A brief survey of the world's largest pharmaceutical companies reveals their changing attitude towards collaborating with biotech firms. At recent conferences and meetings, it seems that pharmas have been fighting to position themselves as the most biotech-friendly.

This change in pharma's attitude reflects a shift in the dynamic between the old giants and the younger biotech sector. Pharmas are becoming increasingly more reliant on licensing products from biotechs to fill their pipelines, and the terms of deals are becoming more complicated and, in some cases, more favorable to the biotech partner. But as more and more biotech companies emerge to sell their wares, there are some things a startup should note to rise above the din.

Changing times

“Big pharma will not be able to survive on its own [research] and pipeline,” says Robert Wills, vice president of alliance management at the pharmaceuticals group at New Brunswick, New Jersey-based Johnson & Johnson. “The science is too big, broad and extensive for pharma to do it alone.” Robert Schmid, director of the office of alliance management at Eli Lilly in Indianapolis, Indiana, concurs: “Biotechs are in a seller's market because big pharma is desperate.” And the numbers from the past year seem to back up these statements: by July 2004, biotech companies had raised $4.3 billion from partnering deals, compared to $3.5 billion during the same time last year, according to Steven Burrill, CEO of life science merchant bank Burrill & Company in San Francisco, California.

Pharma companies' pipelines are less robust then they used to be, but the firms are seeing success at biotech development, which makes such products attractive, says Tomar Howson, senior vice president for corporate and business development at Bristol Myers Squibb in Lawrenceville, New Jersey. Howson also points out that biotech companies are now developing small molecules, and thus playing into the traditional development strengths of big pharma.

Broader access to sophisticated development tools has also raised biotech firms' status and productivity, says Barbara Yanni, chief licensing officer at Merck in Whitehouse Station, New Jersey. “Pharma is using tools also, but biotech now can compete with us, [so it is] more of a race between biotech and [pharma] companies.”

The nature of the deals also appears to be changing. Bristol Myers Squibb's Howson says more deals are being made at an earlier stage in drug development. “People's appetites are increasing for early stage, phase 1 and 2 and preclinical. It's supply and demand.” Pharma would prefer late-stage licensing deals, but not many of these deals are available, she concludes. Indeed, according to databases held by Recombinant Capital in Walnut Creek, California (http://www.recap.com), the percentage of biotech-pharma alliances that are focused on early-stage products was 68% during 2000–2002, a steady increase up from 54% during 1991–1993; alliances that focused on products in late-stage development dropped from 29% to 22% over the same time frame (see Fig. 1).

Figure 1: Number of alliances between biotech firms and top 20 pharma by stage of development at signing 1988–2002
figure 1

Early-stage deals as a percentage of all deals have steadily increased, whereas late-stage deals have steadily decreased. Early, discovery and lead; Mid, preclinical and phase 1; Late, phase 2, phase 3, PLA/NDA filed and approved. Source: Recombinant Capital http://www.recap.com.

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Also, as biotechs gradually attain a better negotiating position because of demand, terms of biotech-pharma deals become increasingly complicated. Since 1995, biotechs have obtained compensation more in the form of milestones than in research payments1. In addition to these more complex financial terms, the deals now include more resource sharing and copromotional agreements with geographical carve-outs, says Johnson & Johnson's Wills.

And with the broader-structured deals and the focus on attracting biotechs, pharmaceutical companies are investing in trying to boost the success rate of these relationships. “Technology still has the same risk it always had, but we're sharing budgeting, resource allocation, hiccups, success jointly, so now the emphasis is on managing the alliance,” says Wills. To reach this end, Johnson & Johnson, Lilly and other pharmas have established internal groups focused on smoothing the way for biotech's interaction with the development apparatus of big pharma.

Are biotechs in the driver's seat?

“On the one hand, big pharma is saying to biotech 'you are more important to us than you have ever been to fill our pipelines so we will do all these nice things, we will be a best partner and put together alliance teams',” says Martyn Postle, director of consultancy company Cambridge Healthcare & Biotech in Cambridge, UK, and a publisher of an annual survey evaluating how pharmaceutical companies are perceived as partners to biotech2. “On the other hand, [pharmaceutical companies are saying] 'we will nickel and dime you if the product is not as good as initially believed.'” In other words, a pharma may cut funding for a program before it yields the desired results, impatiently focusing on short-term dollars rather than the long-term prize. “The biotech executive is between a rock and a hard place,” says Postle.

Still, partnerships with big pharmas are the preferred mode for a biotech to build its business, beating out funding from venture capital, public markets and banks, according to a recent study by IBM Business Consulting Services in White Plains, New York and Silico Research in Cambridge, UK3, (see Fig. 2). As James Egan, a senior vice president at Idenix Pharmaceuticals in Cambridge, Massachusetts, sardonically puts it: “If you are unhappy with pharma, then I invite you to talk to venture capitalists.”

