year of the dragon, year of the deal?

Wishing the team at Phosphagenics, and all members of this forum, a Happy and Prosperous New Year.

2012 ushers in the Year of the Water Dragon (Jan 23, 2012 – Feb 9, 2013). The water dragon is perceived to be more capable of sober reflection than other dragons and therefore more likely to make clever, well-considered decisions. A dragon year is considered a year of likely good fortune and great achievement and therefore an advantageous time to begin new projects. People born under the Dragon sign are described as confident, driven, enterprising, unafraid of challenges, willing to take risks and passionate in all that they do. Those at the helm of Phosphagenics will need those qualities in spades this year, because the Year of the Water Dragon may well be the Year of the Deal – the Company-Making Deal.

At first glance, the current period would seem an excellent time for a mid-stage biotech to strike a generous deal with Big Pharma.

Firstly, despite the GFC, Big Pharma remains cashed up.
“Largely insulated from the impact of the financial market crisis, large biopharmaceutical companies are in an enviable position with large cash reserves and plentiful short-term revenues to fund acquisitions.” http://www.dartmouth.edu/~denet/resources/documents/TrendsinMid-StageBiotechFinancing-MHamilton-Public.pdf

Secondly, these large companies need to find replacements for future revenues which are threatened by “patent cliff”. It is estimated that in the five-year period between 2010 and 2014, about $89.5 b USD worth of drugs on patent will expire.
http://www.imap.com/imap/media/resources/IMAP_PharmaReport_8_272B8752E0FB3.pdf

In addition, the process of bringing new drugs to market in order to fill the gap in falling revenues from patent cliff has become increasingly difficult.

“The FDA Amendments Act of 2007 has forced the FDA to increase standards for approvals of new drugs, introducing mandatory risk evaluation and mitigation strategies (REMS). This is one example of a long-term, global trend of ever higher hurdles for new drugs to be approved, with the corresponding high failure rates and costs associated.”
http://www.imap.com/imap/media/resources/IMAP_PharmaReport_8_272B8752E0FB3.pdf

Finally, it is generally acknowledged that there is a trend of declining productivity from in-house R&D operations at the large pharmaceutical companies which must be addressed.

However, even though these factors would appear to deftly play into the hands of any mid-stage biotech with an attractive offering, statistics paint a different picture. Prior to the GFC, there was a trend for Big Pharma to buy into smaller biotechs at increasingly earlier stages, in some cases, even before Phase I. This is not the case any more.

Susan Aldridge, in an article on Pharma-biotech partnerships, notes, “Figures suggest that the current trend for pharma is for a greater proportion of deals to be done in phase III.”
http://www.inpharm.com/news/110126/pharma-biotech-partnerships

Buying in at earlier stages of product development made sense at a time when the cost of buying in at Phase III might have been seen as prohibitive. However it would appear that Big Pharma is now often able to buy in at Phase III for less outlay than before. Using M&A figures available for global pharma deals during 2009 and 2010, it can be seen that the value of the average deal has fallen, despite the trend to buy in later. Although the numbers of M&As during this period fell by only 3%, the total value declined sharply by 68%, from $161.2b USD in 2009 to $51.5b USD in 2010. Unfortunately the value of licensing deals as a comparative figure is not included in the report which is cited below.
http://www.imap.com/imap/media/resources/IMAP_PharmaReport_8_272B8752E0FB3.pdf

Kevin Kinsella, founder of venture capital fund Avalon Ventures, railed in early 2011 against the “short-sighted, brass knuckle negotiating tactics” of Big Pharma, which he argued were pushing the smaller biotech sector almost to the point of extinction. (The full interview, by the way, is a worthwhile read.)
‘If you try to partner with Big Pharma on anything earlier than Phase III data, then you are almost always going to get a crappy deal,” Kinsella says. “And many of these partnerships seem to be aimed more at pharma tying up proprietary biotech products and research teams than in carrying new technology forward.” He points out that by waiting until late stage Phase III, the pharma companies are effectively shooting themselves in the foot because by then, they are forced to participate in an auction process to buy the product or the company.
http://www.avalon-ventures.com/news/avalon%E2%80%99s-kinsella-calls-out-big-pharma-for-%E2%80%9Cbad-behavior%E2%80%9D-that%E2%80%99s-pushing-biotech-ventures-%E2%80%9Calmost-to-point-of-extinction%E2%80%9D

