It's All Academic: Biotechs Looking to Universities - Pharmaceutical Executive

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It's All Academic: Biotechs Looking to Universities


Biopartnerships

It's autumn, the first bell rings, and it's back-to-school time for students. Some may say that biopharmaceutical companies are returning to school as well. In the case of biotechs, they're going back not to further their educational degrees, but to look for new drugs, such as Genentech's Rituxan (rituximab) for non-Hodgkins lymphoma, originally discovered at Stanford University; Novartis' Gleevec (imatinib), indicated for chronic myeloid leukemia and discovered at Oregon Health and Science University; and Roche's antiretroviral HIV drug Fuzeon (enfuvirtide), discovered at Duke University.

Indeed, those institutions are much-needed resources in the current environment. The pharmaceutical industry is on a circuitous path that includes both high euphoria and deep disillusionment, as it spends an average of $800 million per drug candidate, with only four out of 10 approved products reaching profitability. In addition, Big Pharma faces pipeline pressures—a shortage of blockbusters, and product failures in late-stage development—and intense therapeutic competition in the marketplace, coming from both branded and generic products. In order to survive and remain profitable during this period in time, companies will seek to diversify their product pipelines through inter-company licensing.


Pipeline Value
According to a report from Deloitte & Touche, in-licensed products now account for 30 percent of pharma company revenues, and the number of pharma-biotech alliances has risen from just 69 in 1993 to 502 in 2004. However, the number of deals are misleading because emerging insights into more specific biological targets generally lead to drug candidates that target smaller patient populations—in essence, more drugs are needed to create the same growth. Moreover, many drug candidates change hands several times before approval—and like Rituxan, Gleevec, and Fuzeon, often start out in public-research organizations.

To win, companies need to find a way to mitigate their losses and generate innovative compounds. It sounds simple, but in a high-risk, high-reward venture, challenges and obstacles await every company.

The Market is Watching

Most pharmaceutical and biotech companies know that Wall Street is watching pipelines closely.

The overall pipeline value of Pfizer, for example, is estimated to equal 52 percent, or $98 billion, of its total current market value of $188 billion. On the other hand, 94 percent of Genzyme's total value—$17.9 billion—is attributable to its pipeline value, not earnings on current products.

Further, the percentage of shareholder value attributed to pipeline value is highly correlated with price-earning ratios of companies. In other words, the stock market appears to be quite efficient at discerning differences among the pipeline values of biopharmaceutical companies. (See "Pipeline Value")

Thus, the adage that new product pipelines are the lifeblood of the biopharmaceutical industry is well-founded in historical operating experience and value creation in capital markets.

With all this shareholder value at stake, one of large biopharmaceutical companies' biggest challenges is keeping its product pipelines full of candidates. As a result, Big Pharma companies often turn to small biotech firms for alliances. To supply that demand, biotechs are turning to universities and other public-research institutions.

R&D Approaches

In the last five years, nearly half of new molecular entities, or 42 of 86, came from in-licensing versus in-house research and development, according to analysis by Windhover Information. While the increasing value of in-licensing is often spurned as a failure of internal development, it frequently serves as a source of innovation and energy, because Big Pharmas can allow internal and external programs to compete, then choose which initiatives and projects to move forward after the proof-of-principle studies are complete.


Startup Business Models: Is there a third way?
Within biotechnology, the predominant business model has been to develop a single technology platform, develop leads, conduct clinical trials, and partner. This approach provides focus and allows the best shot on technology goals, as well as multiple iterations from the same platform. This approach is also ideal for venture capitalists because portfolio diversification is achieved through investments in multiple companies.

In cases where technology is promising and founders of the companies might be scientists rather than managers, venture capitalists can provide infrastructure and operating guidance. (See "Startup Business Models: Is there a third way?")

However, this single-technology-platform business model is risky due to a lack of diversification and long clinical development times. This model is akin to giving baseball's home-run superstar Barry Bonds one swing with one time at bat. If it works, it's poetry. Unfortunately, with this one-strike model, most times the player walks back to the dugout.

