Tuesday, March 25, 2008

Big Pharma Outlicensing: Bad News for Biotech’s POC Model?

You would have thought Big Pharma's increasing willingness to outlicense would be good news for the industry. VCs love getting their hands on pre-baked assets; fully-formed spin-outs are even better—especially as these days, strings are a rarity.

But why is BP outlicensing? Not out of the kindness of their hearts, certainly. And not because it’s easy (getting GI-focused Albireo out of AstraZeneca took months). They’re doing it because cost-cutting and R&D prioritization demands it.

Plus, according to commentators at Windhover's Pharmaceutical Strategic Outlook conference in New York last week, Big Pharma’s various R&D experiments (translational medicine, productivity metrics, the externalization splurge) have led to a glut of Phase II programs. They can’t afford to take all of them through expensive late-stage trials--which is why Jim Cornelius, Bristol’s CEO, confirmed last week during PSO: “There will be more [risk-sharing, late-stage] deals like that between BMS and AstraZeneca” in January 2007.

Even size-obsessed, merger-maniac Pfizer has started to (at least) talk about outlicensing—a subject that was previously as good as taboo. “We have headcount for it,” admitted Barbara Dalton, head of Pfizer's Strategic Investment Group, to the PSO audience. “There will be spin outs in future,” she promised.

So here’s the thing, though: if Big Pharma is going to want to shed some risk and responsibility on its development programs, what of the growing numbers of biotechs seeking to bake assets as far as proof-of-concept (Phase II) and then license them—for enough reward, in theory, to justify avoiding Phase III risk and cost?

They're driven--justifiably, one would think--by rising Phase II deal values (see chart below). The question is how long that trend will last (and how valuable are these deals to biotech anyway, which we’ll address in another post)? So far, Big Pharma’s woes have benefited biotechs, driving up deal financials, improving biotech’s leverage, and allowing them to hang on to more value.

But the point of the POC lot is that they don’t, for the most part, want to take on later-stage responsibility (co-promotes and the like). Now sure, the right Phase II programs will always be in demand, as Steven Lee, CEO of POC-focused Summit PLC, was quick to point out during a panel discussing the virtues of POC versus the fully-integrated model. And there’s still virtue in this kind of low-risk strategy, he argued, particularly in Europe. Flexion’s COO Neil Bodick concurred: there’s value in sticking to one’s knitting; the “fully integrated model is doing to de-construct,” he predicted. For Bodick, “there are opportunities to be competitive in different [incomplete] segments of drug discovery and development.” (For more about Flexion, and about Bodick’s Lilly heritage, click here.)

That’s a neat argument, and probably a valid one in theory. (Some of us—the disaggregation-ists--feel it’s particularly relevant to Big Pharma, even though as we suggested here, they don’t seem to agree.) In practice, though, the POC model has yet to prove itself. Even Lilly’s six-year old Chorus experiment—the in-house inspiration for Flexion which likewise aims to get compounds to POC cheaper and faster than anyone else—“there’s no data yet” on whether the model leads to a better downstream success rate (or simply nastier surprises for later), acknowledged Bodick.

Meantime, fully integrated biotech (“FIPCO”) advocates such as Rigel’s Jim Gower or NicOx’s Michele Garufi are still out in force, despite skyrocketing regulatory risk. How else has biotech ever created significant value, they ask? The trend towards more specialist drugs, requiring small sales forces, makes going-it-alone plausible.

Sure, “you have to be a bit crazy” to undertake multi-thousand patient trials and build a sales force, acknowledged Gower. But with a broad portfolio, a handful of existing partnerships, and, most importantly, investors’ green light to take a punt on the lead program, there’s no reason to hand over the jewels. Especially if the value and number of Big Pharma deals do indeed lose their luster.


drewaight said...

Ok you have to indulge me for a minute in a couple of hypotheticals. If the country hits a significant recession for a couple of years and if the democrats are in office and try to relieve said recession by incentivising biotechnology public private partnerships (p3), then wouldn't we expect another (green?) biotechnology bubble driving spin-offs and startups all under the auspices of the POC model? Is there anything wrong with Big Pharma reshaping their business model to become specialty investment banks who specialize in phaseIII through to product launch? In your opinion wouldn't this be a win/win situation? Big Pharma isn't exactly the best at R&D innovation, and the little academic guys I know dont really want to market products or wrangle with the FDA.

Just a Thought.


Melanie Senior said...

Very happy to indulge in hypotheticals. I don't see why a potential bubble would drive POC-modellers specifically, though take your point that if we're talkig early-stage guys, they're likely to be pre-POC focused.
Your second question: no, I don't think there is anything wrong BP re-shaping its business model. Wish they would! I love this notion of sticking to what one does best--it makes absolute sense to me. Folk have put that idea forward before--biotech do (upstream) R&D, Pharma do the Phase III/selling. Except that Big Pharma think they know R&D well too, it seems, despite everything. Still, maybe the cost pressure will get to them and with the % of in-licensed products at Pharma rising (they boast about that now), perhaps we are slowing shifting in that direction.

Anonymous said...

we have been tracking these pharmacompanies as they make presentations at the life science meetings--if you want to check it out go to--
> key word search--w/pharma name