Biotechs are growing up and branching out, having learned that a narrow business focus makes for neither headlines nor payoffs.
Abstract
As biotechs hit their adolescence, they – like test makers and pharmaceutical manufacturers – are more likely than ever to reach outside of their own areas of expertise, link hands with the other guys, and pursue new programs and technologies.
Genentech is no stranger to taking risks. Looking back over an unprecedented string of 15 positive, major drug studies, CEO Arthur Levinson calculated the odds of success at 1 in 300 million. And the company is willing to bet big money that it can keep its winning streak going in an industry where catastrophic failure is an everyday event.
Last year, there was a $919 million deal to buy Tanox, a Houston-based drug developer with a pipeline of experimental drugs aimed at asthma, HIV, and macular degeneration. Late in the year, AC Immune netted a package worth up to $300 million in fees and milestone payments for a research pact to develop antibodies for Alzheimer’s disease and other conditions. There also was a $405 million deal to license a cancer drug from Inotek Pharmaceuticals, up to $500 million for cancer and autoimmune treatments from CGI Pharmaceuticals, and more recent deals with Tercica and Abbott Laboratories, including a pact on small-molecule cancer therapies.
Analysts quickly noted that Genentech was treading on new ground with several of these deals — an idea Genentech eagerly embraced.
“Immunology could emerge for us as a field as important as oncology,” Levinson told Forbes. “There are a lot of parallels.”
But immunology wasn’t the only new direction Genentech was headed in. Another pact with Exelixis for a small-molecule cancer therapy highlighted a string of new deals by Genentech, as well as fellow biotech giant Amgen, for small-molecule programs that could deliver medications in pill form. For Genentech, these deals are all part of a bid to keep the hot streak going while boosting its stable — up from 20 to 30 — of late-stage prospects.
Amgen, meanwhile, is clearly looking past its current troubles to a new day where it can rely on new therapeutics to advance its multibillion-dollar bottom line. And Amgen isn’t drawing arbitrary boundaries on what types of new therapies it will pursue.
“Amgen takes a modality-independent approach to R&D, including licensing collaborations,” says Amgen spokesperson Anne McNickle. “With this approach, scientists choose the best target to block a specific disease process and then consider the type of drug that may be required. Molecules being studied include not only proteins —Amgen’s original area of expertise — but also monoclonal antibodies, peptibodies, and small molecules.”
SMALL MOLECULE, BIG POTENTIAL
Small molecule programs just make good sense for a company like Amgen or Genentech, says John McCamant, the editor of the Medical Technology Stock Letter.
“The larger they are, the more they want to capture as much value as possible. If you can create a pill, make it orally available for chronic disease,” he says, then you have the potential for capturing a much larger market than many injectables can command. “The cost difference between monoclonal antibodies and small molecules is dramatically different.”
For Wall Street analysts, these new strategies have launched the market equivalent of a horse race, pitting a faltering Amgen against a strong comer in Genentech. But the strategic shifts also underscore how quickly a mature biotechnology company has to move to reinvent it-self — much the way big pharma recently has shifted to become an avid player in the biotech field, picking up companies, drug prospects, and new technologies in a bid to come up with fresh hits.
Those in drug development, meanwhile, are being forced to confront a new generation of diagnostic tests that promise to identify patients who would benefit or perhaps be harmed by some of these new therapies. Companion diagnostics are a crucial ingredient in the industry’s recipe for a new era of personalized medicines that has been heralded for its potential in reducing waste and improving outcomes.
“Big biotech and big pharma will not be able to do it on their own,” says Terry Hisey, vice chairman and life sciences industry leader at Deloitte & Touche USA. “They need to move toward relationships beyond the four walls of their enterprise, toward a more open business model, more focused on collaborations. And that will require biotech companies to think about things like advancing science and commercial opportunities and sharing in risks and the reward.”
Next year, says Hisey, look for even more deals that match the most successful players in drug development. It’s a fast-converging drug development world. And there’s plenty of cash at the cutting edge of research.
RAISING THE BAR
In early October, the pharma giant Pfizer took the wraps off of its plan to go biotech in a big way.
A new biotechnology research center being blueprinted in South San Francisco was presented to analysts as the centerpiece of the company’s effort to shed its dismal reputation in new drug development, pushing therapeutic candidates faster in a bid to mimic the nimble technology of small biotech companies.
In Pfizer’s new game plan, the biotherapeutic unit will strike out with considerable freedom in new directions, acting as an incubator for new talent and a watchdog over a blitzkrieg of new licensing deals. In the words of Pfizer CEO Jeffrey Kindler, the new center would help “dramatically raise the bar” in the company’s research and development efforts.
