Regulatory Risk and Business Development: Type 2 Diabetes Falls Out of Favor

It’s a buyer’s market for type 2 diabetes drugs, and you can thank FDA for that. At least, that is the sentiment of business development executives from Big Pharma. Transaction data from 2008 back up that view.

Michael McCaughan

Type 2 diabetes has become a buyer’s market thanks to higher cardiovascular safety hurdles raised by FDA and other regulators.

As such the cost of diabetes drug development has shot up—making me-too drugs in areas such as DPP-4 inhibition less attractive to pharmaceutical buyers.

R&D continues apace in diabetes regardless of any dealmaking slump, with some firms focusing on the kinds of injectible product opportunities seen to have greater value.

Forest’s recent deal with Phenomix for the biotech’s DPP-4 inhibitor has bucked the cooling trend but is unlikely to be repeated by Big Pharma competitors in this difficult regulatory environment.

If you think this is a bad time to try to get a loan, try selling a type 2 diabetes research project to a Big Pharma company.

Diabetes, simultaneously one of the largest yet most under-treated prescription drug markets in the world, is suddenly out of favor with Big Pharma business development executives. And the reason isn’t hard to spot: the belief that regulatory hurdles have fundamentally changed the business case for drug development in the category.

Here is what executives from a few companies say:

Eli Lilly & Co.: "The reality is in the last several months the regulatory requirements for a diabetes drug have increased significantly," SVP corporate strategy and policy Gino Santini said during FDC-Windhover’s Pharmaceutical Strategic Alliances conference in September. "That means that the business case for a type 2 diabetes oral drug has decreased significantly."

Merck & Co. Inc.: "The hurdle has gone up," SVP worldwide licensing and external research Merv Turner agreed. "It is certainly a very daunting prospect to be asked in essence to demonstrate cardiovascular safety before approval, and any company is going to have to think very hard."

Wyeth: "We are being more cautious as well" when looking at diabetes candidates, says SVP corporate business development Thomas Hofstaetter.

Genzyme Corp.: The company recently decided not to advance a preclinical type 2 diabetes project into human trials because of its belief that the regulatory requirements are too onerous to justify the investment, CSO Alan Smith told a New York Academy of Science panel discussion on biopharma drug discovery.

That sentiment is not universal. Pfizer Inc. says it will be stepping up its already aggressive dealmaking in the diabetes space despite its recent struggles in the class. And Novo Nordisk AS is making a strategic bet that continuing to concentrate heavily in diabetes will mean above average growth for years to come. But even Pfizer and Novo say the dynamics have changed, and regulatory expectations demand an emphasis on novel, highly differentiated therapies.

Then there are the numbers. An analysis of alliance activities included in FDC-Windhover’s Strategic Transactions deals database shows that there have been seven agreements involving drugs in that class so far in 2008. That isn’t tracking too far behind the recent annual numbers of deals in the class. (See Exhibit 1.)

The deals are continuing, but the money is gone. Prior to the recent alliance around a pivotal-stage DPP-4 inhibitor between Forest Laboratories Inc. and Phenomix Corp., the six Big Pharma alliances together have a combined value of less than $50 million, the analysis shows. [See Deal] That is a huge decline from values in the class the past five years. (See Sidebar: "Phenomix and Forest Buck Diabetes Trend.")

The change in the climate for diabetes deals didn’t happen overnight: you can go back to Bristol-Myers Squibb Co.’s disaster with muraglitazar (Pargluva) three years ago if you want to find a starting point for concerns that regulatory hurdles were fundamentally changing the economics of the class. But the new consensus seems to have solidified only this year—and may still not have filtered out to everyone pursuing type 2 diabetes projects.

Any change in the dealmaking climate for one of Big Pharma’s biggest categories is an important event. But industry’s new aversion to diabetes deals is also a compelling case study in how regulatory changes translate into business development practices—and how some companies may gain advantage by reading the tea leaves better than others.

Pre-Market, Post-Market Costs Up

The new conventional wisdom about type 2 diabetes development projects is simple: the cost of development has gone up, the risk of failure is higher, and the burdens of post-marketing studies mean lower effective returns on products that do reach the market.

That means that "being the fourth or fifth projected DPP-4 is not as attractive as it would have been probably several months ago," as Lilly’s Santini puts it.

For a Big Pharma company, even one as committed to the diabetes market as Lilly, "the economics of undertaking such huge programs" are daunting. "Several hundred million dollars for a marginally better, if at all, me-too type 2 diabetes drug will come at the cost of several other better molecules that will be more promising," Santini said.

