EP Vantage Interview - Pragmatic Evotec takes on metabolic disease

Interviews

Evotec has moved into a new disease area by purchasing metabolic disease specialist DeveloGen, which has a phase III product targeting type 1 diabetes. But chief executive Werner Lanthaler is making clear that the drug discovery firm is not changing its strategy and taking unpartnered drugs into the clinic.

The acquisition of privately-held German firm DeveloGen, for €14m in shares, €2m in transaction costs and a cash earnout, gives Evotec its most advanced product in DiaPep277, a T-cell inhibitor aimed at type 1 diabetics partnered with Andromeda Biotech and Teva Pharmaceutical Industries. Whilst Mr Lanthaler is hoping for DiaPep’s success in pivotal trials and eventual regulatory approval, he sees greater opportunities from DeveloGen’s research into preservation and restoration of insulin-producing pancreatic beta cells, which are destroyed by autoimmune mechanisms in type 1 diabetics and decline in type 2 diabetics.

“[DiaPep277] was a good argument to acquire the company,” Mr Lanthaler says in an interview with EP Vantage. “That was not the reason we acquired it because the commercial upside was already defined. The real strategic reason to acquire the company was in this specific expertise in metabolic disease.

“[DiaPep277] is exciting because it will be something that will make money,” he says. “It’s not entrepreneurially exciting because it’s all set up. You sit there and hope and wait. The beta cell technology - that’s about forming the right alliances in the long run to generate product upside.”

More arrows for the quiver

Indeed, metabolic disease expertise rounds out Evotec’s arsenal. Previously focused on oncology, pain, and central nervous system indications – all disease areas that have proven to be tricky for drug discovery and development – the addition of diabetes know-how increases the company's chances of success. As obesity, and with it, diabetes, have become bigger public health problems in developed nations, demand has grown for treatments to reverse their effects.

As drug discovery goes, Evotec has had a good year. Its profitable first half of 2010 – which came two years earlier than Mr Lanthaler’s team had targeted - was accomplished on the back of €4.5m in milestones earned from partnerships with Boerhinger Ingelheim in pain and oncology. Profits may be shoft lived, however, off as the company also has guided to increased R&D spending in the second half. The current target is to achieve sustainable profitability no later than 2012.

This improving financial picture has appeared because of a turnaround plan implemented after Mr Lanthaler was appointed chief executive in 2009. The company reduced costs by more than €14m through a 10% reduction in SG&A expenses and 30% reduction in R&D expenses, achieved in part by reducing its workforce to less than 370 from 420.

Prior to Mr Lanthaler’s appointment, Evotec “got a bit carried away,” said Mick Cooper, an analyst with Edison Investment Research. “They threw themselves into proprietary research. It didn’t pay off. They’re now taking a very pragmatic approach to it all.”

Limiting risk

In addition the first half also saw pipeline advancements. Evotec initiated phase II trials on EVT101 in treatment-resistant depression, which is partnered with Roche under an option deal that promises to pay off with $65m at the end of phase II, should Roche choose to license the candidate. A further $235m in milestones and escalating double-digit royalties would also be possible. Readout on that trial is expected mid-2011.

The Roche deal is an example of the Evotec approach: a strategic partnership to bring a product into the clinic and through human trials while limiting the risk to all parties. It is a rather brutal approach, but it avoids the trap that smaller biotechs can fall into when held hostage to a single product.

“If processes are worked internally in black boxes as research has been defined the likelihood that people will make stop-loss decisions will be low. People hang on to a target,” Mr Lanthaler said. “Here we have built a system that has given every target the best of all chances, but on the other hand the most brutal and fastest stop loss and clients appreciate this. You free up money for the next target.”

In being a biotech that forms alliances in order to fund research, Evotec is not alone, Mr Cooper says. “But they are at the more extreme end,” he said. “They are not going to bet the company on a clinical trial.”

The DeveloGen acquisition should certainly help in this regard, as it will give Evotec more shots on goal to strike the partnerships on which its strategy rests.

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