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.

However, 27 percent of the 100 executives interviewed by KPMG for its Industry Pulse Survey suggest that full recovery will not be in pharma’s grasp before the end of 2014, with most expecting ‘just moderate improvements in revenue and hiring’ in the meantime. And, rather disconcertingly, 23 percent “never expect hiring to return to pre-recession levels.”

But if the outlook is cautious for revenue, jobs, and the economy, the KPMG survey results are strongly optimistic on the acquisitions front. A massive 83 percent responded that their company is likely to be involved in a merger or acquisition as a buyer or seller in the next two years, with ’strategic acquisition’ cited as the highest priority investment area by 41 percent of executives surveyed. This was followed by ‘expansion into new markets’, cited by 22 percent.

This mooted “aggressive” growth strategy could suggest that pharma is resorting to its default setting of throwing cash at its problems in an attempt to overcome them.  According to the survey, more than three quarters of executives said their organizations had “significant cash on hand”, with half of them expecting to increase capital spending over the next year.

But KPMG claims mergers and acquisitions will be “exceptional forces over the next two years”, and points to the committed pursuit of geographic expansion as a way to spur organic growth.

The deal is expected to skyrocket Teva’s brand drug portfolio to $7 billion in annual sales, making Teva “not only the world’s largest generics company, but also one of the world’s largest specialty pharma companies,” said Shlomo Yanai, Teva’s CEO, on a conference call yesterday. Post-acquisition, the combined entity boasts “more than 30 products in the late stage, and three awaiting filing,” said Yanai.

Trimming in-house R&D to escape the rigors and expenses of bringing a drug to market – investors are less willing to put their money on a horse that takes over a decade to reach the finish line – has become a strategy du jour for some pharma companies. It’s better to let the smaller, scrappier companies assume the risks associated with early stage development; once a compound proves itself in clinical trials and with regulators, then big pharma can pounce on it, the thinking goes. That was earlier suitor Valeant’s rationale for its own abortive bid for Cephalon.

Teva is bucking that trend with its acquisition of Cephalon, trumpeting the latter’s success in “doing what we call search and development: identifying pipeline products in an early stage, and taking them all the way through to commercial success,” said Yanai on the call. Teva has two primary brand drugs on the market, Copaxatone (for MS) and Azilect (for Parkinson’s). Copaxatone (glatiramer acetate) earned $938 million in 2010, representing 18% of the company’s total net sales in 2010, according to an SEC filing. Azilect had sales of $89 million in 2010. Cephalon’s best-selling product, Provigil (indicated for excessive sleepiness associated with narcolepsy), comprised 41% of Cephalon’s consolidated net sales in 2010, but is expected to meet generic competition in April 2012, according to an SEC filing. The combined company will have 20 branded products on the market, according to a statement.

Cephalon will bring new therapeutic classes to Teva, specifically pain management and oncology, and will also extend the company’s footprint in Europe, Asia and Latin America, Yanai said on the call. The deal will also create marketing and sales “synergies,” but Denise Bradley, a US-based spokesperson for Teva, said in an email that it’s too early to elaborate on what those synergies might entail. Cephalon’s own generics business, Mepha, earned $400 million last year.

Last March, Teva forged a deal with packaged goods giant Procter & Gamble, to leverage both companies’ selling networks for their combined portfolio of over-the-counter (OTC) drugs. The partnership covers all markets outside of the US, and is worth an estimated $1 billion, according to a Teva release.

Pfizer spokeswoman Gwen Fischer told Pharm Exec that the deal came together in a matter of weeks, and that FoldRx will be fully incorporated into Pfizer’s research division. All of FoldRx’s employees are expected to become Pfizer employees when the deal is completed.

FoldRx made its name—literally—by discovering compounds that treat diseases related to protein misfolding, using a proprietary yeast-based target discovery platform. Its pipeline leader is tafamidis meglumine, a treatment for TTR amyloid polyneuropathy, which is a genetic neurodegenerative disease.

“Over the past five years the FoldRx team has successfully developed tafamidis from the bench stage to MAA submission,” stated Richard Labaudiniere, president and CEO of FoldRx, in a release. “Pfizer’s strong clinical and regulatory resources, global marketing reach, and commitment to the treatment of rare diseases will significantly enhance the ability to pursue the goal of efficiently bringing tafamidis to all patients affected by this devastating neurodegenerative disease.”

According to Pfizer, the deal is a reflection of the company’s new business unit structure. The original intent of the business unit was to target specialized expertise in specific research areas.

“This particular transaction will add another important component to the specialty care business unit and investigation medicines for rare and orphan diseases,” Fischer said. “The company also compliments our neurosciences disease area, which is currently a part of Pfizer’s specialty care.”

Earlier this year, Pfizer created an orphan and genetic disease research unit charged with discovering diseases affecting fewer than 200,000 patients in the United States and fewer than 10,000 patients in the European Union.

Pfizer has been upfront with the general public in stating that one of the key ways it will drive growth in the next few years will be through strategic business development, focusing on small to mid-size business deals such as the acquisition of FoldRX.

“Without exception, each member of the Genzyme board believes this is not the right time to sell the company, because your opportunistic takeover proposal does not begin to recognize the significant progress under way to rectify our manufacturing challenges or the potential for our new product pipeline,” Genzyme CEO Henri Termeer wrote.

The letter goes on to state that the company outlined a laundry list of improvements it plans to make in its manufacturing facilities—an area that Genzyme has been chastised for recently—as well as future earnings from its much lauded multiple sclerosis treatment alemtuzumab, currently in development.

