INSIDE TRACK: Big Pharma woos its upstart cousin
By Patrick Jenkins
Financial Times; Dec 09, 2002
Big Pharma and Little Biotech - a racy new romanceshowing at a stock marketnear you. After years of neglect, might the world's lumbering drugs companies finally be feelingsome affection for their busy cousins in the biotechnology industry?
The preview last month looked promising, when Switzerland's Roche, the world's 12th largest drugs group, decided to woo Antisoma, one of Britain's smallest biotechs, rather than stamping on it.
The deal - an innovative collaboration valued at up to $500m (£320m) rather than the easy takeover it might have been for a tenth of the price - sent a wave of optimism through a depressed biotech sector.
Many analysts concluded that this agreement could be a touchstone in the evolving relationship between the old giants and the young innovators of the drugs industry.
On paper, that relationship should always have worked. Big pharmaceuticals companies are fast losing patent protection on their best-selling drugs as patents granted in the prolific 1980s expire. Their internal research and development pipelines are proving too thin to make up the difference. And there is a growing danger that their giant marketing divisions will be left with little to sell.
Biotechs, meanwhile, are inventing more drugs than ever - with the oldest companies in a fast-expanding market now 20 years old, pipelines are maturing. Yet with a business model that relies on raising capital, then burning it, many biotechs are feeling the pinch. The money they raised two years ago is running out, and they face stark choices - merge, go bust or go cap in hand to Big Pharma.
That does not sound like a strong negotiating position. Yet when Antisoma's market capitalisation was £26.5m, the cancer specialist persuaded Roche to part with £27m in exchange for a 10 per cent stake and a share of the rights from any future drugs.
What were Roche thinking? "We could have bought the company for the same money, that is true. But we want to find creativity and innovation," explains Horst Kramer, its communications director. "We don't want to suck that out by absorbing a company."
Roche has tried several different strategies with that same goal. Besides pursuing internal R&D, it has spun off divisions and maintained a stake in them. It has licensed single products from biotech companies. It has even taken a 60 per cent stake in the US's third biggest biotech, Genentech. The validation of this move is tangible - Genentech drugs now account for nearly a third of Roche's total sales.
The Antisoma collaboration is very different. With a modest upfront payment Roche has bought an option on any Antisoma drug entering clinical development in the next five years. Antisoma has four drugs in trials, and believes a further 10 to 15 could be forthcoming over the period. The extra $500m will only be payable in full in the unlikely event that all the drugs work. In effect Roche has created open-ended off-balance-sheet research vehicles.
For Antisoma, which was running short of cash, the tie-up was "imaginative and transforming" in the words of Glyn Edwards, chief executive.
The deal came less than a month after GlaxoSmithKline, the world's second biggest drugs group, signed a multi-product agreement with Exelixis, a San Francisco-based biotech with a focus on gene-based medicines, also for cancer. That collaboration also paid a handsome upfront fee - $30m - and offered future payments of up to $350m. Analysts, confident that two deals make a trend, have begun pinpointing other biotechs that could be next on Big Pharma's hit list.
In Europe, in particular, there is no shortage of potential candidates. Five years ago European biotech companies had a handful of drugs in development but there are now more than 20 biopharmaceuticals on the market. According to WestLB Panmure there are a further 169 biotech medicines undergoing clinical testing, 33 of them in final-stage Phase III trials. Assuming the normal attrition rate, at least 20 should make it to market.
Yet valuations - dragged down by dwindling cash resources - are not reflecting these promising prospects. The value of the European biotech sector has fallen 44 per cent since January to a five-year low.
"The 19 companies that are developing the 33 Phase III products have a combined market cap of about £3bn," says Keith Redpath, biotechnology analyst at WestLB Panmure. "Compare that with GlaxoSmithKline, which has nine Phase III products and a market cap of £73bn. Even taking into account the existing sales of GSK, this superficial analysis might indicate that the biotech sector pipeline is significantly undervalued."
Europe's biotech pipeline covers a broad range of diseases including cancer, central nervous system disorders, inflammation, anti-infectives and vaccines, all areas being targeted by Big Pharma companies.
"There is a whole bunch of [biotech] companies that should be in a position to do deals in the next 12 months," says Mr Redpath. In the UK, he cites KS Biomedix, which has four cancer products in development, and Alizyme, one of the few UK companies not to have experienced a product failure.
Others, such as NicOx, the French group developing safer painkillers and anti-inflammatory drugs, and GW Pharmaceuticals, which makes medicines from cannabis, are under less cash pressure but are also seen as attractive candidates.
There is, of course, no certainty that multi-product collaborations between Big Pharma and Little Biotech will work any more successfully than previous experiments to revive drugs groups' R&D productivity - such as big mergers, research spin-outs or single drug licence deals. Even if the new model does work, the shareholders of the awestruck biotechs will be asking what is in it for them.
In the short term, the answer is quite a lot. Antisoma's share price has more than doubled since the Roche announcement.
But many complain that from here on, there is little upside . Each piece of drug development news, no matter how good, will be mitigated by the knowledge that much of the financial benefit has been sold on to a Big Pharma partner.
Bankers, desperate to kickstart merger and acquisition activity, are quickest to espouse that view. "What many of these small biotechs need is to consolidate among themselves and create critical mass," says Charles Spicer, head of healthcare corporate finance at Nomura. But industry insiders say biotechs and their advisers have to be realistic. M&A within the biotech sector has an appalling record of coming to fruition. If it cannot be engineered now when so many companies are on their knees, it will never happen.
In the absence of a dreamworld scenario, where investors fund biotechs with blind faith through to profitability, most analysts agree that the Roche-Antisoma model could be the pragmatic solution to the problems of both Big Pharma and Little Biotech.
But that means shareholders, in turn, must let go of their long-held aspirations for rocketing biotech growth and settle down for a steadier ride.
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