Viewing Risk Through a Medicines Co. Lens
(In Vivo: The Business & Medicine Report, April 2003 page 35)
The drug behind The Medicine Co.?s success would hardly get any Big Pharma executive?s pulse racing. With sales annualizing at about $80 million this year and 2006 analyst estimates of $250-$300 million, Angiomax is no blockbuster. Withdrawn twice before winning the FDA?s OK for a modest acute-care indication, the whole pre-approval process seemed to only confirm the decisions of a host of companies?pharma and biotech?who passed on the chance to license it (or even to buy TMC at a bargain basement price).
Yet the drug is plenty good enough for TMC, one of the few class-of-2000 IPOs whose venture investors have been able to exit their investments with reasonable returns. The reason: TMC spent far less money getting its product to the market than did any of its competitors, largely because it paid very little for its licenser?s discovery and development work. And it was able to do so because it bought rights to a drug no one else wanted?a compromised product?recognizing in it the potential, if not the specifics, for market-expanding uses. Such compromised products are, in short, the perfectly identifiable gold lying in the road that an industry in love with the apparently novel simply walks past without investigating.
In the late 1990s, TMC?s in-licensing-and-development model suffered by comparison with discovery companies, which appeared to offer VCs a much lower-risk approach. These companies looked to be able to sell discovery technology and services to Big Pharma at very profitable prices, deals which would provide plenty of support for public offerings and thus high-value exits.
But by 2000, at the peak of Wall Street?s love affair with discovery-based biotech, the number of discovery deals had actually fallen by almost 60% from the record levels of 1997, according to Windhover?s Strategic Transactions Database. With no pharma deals to support their portfolio companies, and thus no reason for post-IPO investors to support the stocks, VCs by and large could not exit their investments, so quick and so devastating was the crash that followed the boom. Only at that point did the myth of the low-risk discovery company become obvious.
Suddenly, by comparison, TMC?s model for in-licensing apparently damaged goods seems to provide the combination of fast development and increased product value required for a venture return. Indeed, today, most of the good news in this otherwise bleak industry has come from biotechs who didn?t discover their own products, but acquired them?at relatively low prices since each of them had distinct black marks on their histories. The black marks, of course, were largely in the eyes of the companies who let them go or didn?t compete to license them, and thus provided Adolor with alvimopan, Neurocrine with indiplon, GeneSoft with Factive, and TMC with Angiomax, all of which have turned into extremely valuable assets.
Not that the TMC strategy is low risk in any absolute sense. Developing compromised products in fact requires a discovery mentality, since the reason they?re compromised is often that the originator didn?t know what to do with the product?didn?t really know what, in fact, the product is for. That leaves to the in-licenser the task of finding a purpose for the drug, which is both expensive and risky. After all, many compromised products are compromised because they don?t work.
Moreover, some of the richest grounds for hunting compromised products comes in the acute care hospital markets, where Big Pharma is less likely to compete. And that means that high-value Big Pharma acquisitions, should the biotech be successful in finding and developing a jeopardized product, are also less likely.
Moreover, such markets are competitively tricky. Market positions shift quickly as clinical evidence points one way or the other. TMC?s success was largely determined by a decision which led it to develop Angiomax as a subtractive, cost-sparing therapy?rather than as an adjunctive, efficacy-increasing, but also cost-increasing medicine. But just as TMC re-set, in a single year, many of the market assumptions about its product, so can a competitor easily come along and re-set them again.
Nonetheless, if private and public capital is to stay in biopharma, absent a sustainable Big Pharma market for discovery technologies, then in-licensing strategies will have to provide much, if not most, of the rationale.
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