The Emerging Value Driver in Biomedical Dealmaking
11 May 2012
Innovation in medical science is bringing together diverse fields such as physics, material sciences, chemistry, biology, genetics, informatics and robotics. Large biomedical companies act as aggregators of such innovations during the expensive product development process, linking other participants of the innovation ecosystem such as academia, investors, start-ups and government. Research teams working in these fast evolving fields are incentivised to seek funding at the times when their projects attain certain well defined milestones. Over the last decade these milestones have become standardised, and both buyers and sellers have gained greater visibility into the risk profile and reward potential of each others' projects. This visibility has spawned the probability-based, risk-adjusted approach to biomedical dealmaking that prevails today.
But in assessing asset value, financial metrics on their own do not give full consideration to the scientific potential of a research group's portfolio. This methodological limitation was exposed when the financial crisis came about in the late 2000s. Faced with a lack of liquidity, investors started favouring assets with less uncertainty in their clinical development pathways. Creative scientists and entrepreneurs found themselves facing very dilutive financing rounds unless their projects fitted the profile of the new flavour of the month - de-risked, late-stage clinical assets that had a relatively predictable path to market.
So can such a de-risked, late-stage investment hypothesis be sustained over the next five years? We think not. The low-hanging fruit has been picked, and assets that fit the profile are priced higher to reflect their value. There are no more easy wins for fund managers looking to invest in projects that provide a long-term competitive advantage. This reality has prompted large biomedical companies, especially the biopharma sector, to move upstream in the clinical development value chain in their search for good technology investments. Their objectives in terms of returns and risk exposure are served equally well at this stage, and the cost of entry is lower.
We detect a subtle but discernible shift in the open-innovation strategies of large biomedical companies. Instead of investing large sums of money in 'safe assets' like late-stage, Phase II drug candidates, they are hedging their bets across multiple lines of clinical investigation via early-stage drug discovery alliances with universities and other quasi-academic research institutions. These alliances are markedly different from late-stage deals - a fact that industry analysts often ignore when comparing transaction structures and valuation metrics.
Here we focus on some emerging dynamics within the collaborations between academic researchers and large biomedical companies in their common quest to discover new approaches towards better healthcare. For example, the alliances often target a broadly defined therapeutic approach that may generate more than one mechanism-of-action, and each biochemical mechanism may generate more than one drug candidate upon further validation. The 'attrition' inherent in such early-stage discovery is balanced against the larger number of candidates the partners have to work with.
Another difference is the way in which rights and obligations of the partners are structured. In a typical late-stage co-development deal the partners are likely to have a relatively clear idea of how the eventual intellectual property product rights and R&D costs will be shared. In early-stage academic alliances, such clarity is impossible to provide. Illustrating this is the recent case of Mission Therapeutics, a spinout from the University of Cambridge that is developing a broad platform of cancer targeting enzymes via new research on pathways that control cellular responses to DNA damage. The founding technology is generated in the academic laboratory of Steve Jackson at the university, and most of the prior research has been funded by Cancer Research UK, with inputs from other sources. Through agreements with Cancer Research UK and the University of Cambridge, Mission Therapeutics has access to intellectual property from Jackson's lab, and first option on future IP for a limited number of years.
The shift to early-stage alliances reflects another strategic priority in biomedical partnering - the need for effective alliance management as an organisational competence.
Lack of new innovative products and slim pipelines has forced the biomedical industry to look for alternative sources of innovation. Academia represents a fantastic pool of creative talent. But as highlighted above, early-stage alliances with academia cannot provide rigorous contracted guarantees that allay the fears of large industry partners. Unlike purely commercial partnerships, the objectives of the two sides differ substantially. Academics want the freedom to publish their results and to remain unhindered in exploring their basic research, whereas commercial partners are concerned with secrecy and fiscal prudence. And despite the differences, academia offers the industry a more compelling long-term investment proposition in today's deal-making environment.
The time aspect underscores the role of human relationships, professional empathy and ordered communication in determining success or failure. An ‘interface’ team that has a close understanding of these challenges and experience of handling the people issues is indispensable if the alliance is to succeed. This can be seen in the recently announced partnership between Novo Nordisk and the University of Oxford for the discovery and development of new biomarkers and drug targets for rheumatoid arthritis and other inflammatory autoimmune diseases. A joint steering committee with top academics at the Kennedy Institute of Rheumatology and lead researchers from Novo Nordisk will jointly assess research proposals and select 10 projects on which to work. The Kennedy Institute has in the past made key discoveries in the field of rheumatoid arthritis pathobiology, and its head, Sir Marc Feldman, was one of the co-discoverers of anti-TNF as a therapeutic approach to the disease.
Another example of long-term cooperation between industry and academia can be seen in the case of the Structural Genomics Consortium (SGC) at the University of Oxford, which follows a unique operating model. SGC supports the discovery of new medicines by carrying open access research in structural and chemical biology. It was funded from multiple bodies including pharmaceutical multinationals, governments and charities such as the Wellcome Trust. As one of the largest ever public-private drug discovery partnerships, it increases the profile of more than 200 scientists from academia and industry who make all early-stage research openly available with no patents or restrictions.
The model tackles the problem of a duplication of efforts up to clinical proof-of-concept. In the for-profit biomedical sector, many such projects are conducted in parallel, in secret and without collaboration. As a result, patients are sometimes "unnecessarily" dosed with molecules for targets which competitors know are ineffective. The no-IP policy has tremendous impact at the early stage, and may lead to valuable IP down the line. The policy enables the SGC to collaborate quickly with any scientist, lab or institution. It enables multiple private organisations to work closely with multiple private organisations on the same project, leading to a quicker generation of data.
In conclusion, early-stage drug discovery alliances with universities require an appreciation of the respective priorities of the collaborators, but also an appreciation that these are not contradictory. With ordered brokerage, communication and strong relationships there is great potential to provide excellent returns and serve a common quest to discover new approaches towards better healthcare.
This article was submitted as an opinion piece by Isis Enterprise Senior Consultant Gaurav Misra to FirstWord Pharma, and was published on 7th May 2012.