2011 Dealmakers Outlook - Pharmaceutical Executive


2011 Dealmakers Outlook
Call it spit and risk—hitting it

Pharmaceutical Executive

WL: Is there no sense that increased federal financial support for drug discovery could help counter any pullback by a risk-averse private sector?

Simes: The Obama Administration has proposed more funding for the National Institutes of Health, and much of this would be targeted to help facilitate commercialization of promising compounds. But this money is a drop in the bucket compared to what the private sector does already. And government support tends for political reasons to be widely dispersed, which means critical scale around the most feasible projects is lost. My company received $244,000 from the $1 billion appropriation for the therapeutic discovery tax program. Although it was appreciated, when the appropriation was distributed among the thousands of projects, the amount proved too small to make much of a difference to all but the very smallest companies. On the other hand, a better corporate tax rate linked to investments in R&D could free billions in new investor and industry cash now sitting on the sidelines.

Bonifant: What government really has to focus on is identifying where the regulatory uncertainties are and building more clarity—predictability—into the approval system.

Melincoff: One other thing government can do is to end the cycle of litigation geared to limiting the period of exclusivity. Give the industry a fixed time for exclusivity, as in the European system, and make it strong enough that there would be no litigation within that time frame. Investors would respond by taking on a bit more risk.

Simes: I agree, with a caveat that most politicians don't understand even the basic risk-benefit calculation that companies use to decide on investments. Members of Congress seem to believe that when the FDA approves a drug as "safe and effective," it is going to be safe just because the FDA decreed it so. Not true. The political rationale is disconnected from commercial reality; the politicians want from the industry radical innovations that cure or reverse the course of disease while expecting such breakthroughs will always be benign in terms of side effects and will cost very little in terms of reimbursement. We are moving to an environment where therapeutic assets are deployed by committee-think, and a single payer or committee could end up deciding what your product portfolio should be and what returns you will get from it.

Davis: The defense industry already operates that way. The Department of Defense (DoD) is active in early stage research, establishes contracts to fund development costs, and decides as a sole purchaser what its price will be when the product is ready for deployment. It can often revise the contract to take account of things in the deal that didn't go well.

DeBenedetto: I assume we are unanimous in seeing the DoD as a poor model for the biotech industry. Our goal has to be to prevent the politicization of this business. It's already apparent at the FDA. Most of the reviewers and committees are objective and want to decide based on the evidence presented to them. It's Congress and the policy community that carries a different agenda. In practice, they can force the scientists to do what is expedient.

WL: Deflecting this negative trend set requires a strong outreach by the industry to build enduring partnerships. What are the elements of a good partnership? And what does senior corporate management think about your own function's value within the company?

Melincoff: Shire lives and breathes from the practical value of partnership. We don't have a strategic focus on in-house research, so almost all that we do is focused on licensing and M&A. Rather than justify our existence, as is the case in other companies, we need to demonstrate that our deals deliver a return, contributing to our growth toward our current status as a $16 billion enterprise.

The elements of a good partnership? The most important is good management and being sensitive to the culture of the other party in the negotiations. In talks with Big Pharma, you must be tolerant and flexible. While the biotech's project team may stay the same, thoughout the collaboration, the Big Pharma team is likely to shift a lot in terms of membership. You have to probe deep to find who actually makes decisions—and then once you know who it is, that person may leave. Or the portfolio that brought Big Pharma to the table with you may suddenly be adjusted and you find your therapy area is no longer a priority. The bottom line is building in the right governance structure, which can provide an agreed format to quickly resolve unanticipated issues.

Davis: Good deals are attentive to the details. Clarity is king. I have seen deals where even the royalty rate is not clear because there is no basis for calculating it—like, What is the definition of sales? In the past, the more knowledgeable player would help the other partner, but today, as everyone hurts for money, we see more aggressive displays of self-interest. Even though this stretches the boundaries of partnering, the parties will be looking for loopholes to exploit once the commercial returns kick in.

DeBenedetto: Contracts are only reflective of the merits of the deal itself. It has to be a natural fit for both parties: If you are trying to put a square peg into a round hole, then it is time to walk away. It follows that transparency is very important in building the trust that makes people want to make everything fit.

Craighead: The advent of follow-on biologic drugs may reshape the basis for productive "win-win" partnerships. More attention will be needed in orchestrating a biologic deal near the end of the data exclusivity period. Dealmakers will have to spend more time on lifecycle management in contracts and account for the arrival of a follow-on and bio-better product at a lower price.

WL: What about the notion that Big Pharma is only interested in deals above a minimum sales threshold?

Melincoff: It's not as relevant a factor as it once was. If pharma can make a good return, they will look seriously at an opportunity. The period of exclusivity is thus important too. Also, Big Pharma looks to see if a project is capital efficient. Finally, an early stage project should make strategic sense in terms of buttressing the pipeline and portfolio.

WL: Is intellectual property protection still de minimus for a good deal?

Fordham-Meier: Unless or until the period of exclusivity granted upon drug approval is extended, as it is in Europe, sensible and enforceable IP will be critical. You must have a sufficient period of exclusivity to realize a significant ROI after all those upfront costs, and you must survive the 30-month stay in response to generic challengers. Many smaller biotech partners may not be sophisticated in their approach to IP, and gaps may be identified only when a partnership is under negotiation. Their need to collaborate with many others may also mean they've in-licensed some of their IP rights, increasing complexity and requiring vigilance to ensure the IP can withstand patent challenges.


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