It has come to be expected that the successive Grand Ballroom PowerPoints – limited to twenty-five minutes apiece and kept tightly on schedule, almost uncannily so – given at J.P. Morgan each year by the largest healthcare companies in the world, don’t sparkle with revelation. The majority of presentations highlight the positives of the preceding year, gloss the negatives or omit them entirely, and project new positives – to be detailed in upcoming earnings reports or analyst meetings – on the years to come.

As everyone knows, the action at J.P. Morgan happens behind closed hotel room doors, or in San Francisco’s near limitless supply of coffee shops, restaurants and taverns. Absent a meeting beyond the bounds of the conference’s relentless schedule, attendees would do well to skip the formal presentations and plant themselves in one of the several breakout rooms, which often feature top management and an open microphone for questions. It was in this context that Vertex – still radiant from last year’s approval of Kalydeco, a drug targeting a small fraction of the cystic fibrosis patient population (and costing almost $300,000 a year) – that president and CEO Jeff Leiden told attendees that payers in mature markets have shown a willingness, so far, to pay a premium for the value Kalydeco provides to patients.

The company recently achieved a favorable reimbursement in England, one of the more frugal and skeptical nations in Europe with respect to drug pricing, which bodes well for reimbursement in Ireland and Wales, said Leiden. In France, the company is currently selling Kalydeco through a patient access program, but Leiden spoke optimistically about that country, as well as Australia, Canada and Germany. New Kalydeco trials for younger patients, aged two to five years, are set to commence this quarter.

There was plenty of talk about genetics, but outside of the success stories mostly in cancer, the enthusiasm of recent years seemed tempered by investors and others who feel that most of the current sequencing activity adds a layer of complexity but often doesn’t lead to actionable insights for drug development, or the treatment of patients in most settings. However, Life Technologies’ CEO, Gregory Lucier, said his goal is to “be the only company in the world that can read, write, and edit DNA,” which is difficult to fully explain in a twenty-five minute presentation (or in a blog post, for that matter). Like Illumina and other device and non-traditional pharma companies, Life Technologies drew capacity crowds, and Lucier described fascinating, almost sci-fi seeming technologies, such as the company’s Pervenio lung cancer molecular test, launched in September, which could dramatically affect survival rates for patients by making it much easier for physicians to determine the best course of therapy for an individual patient based on clear prognostic data in the early stages of the disease.

Although most medicines are still impersonal instead of personalized, catering to patient needs as a way to create value and differentiate products came up again and again in discussions with biopharma executives. Biogen Idec CEO George Scangos talked up his company’s intramuscular injectable form of Avonex, approved last February, describing it as “remarkably popular with patients.” Kermit Crawford, president, pharmacy, health and wellness, at Wallgreens, gave the company’s inaugural PowerPoint at J.P. Morgan, in no less than the Grand Ballroom – the largest of the presentation halls – telling attendees during the breakout session that the retail pharmacy administered five million flu shots in 2012. Flu shots, by the way, are a lot less expensive at Walgreens than they are at most doctors’ offices, said Crawford. The company is building out new capabilities in the form of clinics and home care for patients with chronic diseases, and expanded its global footprint last summer with the purchase of a $6.7 billion, 45% stake in Alliance Boots, a European pharmacy retailer.

Anne Whitaker, Sanofi’s president of pharmaceuticals, North America, said in an interview with PharmExec that supporting patients in areas like diabetes, for example – not just providing medications, but focusing on services that help patients meet their goals – can help to differentiate the company and its products from competitors. “We don’t want to just be the Lantus company,” said Whitaker. Helping diabetic patients successfully control their glucose levels, which means keeping HbA1c levels below 7%, means fewer complications (and less cost to the healthcare system), and since only half of the eight million basil insulin users are hitting those numbers, according to Sanofi’s global R&D president Elias Zerhouni, success in this area would be good for other stakeholders as well. Whitaker alluded to risk-sharing pilot programs Sanofi is conducting with payers that might reward the company with favorable reimbursement based on patient adherence and outcomes.

It should be mentioned that both Abbott and AbbVie gave presentations, neither of which were terribly exciting, although Thomas Freyman, Abbott’s EVP, Finance and CFO, said the nutritionals (one of four core business areas within the new Abbott, the others being established products, diagnostics, and medical devices) market is expected to top $50 billion by 2016, up from $36 billion in 2011, an area in which the company continues to invest; Freyman said Abbott has recently opened the doors to a new nutrition research center in Singapore.

