Hits and Misses

An analysis of pharma deals shows certain types are better predictors of success than others.

DANIEL S. LEVINE
The Journal Of Life Sciences

Michael Lewis’ Moneyball showed that major league baseball teams often focus on the wrong stats or rely too much on subjective measures in deciding what ballplayers would be valuable to have on their team. A guy who can belt one out of the park may seem a lot sexier than a selective hitter who walks a lot, but is he a better value?

A new study from the consulting firm Accenture tries to bring a little Billy Beane wisdom to pharmaceutical deal making. It pores over pharmaceutical deals to see whether there are good indicators of what will boost shareholder value and the likelihood that a drug acquired, licensed, or collaborated upon results in U.S. Food and Drug Administration approval.

The information is of no small consequence. Pharmaceutical companies have been aggressively making deals to fill gaps in their pipelines and combat lost revenue from competition from generics. But few studies have looked at what kinds of deals actually increase shareholder value or lead to approved products.

Some consultants have in recent years produced reports that suggested that in a period where there is great pressure to do deals, the most successful companies would be the ones able to buy a particular asset or company and move quickly to absorb it. By contrast, collaborations were seen as less attractive because of the complexity of such arrangements and the high cost of managing the relationship through the entire life of the deal. But Accenture’s new report “Making the Right Bets” finds collaborative deals actually have greater success at raising shareholder value (the change in price from five days prior to the deal’s announcement to five days after) and a greater chance of leading to an FDA approval.

“If a company wants to hold on to an asset, that suggests they have confidence in the asset—sure, but that’s not the way deals have been playing out in the past,” said Elizabeth Coulton, partner with the products strategy practice of Accenture in Atlanta. “It’s the moneyball analogy.”

Coulton points out that baseball scouts used to think that players who get walks weren’t valuable, but now with moneyball, the baseball establishment is coming to realize that people who walk a lot are some of the most valuable in players in the league.

“That’s the same way we’re seeing deals play out in the study,” she said. “More collaborative deals are more successful with respect to shareholder value and FDA approval.”

Accenture began by looking at more than 18,000 deals between 1997 and 2006. It then pared that list down to 355 by eliminating deals where the phase of development was ambiguous, the compounds were destined for commercialization in non-U.S. markets, the drugs involved were already approved, or the deals were for manufacturing or contract research organization services.

There were other surprises. The study showed that while the market does reward shareholders for deals struck in phase III, the greater the market response to a deal, the less likely the drug involved will win FDA approval.

“The truth is that the market reaction for phase III deals is inconsistent with the probability of success with the FDA,” said Coulton. “With phase II, the greater shareholder return, the greater the probability of success with the FDA.”

Coulton thinks the reason for that is that phase II deals were more likely than phase III deals to be collaborations.

Overall, Accenture found that the market rewards buyers of phase I and phase III drug deals, collaborations, and small molecule deals. With in disease areas, the market rewards phase I blood and oncology deals, and phase II and III allergy, pain and infection drug deals. It penalizes the buyer for simple licensing deals.

For sellers, the market rewards deals involving biologic molecules. The market is penalizing companies for sales of phase I and phase II allergy, pain and infection drugs, as well as blood and oncology drugs. It also penalizes sellers of phase I kidney, liver, and metabolic disease drugs.

Other findings were not considered statistically significant.

“For pharmaceutical companies now looking to fill revenue gaps in the near-term and pipeline gaps perpetually,” Coulton said, “this study—an analytical approach—can inform the types of deals companies are looking to do rather than relying on their deal scouting teams and their due diligence.”

Deep Yogurt

Technical innovation is important, but biopharma companies will need operational innovation to thrive in the current environment.

BY DANIEL S. LEVINE
The Journal of Life Sciences

The pharmaceutical industry, as my employer is want to say, is in deep yogurt. The boss is a polite guy, but suffice it to say he’s not talking about boysenberry here. Rather, he is referring to the type of yogurt you want to be sure you don’t step in.

Eroding margins, cost containments pressures, patent expirations, pipeline problems, and increasing challenges on the regulatory front are just some of the issues the industry is contending with these days.

Can innovation solve the industry’s problem? Well, that all depends in how broadly you think of innovation, according to Rob Franco.

Franco, lead director for the life sciences business group for PRTM Management Consultants, was part of a team that included the Tufts Center for the Continuing Study of Drug Development that looked at how biopharmaceutical companies can succeed in the current landscape. To find out, they surveyed 11 large pharma and ten small and medium biopharmaceutical companies. These companies represented 91 percent of 2006 revenues in the biopharmaceutical industry.

