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N E W S & A N A LY S I S FROM THE ANALYST’S COUCH Drug discovery alliances Rose print chair by Danielle Roberts Andrew Jones and Les Clifford Early-stage R&D collaborations and alliances are of increasing importance to the pharmaceutical sector. When some of the best-in-class drug discovery capability and research programmes exists externally, alliances offer an alternative to building expertise from scratch, and present a degree of flexibility, cost advantage and risksharing not afforded by in-house programmes. Although late-stage licensing agreements have and will continue to remain important in meeting the short-term needs of the pharmaceutical sector (for example, bulking up pipelines or filling strategic gaps), it is early-stage drug discovery collaborations that will have a crucial role in ensuring that R&D operations continue to remain competitive in the long term. Why early-stage deals? NATURE REVIEWS | DRUG DISCOVERY Current trends Reflecting the growing importance of early-stage drug discovery alliances to the pharmaceutical sector, the average value of deals has risen sharply in recent years. Typically structured around upfront, milestone and royalty payments, with R&D funding and equity investments common elements, average deal size has risen from US$110 million in 2003 to US$145 million in 2004 and US$169 million for the period to July 2005 (Ernst & Young analysis). Further analysis of big-pharma alliance activity in the period July 2004 to July 2005 provides insight into the current focus of alliances and indications to the content of tomorrow’s pipelines, and is provided overleaf. With respect to disease focus, 28% of all collaborative activity has been targeted at oncology, making it the single most active area (FIG. 1a). In terms of therapeutic type, alliances directed at small molecules continue to dominate (FIG. 1b). Core competencies Overcoming the challenges presented by R&D collaborations and effectively leveraging partnerships across large networks is now a key success factor for pharma companies. Alliances are not simply being used to gain access to capability and assets. Going head-to-head with in-house programmes, alliances can be a catalyst for creating healthy ‘competitive friction’, increase options and, when a pipeline’s financing needs exceed available resources, alliances provide opportunity to out-license non-core assets to partners in the network while maintaining options to participate in later-stage development. As companies become more creative in how they exploit alliances, and as networks become larger and more complex and companies come to rely more heavily on these to drive performance, they must ensure that they maximise value and mitigate risks by building alliancemanagement expertise. The core competencies for overcoming challenges can be divided into three groups: identifying, managing and measuring. First, companies must be able to identify best-in-class capability, evaluate opportunities presented by programmes and understand the associated risks. Second, companies must create deal structures and design contracts to ensure aligned incentives, objectives and clarity on future contingencies, and give consideration to cultural differences and potential impact on partnerships, ensuring effective processes and systems for knowledge sharing and protection of intellectual property. And third, companies need to ensure that in-house and alliance programmes are captured in the same portfolio evaluation and decision-making processes and judged on a like-for-like basis to overcome bias toward internal programmes; achieve adequate transparency through structured reporting processes; and develop approaches to measure the performance of alliance-management capabilities, whether by use of surrogate endpoints (such as internal client satisfaction) or true endpoints (financial value created over time). Given the potential value in the biotech sector, the quality of a pharma company’s alliance network will be a key factor in its future success or failure. Strong alliance management will help secure the former and avoid the latter. ▲ Biotech companies are facing unfavourable market conditions for raising capital. Since 2002, venture capital investors have shown a reduced appetite for companies with early-stage pipelines and altered their investment behaviour1 and focus accordingly, by moving to companies with critical mass, or favouring opportunities with existing or near-term products and revenue. In addition, investors in the public markets are indicating that conditions are currently unfavourable for initial public offerings (IPOs). As of July 2005, among 28 biotech companies that had an IPO2 in the US during 2004, 19 were trading at a discount to their initial offer price (average discount of 40% across the 19). As an example of the challenging environment for biotech companies in the public markets, Peninsula Pharmaceuticals withdrew from its planned IPO in favour of an acquisition by Johnson & Johnson’s Ortho McNeil subsidiary during June 2005. While biotech companies are experiencing a funding squeeze, the pharmaceutical sector needs to fill its pipelines and address productivity issues. However, the scarcity and high cost of sourcing clinical compounds makes relying on late-stage in-licensing an unsatisfactory strategy. The pressures on the biotech and pharmaceutical sectors point towards the two becoming increasingly dependent upon one another: biotech companies for cash and technical validation, and pharma companies for enhanced discovery capability — one of the mutually beneficial solutions to this being early-stage deals. However, the emphasis on early-stage dealmaking will not simply be driven by circumstances; it will be driven by a crucial strategic consideration. By partnering early, pharma companies are better positioned to steer development and ensure commercial success. This is becoming increasingly important as the market demands ever more clinical and economic evidence to secure access (that is, reimbursement at the right price). Drug development must now be powered to meet the needs of