It’s literally impossible to see more than about a seventh of the presentations live on any given day, since they happen concurrently and successively, without breaks in between, and the hallways of the Westin St. Francis get notoriously bottlenecked in between sessions, but the PCSK9 target seemed present in many pipeline overviews, in addition to the use of product combinations to treat larger sub-populations within a given disease or therapeutic area. Outside of the lunchtime keynotes on Monday and Tuesday, given by journalist Bob Woodward and J.P. Morgan head honcho Jamie Dimon, respectively, politics was conspicuously absent from company presentations compared with last year, although Ken Frazier, Merck’s CEO, said at a breakout session that he “told Obama” not to use mandatory drug price cuts to achieve healthcare savings, but to instead create policies that better incentivize the commercialization of innovative new products, which control costs by preventing severe (and expensive) health complications and related hospital visits. Amgen CEO and president Bob Bradway said unspecified provisions of the fiscal cliff bill, signed into law by President Obama on January 3, would generate incremental gains for the company’s Sensipar product, indicated for patients with hyperparathyroidism who are on long-term dialysis for kidney disease, and also to lower calcium levels in people with cancer of the parathyroid gland.

The first two days of the conference offered an increasingly diverse group of companies, including a room and track dedicated exclusively to non-profits, and a lively group of suited attendees who pressed executives for answers in the breakout sessions. More than one CEO expressed relief to find himself in calmer waters, having finally navigated through treacherous patent expiries and R&D failures in recent years, and the mood from the stage was generally upbeat, which might be expected for an audience largely comprised of potential investors. Even so, lots of companies detailed lots of mid and late-stage pipeline candidates, offering new hope for patients and new bets for Wall Street.

Weighing in on the question of buying back stocks versus giving money back to investors in the form of higher dividends, J.P. Morgan’s Dimon said he tended to prefer higher dividends, unless a company can be sure it’s buying back stock at a very low price. But then again, “you know more about healthcare than I do,” Dimon told attendees. Asked what he had learned from J.P. Morgan’s billion dollar trading loss fiasco last spring, Dimon said: “Don’t screw up.”

How can the emerging field of data science help to fruitfully translate research and discovery into successful drug development? Academics and pharmaceutical executives at Mount Sinai’s School of Medicine discussed ways to build a bridge across the valley of death, and the growing importance of data across all business areas.

Academic institutions are good at identifying and planting seeds with the potential to flower, eventually, into life-saving medicines and devices. The National Institutes of Health, as a primary source of the fertilizer needed to germinate these seeds, has helped enable big pharma to focus on what it does best: middle and late-stage drug development and commercialization.

The path from discovery to product development, however, often detours into a “valley of death,” where academic research and early-stage clinical programs languish in the shadow of risk. Some academic institutions are addressing this problem by “building the infrastructure necessary to better demonstrate” the potential value of an early stage program, said Uwe Schoenbeck, chief scientific officer for external R&D innovation at Pfizer. Schoenbeck said Pfizer’s Centers for Therapeutic Innovation (CTI) is finding ways to work together with academic investigators to achieve better results.

Asked about the most frustrating aspect of collaborating with academic organizations, John Sninsky, VP, discovery research at Celera, a molecular diagnostics firm, said that academics can sometimes “overestimate the value of what has been done, in the context of what still needs to be done” to bring a drug or device to market. Noting that “IP is central to our existence,” Paul Stoffels, worldwide chairman of J&J’s Janssen Pharmaceuticals division, said, “If we’re spending between one and four billion dollars [to develop a drug], IP must be protected.” IP rights don’t come cheap, of course. In the antibody space specifically, Stoffels said “the cost of goods is becoming unbearable” when royalties start stacking up. Nowadays, companies pay 15% or more in royalties on the sales of most new drugs, said Stoffels.

Muzammil Mansuri, SVP, Gilead Pharmaceuticals, noted that a lack of exit options for venture capitalists (VCs) represents a key dilemma to financing early stage development programs. “Conditional exits mean less money up front,” said Mansuri. Pharma, VCs and academia “need to take the risk together,” he said.

In his keynote speech at Mount Sinai’s SinaInnovations conference this morning, Jeffrey Hammerbacher, formerly head of Facebook’s data team and co-founder of Cloudera, an open-source software firm, said healthcare is witnessing a “manifest destiny for data,” which will expand not from sea to shining sea, but from “atom to shining bit.” Ever-growing data sets and analytics are coming, so companies can either “ride the wave or complain about it, and get washed up.”

