Cash-Hungry Biotechnology Firms Attract Drug Company Investments

Growing number of alliances with pharmaceutical partners seeking access to gene technologies points to new success path for biotechs. NEW TOOLS: Drug companies need the novel technologies that are "bread and butter" to the biotech industry, says Pfizer's Peter S. Ringrose. With growing fervor, the world's largest pharmaceutical companies have been aggressively buying up a range of biotechnology company assets in the past few years, even as the stock market's interest in the younger industry has waned. In the process, according to pharmaceutical and biotechnology company executives and industry analysts, a new model for the stable, solvent biotechnology company may be emerging. In the past, young biotechs aimed to grow into publicly financed, full-fledged drug companies, with research, development, manufacturing, and marketing capacities. Now, a number of companies have been forced to trim research programs and lay off workers, and a few have been swallowed whole by larger companies. Many, however, are coping by sharply refocusing on their scientific strengths and seeking pharmaceutical partners for the other required aspects of bringing a drug to market. "I would rather be on the science side than the business side right now," says Peter Feinstein, president of Feinstein Partners Inc., Cambridge, Mass., a biotechnology industry consulting firm. "The jobs that are likely to prosper are the ones where you add direct value to the company, and the way to add value to a biotech company is through the selection and completion of particular experiments. That's likely to be the critical path of biotech companies in the future." A study conducted by Feinstein's firm shows that drug-company deals outstripped the stock markets to become the primary source of support for biotechnology in the first quarter of this year. The value of announced pharmaceutical investments in biotechnology for the first quarter of 1995 was more than $1.4 billion, up from only $147 million during 1994's first quarter. In contrast, stock markets contributed a mere $64 million in the first quarter of 1995, down dramatically from $510 million in 1994's first quarter. In recent years, stock market investments in biotechnology, in the form of initial public offerings and follow-on offerings, have dropped from $3.4 billion in 1991, to $2 billion in 1992, $1.8 billion in 1993, and $1 billion in 1994, according to Feinstein Partners. The recent wave of new investment serves as a somewhat belated acknowledgment by the drug companies of the commercial value of biotechnology. "It took a while for the pharmaceutical sector to truly be convinced that these young biotech companies possessed value," observes Stelios Papadopoulos, a managing director and head of the health-care investment banking group at PaineWebber Inc., New York. "For them to be convinced of that, it took an Amgen [Inc., Thousand Oaks, Calif.] and a Genentech [Inc., South San Francisco, Calif.] eating their lunch in their own back yards. Pharmaceutical executives went through the 1980s acting as if biotech wasn't around. But when you finally have an Amgen selling $1.5 billion worth of goods, you have to realize that this is not fake and hype and stock promotion it's real." Biotech companies that have chosen to form alliances with drug companies as a route to fiscal health report expansion in an otherwise relatively austere period in the history of biotechnology. PROSPERING IN HARD TIMES: Mytiad Genetics is growing, reports president and CEO Peter D. Meldrum, partly because of its drug company alliances. "We're a little unusual, maybe, in the biotech area in that we are growing quite rapidly," says Peter D. Meldrum, president and chief executive officer of privately held Myriad Genetics Inc., Salt Lake City. "We're hiring. Based on, I think, disappointing Phase III clinical trial results, other biotechnology companies have had to go into a contraction mode. "Myriad has a very important enabling technology that will lead to the development of new pharmaceuticals. But, as a smaller company, we don't have the resources to develop pharmaceuticals, nor do we have the desire to become a fully integrated pharmaceutical company. So, we look to larger pharmaceutical companies that have the expertise and financial resources to bring products into the marketplace." Myriad uses a genetic analysis of large families performed by University of Utah collaborators in conjunction with proprietary gene mapping, gene isolation, and DNA sequencing technologies. Last year, Myriad's scientists discovered the hotly pursued BRCA1 breast and ovarian cancer gene, in a research effort partly funded by and involving scientists from Eli Lilly and Co. The drug company owns about 10 percent of Myriad and a share in the commercial rights to the BRCA1 gene. Lilly researchers share in Myriad's BRCA1 patent, along with University of Utah and National Institutes of Health researchers. Based partly on that success, Myriad earlier this month signed a $60 million deal with Ciba Pharmaceuticals, Summit, N.J. -- the research arm of Ciba-Geigy Corp., Ardsley, N.Y. --for development rights to therapeutic products resulting from cardiovascular genes the biotech firm may find. "It's always good to go with somebody with a proven track record," comments Richard Kramer, Ciba Pharmaceuticals' head of research planning and strategy. "Clearly, their success in one area was one of the factors in our decision to go with them." A major catalyst to the biotech deals is that the dearth of cash available to biotech from the investment markets has created a new openness on the part of the biotechnology companies to partnering. "It's a buyer's market," says Feinstein. "You're seeing a situation in which the pricing of this technology has dropped significantly. The problem with biotechs in the past, in terms of acquisitions, has always been that they were overpriced. Now, the need for capital is very high, so that the readiness to make these agreements is much higher." THE NEW REALISM: Biotechs are more willing to give up rights to discoveries in return for assistance and cash from drug companies, says Barry Berkowitz, president and CEO of Myco Pharmaceuticals. "The larger companies are finding the biotechnology companies much more realistic, in terms of their willingness to give up marketing rights for the assistance and the cash that a larger company can provide," agrees Barry