For Pfizer — just dubbed the world’s leading research spender with more than $8 billion earmarked for its global research and development budget — this new development strategy helped further to blur the lines between the converging worlds of biotechnology and pharmaceuticals. Astra-Zeneca, for example, has been moving steadily toward developing its own biotech enterprise around its $15 billion acquisition of Med-Immune, with plans to integrate the work done at Cambridge Antibody Technology with MedImmune. And Roche, which owns a majority interest in Genentech, has gone on a buying spree of diagnostic test makers as it prepares for a new generation of drugs that can be more carefully matched to patients.
Over the past year, the deal making in biologics has hit fever pitch. Douglas Ringler, CEO of Tolerx, says he wasn’t really in the hunt for a partner for the company’s promising anti-CD3 monoclonal antibody, the mid-stage TRX4, but wound up with a $760 million package of up-front payments, investments, and milestones — along with co-promotion rights to the U.S. market in type 1 diabetes — from Glaxo-SmithKline in October that was simply too good to refuse. Says Ringler: “That bodes very favorably in terms of the consolidation of biotech and big pharma’s interest in expanding its pipeline.”
It’s no wonder that pharma companies are attracted to biotechnology, says Robert Blum, CEO of CytoKinetics, who forged a $725 million licensing deal with Amgen as well as a separate pact with GlaxoSmithKline. “Pharma is increasingly on the receiving end of criticism on matters of pricing and drug access. Biotech companies with products in development benefit more from general enthusiasm for innovation and get more of a free pass, if you will, to fund new mechanism research.”
In Amgen’s case, there’s been anything but a free pass in recent months as federal and commercial payers tighten controls on erythropoiesis stimulating agents. But in drug development, any market obstacle also can inspire a considerable amount of creativity.
“We had a meeting of the minds,” says Blum about his pact with Amgen, “a perfect storm of our ambitions with their needs.” With payers putting pressure on Amgen’s multi-billion dollar darbepoetin alfa (Aranesp) franchise, “That has them thinking about where they’re going with new product launches, where they can move the needle sufficiently to meet their earnings-per-share growth target. To do that, they’ll have to reach increasingly into large commercial markets in primary care, cardiology, and heart failure.”
That bodes well for small developers with promising technologies.
“Biotechnology is becoming more sophisticated,” says Deloitte’s Hisey. Only a handful of major biotechnology companies are able to take a program all the way through to commercialization, he notes, but the rest of the field is getting much better at forging new partnerships with the kind of companies that have both the capital and a desire to tap into new prospects. That increased sophistication is being played out through new deals that are leaving biotech companies with more control of intellectual property while still garnering some impressive numbers.
Convergence is especially important in drug development, says Blum, when you can match companies like his that are willing to take the risk of testing novel approaches with biopharma companies under pressure to invest in promising new drugs.
“A lot of companies are being constructed where they pivot on one product and one trial,” adds Blum. “They’re standing on one leg.” CytoKinetics, he says, was built on a portfolio approach, with lead compounds, backup compounds, multiple trials, and a commitment to examine their potential impact on various subpopulations in a disease area before committing to the more expensive registration trials. “We’re looking less and less like typical companies financed in today’s environment, where the appetite for careful and more broadly informed clinical research and managed risk is increasingly rare.”
NEW PARADIGM
One way drug makers can reduce the considerable risks — and costs — involved in winning U.S. Food and Drug Administration approval and commanding new markets is by developing a companion diagnostic test that can better pinpoint patient populations most likely to benefit from a biologic. Diagnostic tests also are being rolled out to consumers eager to find out if their genetic profile is a harbinger of health or sickness.
“The biotech industry is transitioning from one focused principally on treating sickness to one that is promoting ‘wellness,’” biotech investor Stephen Burrill noted recently. “The era of personalized medicine is upon us . . . one that emphasizes predictive and preventive medicine. Not surprisingly, diagnostics and nutraceuticals companies have been very successful riding this new paradigm.”
Roche has been evangelical about its belief in marrying diagnostic tests with new biologics. Over the next few years Roche believes that new cancer drugs in particular — such as the ones in Genentech’s pipeline — will increasingly be matched with genetic tests that can identify which patients are going to benefit. That belief inspired Roche to bid $3 billion for Ventana Medical Systems, one of the leaders in the field.