Hammerbacher, who recently joined Mount Sinai’s School of Medicine as an assistant professor, also stressed the importance of failure, a sentiment echoed later on by Stoffels. To illustrate his point, Hammerbacher referred to the Kremer prize in the UK, which offered a cash prize to the first engineer capable of designing an airplane powered by a single human being. Many engineering firms spent large sums of money to design and develop planes that, when tested for the prize, crashed into pieces. The engineer who finally won the contest, 18 years after it was first announced, won by taking a different approach to the problem, Hammerbacher said. “His approach was to design a plane that could be rebuilt quickly after it crashed, so that he could try out new ideas faster.” After failing in the initial tests, the engineer was able to quickly reassembled his plane, make modifications, and try again until he won the contest. “Building a harness for innovation, in order to fail quickly and try again,” is critical, said Hammerbacher.

The need for transparency and trust in producing and sharing data, whether it’s for licensing deals or regulatory approval, also necessitates a willingness to fail, said Stoffels. Pharmaceutical companies should “create an environment where [scientists and researchers] can fail, and leadership stands up for them.” If people lose their jobs every time they fail, it creates a strong incentive to fudge the data, which is bad for everyone.

The three-day SinaInnovations conference was held at Mount Sinai’s School of Medicine in New York City.

Pharmaceutical industry leaders Novartis and Merck—among others—released second-quarter 2012 results showing global sales down in third-quarter 2012, with growth in key pharmaceutical products helping to offset losses due to patent expirations.

Novartis reported global sales of $13.8 billion, down 7% from third-quarter 2011, which was a 2% drop on a constant-currency basis, said the company in a press release. Novartis’ Diovan lost exclusivity on Sept. 21, 2012, and, although no generic competitor has yet been approved by FDA, the company expects generic competition to come at any time. The company, however, was positive about the performance of its pharmaceuticals group in the third quarter. Pharmaceutical products launched since 2007 grew 24% in constant currencies from third-quarter 2011 and now represent 36% of net sales. “While Novartis net sales were impacted by the patent expiration of Diovan and a down quarter in Sandoz and Consumer Health, our launch brands performed well,” said Joseph Jimenez, CEO of Novartis, in the relase. “Our excellent record on innovation continues with new approvals for innovative products like Afinitor in advanced breast cancer, the recent EU filing of QVA149 in COPD, and encouraging news in heart failure. I am confident that this improves the long-term growth prospects of the business.”

Merck reported global sales of $11.5 billion, down 4% from third-quarter 2011. The results, however, are comparable to third-quarter 2011 if the unfavorable impact of foreign exchange is excluded, said the company in a press release. Strong growth of key pharmaceutical products offset the loss of market exclusivity for Singulair (montelukast sodium) in the US. Patents for Singulair expired in the US in Aug. 2012, which led to a rapid reduction in sales, and will expire in major European markets in Feb. 2013. Sales from emerging markets accounted for approximately 20% of pharmaceutical sales in the third quarter. China continues to be a key driver with 19%t growth for the third quarter, including 1% from foreign exchange.
Pfizer delayed its report until Nov. 1 due to the storm hitting the US East Coast this week.

Ten biopharmaceutical companies announced the formation of a nonprofit organization called TransCelerate BioPharma, the mission of which is to accelerate the development of new medicines by identifying and solving common drug development challenges.

The ten founding companies include Abbott, AstraZeneca, Boehringer Ingelheim, Bristol-Myers Squibb, Eli Lilly and Company, GlaxoSmithKline, Johnson & Johnson, Pfizer, Genentech a member of the Roche Group, and Sanofi.

The ten founding companies will pool resources and personnel to solve industry-wide problems. Initially, TransCelerate will focus on best practices for clinical trial execution. Five projects have been selected for funding and development, including: development of a shared user interface for investigator site portals, mutual recognition of study site qualification and training, development of risk-based site monitoring approach and standards, development of clinical data standards, and establishment of a comparator drug supply model.

A senior R&D member from each of the founding companies will sit on TransCelerate’s board, but membership is open to any biopharmaceutical company that can contribute to and benefit from the solutions being pursued by the company.

In years past, drug development was a secretive process. However, the rising cost and diminished success rate of bringing new drugs to market has forced the realization that going it alone is not always the most effective or efficient way of developing drugs. This realization has resulted in greater willingness of pharmaceutical companies to collaborate — with academics, with government agencies, and now, with each other.

The sun was shining, savory scents were floating out from the grill, the lemonade was mixed and the table was set. But then dark clouds blew in and settled overhead. Bristol-Myers Squibb’s (BMS) picnic got rained out this summer.