An example of a soured, “tied up” relationship between a biotech and Big Pharma is the collaboration of Biota with GSK. Biota CEO, Peter Cook, when asked in a 2007 interview what advice he had for biopharma development companies considering partnerships with large pharmaceutical companies, replied,
“The worry for small biotech companies is that Big Pharma will acquire a product and then “park” it – that is, they’ll wait a long time to develop it or never develop it because their intention was to take it out of the competitive arena. They have greater leverage in terms of capital and legal resources, and they know it .The nature of these deals has been that if [licensees] do nothing, it costs them nothing. Unless there's a performance obligation stipulated in the contract, significant money doesn't come to the licensor.”
http://www.pharmamanufacturing.com/articles/2007/093.html

It is against this challenging background that biotech company, Phosphagenics, plans to commence the Phase III trials of its lead product, TPM/Oxycodone patch, during the second half of this year. However, as preparations commence (or perhaps continue) for a seemingly formidable David and Goliath tussle with Big Pharma , it would be foolish to be dismissive of the chances of this small Melbourne-based biotech. Phosphagenics can claim substantial leverage of its own.

Its proprietary TPM technology has compelling advantages. It is a unique, first in class and cost effective delivery system that has been demonstrated to provide steady, long duration, transdermal delivery of the opioid, Oxycodone, via an abuse-resistant matrix patch. Phosphagenics TPM patch will target the estimated $3.5b Oxycodone brand oral tablet opioid market. (The global market for all opioids is currently estimated to be worth $11.2b.) http://www.businesswire.com/news/home/20110608005663/en/Research-Markets-Opioids-Market-2017---Steady

Additionally, because it is a delivery technology rather than a new drug, the lead time to market is considerably shortened. Importantly, Big Pharma can’t rely on capital shortage as a rod to break the company’s back. Phosphagenics has adequate cash reserves to take its patch through to FDA registration. Commencement this year of international sales of cosmeceuticals and diclofenac gel, as well as growing revenues from Vital ET manufacture, will add to revenue streams and there are further income generating deals soon to be announced.

Finally, Phosphagenics is fortunate to have corporate lawyer CEO Harry Rosen, who has experience in commercializing new technologies and working at high levels within the multinational Henkel Corporation. Precedent deals, such as Biota and Acrux, will have been studied and lessons will have been learned. Rosen’s qualifications and experience will certainly be valuable in coming negotiations.

In its December 2011 newsletter the company laid its cards on the table regarding its expectations of a licensing deal. Pointing to its financial independence, the company emphasized that nothing short of an “exceptional “deal would tempt it to enter into a partnership before completion of Phase III trials. The March 2010 deal between Acrux and Eli Lilly, struck after successful completion of Phase III trials, is offered as a signpost. For exclusive worldwide rights to Acrux’s transdermal testosterone solution, Axiron, Eli Lilly paid $335m USD in milestones with a further tiered structure of royalties applying to global sales upon commercialization. The targeted testosterone market has an estimated worth of $1.2bUSD. After 6 months on the US market, Axiron had secured 7.5% of Total Prescriptions. (2011 Acrux Annual Report) http://hotcopper.com.au/asx_announcements.asp?id=355190

By August last year, Acrux had a peak market capitalization of about $700m and a share price of $4.30 after paying out a special dividend of 60c per share in April. Three years ago Acrux shares could be bought for 40c.

So bring on 2012, the Year of the Dragon. There is another small Melbourne biotech now perfectly placed to prove the adage, “You make your own good fortune”.

Please note that this post only represents the research and opinions of the poster. As always, it is advised to do your own research.