Payers, including health plans, are more and more likely to start demanding diagnostic tests before putting up the lion’s share of the cost for many of these pricey therapeutics.
“From a managed care, payer, consumer, and provider perspective,” says Drew Fromkin, CEO of the pharmacogenetics company Clinical Data, “this industry is really in dire need of some new tools. There is a dearth of technology out there that is making a difference in improving medical and therapeutic economics while improving clinical outcomes.”
Companies such as Clinical Data independently develop proprietary pharmacogenetic tests that can be used to determine drug response in individuals — especially with the FDA starting to take a keen interest.
“The warfarin test is a good initial example,” adds Fromkin, pointing out the agency’s recent role in changing the drug’s label to include a suggestion for a diagnostic test to assist in the dosing of warfarin to reduce the serious risk of excessive bleeding or clotting. “The FDA moved recently [on adding the genetic single nucleotide polymorphisms to the drug label] and could become more aggressive in this area soon.”
So could private payers.
“What we’re finding is that biotech companies are getting quite concerned at the economic analysis around reimbursements on products,” says Hisey. For a time, he explains, there had been a belief that a companion diagnostic test that would better identify which patients would benefit would be worth a premium to payers. But so far, pricing pressures are keeping any premiums at bay.
The argument against companion diagnostics had been that they limit the size of patient populations that will be treated and therefore limit the market, notes Raymond Woosley, MD, PhD, president and CEO of the Critical Path Institute, or C-Path, which is collaborating with the FDA on projects to speed up the drug development process. But that’s moot now, says Woosley, because new therapies are designed to attack very specific targets that are present only in subsets of patients with the disease.
“For example, there’s not just one type of lung cancer,” he says. “There are many subtypes, and the targets for most drugs are found in only a relatively small fraction of tumors. Current FDA efficacy standards make it difficult to gain approval for a drug that is only effective in 10 to 20 percent of patients. Even if a drug is approved without a diagnostic test, insurance companies often don’t want to pay for it because only 1 or 2 patients out of 10 are likely to respond. Both patients and physicians want great assurance that the drugs will work before they will use them. We’ve got to find a way to develop drugs and the tests that tell us how and when to use them.”
That message, says Woosley, has been heard loud and clear among bio-pharm companies. “Look at all the pharmaceutical companies that are acquiring companies with greater diagnostic expertise,” he adds, pointing to Roche’s offer for Ventana Medical Systems.
One stumbling block to seeing more of these tests come onto the market has been the absence of a reliable regulatory pathway to gain an approval at the FDA. To assist the process, C-Path and Ventana Medical Systems recently announced that they would use a $2.1 million grant to C-Path to establish the standards for the performance diagnostic tests for cancer.
Educating providers and consumers is the key to driving wider acceptance of the pharmacogenetic tests, Fromkin adds. “We must facilitate getting providers and consumers access to this valuable technology at a reasonable cost. Private carriers see the value and are taking a very close look at these powerful clinical tools,” he adds, but CMS needs to get more involved and help upgrade the reimbursement system to fairly represent the value of these novel diagnostic tests coming onto the market.
FOLLOW-ONS: A NEW OPPORTUNITY?
Congress has yet to push through proposed legislation to create a regulatory process to approve follow-on biologics in the United States. But with some smaller biotechs and a host of generic companies —some allied to major pharmaceutical concerns — feverishly developing follow-ons for biologic medicines that are still under U.S. patent protection, this is another area that sparks plenty of new thinking.
“For big pharma and big biotech, generics are not something that happens to them,” says Hisey. “It can be a strategic opportunity, and they’re best positioned to take advantage. And there are probably some things they can do with pricing to reduce the attractiveness of other players. When we think of generics, we think of the U.S. market. But generics are handled differently around the globe. Biosimilars already are on the market” in some regions, he adds, and that can help these companies develop new strategies in the United States.
This is one field, though, where the big players will gladly wait for a change.
“With the power of the bio-pharma industry,” notes McCamant, “it’s coming awfully slowly.
Looking into 2008, McCamant is keeping his eye out for some big headlines on new biotech acquisitions. Among the possibilities: Biogen Idec, which already is in play, along with Protein Design Labs, Im-Clone, and Onyx Pharmaceuticals.
Even Amgen’s name is being floated as a possible takeover target for an ambitious dealmaker such as Pfizer. Bear Stearns’ Mark Schoenebaum recently looked over the field of possible deals and put Genzyme and Amgen on the top of his list of likely big pharma targets.
In the biotech business today, no deal is out of bounds — provided the potential rewards are worth the risk.