One element of the rain out was forecasted long ago; Plavix, the multibillion dollar blood-thinner, second only to Lipitor in sales for the last several years, was due to face generic competition. Two other products, Avapro and Avalide, also saw profits wrested away by generic copies beginning last year. For the first six months of 2011, Plavix, Avapro and Avalide generated combined net sales of $4.7 billion for BMS. For the first six months of 2012, that number fell by 40% to $2.8 billion. (For a pdf list of BMS key product sales for 2011 and the first six months of 2012, click here.)

Patent expiry losses were expected, and analysts have been positive about BMS’s pipeline and newer drugs, as a way to fill the gap. Yervoy, a melanoma drug approved by FDA in March of 2011, had a strong launch with sales at $316 million for the first six months of 2012. Tim Anderson, senior analyst at Sanford C. Bernstein, predicts that Sprycel, a leukemia drug, and Yervoy will both be blockbusters by the end of 2013 and the end of 2014, respectively. Two early stage monoclonal antibodies aimed at boosting the immune system to fight cancer have generated some excitement in the investment community, too. But other pipeline drugs destined for big success have met with setbacks this summer.

Eliquis, a heart drug for the prevention of stroke and embolism in development with Pfizer has been called a potential blockbuster by just about everyone who makes predictions about blockbuster drugs. It will need to be approved first, of course, and FDA hesitated in June, saying it needed more data. BMS announced a safety problem on August 1 with its nucleotide polymerase inhibitor (BMS-986094), an oral hepatitis C candidate brought in through the $2.5 billion acquisition of Inhibitex last January. The company suspended dosing on BMS-986094 after one patient suffered from heart failure. “With the new hepatitis C news, [BMS] shares may lose some of their luster,” wrote Anderson in a note to investors.

Regulators raised other fusses and hollers this summer. In an Untitled Letter dated June 29, the Office of Prescription Drug Promotion (OPDP) took issue with a sales aid for the breast cancer drug Ixempra. The problem, according to OPDP – and this speaks to the critical importance of endpoint selection and clinical trial design in cancer drugs – was that BMS made claims based on “stable disease” and “progressive disease.” The clinical studies, however, tested for progression-free survival as a primary endpoint in combination therapy, and overall response rate in monotherapy. “We note that stable disease, stable disease [greater than or equal to] six months, and progressive disease were not pre-specified endpoints in the pivotal studies for Ixempra’s monotherapy and combination therapy indications,” scolds OPDP in the letter.

Finally, Robert Ramnarine, most recently assistant treasurer for capital markets at BMS, was arrested for insider trading on August 2. Ramnarine allegedly made illegal trades based on information concerning three BMS acquisition targets, according to an FBI statement.

BMS’s summertime blues could begin to lift in the fall. If everything goes right, the company’s Corporate Integrity Agreement (CIA) will expire on September 26, and BMS will once again be out from under government’s magnifying glass. It’s also possible that BMS’s diabetes dealmaking will start to pay off: profits on the diabetes drugs Byetta  and Bydureon will be shared, as well as any new Amylin drugs coming into the market. (UPDATE 8/9: Deal Done) Byetta earned $120.6 million in 1Q 2012, and Bydureon earned $6.9 million during the same period, after its approval on January 27, according to company statements. Last April, Amylin completed its Biologics License Application (BLA) for metreleptin, an FDA-designated orphan drug for the treatment of high triglycerides and/or diabetes in patients with a rare form of lipodystrophy, and has received fast-track designation. The condition affects just a few thousand patients worldwide, but the price-tag will likely take this factor into consideration. FDA could make a decision about metreleptin as early as this autumn.

Fall is just around the corner, but unfortunately for BMS, there is still no cure – to date – for the summertime blues.

Corporate spin-offs are on the rise across the pharmaceutical sector, but at what cost to shareholders? Brian McGilligan argues that in haste to obtain decree absolute, demerging businesses could be threatening their long-term viability.

Demergers are in fashion again. After years of rampant and unpredictable M&A activity, 2012 is seeing a significant rise in corporate divestitures. According to a recent Financial Times report, global divestments will increase by over 90 per cent to become a £250 billion market. Pressures specific to pharma, not least competition from generic drug manufacturers, will ensure the sector plays its part as large companies continue to re-appraise and spin off lower margin parts of the business to maximize shareholder value.

Indeed, divestments can be excellent news for shareholders — however, the process should not be undertaken lightly. Corporate divorce is rarely pretty. More often in these deals the dominant party is looking to sell off an underperforming division, strip out the best bits and set it adrift to fend for itself in the real world. Employees, feeling somewhat abandoned inevitably want to fight for the spin off business, their shareholding and their futures.

