2012 Dealmakers Outlook - Pharmaceutical Executive

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2012 Dealmakers Outlook


Pharmaceutical Executive


WL: What other factors might be driving decisions on therapeutic targets?

Talley: A challenge specific to oncology is an erratic regulatory climate. Standards imposed by the FDA for clinical trials are increasingly difficult to replicate successfully at the Phase III level. There is also a conflict between the FDA and the European Medicines Agency [EMA] on standards for approval: while the EMA continues to accept disease-free progression as a benchmark, the FDA is moving to embrace overall survival rates, which is a much higher hurdle of proof for sponsors.

David Lilley, SFJ Pharmaceuticals: Oncologics, like all specialty medicines, have to evidence a stronger value proposition simply because of their high cost to the payer. The assertion that oncology drugs are affordable because they are "targeted" and volume sales don't approach the level of a Lipitor is no longer defensible. There has been a threefold increase over the last 10 years in the cost of oncology drugs to the major PBMs.




David Thomas, Biotechnology Industry Association (BIO): It is interesting that the top therapeutic areas of interest for in-licensors in the Campbell Survey are inversely correlated to development success rates. BIO's study with BioMedTracker, which surveyed over 4,000 compounds from 2003 to 2011, found that oncology, CV, and CNS had the lowest success rates. Less than one in 10 compounds in these therapeutic categories makes it from Phase I to commercialization. Success rates are higher for the categories ranking lower in the survey.

WL: Building on the survey, can we identify some of the broader environmental and policy factors that are influencing the art of the deal?

Barbara Ryan, Deutsche Bank: I have covered the industry as an analyst for 30 years. I find there is a surprising consistency in the trends we see before us. For example, the current productivity gap in R&D is not unprecedented; we are an industry of cycles and there have been droughts and patent cliffs before. These pressures have driven consolidation. When I started my career, I covered 16 companies. It's now down to six. I would also say that the impact of the trends may be more intense. Certainly there are mounting financial pressures on R&D to get more productive. Consider how Pfizer has slashed its R&D spending by 40 percent. Why? Simply put, the market is impatient and is demanding a better return from that massive investment. The patent cliff is also higher today than in the past. Most companies have successfully navigated their way through the first wave—you could say we are currently at the "eye" of the LOE hurricane—by accelerating cash flow through aggressive cost reductions and applying the savings to dividends and share repurchases.




The current productivity gap is manageable, especially because of the strong appetite for deals. A few years ago, all we talked about in the analyst community was pricing and access for the big blockbusters. No one mentioned new products because there were none to talk about. Today, I actually have to go to clinical development briefings. Output from the labs is slowly improving and the market is showing a bit more tolerance for risk. There is still an enormous amount of innovation in the marketplace; it just comes from a more diverse array of sources. And when you have a real potential breakthrough against current standard of care, the money is there to follow it through.

What I find most interesting is that the progress we are starting to see has little to do with the current emphasis on restructuring R&D operations, because the innovation coming on stream now stems from actions companies took more than a decade ago. What is good about today is companies are limiting the earnings shortfall from LOEs through improved operational efficiencies. The focus is on executing on plan and avoiding the distractions of big, costly mergers in favor of low profile bolt-on acquisitions. Everyone is more sensible about valuations.

Laurence Blumberg, Kadmon Pharmaceuticals: A key driver of innovation in the West is the state of the capital markets, which variably support risk-taking behavior. Unfortunately, we face a stiff challenge from the progressive demise of the venture capital model which historically has funded the bulk of new product discovery coming from the biotech sector. There is less appetite among this group for backing the original science and the technology platforms that over time built real companies and yielded many significant therapies. Today, they frequently target late-stage products for quicker investment returns. There are examples like Vertex that started out with basic seed money where investors took big risks. Today, I doubt any investor group would go the distance to create a winner like Vertex.


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