Biotech-Pharma deals get no respect

No respect!

It just took me ages to write a simple article for this blog, which talks about the recent deal between Eli Lilly Lilly and Co. and one of our leading tenants, Transition Therapeutics.

It wasn’t the terms of the deals that were tripping me up. Transition signed a licensing and collaboration pact with Eli Lilly and Co. where Lilly will acquire exclusive worldwide rights to its gastrin-based therapies program for the treatment of diabetes. The deal terms gave Transition a $7 million upfront payment, and a potential $130 million in development and sales milestones, as well as royalties on sales of gastrin-based therapies if any product is successfully commercialized.

Not bad, right? So what was holding back my creative juices to write the article?

In an attempt to place this news in a broader context of what this meant to Transition, I was puzzled why the market didn’t reward the company for the deal (stock went up upon news of the deal but actually ended closing that day down three per cent with another loss of five per cent the following day). Granted it wasn’t one of the sexier deals we have seen in the headlines of late but still — what gives?

I suspected that the market probably didn’t like the terms (modest upfront, giving away worldwide rights, smaller milestones and royalties) but in the past licensing and co-development deals with large pharma gave biotech recognized validation — proof that their program was technically valid and had commercial potential — and attracted investors. What has changed?

Upon digging around, mainly in my favorite site for all things biotech, the In Vivo blog, I found support of my suspicion that investors are no longer necessarily rewarding biotech for making deals with pharma. In Vivo blogger Roger Longman did a quick analysis of nine fairly large biotech-pharma deals that have taken place since November 2007 and found that since the day the deals were signed the median share price among these nine biotechs is down 15%.

Granted, not all this loss is due to the deals alone. In one case, the company’s stock plummeted due to safety issues with its vaccine. And of course the markets are in a bit of slide on a whole (can you say Bear Sterns?). But you would hope that such big pharma deals would have meant something to investors. Longman sees several reasons why this is no longer the case.

Firstly, with its well-known pipeline failures pharma has lost its reputation of being able to spot the best products. Institutional investors now rely on their own teams of experts to do the due diligence and decide if a biotech company’s program has a chance to succeed and whether to invest.

Secondly, biotech investors today all dream of a big buck acquisition by pharma; selling off rights to lead products actually subtracts value from the company.

And finally, investors just aren’t as happy to hand over development control of a biotech’s products to Big Pharma. Pharma, in its notorious and risky quest for blockbusters, may only position the biotech’s compound to meet a major indication, ignoring the smaller ones it may have been approved for successfully. As Longan says: “No approval — no milestones, no royalties, no value in the biotech, no brass-ring M&A shot.”

Unfortunately, this last concern gives biotechs, such as Transition, little choice but to try to take a molecule all the way to market, facing the costly clinical trials and marketing challenges it is often less equipped to meet. This leaves us longing for the good old days when, by and large, biotechs were supposed be the research engines that got a molecule passed proof of concept and Big Pharma swept in and took over the costly development and marketing.

Oh, hold on, that was barely six months ago. Wait a few months and another paradigm is bound to emerge!