Adding to the challenge is the unpredictability of demergers; each case is very different and one size does not fit all. For the majority of CEOs (and their boards) this tends to be new territory, not an everyday activity.

So what can businesses do to ensure that plans to demerge are not left to run wild and end up costing significant lost revenue and stock value?

Executive teams first need to understand the likely issues. Demergers will throw up a number of headaches; some familiar, others not so. The team should appreciate that openness and amicability will be in short supply due largely to the wide range of vested interests inherent in a corporate split. Added to that are compliance and regulatory issues which vary both by industry and country, even within the EU. Based on fact, fiction or a combination of the two, suppliers and customers will be wary of any potential impact from the transition of management, staff, structure and assets. Fluctuations in cash-flow and costs often lead to pressure on the balance sheet, which will need to be managed tightly during the programme.

One of the most misunderstood elements of demerging is the fact that there has to be an interim state, lasting anything from two months to more than two years where the divested company remains tethered to the mother-ship, but starts to operate as an independent business.

Of course the speed at which progress is made through this stage can have huge effects on morale and motivation of staff. If it takes too long, key personnel may become frustrated and leave. Losing staff at this juncture is a very real possibility but it can be managed. Having a well-designed interim state and a clear plan to transition quickly will ensure the greatest chances of success here. Equally, while negotiating through an interim state, management should avoid the desire to implement change or fix non-essential issues. Aside from demerging, anything other than keeping-the-show-on-the-road should be off the agenda.

The need for impartiality is paramount and why chances of success will be increased greatly by appointing a professional, experienced and independent team for the programme. Emotion is often underestimated; it’s a serious factor which will increase risk, lead to poor planning and decision making — which ultimately will cost more and affect shareholder value greater.

Internal appointments rarely result in the best team being in place. Top executives and managers are needed to manage the business, and therefore by default it will be a less skilled, less motivated team, having to make decisions about which they would have limited experience. When faced with complex stages of demerger activity, there is no substitute for experience.

Finally, communicate like mad to each and every stakeholder group; employees, the market, suppliers, customers and shareholders alike. Keep the rationale for the demerger forefront of mind and keep everyone informed about where you are on the journey and what the destination looks like.

A good deal for the business, well brokered and strategically sound will invariably net the Executive team an appropriate level of appreciation from shareholders for a job well done. The reality is, however, that at this stage the job is only half done. Those who lead the company in to the deal need to ensure they’ve equipped it with the right team and tools to deliver. Only then can they be sure of fulfilling those promises that won the plaudits.

Brian McGilligan is AVP, Life Sciences Program Management Consulting Lead, Cognizant. He can be contacted on +44 (0) 20 7297 7800, or at Brian.McGilligan@Cognizant.com

www.cognizant.com/life-sciences

Last week Human Genome Sciences (HGS) rejected GlaxoSmithKline’s (GSK) unsolicited $2.59 billion bid for HGS or $13 per share.  Although rejecting GSK’s initial bid, HGS kept the door open for other suitors, including again GSK.

HGS has authorized its board of directors to explore strategic alternatives for the company, including a potential sale. HGS has invited GSK to participate in this process and has requested additional information regarding investigational products in GSK’s clinical pipeline to which HGS has substantial financial rights, including darapladib, in Phase III development for treating cardiovascular disease, and albiglutide, in Phase III development for treating Type 2 diabetes.

HGS posted a net loss of $381.1 million in 2011 on revenues of $131 million and also posted a loss in 2010 of $233 million. Last year, HGS received FDA approval for Benlysta (belimumab), a drug to treat lupus. The drug was approved by FDA in March 2011 and posted 2011 revenues of $52.3 million. In 2006, HGS and GSK entered into a codevelopment and commercialization agreement under which HGS conducted the Benlysta Phase II trials, with assistance from GSK. The companies share equally in Phase III/IV development costs, sales, and marketing expenses, and profits of any product commercialized under the agreement.

Although HGS rejected GSK’s $13.00-per-share bid, the companies’ mutual interest in Benlysta and in the late-stage candidates darapladib and albiglutide make them possible suitors. Some analysts say it is unlikely that another company would be interested in HGS given its stake in the GSK-shared drugs.

Analysts say the deal would be favorable to GSK for it would secure full ownership of Benlysta and the late-stage candidates darapladib and albiglutide. When approved last year, Benlysta became the first new drug to treat lupus in 50 years, and although it has gotten off to a slow start in terms of sales, some analysts are bullish on its prospects as well as the other HGS/GSK late-stage candidates.

