Conference Buzz in New York Centers on Alliance and M&A Activity

By Richard Hendriks, Nerac Analyst

It’s not often that I get to sit in on a question-and-answer session with the CFOs of Merck and Genzyme or the chairman & CEO of Bristol-Myers Squibb. They were among an impressive list of high-level pharmaceutical industry executives and representatives from various investment firms at Windhover Information’s Pharmaceutical Strategic Outlook meeting in New York City in mid-March. And what most of them had on their minds was the unprecedented level of alliances and M&A activity that has taken place over the past few years as the industry copes with momentous changes.

In the final quarter of 2007 alone, for instance, we witnessed over 160 biopharmaceutical alliances, worth close to an estimated $5 billion. Fifteen of those deals were in excess of $100 million. Here are some of the more notable alliances formed in 2007:

• PDL BioPharma Inc. sold rights to its IV Busulfex (busulfan) oncology product to Otsuka Pharmaceutical Co. Ltd for an estimated $200 million.
• GlaxoSmithKline formed a partnership with Toerx Inc. that included a licensing deal worth around $585 million for the company’s diabetes antibody, otelixizumab.
• Regeneron Pharmaceuticals Inc. and Sanofi-Aventis closed a deal worth around $870 million for development of a series of antibodies using Regeneron’s VelociSuite technologies.
• Eli Lilly & Co. signed seven deals, including one with the Belgian drug discovery company, Galapagos, to develop osteoporosis compounds.
• Shire PLC received exclusive licensing rights to develop and market Alba Pharmaceutical’s leading celiac disease compound, AT1001, which is currently in Phase II trials. The potential value of the deal is around $145 million.Nicholas Piramal India Ltd. announced five deals with Merck worth around $370 million.
• Pfizer signed a worldwide licensing agreement worth more than $260 million to develop and commercialize Adolor Corp.’s delta-opioid receptor agonists, ADL5859, ADL5747, for pain treatment.

Then there are the mergers and acquisitions that took place last year, such as GlaxoSmithKline’s takeover of Reliant Pharmaceuticals for $1.65 billion and the Japanese Drug Maker, Eisai Pharmaceutical’s acquisition of the Minnesota-based MGI Pharma for $3.9 billion. Reckitt Benckiser PLC acquired Adams Respiratory Therapeutics Inc for $2.3 billion, about seven times Adams’ 2007 revenues. Another 2007 deal worth noting is the Swedish firm Meda AB’s purchase of its countryman Recip AB in a deal worth about $620 million. Finally, there was AstraZeneca’s momentous purchase of Medimmune for a staggering $15.6 billion.

M&A’s and Alliances Illustrate Industry Changes

Last year’s spate of alliances and acquisitions illustrate the changes taking place in the industry. Big Pharma pipelines are drying up. Primary-care small-molecule drugs, a Big Pharma mainstay, no longer dominate the development landscape. As a result, companies continue to deploy cost-cutting measures from layoffs to project streamlining as part of what Jim Cornelius of Merck & Co. describes as “adopting risk-avoidance philosophies.” At GSK and Merck, for example, “sleepwalkers” are being eliminated in favor of “superheroes.” GSK estimates that in the near future about half of its development drugs will originate from external alliances. That compares to about 10 percent today. At the same time, companies such as UK-based development company Summit PLC are likely to flourish through early-stage licensing and co-development deals with partners in the pharmaceutical and biotechnology industry.

Industry Indicators Remain StrongMake no mistake, though, several industry indicators, particularly new company formation and IPO funding, are as strong as ever. Indeed, 2007 was a record year for new company start-ups, mostly in biologics. The largest area of growth was in oncology, based on how much private funding it attracted. IPOs also have remained fairly constant over the past five to 10 years.

Specialty pharma and biologics companies, such as Xcellerex Inc., are creating a new paradigm. Joe Zakrzewski, CEO of the 5-year-old Millenium Pharmaceuticals spinoff, outlined the company’s strategy and described its innovative bioreactor, FlexFactory (http://www.xcellerex.com/platform-flexfactory-biomanufacturing.htm), as the biologic factory of the future. The company aims for smaller markets with its biologic offerings, without expectations of blockbuster sales potential.

Kleanthis Xanthopoulis, president and CEO of Regulus Therapeutics LLC, a joint venture between Isis Pharmaceuticals and Alnylam Pharmaceuticals, outlined his company’s plans to discover, develop and commercialize micro-RNA technologies. These microRNAs exhibit tissue-specific expression and are important in regulating a variety of cell-specific functions, which in turn are altered in many disease states. They are pioneering anti-microRNA techniques that selectively antagonize their function, resulting in a modulation of disease pathway points that are quite precise and focused. These are only a couple of examples, in a rapidly expanding industry.

The Future of Drug Discovery

Where does all of this leave primary-care, small-molecule blockbuster drug discovery? The conventional wisdom is that we have witnessed the end of the blockbuster boom. Patents on many of those have expired, and three of the blockbuster statin drugs, Zocor, Pravachol and Lipitor, will expire between 2006 and 2015, halving the $27 billion annual market for lipid-lowering drugs. Second-generation statins are in the works for the over-the-counter market, but that is likely to fall far short of today’s revenues. Nevertheless, statins are unlikely to disappear, especially with around 10 million patients in the U.S. currently taking them. They are part of a much bigger picture in which most pharmaceutical companies, big and small, need drugs to fill their product pipelines and to maintain the earnings growth that investors expect.

A lot of companies with money to invest are quite willing to pay significant premiums for developmental-stage offerings. Indeed, valuations for licensing deals have increased by 75 percent on a yearly basis over the past few years. Additionally, mergers and acquisitions have increased, with the premiums paid in such deals also rising. The primary driver is the fact that R&D has yielded limited returns over the past few years in relation to the need for new products. As a matter of economics, once a developmental drug has shown a proof-of-concept (POC), the money available in a licensing deal confers a higher likelihood of the drug making it through clinical trials and to market, than if the compound were developed internally, without such a deal. Additionally, out-licensing is a viable option for smaller companies that may be stuck at phase II with the FDA requiring additional clinical trials.

Through it all, pharmaceutical and investment companies are now taking on more risk at higher costs which could have consequences. No one that I heard speak at the conference had a crystal ball to predict how the industry’s new paradigm will unfold over the next years. It is clear however, that biologics companies and their development models will emerge as a leading market force in drug development. But it remains to be seen whether the current high levels of M&A activity and increased risk-taking within the entire biotechnology industry will eventually pay off.