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European Biopharmaceutical Review

Canny Collaborations

The need for Big Pharma to partner with small- and medium-sized enterprises that have the ability to innovate and develop novel medicines has never been greater. As well as affecting the fortunes of a few, these partnerships are changing the foundations of the industry as we know it.

At the start of 2012 there is no doubt that Big Pharma companies are seeking to acquire assets from smaller biopharma companies. What better example is there than the announcement in November 2011 that Gilead Sciences will acquire Pharmasset for $11 billion, or 70 times the net assets of Pharmasset itself? Moreover, Gilead is betting one third of its valuation on this deal. At stake in the deal is a possible interferon-free treatment for hepatitis C. Analysts believe that the product may be approved in 2014, and it is estimated that the market will be $20 billion by 2020. At the moment, Vertex and Merck sit on the lion’s share of hepatitis C sales. Other small biopharma companies in this therapeutic area include Achillion, Inhibitex and Idenix. It will be interesting to see who is acquired next.

We may reasonably ask why such deals are happening, why Big Pharma companies are paying more for assets, and what the current trends tell us about the future of this space. Firstly, the cost of developing drugs has skyrocketed in the past 10 years, and Big Pharma companies have also been launching fewer new chemical entities (NCEs) and spending more to do so. A dramatic reduction in efficiency and effectiveness tends to characterise Big Pharma at present. As the cost of drug development escalates, and the successful production of NCEs falls, Big Pharma is forced to cut programmes where there is no core expertise, or where results are of marginal value.

It is often the case that funds that would normally be spent internally are instead spent externally via partnerships or acquisitions. The reality is that small biopharma companies are more efficient, and in many cases more effective than Big Pharma. An example is Excaliard, which started business four years ago with a $15.5 million Series A round of funding. Now, Excaliard has been acquired by Pfizer, who are attracted to the small biopharma company’s anti-fibrotic antisense drug EXC 001, which prevents scarring of the skin by interfering with the expression of connective tissue growth factor (CTGF). “The science behind Excaliard’s lead compound aligns well with our R&D focus on new treatments for fibrosis and tissue remodelling,” says Jose-Carlos Gutierrez-Ramos, Pfizer’s Senior Vice President for biotherapeutics, worldwide research and development, as Fierce Biotech reports.

Pfizer and Gilead have both looked outside their companies to identify projects that fit with their strategic objectives. In a world of limits, this means that somewhere in the Pfizer and Gilead organisations, other programmes will be cut, or eliminated. This is not simply a case of outsourcing in the conventional sense of the word, reducing costs of production by finding lower cost centres. But rather, these deals were done in the belief that the work being conducted outside the Gilead and Pfizer labs is better. The value proposition is more compelling. Looking outside for products and technologies is the modern way that large companies continue to grow their revenue. The large number of deals that Big Pharma does with small biopharma companies is about reducing risk and increasing efficiency – in other words, ultimately increasing the bottom line.

This is becoming vitally important to Big Pharma companies because many of the blockbusters that have paid for their huge overheads are coming off patent in 2011-2015. This is resulting in the closure of facilities and largescale layoffs; Astra Zeneca closed a large facility in Lund, Sweden, and Pfizer shuttered its large facility in Sandwich, England. On a weekly basis, the industry media report large scale layoffs in multiples of 10,000 around the world, and primarily in the developed economies. Europe and the US are especially vulnerable. Many beloved research projects have been axed, and non-revenue generating functions such as marketing are taking heavy hits. Product lines are discontinued, and dedicated sales teams are made redundant. The rise of generics promises to revolutionise the cost of treatment for many people, and thus what may at first sight be viewed as bad for the pharmaceutical industry may also be viewed as good for patients in need.

I will take a contrarian view and say that I believe that the loss of margins by the Big Pharma industry will eventually be seen as having had a positive effect, for many reasons. Firstly, Big Pharma will really have to focus on being productive and efficient. There is enormous waste built into the whole system. One has only to look at how efficient the Japanese automobile industry has become, with few natural resources in Japan, in comparison with the American automobile industry and its historic advantages. Inefficient use of capital, energy and human resources make companies less competitive. Another positive outcome of the scaling down of the Big Pharma industry will be that it relies more on innovation coming from small biopharma companies, and in this way more companies will be started, with focused business plans, seasoned management teams and efficient capital expenditures. Many of the scientists and other managers in the small start-ups will have come from Big Pharma, and while small company life will at first be a challenge for many, adjustments will be made and we will hopefully see more Excaliards and Pharmassets.