So time will tell if a marriage of GSK and HGS will be realized.

On exiting a theater, writers are often astounded and dismayed by the film resulting from a screenplay they’ve sold to a producer. Punch-up writers have added corny jokes, directors have replaced nuanced dialogue with bombastic proclamation, and editors have substituted long-form visual narrative with jump cuts and montage. However, these collaborators – the directors, punch-up writers and editors – often determine whether a film is a commercial hit or a box office bomb. Writers and producers have to work together so that both parties are satisfied with the end result.

A similar relationship exists between scientists at academic institutions and the pharma industry; intellectual property is like a screenplay, in that it holds the potential for commercial gains, but it takes a team of different kinds of people to bring that potential to fruition. Academics who spend most of their time in the lab regard the commercialization process with skepticism; they may have concerns about the application of their discovery, or they may feel swindled by the financial arrangement.

With the proliferation of university partnerships in recent years, tech transfer offices have sought to provide intermediary staff that academics can trust, so they don’t automatically assume that industry has shown up in the lab for a fleecing. “University tech transfer offices are hiring biotech and pharma people that can say, ‘You really don’t need another mouse study,’ for example. This helps unlock value faster,” noted one participant at PharmExec’s 2012 Dealmaker’s Roundtable yesterday (the full conversation on trends in deal-making will drop in June; for last year’s roundtable conversation, click here).

Susan Desmond-Hellmann, chancellor at the University of California, San Francisco (UCSF), has been credited as a facilitator on deals with Pfizer, Sanofi-Aventis and Bayer; before she joined UCSF, she was president of product development at Genentech. “As a former head of product development myself, I think that future investment by industry in more deals with academia will depend on a very business-like assessment by companies on what their return on investment has been. They’re going to do that math, as I would expect them to,” Desmond-Hellmann told Nature Reviews Drug Discovery last year. Academics are doing the math, too. Increasingly, institutions “want to be treated like a small biotech,” said another roundtable participant. To avoid distrust, tech transfer offices and academics should “be able to get advice from someone on their side,” and this can be done through the creation of an advisory board peopled with ex-industry expertise.

Job losses at major pharmas over the last couple of years could result in a larger pool of relevant applicants, and many institutions, including Duke University, the University of California San Diego, the University of Michigan, and many others, already have former industry workers in their tech transfer offices. As for writers, they’ll need to cough up Writers Guild of America dues and hold out for DVD royalties.

Biotechs in Colorado, US, are enjoying a windfall of funding from Venture Capitalists who have to date invested $66.1 million in six of the state’s companies working in the fields of biofuel, medical devices and biopharma, according to a report released Feb 21 by OnBioVC, a Boulder-based tracker of investments in the life science industry.

The increase in money invested in the Colorado companies parallels a national trend. OnBioVC counted 305 companies received a total of $6 billion in 2011, up from 281 companies that collected $5.2 billion the previous year.

Small biotech have always been synonymous with innovation. Will that still hold true with this model? The question is asked this month by Stewart Lyman, a Seattle consultant, in an article in Xconomy.

“While this new model may generate good financial returns for VCs, is there much data to support the idea that this approach will succeed in generating new and useful drugs? Will it siphon money away from other approaches? What effect will adopting this model have on the biotech ecosystem?” asks Lyman.

His point is that the biotechs who have survived and thrived in the past quarter century such as Biogen, Immunex, and Genentech have been companies that established relatively large, cutting edge research programs that hired young, innovative scientists by promising them a certain degree of intellectual freedom to pursue research projects and build their reputations on the results.

“While these researchers were well compensated financially for their efforts, I don’t know of a single one who signed on for the money. Their true reward: the ability to make ground-breaking scientific discoveries, publish and present their data in prestigious journals and conferences, and help turn them into breakthrough medicines for treating serious medical problems,” he goes on.

Five years ago, in the heyday of small biotech funding, VC’s footed the bill for small companies with research staffs and brick and mortar headquarters. That proved not to have weathered economic hard times. This time around, VCs seem to be favoring the “virtual model,” small, single project startups who outsource R&D. Good for the funders, but not necessarily for drug development.

The primary goal of venture capitalists is to invest in companies that can be liquidated (via acquisition or IPO) for a significant return in a relatively short period of time. But are virtual companies counter to the very definition of the biotech ecosystem? asks Lyman. Having to outsource core skills will they loose hat biotechs have always been heralded for—talent? Will contract workers perform with the same passion as those who are directly invested in the success of a new drug?

