Tuesday, June 23, 2009

When Is A Billion Dollars Not a Billion Dollars?

When you read about it in a press release. And today's award for most egregious use of a biodollar deal total goes to Chroma Therapeutics.

Don't get us wrong. Chroma no doubt signed an interesting, solid option-alliance with the King of All Option Alliances, GSK. The deal is in an exciting area of inflammatory disease research, using Chroma's esterase-sensitive motif (ESM) technology to create compounds targeting macrophages. Macrophages are central to inflammatory cascades that give rise to a variety of conditions. The undisclosed upfront and some early milestones will likely--if they're akin to payments in other GSK option-alliances--allow Chroma to fund the disco-development programs through POC.


But there is zero clarity in Chroma's press release on the financial details. There's only one figure: $1 billion dollars. That's what Chroma gets "in milestone and option payments in the event that all four programs are successful." Cue "$1 billion dollar deal!" headlines. [UPDATE: here's one from Reuters!]

Is it impossible for Chroma to get $1 billion of GSK's cash-money? No. Is it highly friggin' improbable they get anywhere close? Yes.

Of course the improbable happens on occasion. For instance (if you'll allow us to go off on a tangent): on Sunday night the US men's national soccer team was up against Egypt in FIFA's Confederations Cup, in the last match of the group stage. For USA to advance to the semi-final, they needed to win BIG against a highly favored Egypt. In fact their margin of victory combined with Brasil's margin of victory over Italy (thanks to the tournament's goal differential rule to break ties in the standings) had to be six goals. And they weren't exactly playing very well going into the game.

What happened? Brazil beat Italy 3-0. Improbable, but not overwhelmingly so. And USA beat Egypt 3-0. Very improbable. USA advances to play Spain tomorrow. Taken all together? Extremely improbable!

The stars do align, sometimes. We were cheering for USA from our couch on Sunday night and we wish Chroma the best too. But lets see what has to happen for Chroma to reach that ten-digit number.

Chroma's macrophage-targeting compounds don't exist yet. The company "will undertake four discovery and development programs" to identify the small molecules. OK, so that has to work out. They need to identify lead compounds, optimize, start preclinical development programs, the whole nine yards.

Those four compounds need to make it to the clinic. Then those four compounds need to be successful up through Phase II proof of concept studies (after they've been deemed safe in Phase I). Then GSK will have to like each one of them enough to pull the trigger on its option.

Now keep in mind that success in the clinic doesn't necessarily translate into an option getting exercised (nor is that necessarily bad for Chroma). See, for example, GSK's deal with Exelixis, where GSK decided not to option Exelixis' Phase III XL184. Bad news for Exelixis? Hardly--BMS came in and paid top-dollar for the program only weeks later.

OK so say the programs are all successful through POC, and GSK options all of 'em. Well then each compound needs to be successful in large Phase III clinical studies, and eventually all four need to get approval. Probably (the release doesn't say) in multiple markets like the EU, the US, Japan, maybe even some developing countries like the BRIC markets? And then we're probably talking sales milestones as well. Do all four drugs need to become blockbusters? Do they need to avoid generic competition for a set amount of time? This is no six-goal differential. It's a sixty goal differential.

We don't think Chroma management is deluding itself. Maybe the up-front is better than some other GSK option-alliances and they'd rather not piss off current partners by having Chroma shout their windfall from the rooftops. But inflationary biodollar figures like $1 billion for a discovery alliance are just, well, silly.

image from flickr user peat bakke used under a CC license


EP Vantage said...

We at EP Vantage are also sceptical about these blockbuster bio-dollar deals, unfortunately it's not an easy task to assess how much money a company actually receives from their partner over the course of these collaborations; we'd be amazed if they even got close to 50%.

In terms of the upfront fee, we found out that GSK paid £5m upfront and contributed £5m of the £15m Series D, giving GSK a 5% equity stake in Chroma. So a total upfront consideration of £10m.

They clearly have some way to go to hit $1bn!

Anonymous said...

The USA boys did even beat Spain yesterday puttting an end to their record series of 35 wins in a row - highly unprobable. Any implications on the biodollar discussion - probably not...

Chris Morrison said...

yes it was a brilliant victory. in this context lets call it a $300mm milestone payment.