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Q&A with Barbara Yanni


Pharmaceutical Executive

Pharmaceutical ExecutivePharmaceutical Executive-05-01-2008
Volume 0
Issue 0

How do you find and license the best drugs out there? If you're Merck, you send scientists to go get 'em

Merck's stock has been on a downward spiral over the last few months. And it's no wonder: with the constant drumbeat of news and analysis over Vytorin, it's been hard for investors to think about anything else.

But if Merck can come back from Vioxx, it can engineer a comeback from Vytorin. How? Behind the scenes, the company is getting out in front by cherry picking the most promising compounds to pave its way toward future profits. Merck tendered three major late-stage deals last year alone: with NovaCardia for a heart failure drug; with Ariad for an oncology compound; and with Dynavax for a hepatitis B vaccine. What's more, at press time the cholesterol-lowering drug Cordaptive—a could-be blockbuster—was before FDA awaiting approval. That makes Merck's Phase III pipeline one of the strongest in the biz. The company is also locking up blue blood partners in early research, such as the Dana-Farber Cancer Institute, which recently signed a deal with Merck to identify oncology drug targets.

So with the ferocious competition for compounds, how has Merck managed to stand out from the pack? To understand, Barbara Yanni, vice president and chief licensing officer, says you only have to look as far as the company's formula for business development: hire scientists to talk the science and comb the earth for compounds. It sounds expensive and a little chaotic, but the proof that it's working, in this case, is in the pipeline.

Yanni, who is responsible for constructing the terms of licensing deals and partnerships, has been at Merck for more than two decades, after starting in the industry as a tax lawyer. Yanni sat down with Pharm Exec to discuss the company's growing number of deals, and what she feels is Merck's scientific advantage.

You hear often that the old Merck was "internally focused." When did that change?

To some extent, I think it was exaggerated how internally focused Merck was. I mean, 10 or even five years ago, what company would you have said was "externally focused"? Even in the 80s, some of Merck's products were from outside. Prilosec, for example, came from the Astra deal, and Pepcid was from Yamanouchi in Japan.

Merck's Power Pipeline

But I do think Merck's attitude has changed. Dr. Peter Kim [president of Merck Research Laboratories], who came from outside Merck, was a big part of that.

How did Dr. Kim change Merck?

You can see his influence in deals like the one with Sirna. Sirna's business model was to do different deals in different therapeutic areas. We started to talk with them about a license in a particular category. But Dr. Kim's view was that if it worked, it would work in a lot of therapeutic areas. The platform had the potential to really change drug discovery and drug development. And if that could happen, he wanted Merck to be a part of it.

So Dr. Kim had this vision—and he was able to convey that vision to Merck's Board of Directors. He was very articulate, and convinced them to move from just a license to a full acquisition of the company.

Merck's Alliances: A Decade of Growth

After the Sirna deal, other companies rushed in to snatch up the other major players in RNAi. Are there other areas where you see that happening?

You might see the same thing in, say, cancer, after a target is discovered. If suddenly a company announces they've entered Phase II with a certain mechanism, that can catch attention and move a mechanism up or down in terms of a company's priorities.

It also shows how licensing is influenced by what happens on the outside of the company. Science is constantly changing. And in a way, licensing just follows that. We're just the piece that you see—there are all kinds of other things going on in the research labs. For example, you might have read about our deal with the Swiss company Addex on a particular mechanism in schizophrenia; but there are other things Merck is doing in neuroscience that you don't really hear about because they are still early-stage.

Licensing and M&A have become just another form of R&D in the industry. How do the two functions overlap at Merck?

Dr. Kim tells all the scientists that it's their job to know what's going on in a therapeutic area, and to get the best programs—whether they come from our own basic research invention or from outside Merck. And they take that very seriously.

As a result, scientists view the licensing group as partners, as the instrument of how these people are going to carry out their vision. The basic research scientist will say, "I was at the American Diabetes Association and I saw this great poster. You should call this company and see if they'll talk to us."

How does the company facilitate those conversations?

When it comes to licensing, there are two basic groups: external scientific affairs—there's 50 or more of these people—and our so-called scouts. All of these people are scientists. Most came from inside the Merck research labs, so they know each other. It's a scientist-to-scientist relationship. It's just that the people who are in the licensing group have this additional skill of knowing how to contact people and how the process works.