Figure 2: Preferred source of funding for all biotech companies.
figure 2

Respondents were asked to rate each source of funding out of 10, with 10 representing highly preferred. Respondents clearly prefer funding from other, larger companies in the biotech and pharma sectors. Source: reference 1.

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Still, a partnership with big pharma, although viewed as validation by investors and a step on the path to FDA approval, is hardly assurance of success. Indeed, more than half of alliances fail to meet most of their objectives, according to the IBM report3,4 (see Box 1).

“A partnership with large pharma may provide short-term gain—investors like it—but sometimes not enough attention is focused on the downside,” says George Schreiner, president of research and development at Johnson & Johnson-owned Scios in Fremont, California. Schreiner says all gains that allowed them to get to the point when they could partner can be nullified if a pharma drops the compound after a few years of development (see Box 2). But, he concedes, “it's a hard path to not partner.”

And whereas big pharma is looking to biotechs for drug leads and working to attract them, the odds of winding up with a partner are still stacked against most biotechs. For example, Johnson & Johnson received about 400 meeting requests at this year's annual US Biotechnology Industry Organization conference, says Wills, of which it accepted approximately 300. That's just one conference, albeit the biggest one of the year, but pharmaceutical companies typically get approached and also solicit deals all year at various meetings, through e-mail cold calls, via company websites and through previous relationships. Although most pharmaceutical companies screen every deal proposal that they receive, to put hit rates for closing a deal in perspective, Johnson & Johnson typically does between 10 and 30 deals a year through its pharmaceutical group, says Wills. Similarly, Merck reviews thousands of deal proposals a year, says Yanni; so far this year, it has inked 26. So what's a biotech to do to break through the noise and get a pharma's attention?

It's the data, stupid

“It's the data, stupid,” could be the slogan for what many pharmaceutical companies are looking for. This may seem obvious, but pharma executives say some biotech companies approach the deal pitch too much like a business proposal, whereas the data supporting the mechanism of action is what will open the initial screening gates to a more thorough review (eventually leading to consideration of the market and earnings potential of a drug candidate). And that data needs to be not only scientifically sound, say pharma deal makers, but also complete. “Aim the [proposal] package to scientists,” says Yanni.

“The best way to get our attention: make sure you can back up whatever you are advocating with good data,” explains Johnson & Johnson's Wills. He says one of the mistakes biotechs often make is that they think if all the information is not there, then big pharma will not be interested. Wills says it's just the opposite. “We've been doing this for years and expect not everything to be there, but biotechs need to address this. If a biotech comes in and gives the impression that the product is perfect, no problems, it calls into question the competency of the biotech executives.” He says pharma companies expect biotechs to have issues, and being more open and up front with the data will put you in the driver's seat when pitching the deal. Lilly's Schmid offers this tip: present the real situation of where your asset is. If you say your product is farther along in development than it really is, the pharma partner will find out in due diligence. “If it is dressed up or overhyped, it's a disservice” to both parties, says Schmid.

Of course, if a biotech gets through the first screen, additional scientific scrutiny follows, including a secrecy agreement exchange, and also the business aspects of the technology deal begin to be explored. To that end, pharma executives recommend that data, even if supplied in complete form, also be put into the kind of context that will facilitate the pharmaceutical companies' evaluation. What is the medical sense behind this approach? How is it competitive with other technology? Does the data support the hypothesis? Does the development plan make sense? Does the intellectual property support making money? Pharmaceutical executives recommend that biotech companies not only ask themselves all these questions, but also answer them in their initial proposal.

Living through the deal

Beyond the main drivers of the technology and financial terms, pharmaceutical executives ask themselves how the people involved will live with the deal over its lifespan. They suggest that biotech companies ask the same question when evaluating a potential partner. “You don't want to be in a bad relationship. It hurts the product,” says Johnson & Johnson's Wills. “When you do have disruptions—and it will happen whether in development or commercialization—if the right people are together, you'll get through it.”

Personnel at big pharma will often change over the course of the years, not just because of regular employee turnover but also because of merger and acquisition activity. Because pharma companies anticipate these personnel changes, many of them have installed an entire department to provide continuity and watch over a deal for its lifetime to better serve the deal and the experience for both companies.

“Relationship management is what we do,” says Schmid, who directs the alliance management office for Lilly. That way, he is sure that if there is a failure, it is the technology and not the relationship. Lilly's program includes evaluating behavior of the partnered team, coaching, feedback and even 'interventions' if the team reaches an impasse and a decision on the next steps can't be made, says Schmid. Johnson & Johnson has a similar program, and both companies credit it with an attempt to improve the success rate of partnerships.

“Prediction: within three years, every big pharma will embrace alliance management. You can't do deals without it,” says Johnson & Johnson's Wills. When collaborating with big pharma, it is in biotechs' best interest to pay as much attention to the relationship and resulting troubleshooting as to the actual scientific development process. It is usually the relationship, not the science, that kills a drug's development.