Phase II is the new Phase III

It's what you might call a slow news day for us so we figured we would dip back into our colleague Roger Longman's presentation from our Euro-Biotech conference last week. Roger's on vacation, see, so he can't stop us from pilfering his slides.

One of the points he emphasized during his talk and illustrated with some data from our Strategic Transactions Database is the idea that products that have cleared clincal proof-of-concept, i.e. the Phase II hurdle, are attacting the kind of deal dollars only seen previously for Phase III-stage products. The value of relatively scarce Phase III products these days is another thing altogether.

Taking a look at this phenomenon using upfront payments as a proxy for deal value, above, and you can see what we mean. So while those biotechs that excel at drug discovery can in fact sustain themselves by selling IND-stage candidates, which we pointed out last week, others can play on the next valuation inflection point at proof-of-concept.

Are Phase II deals a remotely new feature of the biopharma dealmaking landscape? Of course not. But the volume of deals for Phase II products has shot up in the past few years, and upfront payments are simply booming. A few recent examples include Novartis and Antisoma's deal around the oncology product AS1404 ($75mm up front), Bayer and Regeneron's deal on ex-US rights to Regeneron's VEGF-trap product in ophthalmology ($75mm u/f), and going back to last summer, Johnson & Johnson's ex-North America, ex-Japan deal for Vertex's hepatitis C protease inhibitor ($165mm u/f). Follow the links to a more detailed analysis of each deal.

Various pharma execs have chalked the rise in Phase II prices up to their own companies' inability to reliably and predicably get products through proof-of-concept themselves. This is excellent news for clinical-stage biotechs. A few, like CNS-focused Synosia, have set themselves up as proof-of-concept specialists, in-licensing compounds in preclinical or IND or even Phase I, shepherding them through a human efficacy trial, and licensing them on for a significant profit.

Live from Paris: Roger's dealmaking overview

Everyone was feeling a bit fuzzy this morning

Day two of our Euro-Biotech Forum opened up this morning with Roger Longman's dealmaking overview. One of the topics that Roger touched on was the increased specialization of biotech companies along the development continuum: Phase III specialists, proof-of-concept specialists, and--perhaps getting back to biotech's roots--discovery specialists.

The idea is to latch on to a particular and finite piece of the so-called value chain where investors can take advantage of an inflection point. Thanks to some of the astounding deal values we heard about yesterday this specialism is increasingly popular and undeniable profitable (when products work out--of course it's also a cheaper means of finding out quickly when they don't).

Below is a quick snapshot of the upshot for some of the discovery shops out there. Of course not all discovery companies opt-out at IND; some hang on to considerable upside. But the very idea that biotechs can subsist, and even thrive, as pure drug discovery purveyors recalls what seems to be a different, pre-FIPCO era.

Drug Discovery Pays

Welcome to Paris: take my drug ... Please

Mood lighting for the hot dealmaking topics panel

Windhover's Euro-Biotech Forum kicked off this morning in an overcast Paris with a panel discussion on deal structure and rationale. We'll keep readers apprised of the goings on here but most of the action as it were takes place behind closed doors, in the one-on-one partnering discussions.

The morning panel though, moderated by IN VIVO Blog's own Melanie Senior and sporting three pharmaceutical executives (Scott Myers, VP global strategic marketing with UCB, Nigel Sheail VP global head of licensing Roche Pharma Partnering, and Beverly Jordan VP Finance for Strategic Planning, AZ), gave us all a peek at the mindset of a few European in-licensors/acquirors at a time when the leverage in dealmaking sits squarely on the other side of the table.

Most of the panelists' comments about specific deals were just that--specific--and of the "if you've seen one deal, you've seen one deal" variety (AZ's Beverly Jordan went as far as to suggest that deals were like snowflakes, though we're relatively sure she didn't mean that they were small, cold, wet and disappear as soon as you catch them).

But accepting the premise that deal structures and the strategies that propel companies toward alliance or acquisitions are in fact unique, there are some more broad generalizations that can be drawn from our guests remarks.

More than ever Big Pharma (and smaller, medium-sized outfits like UCB) are comfortable in their roles as collectors and integrators of biotechnology products and technologies (snowball makers?). AZ in particular has embarked on a significant and deliberate externalization strategy going back to early 2006 (Beverly Jordan noted the MedImmune acquisition but focused more on an earlier important move, the takeover of alliance partner Cambridge Antibody); UCB's dual acquisitions of Celltech and Schwarz Pharma, we heard from Scott Myers, have created a force in mid-sized European pharma; and Roche is perennially near the top of the deals tables. When challenged that surely all that external spending might come at the cost of supporting in-house R&D, the answer was a resounding 'not necessarily.' AZ, said Beverly Jordan, has one of the lowest R&D spend-to-sales ratios in the industry, so there may be room to maneuvre.

Melanie set the scene with a dealmaking review, which mostly illustrated biotechs' increased leverage in dealmaking with the pharma counterparts (though, as she pointed out, part of the bump in 2007 figures is a reflection of intra-pharma dealmaking, in as much as Bristol-Myers Squibb remains a Big Pharma).

Trending Upward

It is mainly in response to the price of later stage deals, Roche's Nigel Sheail reminded us later, that preclinical and Phase I deals have soared in number and price as well. But upfront payments for later stage assets suggest there is still plenty of competition further down the value chain: the average upfront payment in licensing deals in 2005-07 for Phase II products was $41 million, according to data that Melanie crunched from our Strategic Transactions Database. From 2000-02, that same figure for Phase III projects was only $28 million.

The rising costs of doing business development combined with the increasingly sensitive and uncertain safety/reimbursement environments are certainly contributing to Big Pharma's embrace of large molecule technologies and specialty products in general. But surprisingly the data doesn't necessarily reflect this phenomenon when it comes to licensing deals, where traditionally primary-care oriented spaces like metabolic and cardiovascular disease kept pace--both in number of deals and value of up-front payments--with specialist areas.

Still, oncology, the favorite specialist area for most companies, continues to dominate in number of deals. This is generally due to the availability of oncology products, thanks to the myriad targets and unmet need which make it a fertile ground for many biotech companies, points out Nigel Sheail.

Although biotech companies seemingly have the upper hand--at least as reflected by deal valuations--the panelists stressed that high-upfronts and big payoffs weren't necessarily the way forward for every deal, thanks to tax considerations etc. Partners should "be creative," think about downstream rights, quids, and revenue sharing. Scott Myers encouraged potential partners to dream up new structures: "don't expect us to have a formula, because we don't."

All that said, IN VIVO Blog prefers for now to look at the numbers. If as Aesop (and today, Nigel Sheail) said, "the value is in the worth, not in the number," then surely as biotech's own products become more valuable to the future of Big Pharma that worth will increase. We think the numbers will continue to follow.

If you're here, happy dealmaking.