“Can remote oversight substitute for walking down the hall to get your questions answered?” asks Lyman.
And where is the ability to follow-through if a single product does not deliver? The venture capitalist doesn’t suffer. But then who does?

“Every time a venture capital firm boasts about a biotech acquisition that provided a substantial return on their investment, let’s keep track of whether or not the acquired asset actually makes it to market,” says Lyman. “I’ve yet to see a sick patient cured by an infusion of stock warrants or the cutaneous application of cold, hard cash.”

Joe Panetta, president and CEO of BIOCOM, discusses an emerging model of M&As in which human and IP assets are valued and biotech brings expertise to Big Pharma as venture capitalist funding dwindles and patent cliffs loom large.

Pharm Exec: Can you tell me about how small biotech and specialty companies have started switching from relying on venture capitalist (VC) funds to M&As, and when that shift came about?

Joe Panetta: I wouldn’t say they’re switching from relying on VC. I think the fact is that VC investment has taken on a different approach than it had traditionally; so we’re seeing a different, let’s say more conservative, shorter-term VC investment model. That’s combined with the fact that we’ve seen for a couple of years now that VC firms have been much more engaged in investing in their current portfolio companies, and there’s been less of an appetite for investment in new companies than there was five years ago.

Part of that is the fact that we’ve got economic challenges; part of it is the fact that we have a tremendously challenging environment at FDA; and part of it is the fact that we have uncertainty from a political standpoint. So those kinds of things have created a much more conservative approach to VC investing than we’ve seen in the past, and that’s had an impact in terms of the ability of our companies to be able to raise the kind of funding that they still need to raise to move their products through the pipeline.

What that means is that companies need to turn toward alternative sources of funding beyond VC. VC is also taking a much shorter timeframe perspective in terms of the investments that they’re making now. But that leads us to the need that large pharma companies see for innovative technology to fill their pipelines; the ability of biotech companies to attract large biotech and large pharma partners much more successfully than they have in the past; and the dynamic that we’re beginning to see—biotech companies becoming much more focused on management of the products that they’re developing, and on partnering to gain the expertise that is needed to move through development and clinical testing and commercialization.

So that creates the opportunity for companies to focus on innovation and to team up and partner with the experts on product development, commercialization, and manufacturing. And that’s where pharma comes in and plays an enormous role. Obviously pharma’s pipelines have become more depleted in terms of new innovative products over time, so there’s a greater appetite from the pharma side to engage in real partnerships with biotech companies. It’s not outright acquisition; rather, what I’m hearing more and more from a number of different pharma companies, is that the partnering model is more attractive than the outright acquisition model. And if the outright acquisition takes place, then the ability to allow a biotech company to continue to function as a satellite entity is much more attractive than simply acquiring the assets and letting the people go.

PE: What has changed in the industry or the economy that has larger pharma realizing that partnerships where both organizations work together on a level playing field may be more valuable than the straight acquisition model?

JP: There isn’t so much of an appetite any more in biotech, from the investor side or even from the management side, for creating fully integrated future large biotech companies that look like pharmaceutical companies. That used to be much more the direction that the companies were headed in, and for the most part that model has gone by the wayside. Now there’s a more virtual model, a leaner model, and that makes it much more attractive for partnering. The larger partner doesn’t have to worry about what to do with an entity that is duplicating—or at least attempting to duplicate—what they already have the ability to do.

The other thing that’s changing is the fact that we’re seeing generics come on the scene. Now there’s a future road map for biosimilars that is being developed. We see that way forward, and larger companies are beginning to plan for the world of biosimilars. Also, Big Pharma is beginning to plan more for the world of generics and of patents expiring, and I think they’re beginning to realize that they need to go into fast forward to begin to fill the pipeline, and to develop more innovative products. That’s not coming out of the merger of pharmaceutical companies. Those mergers are actually resulting in the large pharma companies having to deal with duplicate organizations and integrating existing products together, so that isn’t providing for innovation.

PE: So the mergers with smaller or more specialized biotech companies are where you believe the more specialized knowledge can come from?

JP: Absolutely—the more specialized knowledge, and the ability to do early-stage research and development much more nimbly and more quickly, resulting in more candidate products that can be developed through partnerships.

PE: How is this working so far as an economic strategy? Is this helping to bridge the financial gap that’s left from VC funding?