Berkowitz, president and chief executive officer of privately held Myco Pharmaceuticals Inc., Cambridge, Mass. "I think what you have is not so much the predator being really hungry and thirsty," asserts PaineWebber's Papadopoulos, "but the prey being willing to be consumed, because the small companies don't have many other options." One biotech company that has enthusiastically embraced the partnering model for solvency is Ligand Pharmaceuticals Inc. in San Diego. Ligand, although publicly traded, receives support from the pharmaceutical industry at a 4-to-1 ratio over what it gets from the stock markets. In February, Ligand announced a $21.5 million alliance with SmithKline Beecham, Philadelphia, in which the drug company provides research funding and equity payments in return for rights to new compounds that may control hematopoiesis, the formation and development of blood cells. The new-drug search will use the biotech's proprietary technology relating to signal transducers and activators of transcription. The Smith-Kline deal adds to similar arrangements Ligand has negotiated, including those with Abbott Laboratories, North Chicago, Ill.; American Home Products Corp., Madison, N.J.; Glaxo Inc., Research Triangle Park, N.C.; and Pfizer. What the big drug companies are looking for is not only specific new products, but also cutting-edge technologies not available within their own discovery groups. Pharmaceutical firms are using alliances and other investment deals to assemble the tools in molecular biology and genetics that they hope will be able to populate their product pipelines well into the next century. "The pharmaceutical companies are using these kinds of alliances with the smaller companies as a way to gain access to new technologies and new knowledge that they are unlikely to get from their internal groups," says Kramer. "They don't have, for example, the direct connections to the academic groups that most of these companies seem to have. In a sense, a lot of these small companies can be looked at as middlemen in dealing with academics, because most of them have come out of academic groups and are now looking to commercialize what they've found." "There are two types of buys," explains Feinstein. One is a deal involving a platform technology that might lead to multiple discoveries, and the other would be for rights to a specific potential drug. "Most of the big deals have been for platform technology." "Projecting into the next decade and beyond, we feel there's going to be a mix of small-molecule drugs_the sort that we're all familiar with_but also new modalities of therapy, like gene therapy, monoclonal antibodies, ribozymes, antisense, all these new words that are associated with the genome science area," says Sandwich, England-based Peter S. Ringrose, senior vice president for worldwide discovery at Pfizer Central Research, Groton, Conn., the research facility for New York- based pharmaceutical firm Pfizer Inc. "These involve a whole range of technologies that the traditional pharmaceutical companies haven't been too familiar with, but that, of course, are bread and butter to the small biotechs. "Some people have used the analogy of a tool box. You need your spanners, your screwdrivers, your wrenches, all these different things, to enable you to produce a drug for the future. Just making one investment doesn't do it. Also, we're spreading the risk, because, at this point in time, one doesn't know which of these new technologies is going to be a real winner." Pfizer this year raised the amount of money it will spend on research by 20 percent, to $1.4 billion, exceeding industry leader Merck and Co. Inc., Whitehouse Station, N.J., in this area for the first time. Much of this jump will go to biotech investments. In the first quarter of 1995, Pfizer announced alliances with four different biotech firms_ including privately held Immusol of La Jolla, Calif., cofounded by Flossie Wong-Staal, Florence Riford Professor in AIDS Research at the University of California, San Diego_to develop ribozyme gene therapy technologies. The deals involve R&D support and equity investment in return for rights to produce and market therapeutic products that may result from the collaborations. "We were probably one of the early proponents of building a tool kit," says Berkowitz at Myco Pharmaceuticals, which negotiated a $50 million deal with Pfizer Inc. in March to develop pharmaceuticals for fungal diseases. "The tool that we used was microbial genetic engineering. We leveraged that to build a source [of candidate compounds], then leveraged that to build screens, and our first application there was for antifungal drugs." With the new influx of support from Pfizer, Myco can extend its capabilities and, perhaps, begin looking for its next pharmaceutical partner. "We have now the opportunity to use our resources to grow our core technology, our tool technology. Our tools are all reusable for other therapeutic franchises, which include antibacterial, immunosuppressant, and anticancer [therapies]. Those tools can then be used, potentially, as a vehicle for partnering with other companies." In addition to the need of the drug companies to gain access to new technologies, another factor is cited by company executives and industry analysts as contributing to the drug- company investments in biotech properties. This factor is the increase in company size among pharmaceutical firms, accentuated by the recent merger mania that has swept the industry. Among these deals are the August 1994 purchase of American Cyanamid Co., Wayne, N.J., by American Home Products; the joining of Wellcome PLC, London, and Glaxo PLC, London, in March; and this month's agreement by Hoechst A.G., Frankfurt, to buy Marion Merrell Dow Inc., Kansas City, Mo. Some observers feel that the sheer massiveness of some drug companies limits overall research creativity and that the smaller biotechs have an inherent advantage in this regard. "As the pharmaceutical companies are becoming larger, they are becoming increasingly less capable of managing early discovery research," says PaineWebber's Papadopoulos. "Discovery research requires a creative, spontaneous approach. You cannot have standard operating procedures for discovery scientists. So, increasingly, the pharmaceutical companies need to look to the small companies for those capabilities."

Cash-Hungry Biotechnology Firms Attract Drug Company Investments

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