One of the strengths of the way Merck does business is that all partnership activities are all handled under one umbrella group: scouting and evaluating, working with the therapeutic area experts for due diligence, and then the structuring of the deal and the commercial terms. The licensing group shows the opportunity to the therapeutic area group; if they're interested they do due diligence. If the opportunity is still interesting, it comes to my group to talk about terms.

Is there anything that makes the Merck business development function unique from other companies?

The fact that we have a scientific scouting organization is unusual. We get feedback from partners and potential partners who were impressed with Merck when they met the scientists—and that's what sparked a strong interest in working with Merck. We've had a scout in Japan for many years, but we beefed up the rest of the organization about three years ago. The scouts are assigned geographically so they can get to know the companies in their region. In addition to our scout in Japan, we have four scouts covering Europe, one in Korea, one in China, and US scouts in San Diego and San Francisco.

There are some hints that this is being copied by some of the other Big Pharma companies—so it must be a good idea.

Has the scouting organization proven its return on investment?

I think so. It's good to get to know people and make them feel comfortable with who we are at Merck, what we're interested in, and what we're about as a company.

You can see how that plays out. For example, take Ray Hill, who is our scout in England and the second scout we hired. Ray is a neuroscientist, and he got to know Addex right when they were founded. Ray has been there since then, chatting with them, and became interested in what the company was doing. And we ended up doing not one but two deals with Addex. In December, we signed a basic research deal around a Parkinson's compound, and then in January of this year, we signed a second deal with them to work on the preclinical schizophrenia drug.

In 2007, Merck tendered an impressive number of deals. Do you expect a similar volume of deals in 2008?

The number is growing. We get teased by our investor relations people, who call us up every quarter and ask, "How many deals are there?" And we always say, "40." But they're always a different 40. Those are the deals that advance. Our external scientific affairs liaisons and scouts see somewhere between 5,000 and 6,000 opportunities a year.

We don't start out with a target—we're driven by the quality of the opportunity. We didn't start out last year looking for three Phase III deals. Obviously, if we can find late-stage deals that we think are a good opportunity, that's great. But that's a very unusual year.

Is licensing technology more or less risky than licensing a compound?

It all depends on what you think is risky. For a compound, it's more binary. It's less risky in that you know what you're buying and you have plans for it. But if that mechanism of action fails, then it's done. With technology, in a sense, it's much more difficult to measure later what a company gets out of a platform, because it's harder to trace.

It's not a calculus that we're used to performing. For us, it's much more about finding great ideas or pursuing a mechanism we're willing to bet on. It's also part of the Merck philosophy to go after the best science. And if they have to get the technology platform to enable the science, like with Sirna, then we'll do that.

Do you ever review the deals Merck didn't go forward with?

We do look back and try to evaluate the deals we didn't complete. Maybe we weren't interested in the science, but then it turned out to be something that worked. Or maybe we couldn't agree on terms; we thought it was too expensive. But it's hard to learn from that.

Take inhaled insulin. We looked at a lot of different companies, and it seemed to make sense. But we never did any deals. This is one of those times when you look back and ask "Were we smarter than everyone else?" And I think the answer is no. To some extent, we were still looking and thinking about it. And it just didn't work out.

You say, "All right, it turned out that this mechanism didn't work, so we're glad we didn't do the deal." But it could have gone the other way. To me, the important thing is to ask: "At the time we were looking at this deal, was there something we knew or we should have known so it could have come out better?" But if something happened that couldn't have been predicted, we can't give ourselves credit or beat ourselves up about it.

The field of business development is growing and becoming more sophisticated. What new trends do you see developing?

Competition is ferocious, and prices are definitely going up. I especially notice the growing prices for preclinical deals.

We've also done two deals with Indian companies that have a very interesting structure. There's one with a company called Advinus, which is in the metabolic field, and another with Nicholas Piramal India, which is in the oncology area. They have low up-front payments; the deal is instead based on achievement of certain milestones. They're interested in doing those kind of deals because the Indian companies have great chemistry expertise, and they're looking for more biology and clinical expertise.

Anything is possible. Look at the Big Pharma/Big Pharma deals. Bristol-Myers did a couple of those—one with Pfizer and one with AstraZeneca. At the end of the day, we just have to be totally open when thinking about development and look at all the possibilities.

Are there any big changes in licensing within Merck?

We're organized around six franchises: oncology, neuroscience, infectious disease and vaccines, respiratory/inflammation, endocrine/other, and cardiovascular. We know we're going to play in these areas, and that's where we're going to be looking for opportunities to complement the science we're doing. And we have a scientific leader and a marketing leader for each of those.