multiple stakeholders in multiple territories: outcomes-based studies must be built into clinical development and strong pharmaco/health economic arguments formulated. The question that remains to be answered is whether biotech companies have the in-house resources and expertise to ensure that, in addition to regulatory hurdles, their development programmes are able to meet the needs of all budgetary stakeholders in all major territories. Although the biotech sector might have proven its ability to innovate, it remains unproven in this regard. So, although late-stage deals have traditionally presented relatively lower risk with respect to regulatory failure, as budget-driven healthcare decision-making places greater emphasis on this ‘fourth hurdle’, the overall risk profile of late-stage compounds looks set to change. The knock-on effect will be reluctance among pharma companies to in-license late-stage assets that have been developed without adequately accounting for ‘fourth hurdle’ demands. VOLUME 4 | O CTOBER 2005 | 807 N E W S & A N A LY S I S DRUG DISCOVERY ALLIANCES | MARKET INDICATORS ▲ Oncology is the most active disease area for alliances, accounting for 28% of all recent collaborative activity (FIG. 1a), and the majority of alliances involved small molecules, although biologicals (in particular, antibodies) are also popular (FIG. 1b). Among the most significant recent deals are AstraZeneca’s monoclonal antibody alliance with Cambridge Antibody Technology, and Pfizer’s US$480-million collaboration with Medarex TABLE 1. As such alliances bear fruit, the technological distinctions often made between the pharmaceutical and biotech sectors will lose meaning. Indeed, the majority of products brought to the market in recent years by Wyeth are biologicals, such as etanercept (Enbrel) and gemtuzumab (Mylotarg). Among the multinational companies, GlaxoSmithKline has been the most active to date in terms of total number of collaborations, and the recent formation of a business unit dedicated to sourcing and developing new drugs ‘virtually’ through partnerships underscores the strategic importance placed on its alliance network. When deal activity is adjusted against 2004 ethical sales, Boehringer Ingelheim tops the list, followed by Merck and Novartis TABLE 2. Table 1 | Pharma–biotech discovery alliance and acquisition highlights Deal highlights in 2005 Les Clifford is Head of Ernst & Young’s Pharmaceutical Practice in the UK. Andrew Jones is an analyst in Ernst & Young’s Pharmaceutical Practice. 1 More London Place, London SE1 2AF, UK. e-mail: [email protected] doi:10.1038/nrd1856 1. 2. Other: 7% (GSK, PFE, WYE) Value Therapy (US$m) area/ indication Type of molecule Company Target (reported cost in US$M) Month in 2005 AstraZeneca– Astex 275* Oncology Small molecule Roche GlycART Biotechnology (~180) July AstraZeneca– Avanir 340* Dyslipidaemia Small molecule Sosei Arakis (~187) July Merck– Metabasis 74‡ Metabolic Small molecule Pfizer Vicuron (1,900) June GSK–Vitae 175* Hypertension Small molecule Shire Transkaryotic (1,600) May Novartis– Hybridon 136* Asthma/ allergy Small molecule Cephalon Salmedix (160) May Pfizer– Renovis 187* Pain/UI Small molecule GSK Corixa (~300) April Genentech– Curis 140* Oncology Small molecule JNJ Peninsula (245) April GSK– Theravance 252* COPD/ asthma Small molecule JNJ Transform (230) March Ortho McNeil–Arena 295§ Diabetes Small molecule Takeda Syrxx (not reported) February AstraZeneca–CAT ~140|| Antibody Pfizer Idun (not reported) February Wyeth– Plexxikon 372* Small molecule Pfizer AngioSyn (527) February Pfizer– Medarex 480* Antibody ScheringPlough Neogenesis January Diabetes Source: Ernst & Young. *Total reported potential payments excluding royalties and equity investments.‡Total upfront and milestone payments assuming one successful product approved in more than one indication. § Total potential milestone payments per compound successfully commercialized. ||Equity investment. CAT, Cambridge Antibody Technology; COPD, chronic obstructive pulmonary disease; GSK, GlaxoSmithKline; JNJ, Johnson & Johnson; M, million; UI, urinary incontinence. Booth, B. From the analyst’s couch: valuation with cash multiples. Nature Rev. Drug Discov. 4, 533–534 (2005). Beyond Borders: Ernst & Young Global Biotechnology Report (Ernst & Young, London, 2005). a Respiratory: 4% Acquisition highlights in 2005 Companies involved b Protein therapeutics: 3% Other: 2% Vaccines: 3% Metabolic: 7% (JNJ, RHHY, GSK, MRK, PFE) Oncology: 28% (RHHY/DNA, NVS, MRK, AZN) Cardiovascular: 9% (PFE, AZN, MRK, NVS) Small molecules: 63% Antibodies: 29% Infectious disease:16% (GSK, RHHY, MRK, NVS) AIID: 14% (JNJ, ABT, AZN, RHHY/DNA) CNS: 15% (AZN, MRK, PFE, JNJ, GSK) Figure 1 | Preclinical discovery alliances. a | Alliances broken down by therapeutic area, with key companies involved shown in brackets. b | Alliances broken down by type of therapeutic. Data are for alliances formed between July 2004 and July 2005 by the following pharmaceutical companies: Abbott (ABT), Amgen, Astellas, AstraZeneca (AZN), Baxter, Bayer, Boehringer Ingelheim, Bristol-Myers Squibb, Johnson & Johnson (JNJ), Chugai, Eisai, Eli Lilly, Genentech (DNA), GlaxoSmithKline (GSK), Merck (MRK), Merck KgaA, Novartis (NVS), Novo Nordisk, Pfizer (PFE), Roche (RHHY), Sankyo, Sanofi-Aventis, Schering AG, Schering-Plough, Takeda, Wyeth (WYE). Companies involved in major alliances are highlighted using their abbreviations in the pie-chart. AIID, arthritis, inflammation and immune disorders; CNS, central nervous system; COPD, chronic obstructive pulmonary disease. Source: Ernst & Young. 808 | O CTOBER 2005 | VOLUME 4 Table 2 | Most active deal makers* Rank Company Share‡ Adjusted rank§ 1 GSK 15% Boehringer Ingelheim 2 Pfizer 13% Merck 3 Merck 13% Novartis 4 AZN 11% Roche 5 JNJ 11% AZN 6 Novartis 10% JNJ 7 Roche 9% Wyeth 8 Boehringer Ingelheim 6% Eli Lilly 9 Eli Lilly 6% GSK 10 Wyeth 6% Pfizer *Between July 2004 and July 2005. ‡Percentage share of activity among top-ten most active companies. §Rank adjusted against ethical pharmaceutical sales in 2004. AZN, AstraZeneca; GSK, GlaxoSmithKline; JNJ, Johnson & Johnson. www.nature.com/reviews/drugdisc