Big Pharma is also developing funds to invest directly in biopharma companies. For example, on November 10 2011, GlaxoSmithKline (GSK) launched a $50 million life science innovation fund focused on Canada. This will have a really positive effect on the biotech sector in Canada. The press release announcing the fund states that it will “significantly advance the commercialisation of scientific innovation in Canada by investing in early stage breakthrough research.” The fund is specifically aimed at academic and health institutions, translational research centres and start-up companies. Moreover, there is a close cooperation between GSK executives and departments of the Canadian Government. The fund launch event included the President and CEO of GSK Canada, Paul Lucas, and Dr Moncef Slaoui, GSK’s Global Chairman of Research and Development. An earlier commitment to Canada by GSK was seen in 2009 when Dr Slaoui and Paul Hastings, CEO of OncoMed, a San Francisco-based biopharmaceutical company focused on oncology, discussed their collaboration at TVG’s BioPartnering North America in Vancouver. In 2007, OncoMed and GSK formed a strategic alliance to develop cancer stem cell antibody therapeutics. The alliance is being conducted through GSK’s Centre of Excellence for External Drug Discovery (CEEDD). CEEDD itself was created by GSK to access new sources of innovation outside GSK research labs.

Big Pharma is now engaged in search and evaluation exercises on a global scale to access innovation. With the rise of major new markets in Asia, and the rise of generics, new business models will be pioneered to serve new and massive customer-bases. We will see innovation occurring in the discovery and development of novel biopharmaceuticals, as well as diagnostics, prevention, drug delivery, patient monitoring and product distribution. All of this will be driven by the huge customer base in Asia which has never before been served, and which will be amenable to efficient and innovative systems at all levels. As in the case of the automotive industry previously mentioned, Asian pharmaceutical companies, and Asian subsidiaries of western companies, will be freer to implement new ways of meeting medical needs, without the huge legacy costs found in the US and Europe.

My prediction is that there will be more and more deals as Big Pharma struggles to remain competitive, and these deals will spur investors to create new biopharma companies, designed from the outset to be sold to Big Pharma. Investors will explicitly fund companies to be acquired. Indeed, they will study the market and identify acquirers for specific niche products, and then create companies around them. This is a different model from the one that launched Cetus/Chiron, Genentech, Amgen, Biogen Idec and Genzyme 40 years ago. The dream to build a fully integrated biopharmaceutical company (FIBPCO) is dead, at least for now. What has emerged, and has made investors and lot of money, is the designer biopharma company – a company with a shelf life.

Big Pharma will not go away, but it will morph as required to become global marketing organisations, networked into innovation and excellence found around the world in small biopharmaceutical companies and research institutes. One thing is certain – science has always been an international endeavour, well before the ‘global economy’ replaced the closed economic systems of empires and countries. Now, more than ever, scientists use the internet to talk to each other, and to find shared interests and projects, as well as to explore scientific problems. Innovation will continue to grow around the world in centres of excellence, and Big Pharma will find ways to tap into it, to ensure that new therapies are developed which will drive their revenue. As Bob Dylan sang 50 years ago: “the times, they are a changing.”

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Robert Lee Kilpatrick is Co-Founder and Partner of Technology Vision Group LLC (TVG). Since 1992, he has been connecting innovators and leaders in the life science industry across the US, Canada, China, Europe, Australia, Latin America, India, and Asia. Robert was educated at the University of California, Berkeley and Cambridge University, where he received a Doctorate in the History and Philosophy of Science and Medicine. He is on the Board of Directors of the BayBio Institute, a non-profit think tank in San Francisco focused on issues related to the bio-economy. His professional memberships include: BayBio Life Science Association, BIOTECanada, and the Biotechnology Industry Organization (BIO). Email:
Robert Lee Kilpatrick
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