Beyond Borders: Global biotechnology report 2010

In both of these models, investors are also
getting around the “you-can’t-build-it-to-sellit”
problem more effectively than they could
under the traditional funding model. For one,
while they are still looking for an exit via sale,
they aren’t building very much — projectfunding
approaches inherently involve less
infrastructure and overhead. In addition,
since these projects involve very specific
propositions (taking a particular asset to a
defined development threshold in a short
period of time), investors are typically able
to validate at the outset buyers’ interest in
purchasing them if they succeed, and can
even effectively hold the auction “up front”
through the negotiation of a
purchase option.
Other approaches have similarly involved
trying to find ways to fail fast. As has been
widely reported, Lilly’s Chorus experiment
has successfully done this within one large
pharma company by developing a leaner
way to get to clinical proof of concept.
That same approach is now being used
in a wider way through a venture-backed
start-up, Flexion Therapeutics. Flexion,
founded in 2007 by the founding members
of Lilly’s Chorus division with backing from
Versant Ventures, 5AM Ventures, Sofinnova
Partners and Pfizer, in-licenses molecules
from big pharma companies where it thinks
it can quickly and cheaply get them to proof
of concept. (For more details, see “Lean
proof of concept,” by Michael Clayman, on
page 9.)
Big pharma
Big pharma is facing its own new normal,
though this has less to do with the Great
Recession than with longer-term trends
that preceded the economic downturn.
Specifically, the industry’s patent cliff, and
the fact that most firms do not have enough
in their clinical pipelines to replenish the
revenues they are poised to lose, have
driven aggressive restructuring measures
and efforts to access innovation externally.
There are differences of opinion on the need
for diversification — some companies are
remaining focused on the core business of
drug innovation, while others are expanding
into a variety of other businesses, from
branded generics to nutraceuticals.
Despite these differences, the industry
has consistently been shifting from a
blockbuster-based model toward one based
on products targeted at smaller patient
populations. These changes, sometimes
referred to as the transition from Pharma
1.0 (“the blockbuster model”) to Pharma
2.0, have been discussed extensively,
including in prior editions of Beyond
borders and in our sister publication on the
pharmaceutical industry, Progressions. For
several years, the biotech industry benefited
from big pharma’s pipeline challenges, as
large companies bid up prices for desirable
platforms and late-stage pipeline assets.
While pharma’s patent cliff has been
anticipated for some time now, the
pressures are becoming particularly acute
just as biotech and pharma companies
are grappling with the new normal. For
several pharma companies, the biggest
blockbusters are scheduled to go off-patent
in 2011 and 2012, at which point the
industry will finally be on the other side
of the cliff, leaving a number of firms with
reduced revenues and cash flows with which
to buy their way out of trouble.
Pharma’s challenges are also being
compounded by the transition to the next
phase of the industry — something we
term “Pharma 3.0” in the 2010 edition
of Progressions. The convergence of
new trends such as health care reform
and the adoption of health information
technology (IT) promises to change the
very business that drug companies are in,
8 Beyond borders Global biotechnology report 2010
from selling drugs to delivering outcomes.
As pharma companies desire new solutions
to deliver health outcomes — as well as
to address Pharma 2.0 challenges such
as serving patients in emerging markets
— many “non-traditional” companies
are sensing opportunities to capitalize
on increased health spending and are
entering the fray. Pharma companies
are beginning to collaborate with these
entrants — from sectors as disparate as
IT, telecommunications, retail trade and
financial services — to create entirely new
service and product offerings customized
for the world of Pharma 3.0. We’ve seen a
flurry of partnerships in recent months, and
while these have mostly been early-stage
experiments and pilot programs, partnering
with non-traditional entrants will likely
become a greater focus over time.
Pharma companies have long been
vital partners for the biotechnology
industry — providing everything from
clinical expertise to R&D funding and from
validation of early-stage assets to exits
for investors and founders. It is almost
inevitable, therefore, that the sweeping
changes under way in the pharma industry
will have significant repercussions for
biotech companies and their investors.
For instance, there has been a marked
uptick over the last couple of years in
the number of deals that are structured
to include options. In these transactions,
buyers do not purchase or in-license an
asset but rather pay for the right to license
it at a later date (e.g., when a clinical trial
has been successfully completed). To some
extent, these deal structures, which typically
allow buyers to take on less product
development risk, have been enabled by
the fact that many biotechs have seen their
bargaining power diminish in today’s capitalconstrained
environment. But option-based
transactions are also being
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