Henry, this might have been posted before, but I don't recall seeing it here. I apologize to the thread if it was posted already. Appeared on XOMA thread today, it is from a March 98 SD Union LGND mentioned with others...
A bitter pill | Without products to sell, San Diego biotechs rely heavily on funding from big companies for survival. But are they selling their future?Wire:Pharmaceutical/Biotech Stock TrendsSource:The San Diego Union-TribuneDate:Mon 09-Mar-98Author:Thomas Kupper
After a decade of work, occasional frustration and finally the
triumph of Food and Drug Administration approval, San Diego's Idec
Pharmaceuticals was ready to launch its first drug in December.
And a company 500 miles away was preparing to collect most of the
profits.
In need of cash two years earlier, Idec had turned to the larger Bay
Area biotech Genentech, which paid for much of the remaining
development of the lymphoma drug Rituxan in return for what analysts
expect to be a majority of the profits. Genentech also handles some
of the manufacturing and takes a big role in marketing the drug.
The symbiotic relationship represents an increasingly common
arrangement for biotechs, one in which companies share financial
risks among themselves but also share the profits from any drugs they
develop.
In some cases, biotechs are shunning drug development entirely and
sticking with niches in early-stage research.
It's a trend that could make it more difficult for San Diego's
adolescent biotech community to fulfill its promise as an engine of
the local economy in the 21st century, let alone to catch up to the
industry's leaders in Silicon Valley and on the East Coast.
You can't become the next Amgen, the world's largest biotech, if half
your profits or more are going to collaborators in New Jersey or
Switzerland.
Instead of taking one or two drugs to get there, as it did for
Thousand Oaks-based Amgen, these companies could require repeat
successes before they're in a position to launch products on their
own.
While not impossible, the degree of difficulty is illustrated by the
fact that San Diego biotechs so far have gotten only two drugs
approved, including Idec's.
"Successfully done," Idec chief executive William Rastetter said,
"you keep the next series of products for yourselves" -- if there is
another series of products.
The difference between San Diego's companies and heavy hitters like
Amgen and Genentech is largely that the San Diego companies are
younger and that the industry has changed over time. In the 1970s
and early '80s, investors in search of huge returns were willing to
pay much of the cost of building a large-scale biotech company.
But as it became clear that success in biotech is far from a sure
bet, Wall Street looked for ways to reduce the risk of such
investments.
Since peaking in early 1992, biotech shares have fallen out of favor,
and the difficulty of raising money through stock sales only
intensified after the industry got whacked in last fall's market
collapse. Just last week, Idec withdrew a planned stock offering,
blaming weak market conditions.
Instead of the early model of the "fully-integrated" biotech company,
many investors now favor the "virtual" company, one that enlists
other companies to help in the drug development process and thus
spread the costs and risk.
Additionally, big pharmaceutical companies have grown hungrier for
new drugs and thus willing to invest heavily in biotech. In recent
years, big pharmaceutical companies, many of them overseas, have
poured billions into the U.S. biotech industry and occasionally
acquired sizable ownership stakes in biotech companies.
Investments triple
Biotechs nationwide collected $5.9 billion in such funding in 1997,
almost triple the previous year, according to the San Francisco
merchant bank Burrill & Co.
In fact, such deals have become almost prerequisites to doing
business in biotech, because Wall Street won't finance companies that
don't have benefactors in "big pharma."
"Biotech investors want to see surrogates, for validation, and
corporate partners who are willing to invest are the surrogates,"
said chief executive Stanley Crooke of Carlsbad-based Isis
Pharmaceuticals.
Nearly all of San Diego's roughly three-dozen publicly traded
biotechs rely in one way or another on partnership deals with
pharmaceutical companies. Such deals contributed more than half the
local industry's revenue in 1996, according to a survey of the
industry by Ernst & Young.
Agouron Pharmaceuticals, whose AIDS drug Viracept was the first San
Diego biotech drug to win government approval, similarly shares the
profits from that drug with partner Japan Tobacco.