JP: I think it’s more than bridging the gap. Last year we did our first pharma/biotech partnering conference here in San Diego, but the relationship between large pharma and biotech has been evolving slowly over time. There was a time when the attitude on the pharma side was, ‘don’t call us, we’ll call you.’ But what we saw at out partnering conference last year and we are continuing to see now is a real appetite for equal partnership on both sides.

Everything we hear and everything we see points to a greater desire for there to be a real partnership between the two. And I think that can sustain smaller biotech companies. Pharma needs biotech as a partner, and biotech needs pharma, but pharma especially needs to continue to appreciate the value of biotech as a partner in terms of the people assets, and not just the intellectual property assets.

PE: Can you tell me more about the dynamic? How is this model of partnering different in terms of what both sides might be gaining, compared to the traditional acquisition model?

JP: The major difference is that by utilizing the resources of smaller biotech companies and by creating partnerships with various smaller biotech companies, a larger pharma can take advantage of the diversity of technologies that these small biotech companies are working in; they can take advantage of the creative environments that exist within these companies; they can harness all of that energy. Just as the biotech model is evolving away from creating a fully integrated pharmaceutical company, the pharma model is evolving away from creating these enormous R&D organizations; if we look at the performance over the last few years for the investment that’s been made, it’s pretty clear that that model isn’t as successful as it was years ago.

PE: What are some factors that result in VCs not being as willing to invest as they were in the past?

JP: I think FDA is overwhelmingly the concern right now. I don’t think a day goes by where I don’t hear or read something about how the FDA is negatively impacting the ability of the industry to be competitive in terms of developing and introducing new drugs. The climate has changed. Because of the risk-averseness at FDA, the lack of ability to accept innovation at FDA, the investor community—particularly the VC community—has been encouraging its members to obtain their approvals outside of the US, in Europe in particular. And that’s because the review process at the European Medicines Agency (EMA) is much more predictable and much more innovation-focused than the FDA is here.

If we look at what has happened with a number of drugs that have been reviewed by the FDA in the last year or two, in the obesity arena in particular and in diabetes drugs, the FDA has shown a real reluctance to approve new products and new technologies. So why invest in a process that’s unpredictable and has demonstrated that the ability to get all the way through the process to commercialization is pretty slim? That wasn’t the case years ago with FDA, especially when the Prescription Drug User Fee Act (PDUFA) came into play 15 years ago. There was a real desire on the part of the FDA to move products through the pipeline more efficiently, to take advantage of the user fees and the deadlines that were agreed upon. But now we’ve got an FDA that’s just mired in bureaucracy and risk-averseness.

Part of that is fear of making a mistake. We’ve got examples like Vioxx where, post-approval, there have been issues that have come up, and FDA is taken to task by Congress for having made a mistake. There’s a lack of understanding of the fact that there are risks associated with all products that are approved; from a media standpoint, from the Congress standpoint, from the public’s standpoint. So that all makes for a very risk-averse climate and VCs won’t invest in a process that isn’t predictable. That’s why we’re seeing a lot of VC investment moving more towards early-stage product development with an investment period of maybe three years. This way, they can be more focused on the part of the process that doesn’t involve FDA review, and can let pharma or other partners deal with the later stages of review at FDA.

I think FDA is beginning to appreciate the fact that this is an issue, and is beginning to talk more about the need to focus more on innovation. But making good on that is a long-term process, and it’s going to take years for it to happen.

PE: How do you see all of this panning out in the next five to ten years? Will M&As continue to spread, and will VCs come around if they see certain changes occurring within industry?

JP: I think pharma will continue to need to engage in M&A over the next five years. I think biotech is becoming more sophisticated in terms of its ability to rely on outside expertise and predictive tools.

Two weeks ago I talked to a VC firm that actually has an FDA expert within the firm, who now goes in and looks at all of the relationships that the biotech company might have had with the FDA before making a decision on investing. I think that’s good; I think it helps to focus in on the companies that are doing it right, and it helps to drive other companies to understand that they need to bring in the expertise to help them to create greater predictability for the investors.

But I think in the next five years, if we see an FDA that truly responds to this call that’s coming from the industry and from Congress to focus more on innovation, and we begin to see some results, then I don’t think there’s any doubt that we will see the VC community engaging in later-stage investing. But I don’t think that changes anything in terms of the need for Big Pharma to create more partnerships across the board with biotech companies. And I think we’ll continue to see that happening as there’s a need to fill pipelines and as the patents expire on products, and as we move more towards the implementation of the biosimilars legislation. VC funding and healthy, dynamic M&A deals do not have to be mutually exclusive.