Spotlight

June 1, 2006
Paljit Mudhar

Pharmaceutical Technology Europe

Pharmaceutical Technology Europe, Pharmaceutical Technology Europe-06-01-2006, Volume 18, Issue 6

This column provides a summary of the key trends that are occurring within pharma–biotech alliances, as well as looking at biotech–biotech. It will explore the changing balance of power in pharma and biotech deals, providing examples and insights into which areas alliances are becoming increasingly popular.

In every major industry in the world, alliances are being formed. Alliances are becoming increasingly important in the pharmaceutical and biotechnology industry. This is because larger pharmaceutical companies need to increase research productivity and biotechnology companies are representing one of the major sources of this cutting-edge research.

It is this symbiotic relationship that fuels an increasing number of alliances. Research has shown that the 20 biggest pharmaceutical firms formed nearly 1500 alliances with biotech companies during the period of 1997–2002.

Figure 1 shows the value of pharma alliances signed globally. This article provides background and a historical overview of pharma alliances.

Figure 1 Value of pharma alliances signed globally.

Key trends and strategic alliances

There are many key trends being observed at present with regards to the pharmaceutical and biotechnology sectors in terms of relationships and changing market dynamics. First, there has been an observed trend in pharmaceutical companies forming key relationships, merging, acquiring or collaborating with biotechnology companies.

Second, as larger biotech companies become more structured and are growing, they are forming relationships with emerging biotech companies.

Another key trend is large pharmaceutical companies creating biotech spin-offs. As the smaller biotech companies are becoming increasingly more important to the larger pharmaceutical and biotechnology companies, they are gaining more power and have greater choice in terms of what they are likely to do in the future. Discovery-phase research deals have also been a key continuing trend.

A strategic alliance is a form of partnership where specific resources and competencies are shared to gain and maintain competitive advantages. It is often defined as a cooperative relationship between firms involving sharing of resources for a common goal. Many of the key reasons include cospecialization, learning and gaining critical mass. Over the past decades, firms have largely relied on mergers and acquisitions (M&As) to grow and/or diversify. Yet the vast majority of M&As are, at best, mild successes and often costly failures because they have not delivered R&D productivity gains. Strategic alliances are therefore likely to become a more popular alternative.

Figure 2 shows the comparison of different deal types. It is interesting to see that alliances and corporate partnering offering a degree of flexibility and risk management. The problem with joint ventures, for example, is that although scale of efficiency is achieved from this form of partnership, it can create potential ownership and accounting issues.

Figure 2 Comparison of different types of deals.

Marketing agreements allow more flexibility but a low level of control. Therefore alliances are appealing because they are more flexible overall and there is less red tape.

The pharmaceutical industry

Difficult conditions have meant major drug producers have undergone massive mergers to find cost savings and critical mass in R&D and marketing. More emphasis has also been placed on internal discovery and development of new products. However, more recently, mergers have slowed down and strategic alliances between pharma–biotech are becoming more prominent. This has meant acquisitions are seen less and less as effective as a result.

Consolidation among the main pharma players has meant big pharma companies need to explore other partnering options and new ways to integrate with other companies. Many pharma companies are working on the basis of a network model as the need for more pipeline products increases. This means as the number of projects increase, the risk reduces, thereby making many partnering options an optimal choice.

At the same time, this mismatch of risk between a pharma and biotech company can cause friction and requires alignment if it is causing problems, to ensure effective alliance management.

The biotechnology industry

The biotechnology industry has been growing and maturing for over two decades. Biotech companies are trying to reinvent themselves as fully integrated pharmaceutical companies.

Collaboration is playing a major role in the development of biotechnology. Many of the biotech companies today would not have grown and survived without alliances and partnerships that have helped develop and sustain new technology platforms and products which are in late-stage clinical development. Interestingly, many of the larger biotech companies are now changing the competitive landscape in the pharmaceutical market, as they have their own products, strong R&D pipelines and are developing an infrastructure of a fully integrated drug business. It is also interesting to see that the balance of power in alliance deals between pharma–biotech is evolving.

Some of the deals in the past have involved large up-front payments to the biotech company and milestone commitments that need to be achieved. However, many deals are moving towards profit sharing, codevelopment and copromotion. Further consolidation is expected in the biotech industry as many companies will not survive, particularly the smaller players who need the cash and support to survive.

The changing balance of power

Many pharma–biotech deals are funded by the large pharma company, allowing the alliance managers from these companies to have more influence over the management of the partnership. Increasingly however, the growing biotechnology companies and the niche biotech providers are gaining more power because of their position in the market place. This means pharmaceutical companies will have to negotiate differently compared with how they have done in the past.

Figure 3 shows the changing balance of power in partnerships. In the future, pharma and biotech companies will move towards alliances where risks and rewards are shared. Many key alliances show the trend is no longer to secure large up front payments and milestone commitments, but to retain a larger share of downstream revenues. More competition in the licensing market means that biotech firms are now able to structure deals that give them higher ownership levels and more long-term involvement in a drug.

Figure 3 Partnership: changing balance of power.