In addition, the timetable for a single-product or single-platform company is shrinking as the venture-capital model continues to shift its focus from initial public offerings being the critical liquidity event to merger and acquisition activity with larger companies.

Another commonly used business model in specialty pharmaceuticals is often based on redirecting failed compounds, or selling smaller products acquired from larger biopharmaceutical companies. This approach has its flaws, as companies will not simply surrender promising technologies.

For this reason, companies are more often than not stuck with acquiring failed compounds or smaller products from the larger companies. There are some notable exceptions, particularly in the case of mergers and acquisitions.

While this approach provides speed to market for the products, the utilized method typically reflects low innovation, is opportunistic, provides lower margins—and, consequently, is difficult to sustain.

Innovation

Today, early start-up companies increasingly license their technologies from academia. And the public is starting to notice. In a survey conducted at the 2005 American Association for Cancer Research conference, 81 percent of the delegates agreed that academia is the engine for drug discovery.

The key factor that separates academic licensing from inter-company licensing is risk. A big pharmaceutical firm typically partners with companies after proof-of-principle clinical trials. This gives biotech start-ups an opportunity to license technologies from universities and research institutes, and focus on translational development through the different phases in clinical trials. Sometimes, these small biotechs will bring the product to market themselves. More often than not, once the technologies and products start to look promising, Big Pharma enters the picture and in-licenses the product from them. One can argue that Big Pharma is selectively paying a premium to avoid the risk involved in licensing academic technologies.

This business model provides Big Pharma companies with a more diverse range of technologies to choose from and provides a higher projected profit yield when the drug hits the market. Now, instead of getting one swing at bat, companies can choose from multiple opportunities with independent technologies to diversify risk, increasing the probability of a clinical signal or, to extend the metaphor, a hit.

Partnering with Academia

Before biotechs consider a licensing deal with academia, the deal first needs to fit within the company's strategy. Sorting through the myriad opportunities is most successful when companies have clearly defined acquisition or licensing objectives. For the most part, executives must look for products and technologies that will be attractive to the big companies that might eventually in-license them.

Biotechnology companies may find their partner institution by searching through technology transfer listings on university Web sites and their corresponding transfer offices. Companies may also send their scientists to identify key university researchers in a particular therapeutic area.

But finding that perfect product is just the first step. For an academic alliance to be a success, the benefits of the relationship must be mutual. The academic institution will have a list of requirements just as the biotech company will come to the table with its list of must-haves. The greatest fear for academia is to see its research go to waste; academia dreads placing technology in the hands of a commercial enterprise that may not provide the dedicated attention needed to find a signal for continued development. For this reason, academic institutions look for a strong commitment from the company's senior management, favorable deal terms, market depth in a specific therapeutic area, and alignment with the partner's core strategy. All these characteristics help ensure that the product is important enough to warrant the company's full focus—and won't get dropped by the wayside.

Unlike big companies, which sometimes push academic institutions aside, small biotechs are the preferred choice for academic-institution alliances. They are more focused and have a greater interest in developing the acquired technology collaboratively. In a typical license agreement, academic institutions reap such benefits as an up-front fee, annual payments, milestone payments, earned royalties, and payment for patent expenses.

Win-Win Situation

Companies and academic institutions are forming alliances at an increasing rate to exploit the promise of emerging biological insights.

In today's environment, fully integrated biopharmaceuticals, such as Amgen, Genentech, and Biogen Idec, continue to commercialize innovative drugs from academic labs and small companies alike.

For start-up companies, the considerable business risk of funding early-stage innovative science can cause many venture capitalists to shy away. Instead, they will increasingly look to academic settings where drug-discovery programs can often be more securely established and maintained . After all, government agencies, such as the National Institutes of Health among others, recognize the significance of drug discovery as an important and enduring contribution to healthcare and society.

Early-stage biopharma companies are poised to be the partners of choice for academic institutions. These companies not only bring focus to the product and relentless energy to the task, but they also provide flexibility in accelerating new generations' therapies to enhance patient care.

Mark J. Ahn, (
) is president and chief executive officer, Fred Vitale (
) is vice president of business development, and Victor Tong, Jr. (
) is financial analyst for Hana Biosciences.

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