Big Pharma’s cash flows in a flurry of partnerships
It’s become a rite of passage for local biotech startups: After you’ve launched, raised venture capital, and set up labs, it’s time to find a partner to share the costs and risks of drug development.
Jounce Therapeutics Inc. did it Tuesday, drawing a $225 million upfront payment from Celgene Corp. to bankroll its immuno-oncology research. Moderna Therapeutics Inc. last month pocketed $200 million from Merck & Co. as part of a licensing deal for Moderna’s personalized cancer vaccines. And in May, serial dealmaker Celgene handed over $200 million to another cancer drug developer, Agios Pharmaceuticals Inc., focused on fixing metabolic irregularities.
The partnerships involving this trio of Cambridge cancer drug developers are the biggest, but far from the only, recent alliances between cash-hungry companies experimenting with new drug discovery approaches and established biopharma players scaling back on their in-house research.
“It’s a way for young companies to build out quickly,” said Agios chief executive David Schenkein, who said such deals — and the capital infusions they bring — are especially important to early-stage biotechs when financial markets are uncertain like they are now. “We’re exploring a new area of biology, and we knew we were going to need a lot of resources.”
Larger drug companies, meanwhile, see the alliances as a way to complement their own research and keep up on the cutting-edge science biotechs license from university and hospital labs. “We’re asked why we do so many deals in Boston,” said Angus Grant, corporate vice president of business development at New Jersey-based Celgene, which has struck 10 deals with Massachusetts biotechs since 2008. “It’s because there’s so much innovation there and a pool of talented people who know how to run small biotechs and not waste money.”
If high-profile buyouts and initial public offerings are the biotech industry’s fireworks, the drumbeat of strategic deals has become the background music for the business.
Each deal is different, making them difficult to compare. Many revolve around licensing a single clinical asset. Others are broader but involve relatively small sums, such as the $1.25 million pooled last week by five drug makers, including Cambridge-based Biogen Inc., teaming up with academic scientists to speed development of Alzheimer’s drugs. Many don’t specify financial terms, such as a deal announced Monday between Lexington’s T2 Biosystems Inc. and German drug maker Bayer AG to collaborate on biomarkers for blood coagulation.
The deals getting the most attention typically include milestone payments with eye-popping potential value. Jounce stands to rake in up to $2.3 billion from its Celgene partnership, for instance. But to do so, it would have to win commercial approval of five experimental cancer drugs and meet a range of specified clinical and regulatory goals.
Cary Pfeffer, a partner at Third Rock Ventures, a Boston venture capital firm that has launched and funded dozens of biotech startups, said the pace of strategic dealmaking has accelerated markedly over the past decade. “Nine or 10 years ago, people weren’t doing these broad big-dollar, multiyear deals you’re seeing now,” he said.
Biotech companies have to give up something — often equity or a share of future profits — to secure a strategic partnership. But in addition to their money, pharmaceutical partners bring clinical, development, and regulatory expertise.
For the pharmas, alliances with biotechs bring technology that might be too costly to develop in their own labs. “We recognize that innovation happens inside our doors but outside our doors as well,” said Katherine Bowdish, vice president of global research for French drug maker Sanofi SA and head of its Sunrise unit, which helped create and finance Cambridge biotechs such as Warp Drive Bio and MyoKardia Inc. “We have to position ourselves to access it.”
Drug companies often call this a “distributed” research strategy, but it clearly means they are doing less internal research. “Many of the big companies are outsourcing their research and development,” Pfeffer said. “Celgene has masterfully executed on this strategy. They invest in areas where they can get the best science, the best product opportunities.”
Some strategic partnerships include explicit options to buy drugs, or even companies, in the future. Even if they don’t, parties to the deals, especially financial backers of the biotechs, understand that successful research collaborations could lead to acquisitions. Many cite Swiss drug maker Roche AG’s investment in California biotech Genentech Inc. — one of the industry’s early strategic alliances — which ultimately led to Roche’s takeover of Genentech.
But collaborations make sense whether or not they become something larger. They are a way to do research “on a cost-variable basis,” meaning pharmas make milestone payments only if drug programs meet targets and biotechs have an incentive to meet those targets, Pfeffer said.
The trend can be seen clearly in data compiled by Boston Consulting Group showing that 78 percent of the drugs approved by the Food and Drug Administration in 2015 originated in biotechs or in academic labs rather than Big Pharma. That compares with 38 percent in 1998.
“Usually the company bringing the drug over the finish line is Big Pharma,” Boston Consulting Group partner and managing director Michael Ringel said. “But they didn’t discover the molecules. Even the largest pharma company has under 10,000 people in research and development, and even fewer doing the early biology work. Most of the smart people in the world work outside these companies.”