Pharma–biotech alliances

Pursuit of creative collaboration and partnership is a key requirement to success. The current move is towards establishing strategic alliances with small to medium-sized biotechnology companies allowing pharmaceutical firms to harness entrepreneurial skills from them. Partnership and collaboration can help reduce the cost of marketing and help with market penetration. A healthy alliance is the way forward and will be of mutual benefit to both pharma and biotech companies.

GSK and Roche are some of the key companies involved in many pharma–biotech deals. GSK has now established an entire research centre built on alliances with outside firms. Merck and Co. for example is known for its independence in research operations but completed 50 partnering deals in 2004.

Late-stage deals are becoming more competitive and pharma companies are forced to identify earlier stage deals. Big pharma is moving to earlier stage deals to ensure it has first access to promising products and technologies.

A key trend is more new drug discovery deals of a collaborative nature with relationship licensing and codevelopment being prominent. Leading pharmaceutical companies are either acquiring or forming strategic alliances with biotech companies possessing promising pipelines or cutting-edge technologies compared with deals involving late-stage compounds.

Research has shown oncology is an area where pharma–biotech alliances are particularly strong. In terms of technology, genomics and standard technology platforms are more significant in this type of alliance.

The major trend for the biotech industry is the changing balance of power with pharma companies. As the biotechnology industry progresses and the pharma industry begins to face tougher times, biotech companies have greater power to negotiate deals. Therefore more benefits will accrue to the biotech company in terms of rights over their compounds. Pharma companies do, however, benefit from lower upfront payments, offsetting this with higher milestone payments. This is beneficial for the pharma company because it can look to invest and create alliances with many partners, reducing the risk financially.

Codevelopment

Procter & Gamble pharmaceuticals and Curis (2005). Procter & Gamble (P&G) and Curis entered into a research and development agreement to study and develop possible treatments for hair growth regulation using Curis' Hedgehog agonist technology. P&G was granted a licence to use the technology and Curis will have the option to codevelop as well as retain rights to veterinary applications of the technology. This alliance became beneficial to both companies because P&G has expertise in pharmaceutical development, and creating hair and skin products, and Curis has the expertise in the small molecule Hedgehog agonist. This deal involved a $500000 initial payment and up to $2.8 million in preclinical milestones, dependent on the achievement of certain preclinical goals.

Biotech–biotech alliances

As the biotechnology industry is maturing, larger biotechs are able to support smaller biotechs in alliance scenarios. Key trends in the biotech-biotech relationship scenario include collaborative relationship licensing as well as codevelopment and transaction licensing. Discovery-stage alliances are important in the pharma–biotech industry as well as a strong emphasis in the oncology field. In terms of technology, genomics are a key trend.

Figure 4 shows the number of new deals. Since 1999, the deals between biotech companies have increased compared with pharma–biotech deals. Industry sources have shown that during the period 1996–2001 the number of new deals has doubled. Since 2001, when the global economy has experienced challenges, the number of deals has stabilized. Millennium, Amgen, Incyte and Genomics are key biotechnology companies involved in strategic alliances.

Figure 4 Number of new deals.

Amgen is now the world's largest biotech company in terms of ethical drug sales and is competing directly with some of the tier one pharmaceutical companies. A key reason for its success is that product pipeline and development has diversified through mergers and acquisitions, in-house development and in-licensing.

The biotech industry is growing and maturing like the pharmaceutical industry has done in the past. This means more mergers and acquisitions as well as alliances. Many biotech deals focus on drug discovery and technology, as opposed to product licensing. One key trend is that many biotech companies frequently develop many relationships with other biotech companies. The larger biotech companies are focusing on alliance formation in the top therapeutic areas and forming alliances at earlier stages of product development.

There is also an abundance of emerging biotech companies who lack the resources and funding compared to leading biotechs. They are therefore more vulnerable because of their dependence on external financing.

Serono and BioMarin (2005). Serono and BioMarin have formed a strategic alliance for the further development and commercialization of two BioMarin products: phenoptin and phenylase for the treatment of phenylketonuria (PKU).

Serono acquires exclusive rights to market the products in all territories outside the USA and Japan. BioMarin retains exclusive rights to market the products in the USA. BioMarin will receive an upfront payment of $25 million and payments of up to $232 million if milestones are met based on successful development and registration of both products in multiple indications, of which $45 million is associated specifically with Phenoptin in PKU. BioMarin will also receive royalties on its net sales of the products.

The development costs will be shared following successful completion of Phase II trials for each product candidate in each indication. The key to this alliance is that Serono is considered now as a top-tier biotechnology company. Like a large pharma company, it has the global development capabilities and commercial operations to become an attractive company for a smaller, emerging biotech to create a partnership to market novel products for metabolic and genetic diseases. For Serono, this alliance further develops and strengthens its product pipeline creating more innovative products.

Conclusions

As early stage alliances are becoming more prominent, multiple partnerships become interesting for large pharma companies. This helps reduce risk and builds product pipelines. Pharma companies must learn from each of these alliances and perhaps group similar partnerships together, and work in these groups in a collaborative nature to set out optimal ways of creating strategic alliances. Strategic alliances are not just a competitive tool for companies, but a tool for survival and it is important to manage these alliances as effectively as if you were managing your own in-house research team to make sure companies get the most out of their partnerships.

Paljit Mudhar is a research analyst, pharmaceuticals and biotechnology healthcare practice (EMEA), Frost & Sullivan, UK.