The pheromones were flowing in Chicago a few weeks back as BIO held its annual International Convention, a kind of marathon corporate speed dating session whereby established biopharmas looking to replenish their pipelines romance startups shopping developmental treatments, and vice versa.
Mergers and acquisition activity has been in a slump of late—the aggregate value of these deals fell to a six-year low of $90 billion in 2012, according to Deloitte figures cited by Biopharma Dealmakers. But 2013 is expected to prove a banner year for both acquisitions and in-licensing deals—at least in number, if not in value.
That’s partly because the cost of capital for small companies on the sell side is prohibitively high, while that for larger companies is at rock bottom. There’s also been a paradigm shift among buy-side companies, which have finally accepted the fact that external R&D is going to be a big part of the future.
“Companies that once swore by the belief that their internal R&D was the best now say explicitly that they’re looking for outside help,” says Jeff Stewart, director of corporate development at Campbell Alliance. “It’s been true for a while that the assets that work in pharma have come from small biotechs, but it’s now okay to say that within the ranks of Big Pharma.”
In a Campbell Alliance survey of 129 licensing pros that was conducted earlier this year, 62% of those from in-licensing companies said they anticipate doing more Phase I and preclinical deals this year.
“Everyone likes preclinical assets,” says Stewart. “This is a sea change. Companies until recently were looking to fill bags. They had boots on the ground. They needed additional products to fill up the reps’ bags. With the contraction in sales reps, you don’t have this stark demand, and your priorities change to earlier stage assets that you can take fliers on. Even though companies are desperate for new assets, they’ve accepted that they’re smaller.”
As a result, giant companies that would have turned up their noses at Phase I therapies just a few years ago are now in-licensing them, or are buying their makers outright. They’re not betting the house on them, though—instead, they’re inking earnout deals wherein out-licensors net benchmarked payments if their products advance. Think of it as a biopharmaceutical pre-nuptial agreement, one that limits the risk for large biopharmas while rewarding innovative smaller firms with milestone payments as their products perform.
“They have differences on what they think the value is, and this is a way to bridge that gap,” said Stewart.
The buy-side companies polled by Campbell Alliance were most interested in early-stage oncology products, with nearly a quarter of in-licensers saying that they’ll shop for preclinical oncology assets this year. In-licensers were nearly as interested in early-stage CNS assets, and expressed strong interest in preclinical, Phase 1 and Phase 2 candidates in the immunology, metabolics and cardiovascular categories.
BIO CEO Jim Greenwood told MM&M that as the trade group celebrates its 20th anniversary, it was planning on hosting 3,000 companies taking part in 25,000 meetings among four football-fields’ worth of exhibit booths. “The state of biotechnology in 2013 is very similar to where we were in 2012,” said Greenwood, “with some great success yet still facing several challenges.
“Industry has had 38 approvals since last June. Record high for NASDAQ Biotech Index, up 36%. Big Pharma stocks are also hitting new highs (up 24% last 12 months). But early stage companies still struggle to find capital. Venture capital overall is down in 2012 and still off peaks.”
When he was asked to discuss the group’s policy priorities for 2013, Greenwood said: “Any cuts to Medicare Parts B or D/Potential Budget Deal. If there is going to be entitlement reform, BIO will work to ensure that incentives for innovation are not undercut.
“Two such ideas that have been proposed include changes to Medicare Parts B and D. Additional cuts to Medicare Part B drugs should be resisted. ASP is a market driven system that works well. There is no reason to jeopardize access for patients facing grievous illnesses, especially since MedPAC and others have found that physicians already have problems obtaining some products at or below the current ASP rate.
“The President is now proposing to cut even further, lowering the reimbursement from ASP+6% to ASP+3%. This must be stopped. Medicare Part B coverage of drugs provides an invaluable route of access for patients facing grievous illnesses such as multiple sclerosis, cancer, and rheumatoid arthritis. In his budget, the President has proposed instituting a rebate for dual-eligibles with drug coverage under Medicare Part D. BIO strongly opposes this, as it will likely lead to increases in expenses for Medicare Part D beneficiaries, and it will harm continued innovation, and lead to increased prices for beneficiaries and increased prices for non-beneficiaries alike. This proposal must be rejected.”