Biotech-Big Pharma Betrothals Declining

You've just started your job with a small biotech startup that has some promising drug candidates and a freewheeling culture. You enjoy the shorts and T-shirt dress code and the midnight pizza parties for late workers, as well as the generous stock options. But then it's announced that your company has sold a large equity stake to a mega-pharmaceutical company. Now you're expected to wear a suit when meeting with your partners. To make matters worse, the large equity stake the pharma company bought has diluted your own shares. Things just aren't quite as interesting as they used to be. That's the best-case scenario for a biotech employee. Far worse is the prospect of an outright merger with a pharmaceutical giant, which might result in the loss of your job. The good news for those who enjoy working in the biotech industry is that the number of biotech-Big Pharma marriages is declining for the first time. According to data from the venture capital firm, Recombinant Capital, companies announced 442 alliances between biotech and pharmaceutical companies in 2001, a decline from 524 alliances in 2000. Ties between biotech companies are replacing biotech partnerships with Big Pharma. Biotech alliances increased from 728 in 2000 to 745 in 2001, according to Recombinant Capital. More than a half a dozen biotech companies have announced mergers in the last year. "Biotechnology companies are realizing that they don't necessarily need to marry a major pharmaceutical company to be successful," says Carl Feldbaum, executive director of the Biotechnology Industry Organization (BIO), a trade group. The prospect of biotechs expanding is good news to biotech employees and to many scientists seeking entry-level work, since these companies are building their employee bases. The number of employees at US biotech companies has more than doubled since 1992, from 79,000 to 191,000 in 2001, according to BIO. HISTORIC BRILLIANCE The original model of biotech development highlighted a brilliant scientist who started a company based on drug candidates discovered in a university lab. Long hours of work by a few equally brilliant employees might have advanced the compound as far as Phase I trials, which simply confirm that the compound will not harm human beings. But the Phase II, III, and IV trials, which involve hundreds or thousands of patients and management of massive data sets, overtax small companies. "I've been astounded at the sheer cost of third-stage trials," says Chris Rallis, president of Triangle Pharmaceuticals in Durham, NC, whose company struck an alliance with Chicago-based Abbott Laboratories in 1999. Triangle's drug is for treatment of HIV and hepatitis, which means Phase III trials can be much smaller and shorter than those for other discoveries, according to FDA regulations. "But even with hundreds of patients instead of thousands of patients, it's a colossal effort," Rallis says. "We never could have done it by ourselves." Tapping Big Pharma for large costs has made a handful of people very wealthy, but it makes for a strange working environment. Biotech companies exist typically for a few years before they become subsidiaries of large pharmaceutical companies--the average biotech lifespan is four to five years. Biotech employees then trade companies like trading baseball cards. But the sellout trend is starting to fade. "There are two types of people who start up biotech companies, those who want to build the next Pharmacia and those who want to sell the company as soon as possible. The former are becoming more and more numerous and the latter are becoming extinct," says Joseph Schlessinger, chair of the pharmacology department at Yale University School of Medicine and cofounder of the recently established Berkeley, Calif.-based Plexxikon. Schlessinger speaks from experience. Pharmacia acquired his first company, SUGEN, for $750 million (US). Though he made a tidy profit from it, he still regrets the sale. "I wanted to keep the company independent, but by that point I no longer had control of it and the sale was against my will," he says. "It was a good deal, but I'm less interested in making good deals than building good companies. I'm determined to not be put in that position again with Plexxikon." Another company trying to avoid past mistakes is Tarrytown, N.Y.-based Regeneron Pharmaceuticals, which is entering clinical trials for an antiobesity compound without a partner, an audacious act that was unheard of just a few years ago. It helps that the company has $400 million in cash reserves, thanks to successful equity offerings. Regeneron also has three Nobel laureates on its scientific advisory board, and a former CEO of pharmaceutical giant Merck, Roy Vagelos, chairs its board of directors. The move by Vagelos from CEO of a $120 billion company to a biotech startup points to a larger trend: Pharmaceutical companies, and not biotechs, are looking at possible hard times ahead. After years of double-digit growth made them loved by Wall Street, these firms now have empty pipelines and floods of patent expirations that hamper their advancement. For a few years, they were able to keep earnings increasing by merging and cutting jobs, but that game has limitations too. "The pharmas are getting desperate," says Michael Lytton, a consultant with Oxford Bioscience partners, a Boston-based venture capital firm. "They can merge together [only] so many times and they're under tremendous pressure to come up with new products." NO PATENTS PENDING The pressure stems from the pending expiration of the patents on an enormous number of blockbuster drugs. During the entire decade of the 90s, drugs that accounted for about $17 billion in sales went off patent. The next five years will see drugs with sales of $19 billion lose their patents, according to data from brokerage UBS PaineWebber. "The main problem is that the major pharmas are losing their drugs and they don't have much to replace them with," says Len Yaffe, a financial analyst with Banc of America Securities in Manhattan. When biotechs do make alliances with pharma, they often enjoy generous deals. In April, the Berkeley, Calif.-based Genta sold licensing rights for Genasense, an antisense drug used to boost the effects of cancer chemotherapy, to Aventis, a large pharmaceutical company based in Frankfurt, Germany, for $135 million. "That much cash up-front used to be unheard of," says Lytton. "Now it's becoming the norm." The Genta/Aventis alliance points to a trend by European pharmaceutical giants to take advantage of American biotech drugs in late-stage development. Plenty of European biotech companies are also finding partners in American pharmaceutical companies. "The European biotechnology industry isn't as mature as America's, but it's growing," says Hugo Schepens, the secretary general of EuropaBio, a European biotechnology trade group. He counts more than 1,600 biotechnology companies in Europe (compared with 1,457 in the United States), most of which are startups. "The world has changed to the point where it doesn't matter where you are from; if you've got good science and good management, you're going to find partners," Schepens says. Despite deals like Genta's, biotech- Big Pharma alliances are falling out of favor because they don't have good track records. A January 2001 PricewaterhouseCoopers poll of biotech and pharmaceutical executives found that 59% of alliances failed to meet their original goals, and 50% of the potential value of these alliances went unrealized. "The most important thing in choosing an alliance partner isn't how much money you get, but picking one that has a history of implementing past alliances well," says Gene Slowinski, managing partner of Alliance Management Group, a New Jersey-based pharmaceutical management consultancy. "Too often these alliances are frittered away with bad management." Sam Jaffe (sjaffe@verizon.com) is a freelance writer in Philadelphia

Biotech-Big Pharma Betrothals Declining

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