Sunday, 19 January 2014

Biotech & Pharma 2013 Licensing & Partnering Activity Review: Diminishing Upfronts, Increasing Platform Licenses Indicate Stronger Risk Aversion among Big Pharma

Let’s face it: everyone finally realized that Pharma’s traditional business model was only as good as the piles of money thrown at it every year. Now that players are feeling the pinch of financial crises and therapeutic droughts, some ingenious dynamics are beginning to play out on the dealmaking landscape. And to begin with, the bulky, disincentivized and unproductive in-house R&D monster is going away forever, leaving behind a legacy of chronic phobia of go-it-alone risky drug development ventures.

So what is replacing the cumbersome in-house R&D? Risk-diluting options are. Although strategies which lower risk by sharing or buying options in clinical programs were already visible in 2005, it wasn’t until the financial burden of the most recent patent cliff that companies really had to implement ways of doing more with less.

Nowadays, in-house clinical projects bear a higher financial risk than ever before

Commitment to traditional in-house drug development model played out all-or-nothing scenarios, where losses were compensated by an abundance of therapeutic targets. But times have changed. Me-too drug niches are saturating at cosmic speeds, which is a clear indicator that emergence of novel disease targets through basic science is simply not up to speed with industry demands.  

Then there’s the dollar-per-approval conundrum: R&D spend has increased with vicious speeds over the last decade, with little growth in the number of approved drugs to show for it (save for 2012 – see fig. 1). Most people would have considered the pharmaceutical industry a pull market, but here, too competition has become another vice, and another major risky step in development, to worry about.

Not only do collaborations lower risk and allow companies to embark on more projects, they also ensure that companies are not competing for the same disease niche. Patent exclusivity times no longer serve as the ultimate protection of the drug's market when there can be up to 10 molecules developed for the same disease target at any given time.

Last year Vertex Pharmaceuticals, for example, had to completely sell off its Incivek (telaprevir) Hepatitis C business after revenues of the drug dropped to zero upon expectation of AbbVie’s and Gilead’s oral competitors. Telaprevir was approved only a year prior to its abandonment, having earned Vertex just under $1 billion in total sales.

All of this boils down to immensely increased financial risk per each drug in development. Because most Big Pharma are becoming acutely cash-aware, new business strategies are much more about risk than gains.

Figure 1. Total spend on drug development vs. number of New Molecular Entities (NMEs) and Biologics License Applications (BLSs) approved each year by the U.S. Food and Drug Administration

Risk is lower together

Nowadays, even when companies choose to outsource the bulk of their pipeline, projects are co-developed with service providers, utilizing risk-diluting and reward-sharing milestone programs. And, amidst what seems like a decade-long criticism of pharma’s secretive nature, the veil of R&D isolationism has suddenly lifted to uncover a series of Big Pharma dating exercises in the form of actual 50-50% pipeline collaborations and data sharing agreements.

Traditional licensing, where a company acquires clinical assets at any stage of development and assumes all further responsibility and cost, is playing out a very visible downward trend. Popularity of traditional licensing has dropped by nearly 10% in just 5 years, while collaborations which assume shared responsibility and rewards increased by 15% (fig. 2).

Figure 2. Collaboration vs License purchases as % of year’s total, 2007-2012
Basic License: Buyer assumes all development responsibility with one-off upfront payment and optional royalties Collaboration:  Shared responsibilities on all or a portion of the drug’s development; shared rewards
Source: Suzanne Elvidge, 2012

Options in the form of success-dependent milestones or pipeline insurance deals are becoming more popular

Collaborations are overtaking one-off license purchases as they allow for lower up-front payments and hedge risks of failure into success-dependent milestones. In M&A exits, too, upfront payments as proportion of total deal value have been on a significant decline (fig. 3), indicating that acquirers are diluting risk through future options and milestones are now holding more and more of the value.

Figure 3. M&A Upfront payments, total deal value and upfront payments as % of total deal value, 2005 -2012
Source: Silicon Valley Bank

For public companies, options in the form of Contingent Value Rights (CVR) stocks seem to be more and more populous on exchanges. Most recently Cubist issued CBSTZ for Obtimer shareholders – the stock will pay out certain dollar per share if Optimer’s Dificid sales targets are met. Meanwhile Sanofi-Genzyme’s Lemtrada-approval-dependent GCVRZ might have actually played out Wagner’s “Ride of the Valkyrie” in the unpredictable days between a negative FDA review and a final approval:

2013 Collaborations, Co-Developments and Licenses: Top 50

Table 1 has some of 2013’s top licensing, co-development, collaboration and general partnership deals. 
(Clicking the picture will open PDF file)

Development Stage

Figure 4 shows the development stage segmentation of last year’s largest licensing and collaboration deals.

The majority of the top 50 largest licensing deals of 2013 involved molecules in Phase II stage of clinical development. Platform technologies which granted companies access to novel methods of drug development, screening and synthesis were the second most popular target of licensing and collaboration.

Platforms are perhaps the most effective way of capitalizing on investment as they may cover several projects at a time, thereby yielding the highest probability of success – which explains their rising popularity for discovery and preclinical projects. For instance, the $1 billion Gilead-MacroGenics collaboration is a prime example of efficient risk hedging. The deal will provide Gilead with access to the MacroGenics’ Dual‐Affinity Re‐Targeting (DART) technology on up to four cancer projects, totaling a reasonable $250 million per oncology lead with zero upfront fees.

Figure 4. 2013 and 2012 top 50 Pharma licensing and collaboration deals by stage of development

Therapeutic Area

In 2013, cancer became an even more popular target of licenses and collaborations than in 2012. 42% of all top partnership deals were in the area of oncology, in contrast with 37% in 2012 (fig. 5). This was followed by Central Nervous System (17%) and Autoimmune Disorders (15%). Alzheimer’s and Parkinson’s disease were the most targeted CNS disorders in 2013. 

Figure 5. 2013 and 2012 Pharma partnerships, collaborations and licenses by therapeutic area

Financials: Commissioning Success

In 2013, the top 50 collaborations, partnerships and licenses cost an average of $99 million in upfronts and $641 million in total deal values.  The largest upfront ($1130 million) was paid by Aspen to GSK for the company’s two divested thrombosis brands, Arixtra and Fraxiparine, both of which are marketed. The lowest upfront payment ($0 out of a total deal value of $1150 million) was made to MacroGenics by Gliead following 9-month negotiations. The deal covers MacroGenics’ Dual‐Affinity Re‐Targeting (DART) technology which produces dual specificity “antibody-like” therapeutic proteins capable of targeting multiple different epitopes with a single recombinant molecule.

Unsurprisingly, upfronts in 2013 were directly proportional to the stage of development. Platform technologies were worth an average of $46 million in upfront payments, while marketed and Phase III products cost an average of $355 million in upfronts.

Deals are increasingly shifting towards long tail royalties and earn-outs at the expense of larger upfront payments. Combined with the fact that a large portion of licensing deals are signed for products in early development stage, it seems that pharma companies aim at starting deals earlier, with less upfront payments, and share the risk with their partners. In other words, when it comes to licensing agreements, it looks as if Big Pharma's strategy is going for many small deals, rather than a few big ones.   

The presence of zero upfront payments in 2013 is likely to be shortly setting the trend of “commissioning” success in Pharma.