The board feels that Sanofi is low-balling the company with its $69-per-share offer, and should be willing to boost the price since Sanofi has openly talked about how much they are willing to pay for mergers and acquisitions as recently as last year.

According to analysts interviewed by Bloomberg, Sanofi should expect to pay upwards of $77 per share for Genzyme, but might not bump up the offer until its had time to thoroughly examine Genzyme’s financials.

Sanofi CEO Chris Viehbacher originally offered the same price for Genzyme in early July when the genetic firm’s stock hovered around $50.

“Notwithstanding this information and assistance, you have not increased your price above $69 per share,” Termeer stated. “You and your advisors claim you are willing to pay more but that you are unwilling to ‘bid against yourself.’ The Genzyme board is not prepared to engage in merger negotiations with Sanofi based upon an opportunistic proposal with an unrealistic starting price that dramatically undervalues our company.”

• Just days after its purchase of Genentech, Roche has made another acquisition, albeit a much smaller one, of the German firm Innovatis. Roche will pay EUR 15 million for the cell analytics company.

• Oxford Gene Technology (OGT) is to acquire Sense Proteomic, a UK-based company engaged in the discovery of disease-specific biomarkers based on its innovative functional protein array technology.

• ACM-Pivotal, which provides clinical trials services to the pharmaceutical and biotech industries, has been acquired by its US counterpart for an undisclosed sum. Following a management buy-out in 2005, Pivotal and ACM Medical Laboratories formed an alliance to extend their global capabilities and have been operating as ACM-Pivotal for the past three years.

• US-based contract research organization (CRO) Covance has expanded its clinical pharmacology footprint in Europe by acquiring Swiss Pharma Contract (SPC), a clinical research company based in Basel, for an undisclosed sum.

Roche plans to keep the Genentech site in San Francisco, and transition its New Jersey corporate headquarters to the West Coast. Additionally, research and early stage development will operate as standalone units. Roche expects to save about $850 million in the reduction of redundant services and positions, but there’s no word yet as to the actual number of jobs that could be eliminated.

Negotiations between the two firms were far from smooth. An initial $44B offer by Roche, made last July, was met with disdain by Genentech’s board of directors. Roche fired back by taking an even lower offer of $43.7B directly to Genentech’s shareholders—but that didn’t go over well either, and Roche was forced to go back to the well. Last week, the drug company made a firm offer of $46.8 billion, a price that appears to have satisfied Genentech’s board.

“We believe this is a fair offer for Genentech shareholders, and the committee is pleased to come to a successful conclusion of this process,” said Charles Sanders, chairman of the special committee of Genentech’s board of directors. “We look forward to working with Roche to complete the transaction as expeditiously as possible.”

Genentech and Roche’s partnership began nearly two decades ago, when Roche purchased controlling interest in the biotech firm. Over the years, Genentech has morphed from a smaller specialty firm to a sprawling bio-giant with annual revenue fluctuating around the $12 billion mark.

Roche has not commented on the deal beyond statements in a press release. The company has scheduled no press conferences or investor calls, and told Pharm Exec that none are in the works.

Another Mega Merger
The Roche/Genentech deal comes just three days after news broke that Merck would merge with Schering-Plough, and less than two months after Pfizer signed a deal to purchase Wyeth. Mergers and acquisitions are going strong, as Big Pharma faces looming patent expiration and a scarce supply of new drugs. However, not everyone thinks mergers are the best strategy. The New York Times comments section exploded with negative reactions after the Merck announcement. Most readers voiced fears that Big Pharma was getting “too big.”

While many analysts disagree that the general public should be concerned at this point, some did tell Pharm Exec that the push for large-scale mergers might not be the best course.

“Large-scale mega mergers at this stage in the game don’t really solve the fundamental problem,” said Peter Young, president of Young & Partners. “You don’t invent faster because you’re bigger, and the reality is that they are only buying themselves a little bit more time. The best analogy is that if you own four houses on a lot and one burns down, the others are fine. However, if you decide to glue them together in order to have more size and scale, [then] if one part of the house burns, there’s a risk that everything will burn down.”

Coats is referring to the pressure that cash-strapped biotechs are feeling to sell out and says he gets no less than five calls a day from small companies desperate for suitors. “The VC guys are saying you better get another revenue stream or control the costs, because the money is just not coming in,” he says.

It’s an interesting vantage point for Eisai, which unlike some Big Pharma competitors doesn’t have to go through the massive reorganization and downsizing.

Part of that has to do with the more careful business planning on behalf of the Japanese companies, according to Elizabeth Evans, a senior specialty sales rep with Eisai. “The culture is different,” she said. “It’s the worst thing to fire someone, so they think very much about the long-term before making the hire.”

Coats notes that 21 percent of the company’s revenue now comes from specialty drugs—with more promising therapeutics on the way out of its new MGI Pharma acquisition. But Eisai has just 1,000 specialty reps. “Because we haven’t taken on the infrastructure, we don’t have to go through the pain that a lot of the other companies have,” he said.

Rather, the pharma company of the future will be built through partnerships instead of a lot of heavy M&A. “M&A and all the work you have to do on integration is a big distraction,” said Coats. “Look at Merck. There was a lot of pressure to do a merger. But they held the line until there were drugs coming out of the pipeline.”

Coats also notes that Jeff Kindler has made some right moves in this direction for Pfizer; he’s willing to take the hit now by holding out on a lot of the M&A that will just build up infrastructure and make the patent cliff steeper for as long as possible. Instead, the company is seeding projects throughout the rest of the industry that will bring it revenue streams in the future.