Strategic Alliances: Filling Pharma's Pipeline Becomes a Two-Way Street
In 1970, 80% of drugs developed by pharmaceutical companies were created in-house. By 2000, the proportion had declined to 40% and industry observers estimate 50% of the revenue generated by large pharmaceutical companies in 2010 will come from licensed compounds.1 A combination of factors ─ large pharmaceutical firms seeking to fill pipelines more quickly and cheaply than they could on their own, a desire to spread the risk associated with drug development, a plethora of biotechnology companies with promising compounds and investors eager to fund potential blockbusters ─ are driving this trend.

A Pathway to Products

With 70% of industry drug trials failing at Phase II, the pressure is on for deals that could potentially reduce this failure rate and its associated costs. A published review of pharmaceutical data sources suggests in-licensed compounds are more likely to reach the market when compared with self-originated compounds, especially among compounds in the early clinical stages.2 In-licensing may make it easier for Big Pharma to fill pipeline gaps by partnering in areas outside of a large company's core competency, a strategy which permits in-house resources to be focused more efficiently.

The headlines of 2008 present compelling examples. In October, Bayer HealthCare licensed global rights to ImmunoGen's tumor-activated prodrug (TAP) technology platform, which combines monoclonal antibodies with molecules to target and kill tumor cells.3 In July 2008, Merck & Co., Eli Lilly & Co. and Pfizer Inc., which historically have competed to bring drugs to market, announced the formation of Enlight BioSciences LLC, a venture designed to speed the way drugs are discovered and developed. When Enlight identifies a promising technology, it will spin off new companies and Merck, Eli Lilly and Pfizer will have opportunities to license the technology and buy shares in the company.4
Biotech's Compounds = Partnering Leverage
As the examples mentioned above illustrate, large pharmaceutical firms are cross- licensing with one another and in-licensing with smaller firms that have developed promising compounds. Big Pharma's eagerness for in-licensing is altering the status quo and giving biotechnology firms new found leverage. Thanks in part to investors trolling for potential blockbusters, many biotechnology firms have considerable cash and no longer feel they need an alliance with a large pharmaceutical company to validate a business strategy. Unlike past eras, when large pharmaceutical firms were positioned to dictate terms, the tables have been turned and biotechnology firms are more selective in their alliances and are commanding more favorable terms and commercial benefits.5
In response to these circumstances, Big Pharma is structuring in-licensing partnerships with more flexible terms that include ceding commercial rights. As part of Novartis' agreement to license Antisoma's AS1404 vascular disrupting agent, Novartis promised to help Antisoma build its sales force, setting the stage for Antisoma to co-commercialize the product in the United States. Antisoma's prior deals with Roche and Abbott Laboratories were solely licensing agreements without commercial rights. In addition, Anacor Pharmaceuticals signed a $625 million agreement in February 2007 to license a Phase 2 antifungal ANA2690 to Shering-Plough while retaining the rights to co-promote the antifungal agent in the United States.

A Balancing Act

No matter how glaring the gap in Big Pharma's pipeline may be, identifying successful licensing agreements requires balancing the potential for commercial success with the risk inherent in yielding a degree of control in the drug development process. How Big Pharma approaches this balancing act may depend on the maturity of the therapeutic area under consideration and a company's financial situation.
Half of licensing compounds pharmaceutical companies in-license fail because the companies cannot produce the desired drugs despite initial promises of efficacy.1 Given this failure rate, some firms with more limited resources or a lower appetite for risk may consider a fast-follower strategy in which they license a second, third or later product in a class to gain a portion of revenue in an established market. Yet follow-on products may have limited commercial potential unless they present a significant advantage, such as fewer side effects or easier administration for the patient.6
A company's financial status also influences strategies for licensing agreements. When a small company's cash position is tight, it may look to out-licensing as a strategy for obtaining cash in the form of milestone payments and potential royalties. In contrast, when a large company is in a strong financial position, it may pay more upfront for licensing rights or acquire a partner outright.

Managing Pitfalls

Despite the commercial potential, managing licensing agreements is fraught with pitfalls. When life sciences executives were asked to identify their greatest concerns about alliance management, 31% indicated operational challenges, 31% lack of alignment, 22% poor communication, and 11% lack of visibility into relevant data.7
On the operational end, establishing procedures for identifying potential partners and conducting due diligence are key ingredients for success. A representative of Merck described the company's experience in these areas in an interview with Pharmaceutical Executive. At Merck, all parties involved in licensing agreements work within one umbrella group that is responsible for scouting, evaluating, conducting due diligence, structuring the agreement and establishing commercial terms. The scouting organization consists of scientists who formerly worked within the company's research labs, a practice Merck believes helps to entice scientists at partner organizations to want to team up with them.8
Lack of alignment may become an issue when competing priorities and core competencies are in evidence even when partners work towards a common goal. For a larger pharmaceutical firm, an in-licensing partnership may be one of many such agreements that have an established protocol for advancing through various stages. Start-up firms, in contrast, may be less experienced at managing internal and external resources devoted to drug development alliances. Smaller firms may excel in innovation and establishing efficacy but lack the skills to bring a product to market, a step that larger firms may have followed many times over. Capitalizing on one another's strengths, rather than adhering to rigid protocols, may be necessary to achieve maximum value from a partnership and to ensure that it evolves to capitalize on new opportunities.
Given the large number of therapeutic areas that the industry is addressing, there is no one-size-fits-all approach for making a drug-development licensing deal work. That said, understanding the dynamics that are making licensing deals more prevalent, potential pitfalls and strategies for success may help to pave the way for a winning combination.

1 Source: "Synthesis Stumbling Blocks in Pharma Licensing," in-PharmaTechnologist.com, February 6, 2008.
2 Source: "The ‘Not Invented Here' Myth," Nature Reviews Drug Discovery, June 2006.
3 Source: "Marcial: ImmunoGen Attracts Big Pharma," BusinessWeek, October 23, 2008.
4 Source: "Big Pharmas Join to Speed Discoveries," The Wall Street Journal, July 10, 2008.
5 Source: "Licensing Deals Morph to Acquisitions in Seller's Market," Nature Biotechnology, June 2007.
6 Source: "Driven to License," Pharmaceutical Executive, February 1, 2007.
7 Source: "IntraLinks Poll: Three-Quarters of Life Sciences Executives Say Licensing and Alliance Activity Will Increase in the Next 12-24 Months," September 16, 2008.
8 Source: "Q&A with Barbara Yanni," Pharmaceutical Executive, May 1, 2008.