One area where we really have loosened up, if you want to put it that way, is Merck's willingness to do late-stage deals. We were much more reluctant to do these in the past. The issue with later stage deals is there's more data—and many more opportunities for the company to say, "I wouldn't have done it exactly this way or that way." The more information you have, the easier it is to find a reason not to do a deal. But now we realize we have to take these opportunities for what they are.

With the increased competition for promising compounds, do smaller partners have a bigger say when it comes to development?

Obviously, the later stage a compound is, the more you're talking about co-development, because the licensor, to a certain extent, has already developed the drug. Take the deal we did last year with Ariad for their oncology compound going into Phase III. Ariad has done a tremendous amount of work, and they're the experts—they know the trials and results, and they have definite feelings about what areas to go into, because this is a mechanism that could work on several different types of cancers.

If you're talking about a basic research deal, it's possible that the company's area of expertise really is basic research. But to be flexible, you have to go with the expertise of the parties from both companies, and let them do what they do best. You can't make the pitch, "We're from Big Pharma, we know it all, just hand it over to us." To be successful, we have to meet as equals in the clinical space. Just look at Ariad: Harvey Berger, the founder, has been with the company for years—it's his baby. He was looking for a real partnership.

How can companies conduct M&A and licensing more efficiently?

Big Pharma has the reputation of being slow and taking forever to make a decision. We've tried hard to ensure that's not true at Merck. We can make decisions very fast—we've even shocked our biotech partners on several occasions by being ready before they were.

For example, we did a basic research deal with Ambrx that took just six weeks from when we first met them. It was a new mechanism in diabetes that doesn't have any clinical proof of concept. But Nancy Thornberry, who heads basic research in diabetes, had her eye on this mechanism. It wasn't something that we ourselves were ready to invest in. But when we got to know Ambrx, and we saw that they'd made progress and had good ideas about how to pursue this mechanism, it was a perfect opportunity to do this deal.

And then there's the other side of deals, which is that some take a very long time. But in the end, that's not really a reflection on the deal.

How were you able to move so fast on the Ambrx deal?

It goes back to the fact that we have tried to make our process easier for the partners and for ourselves. We have a due diligence checklist. We know the questions and the data we want to see. And we have access to senior management on both the research and on the finance side, straight up to Dick Clark and Dr. Kim. All that's happening in the background, so the company we're working with doesn't have to worry about it or wait around for us.

What could biotechs and other companies do to make the deal-making process more efficient?

One of the latest things is that some companies want us to make a bid before we've seen any data. We're not fond of that development. To me, that's a big waste of time because we'd just be making a wild guess. There's not a lot we can do about discouraging this, other than to point out that it's not the best way to do things. They may have four or five bids, but you don't know what they're worth because people don't know what they're bidding on.

Nektar found out about the termination of their partnership with Pfizer by reading about it in the morning news. Did that alter the way companies think about doing deals?

It is an example of what not to do. But you didn't need an example to say it's a bad thing to surprise your partner.

Everybody knows that's not the way you want it to go down. We have an alliance management group, and it's their job to make sure those surprises don't happen. We hope that we would never make a mistake like that.

These days, is the relationship more important than cash?

We've been told on more than one occasion that we were chosen despite the fact that we weren't the highest bidder. My guess is that it wasn't a Grand Canyon-sized gulf—let's face it. But I think people do make decisions based on relationships. In the end, the biotech firm has to feel comfortable that they have a good partner who has that same vision for the product, and that they respect the clinical and marketing people.

Big Pharma partners often redo clinical trials after licensing a compound—they find they have to repeat a Phase II trial, for example. Have you seen that problem?

You do or redo a trial so that you can see a clearer path forward. Nobody wants to redo a trial for the sake of doing it. But sometimes it's unavoidable.

Sometimes, biotechs have to cut corners when they're doing their trials because they don't have as much money [as Big Pharmas]. They're constantly being pushed to go faster, faster, faster. If they had more money, maybe they would have designed something a bit more elaborate.

Every deal has a "work plan" associated with it that says, "Here's what we're going to do." You have to build that understanding as you're working out a deal, so it shouldn't be a surprise if a company plans to do a second Phase II trial.

After 22 years in the biz, do you think there is a science to business development?

It's the same skill as picking what's going into the pipeline. People ask me, "What's the probability of success?" And I say, "What's your success rate in the lab?" It's very hard to know—I think it's a combination of art and science.

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