Thursday, July 05, 2007

Phase II is the new Phase III

It's what you might call a slow news day for us so we figured we would dip back into our colleague Roger Longman's presentation from our Euro-Biotech conference last week. Roger's on vacation, see, so he can't stop us from pilfering his slides.

One of the points he emphasized during his talk and illustrated with some data from our Strategic Transactions Database is the idea that products that have cleared clincal proof-of-concept, i.e. the Phase II hurdle, are attacting the kind of deal dollars only seen previously for Phase III-stage products. The value of relatively scarce Phase III products these days is another thing altogether.

Taking a look at this phenomenon using upfront payments as a proxy for deal value, above, and you can see what we mean. So while those biotechs that excel at drug discovery can in fact sustain themselves by selling IND-stage candidates, which we pointed out last week, others can play on the next valuation inflection point at proof-of-concept.

Are Phase II deals a remotely new feature of the biopharma dealmaking landscape? Of course not. But the volume of deals for Phase II products has shot up in the past few years, and upfront payments are simply booming. A few recent examples include Novartis and Antisoma's deal around the oncology product AS1404 ($75mm up front), Bayer and Regeneron's deal on ex-US rights to Regeneron's VEGF-trap product in ophthalmology ($75mm u/f), and going back to last summer, Johnson & Johnson's ex-North America, ex-Japan deal for Vertex's hepatitis C protease inhibitor ($165mm u/f). Follow the links to a more detailed analysis of each deal.

Various pharma execs have chalked the rise in Phase II prices up to their own companies' inability to reliably and predicably get products through proof-of-concept themselves. This is excellent news for clinical-stage biotechs. A few, like CNS-focused Synosia, have set themselves up as proof-of-concept specialists, in-licensing compounds in preclinical or IND or even Phase I, shepherding them through a human efficacy trial, and licensing them on for a significant profit.

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