Friday, August 08, 2008

Thought-Leadership in Hoosiertown: Lilly’s Innovations in Pharma Finance

It was hardly groundbreaking, as the Covance/Lilly deal was described by one of the PR flaks who’d pre-alerted us to the deal (you can read more of our Pink Sheet Daily coverage here).

But as one piece of the overall strategy Lilly has been fitting together over the last few years, it does indicate to us that those isolated Indianapolites are now the leading Big Pharma thinkers when it comes to financing R&D.

Let’s not go overboard here. The Covance deal isn’t a brand new concept. Aventis (and a few others) did more or less the same thing with Quintiles in the previous decade (see this piece, for example: you can get it for free and it will outline the key issues Lilly also had to wrestle with).

But add this deal together with Lilly’s recent three-way Alzheimer’s funding/development program with the private equity firm TPG-Axon and Quintiles’ NovaQuest unit, plus Lilly’s Asian forays in cooperative discovery (see this analysis, for example), and the company’s FIPNet notion is looking like a lot more than a marketing slogan.

Lilly, in short, seems almost uniquely serious about both variabilizing and off-loading development expenses. The first bit is pretty easy and relatively popular – all drug companies want to cut expenses. Lilly’s sale of a standalone drug-development facility and transfer of employees is simply one technique among many (like firing people, an activity with which Big Pharma has gotten a lot more comfortable over the last two years).

The second bit is harder: we haven’t seen any Big Pharmas except Lilly turn in a big way to private equity to help them fund high-risk R&D and share in the returns. (Lilly and other Big Pharmas have let NovaQuest take on some development risk in return for milestones and royalties, but those are pretty limited deals; Bristol has of course rather famously turned for financing and development help to other Big Pharmas).

There have certainly been plenty of discussions with PE – we ourselves know of several. But by and large the investors we’ve spoken with want more than just a couple of high-risk projects in these financing arrangements – they want a market basket of compounds, and so far as we know, no major drug company has been willing to share the upside that broadly. (Interesting that Mikael Dolsten, who was running an incipient Pharma-funding operation for Orbimed, gave up that job to run Wyeth’s R&D organization.)

In this regard, the Lilly/TPG deal was a compromise: two different Alzheimer’s compounds, both about ready to start Phase III trials, but hardly the four or five programs that would make most PE players comfortable with the development risk.

CROs, meanwhile, are anxious to take advantage of Big Pharma’s new attitude toward infrastructure and risk sharing. Their businesses are booming with Big Pharma’s boom in Phase I and II programs; they need more people to handle the additional trials. Getting them from Pharma in a friendly sort of way is good business for two reasons: the drug company pays the costs of their new employees for the first year or two; and it’s likely that the Pharma will be more inclined to send a preponderance of their new business Covance’s way. We very much doubt, incidentally, that other Big Pharmas will shun Covance because it is too cozy with Lilly: there’s simply too much momentum towards outsourcing in general.

If this merry-go-round of employee transfers stops – it’s fueled by the boom in early-stage productivity -- the CROs will be stuck with the firing duties and expenses of doing so, as was Quintiles when it ran into problems earlier this decade (problems which, among others, eventually led to its LBO). But in 2008 – unlike 1999 -- drug companies are pretty committed to outsourcing; should their mid-stage pipelines dry up any further, they’re as likely to layoff more of their own employees as they are to use them on work taken back from CROs.

Image from flickr user Marttj used under a creative commons license.

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