First they took quantifiable measures of innovation (percent of approvals, percent of priority FDA approvals, first cycle drug approvals) and then looked to see if they correlated with measures of financial success (revenue growth, margin growth). They found a strong correlation between the two.

Among the large pharmaceutical companies, the most innovative ones enjoyed three times faster revenue growth than their competitors. These companies also experienced a 17-month approval advantage from regulators for first-in-class drugs and drugs from these companies won approval 40 percent more often during their first regulatory review without any need for additional testing or information. These companies also received 15 percent more priority reviews than average companies.

But being technically innovative is not enough, according to the study, which is expected to be published in September.

“While most everyone will agree that the biopharmaceutical industry is driven by innovation, when you dig a little bit deeper you find that innovation is really a bit narrowly defined by this industry,” said Franco. “They really talk about technical innovation – the next monoclonal antibody, the next new drug, the next exciting new target.”

Outside of the industry, Franco said, innovation is viewed more broadly. Whether its design innovations at Apple, manufacturing innovations at Toyota, or supply chain innovations at Dell, companies have been able to take technical innovation and marry it to other sources of innovation to establish competitive advantages that gives them a new position in the marketplace.

“Pharmaceutical companies in the future are going to have to marry their technical innovation with some operational innovations to have some sustainable advantages,” he said.

This means a move away from vertically integrated business models where a pharmaceutical company tried to do everything itself, to a model characterized by flexibility to develop drugs across different areas and therapeutic categories with resources, ideas and capabilities drawn from sources outside a company’s four walls, collaboration of increasing sophistication, and standardized business practices that help fuel cost efficiency and make it easier to integrate partners, vendors and CROs into an operation.

Franco said the big surprise is that no one appears to be making radically changes to their operating models yet. He thinks there are plenty of opportunities to be more innovative as companies struggle to maintain their positions in the market and look at how to better incorporate such things as molecular diagnostics, patient services, and payer needs into their development practices.

He believes innovation solve the industry’s problem, but innovation broadly speaking.

“They are going to have to marry technical innovation with operational innovation to do so,” said Franco. “Technical innovation alone is not going to be the answer for the industry.”

Biotech Gets A Flat

The life sciences sectors fails to muster a single IPO in the second quarter.

BY DANIEL S. LEVINE
The Journal of Life Sciences

In the halls of the San Diego Convention Center during the BIO 2008 conference last month I ran into an investment banker I know who specializes in the life sciences. When I asked him about the outlook for IPOs this year, his brow bent downward, his eyes rolled skyward and his mouth blew an exasperated gush out of one corner that sounded a lot like air coming out of a tire.

It was an apt sound. If you haven’t noticed, the tire’s gone flat.

Burrill & Company, the parent of The Journal, noted earlier this week that there were no U.S.-based IPOs in the life sciences during the second quarter of 2008. That follows the rather grim first quarter in which only three deals raised a total of $138 million through IPOs. BioHeart, the one biotech in the bunch, raised a mere $6 million.

The IPO window – a notion that had been fading within the biotech arena – appears to be back and it’s closed. While there have been some drivers within the sector to weaken Wall Street’s appetite for biotech IPOs – such as the aftermarket performance of deals in recent years, risk-averse investors, and a cautious FDA – the housing meltdown, skyrocketing oil prices and the credit crunch are taking their toll in the IPO world well beyond the life sciences.

In fact, the National Venture Capital Association and Thomson Reuters reported this week that for the first time since 1978 there were no venture-backed IPO in the second quarter of 2008 according to their Exit Poll report.

But if you can’t exit through the window, there’s always the door. Biotech companies have long used alternative means of financing. The reality of expiring patents and the need to bolster pipelines continues to fuel robust partnering deals. M&A continues to provide an exit to investors whose portfolio companies are unable to avail themselves of the public market.

Though it’s nice to have choices, GlaxoSmtihKline’s $720 million acquisition of Sirtris Pharmaceuticals shows there are still alternatives to the IPO market for privately-held companies, the quarter was characterized by much bigger deals including Invitrogen’s plans to purchase Applied Biosystems for $6.7 billion, Daiichi’s acquisition of Ranbaxy for $4.6 billion, and Takeda’s purchase of Millennium for $8.8 billion.

As for the investment banker I ran into in the halls of the San Diego Convention Center, he managed to chuckle when we talked about the dismal IPO market. He doesn’t expect to see a change this year and said he believed it would be well into 2009 before the IPO market starts up again for the life sciences.

But he didn’t seem too concerned. That’s because he seems to be keeping plenty busy with M&A deals.