Isis has a deal with CIBA Vision for fomivirsen, a drug for
AIDS-related blindness. That one calls for up to $20 million in
funding but gives CIBA Vision nearly half the profits.
And Amylin Pharmaceuticals, a company that is working on a new
diabetes drug, was splitting the costs with Johnson & Johnson until
the larger company backed out of the deal last week.
J&J had put $91 million into the project through the end of 1996.
Compared with biotech clusters elsewhere, the difference is stark.
More mature biotech clusters generate more revenue from product sales
and thus are less reliant on partnerships, according to the Ernst &
Young survey.
Bay Area biotechs, including power hitters Genentech and Chiron,
generated 70 percent of their revenue from product sales in 1996,
while in New England the figure was 64 percent.
In San Diego, it was 44 percent.
Among the country's top research clusters, only North Carolina, where
biotechs are concentrated in the Raleigh-area Research Triangle,
generated a lower proportion of its revenues from products.
Partners for long?
The question is whether the local companies will mature to the point
that they outgrow the partnerships, as the industry's heavyweights
have, or if they will merely become research franchises, with much
smaller profits.
At Idec, executives signed on to the deal with Genentech -- a biotech
powerhouse that had grown big enough to take such deals -- in March
1995, a time when Idec needed cash to keep the Rituxan development
moving forward.
With Idec stock at less than $4 at the time of the deal -- one-tenth
what it sells for today -- the company would have had to give up a
huge stake to raise the money on Wall Street.
Instead, it gave Genentech rights to co-market Rituxan and to take
more than half the profits from the drug. In return, Genentech would
pay Idec up to $57 million, of which Idec collected $31 million by
the end of 1996.
Part of the idea was to win access to manufacturing capability to
supplement what it could build on its own in La Jolla. And Idec also
planned to build a sales force gradually.
"It's clear that with our access to capital as a young company, we
could not put into place a manufacturing facility that's needed to
address a worldwide market," said Idec chief Rastetter.
Indeed, success through partnerships would not be unprecedented. One
of the top biotechs, Biogen, started with a strategy of licensing its
drugs and now has annual sales of over $250 million and a market
capitalization of over $2.5 billion.
But more than a quarter of those sales come from the
Massachusetts-based company's newest product, a multiple sclerosis
drug it launched in 1996 and now markets itself.
The lure of partnerships remains strong. In recent years, a new type
of biotech has emerged that in many cases relies entirely on such
deals.
These "toolbox" biotechs sell services or information to other drug
companies and make money without ever producing a product in the
traditional sense.
One fast starter
For example, the 1997 rookie of the year in San Diego biotech was
Aurora Biosciences, which went public and already has achieved a
market capitalization that puts it among the top 10 local biotechs,
despite having no plans to develop its own drugs.
The company is building the Ferrari of drug-screening systems -- one
that Aurora says will be 50 times faster than anything now in use.
"Royalties on any one deal are not going to get stockholders the kind
of returns that Amgen gets," said chief executive Timothy Rink,
referring to the world's largest biotech. "But we have the potential
to do tens or even hundreds of projects."
But some have started to question this model, arguing that while
there's less risk, it also takes more successes to sustain profits.
The San Diego gene-hunting firm Sequana Therapeutics, beIst known for
its discovery of an asthma gene, sold out to the Bay Area biotech
Arris recently, partly for that reason.
An illustration of how partnership deals can water down the payoff
from a drug is Agouron, which splits the profits for its AIDS drug
Viracept with partner Japan Tobacco, which helped with development
costs.
In the most recent quarter, Agouron sold $91.8 million worth of
Viracept, with a gross profit margin of almost 60 percent. But under
the terms of the deal with Japan Tobacco, Agouron passed along $15.4
million to its partner. After administrative costs and research on
other projects, that left net income of $4.9 million for Agouron.
