with private companies. Wyeth did three discovery phase deals, two of which were with private companies: Elbion NV, and Catalyst Biosciences. Each of these deals was worth about $100 million. In the larger deals, not only were Schering Plough-Anacor and AstraZeneca-Argenta transactions involving private companies, they were joined in the $200 million+ discovery-stage category by private companies Adnexus and Ablynx. Adnexus inked an agreement with Bristol-Myers Squibb for a discovery programme of up to six oncology product candidates using its PROFusion technology, while Ablynx offered its nano-body technology for Alzheimer’s disease.

Peter Winter

Peter Winter has over 22 years experience as a journalist, editor and consultant on the biotechnology and life sciences sectors. He was founder and Editor of Canadian Biotech News, a weekly newsletter that has been serving the industry for over 17 years. Canadian Biotech News was acquired by Burrill & Company in 2005 and has been renamed the Burrill Canadian Biotech News. Mr. Winter also edits the Burrill Biotechnology Intelligence Report, a quarterly review on the business and finance developments in the global biotech arena. Mr. Winter has provided strategic intelligence for governments and industry and developed communications strategies for start-up biotechnology companies. Educated at the University of London UK, - BSc. (Special Hons.), he has worked in cancer research and the pharmaceutical industry.

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