At the height of frenzied partnering discussions at BIO last month, Roche’s head of partnering, Dan Zabrowski, took time out with EP Vantage to discuss some of the current themes and trends in deal making, the take home message being the need for speed and partnering as early as possible in the R&D lifecycle.
The reasons behind these trends are manifold but one important factor undoubtedly has been the recent financial crisis as biotechs have struggled to raise the cash required to develop innovative products and technologies. On this issue Mr Zabrowski is particularly forthright, claiming the loss of venture capital money and experience at this early stage could have a major impact with a stark warning over “an innovation gap in four to five years.”
External is good
Roche’s approach to deal making is important, not just that it is a big pharma group with deep pockets, but also because like many of its peers the company is increasingly comfortable with sourcing products and technologies from outside; long gone are the days when big pharma assumed it could do everything and remain at the cutting edge of research.
As EP Vantage highlights today, the most valuable portion of Roche’s current pipeline comes from in-licensed candidates, accounting for 77% of pipeline product sales in 2016 (link to story, June 4, 2010).
In terms of the numbers of products, Mr Zabrowski estimates that 30%-40% of Roche’s pipeline comes from external sources, a figure that is unlikely to change dramatically over the next few years.
Despite this high level of licensing activity, the partnering division at Roche does not have an annual budget to spend on licensing or a target number of deals. Mr Zabrowski feels this is very important as it allows the focus to remain on the product or technology being sought, namely first and best in class, rather than being concerned with spending a budget allowance or meeting deal targets.
Early is good
Again in keeping with many of its peers, Roche appears keen to get involved much earlier in the R&D cycle than in the past. Essentially Mr Zabrowski believes innovative product development to be a “speed game”, to get a first in class product to the market while “the competition is breathing down your neck”.
A case in point was the race to get the first DPP-IV inhibitor anti-diabetic agent to the market, won by Merck & Co’s Januvia as the likes of Novartis’ Galvus floundered.
A shift to earlier stage, higher risk collaborations has created more variety in terms of the deal structure, with more focus on option based deals and risk sharing; in the past the bigger licensor partner would be forced to take on almost all the risk associated with a research project.
While early stage deal structures have become more innovative, the fact is that big pharma’s increasing desire to get involved much earlier appears to be significantly increasing the price of earlier stage assets (Product deals continue decline in 2009 but early stage assets gain value, February 23, 2010). Teva’s recent $334m deal with Mersana Therapeutics for a single pre-clinical candidate is another case in point (Mersana seals chunky pre-clinical deal with Teva, April 14, 2010).
Mind the funding gap
Aside from the need for speed, what’s also driving this shift to earlier stage deals is the need to plug the gap in research funding caused by the recent exit from this early stage of development by traditional venture capital (VC) firms.
While VC arms of big pharma are definitely moving more into this space, standard partnering divisions are also getting more involved, increasingly comfortable striking deals with incubators, VCs and academic institutions.
Although Genentech has a long history of doing deals with these types of partners, for Roche it is relatively new, something that Mr Zabrowski claims to be “very excited about”.
Roche’s recent deals of this nature include one with Pontifax, an Israeli venture capital firm who will identify and invest in seed and early stage Israeli biotechs who could be potential partners for Roche, and another with b3bio, a North Carolina incubator company who will effectively be Roche’s ears and eyes for new products, targets and technologies being researched at universities in the region.
Indeed, Mr Zabrowski is hoping to strike three or four more of these types of deals by the end of this year, an encouraging sign perhaps for any embryonic company out there struggling to make the next step.
Mind the innovation gap
Although large pharma and biotech companies and their respective VC arms are attempting to plug the early stage funding gap, Mr Zabrowski’s real concern is over the loss of the expertise that traditional VCs have in nurturing innovation from academic institutions and bringing the best products ad technologies out into a start up biotech.
“This is the role that venture capitalists play very well and we need them to go back to their roots to deliver on their mission in the overall innovation life cycle,” he says.
While the general upturn in the markets and easing of the credit crisis may have encouraged VCs to invest in healthcare once more, in Mr Zabrowski’s experience so far those VCs are still mainly focusing on low risk opportunities, for example companies with late stage clinical assets. The longer that VCs shy away from early stage, high risk investments, the more pronounced any innovation gap will be: “this is the real potential threat of the financial crisis that we had, but we won’t feel that for several more years,” claims Mr Zabrowski.
Natural selection process
Yet a concern over an innovation gap is not Mr Zabrowski’s only warning message for the biotech sector.
“I do believe the biotech community will go through a natural selection process, as a result of the credit crunch”, he says. Although the number of biotech companies going bankrupt since the financial crisis has definitely increased, there is a sense that the full impact has yet to materialise.
A recent report by Deloitte and the Economist Intelligence Unit surveyed almost 300 senior executives for their outlook on the sector and it was particularly gloomy. For example, 68% of biotech executives believe that 20%-40% of biotech companies will cease to exist within five years, mainly as a result of the economic downturn.
Some other sombre opinion poll results: 32% of respondents said their company had to slash R&D budgets, 51% rank venture capital as the funding source hardest hit by the credit crisis, and 74% reckon they are witnessing a major slowdown in the formation of biotech start ups.
As to whether the prospect of more companies going under might actually be a good thing, assuming the theory that only those with the most clinically and commercially relevant products and technologies will survive, Mr Zabrowski would not be drawn, except to say: “I think natural selection in general is a good thing”.
It seems therefore, in the eyes of one of the industry’s most senior partnering executive, that while Roche and its big pharma peers will attempt to bridge any early stage funding gap the return of traditional VCs is still desperately needed, while the full impact of the financial crisis on the biotech sector will not be seen for a few years yet.