Meanwhile, Japan Tobacco had received $28.8 million in royalties
through the end of last year -- a quick return on the company's
contribution of $30 million plus an undisclosed share of the Viracept
development costs. Those royalties will continue indefinitely.
And Agouron's deal was a relatively favorable one for a biotech. The
company was able to give away a smaller share of the profits because
it is marketing the drug in the United States itself.
Chief executive Peter Johnson said the company prefers to avoid
partnership deals if possible partly because a larger company often
wouldn't share a biotech's degree of commitment to a project.
"We recognized the frailties of dependence on corporate partners at
an early point," Agouron's Johnson said.
In extreme cases, larger companies have simply bought large stakes in
biotech companies -- in a sense making them research franchises.
Many partnership deals involve part ownership for the larger company.
Selling large stakes
Genentech and Chiron, the two top biotechs in the Bay Area, both sold
large stakes to Swiss pharmaceutical companies. Roche owns 66
percent of Genentech, and Novartis owns 46 percent of Chiron.
Several of San Diego's top biotechs are also partly owned by major
pharmaceutical companies. Novartis holds 9 percent of Isis, for
example, and Johnson & Johnson owns 11 percent of Amylin.
Nonetheless, some believe a biotech powerhouse could still emerge
from San Diego, though possibly in much different form than today's
industry powers.
Some executives say success could come through a merger or
combination of several companies. An example is the Arris-Sequana
deal, which was designed to create a "gene-to-drug" company, one that
offers the potential to both launch big-revenue drugs and continue
breakthrough genetic research.
Likewise, traditional drug-development biotechs say large-scale
success could come through the evolution of new business models.
Eventually, many of these companies hope to switch to the other side
of the deals, as Genentech did in its deal for Rituxan with Idec.
In fact, Idec completed such a deal this year, acquiring the rights
to an antibody from the Seattle biotech Cytokine Networks.
"By the time you're a dozen years old, you start building
partnerships the other way," said Rastetter, Idec's chairman.
More common for now in San Diego, however, are deals like the one the
local biotech Vical has with Merck & Co. for Vical's vaccine
technology. The companies think the work could have applications in
dozens of diseases.
Alain Schreiber, Vical's chief executive, said there's no way a small
company like Vical could pull off the extensive testing necessary for
such vaccines -- let alone market them worldwide.
So the company's alternative was to turn over the development to
Merck in exchange for royalties that analysts estimate at slightly
less than 10 percent.
That could still be a huge payoff if new vaccines for diseases such
as influenza or AIDS emerge, Schreiber said. But Merck would be the
one taking a bigger share of the cash to the bank.
"There is no question," Schreiber said. "If you have the financial
means, you reap about 10 times the benefit if you do it yourself."
------------------------------------------------
How biotecs are financed
Partnership deals with larger companies make up a growing proportion
of biotech financing. But such deals usually also require biotechs
to give away a piece of their future profits.
1996 % of total 1997 % of total
Stock offerings $4,231 57.8% $3,714 31.7
Private investment 537 7.3 1,297 11.1
Venture capital 449 6.1 609 5.2
Other 103 1.4 213 1.8
Partnering 2,004 27.4 5,892 50.3 (upfront payments
and equity
investments)
TOTAL 7,324 11,725
------------------------
Big brothers
With a few exceptions, San Diego's biotechs depend on larger
companies to help finance their top projects. Here are a few of the
deals:
{} Advanced Tissue Sciences Dermagraft (skin replacement)
Smith & Nephew holds half the commercial rights
{} Agouron Pharmaceuticals Viracept (AIDS drug)
Japan Tobacco receives share of profits
{} Idec Pharmaceuticals Rituxan (Lymphoma drug)
Genentech holds co-marketing rights and a share of profits
{} Isis Pharmaceuticals Fomivirsen (Drug for AIDS-related blindness)
Ciba Vision (Novartis) holds worldwide distribution rights
{} Ligand Pharmaceuticals Targretin (Diabetes drug)
Eli Lilly & Co. developing the drug
(Copyright 1998)
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