Merck’s Turner agrees. "That old mantra that patients and physicians want choices just no longer applies in today’s environment. The ability to differentiate in the marketplace is critical." That is affecting how Merck thinks about both internal and external candidates in the class. It is not that "we have changed our approach to in-licensing in diabetes…in comparison to our internal processes," Turner says. "The hurdle has gone up on both sides."

Wyeth’s Hofstaetter agrees. The key before undertaking any project is "to be very sure that no outcomes studies (especially on CV risks) are required before approval, but also that there be a clear differentiation from similar treatments that provides accepted benefits."

Bristol, GSK Learn Early Lessons

Not everyone in Big Pharma reached that consensus on the type 2 diabetes class at the same time. There were at least three distinct milestones in the redefinition of perceived regulatory risk in the type 2 diabetes class:

October 2005: The failure of Pargluva at the end of the FDA review process

May 2007: The Avandia safety scare

Summer 2008: The articulation by FDA of a greater emphasis on outcomes data, first in the context of a diabetes drug development guidance, and then more explicitly during an advisory committee discussion of endpoints this summer

In hindsight, it is clear that the regulatory risk in type 2 diabetes was much higher in 2005 than anyone in industry perceived it to be.

Bristol found that out the hard way, after shepherding Pargluva all the way through a successful advisory committee review only to see a re-analysis of the cardiovascular safety profile of the drug by Cleveland Clinic cardiologist Steve Nissen published to great fanfare, followed by an "approvable" letter from FDA that requested significant long-term data. Bristol ended up terminating the project. (See "Shadow FDA? Researchers Are Taking Approval Matters into their Own Hands," The RPM Report, December 2005 (Also see "Shadow FDA? Researchers Are Taking Approval Matters into their Own Hands" - Pink Sheet, 1 Dec, 2005.).)

GlaxoSmithKline PLC took the biggest hit in the Avandia controversy—also fueled by a Steve Nissen cardiovascular safety analysis. GSK was able to salvage the product, but only after losing more than $1 billion in sales.

FDA’s publication in March of draft guidance on diabetes drug development attracted broader notice because it suggested that outcomes studies might be required prior to approval and would certainly be required in the post-marketing setting. FDA convened the Endocrine & Metabolic Drugs Advisory Committee to discuss the draft in July. The committee—egged on by Nissen—suggested that lowering of blood sugar should not be the sole basis of approval for type 2 diabetes drugs, although the committee left plenty of room for further discussion about when and whether outcomes studies would be expected prior to approval.

But even more interesting than what the committee said was what FDA said to reporters following the two-day session. "The important point that we heard was they wanted us to have greater certainty and assurance before approval about the cardiovascular effects of the drug and that they wanted us to ensure that the question was ultimately answered either before approval or after approval to better understand cardiovascular risk," Office of New Drugs Director, John Jenkins, said. "That’s a shift in the expectations of what we’re asking for today. It’s a higher level of understanding and a higher level of assurance—that you’ve excluded an unacceptable cardiovascular risk."

Office of Medical Policy director Robert Temple suggested a parallel between type 2 diabetes therapies and non-steroidal anti-inflammatory drugs. "There’s not a lot of drugs where you need large-scale cardiovascular outcome data at the time of approval," Temple noted. "You can see that people developing non-steroidal anti-inflammatory drugs are getting that kind of data for obvious reasons because there’s been nervousness about that."

"It is very common now because of the history of those drugs and the questions that have been raised that they come for approval already having conducted very large studies, Jenkins agreed. "It is not inconceivable that the [same] model could apply" in type 2 diabetes.

Those kinds of comments are catching the attention of business development executives across pharma. (See "Straight Talk from FDA: Wyeth R&D Head Reacts to Climate Change for NDA/BLA Reviews," The RPM Report, November 2007 (Also see "Straight Talk from FDA: Wyeth R&D Head Reacts to Climate Change for NDA/BLA Reviews " - Pink Sheet, 1 Nov, 2007.).) In addition to NSAIDs and type 2 diabetes, industry is concerned about what they perceive as a higher bar for antipsychotic medications. (See Sidebar: "Wyeth Wary of Antipsychotics.")

Early Adapters?

Stung by the muraglitazar experience, Bristol turned around and out-licensed its next diabetes projects, saxagliptin and dapagliflozin, to AstraZeneca PLC. [See Deal] (See "BMS Deals Diabetes Drugs, Solidifies Specialist Stance," IN VIVO, February 2007 (Also see "BMS Deals Diabetes Drugs, Solidifies Specialist Stance" - In Vivo, 1 Feb, 2007.).) Looking back, that may turn out to be one of the smartest, timeliest moves by a company in response to an evolving regulatory climate.

Saxagliptin is pending at FDA, but from Bristol’s perspective at least the ups and downs of the type 2 diabetes regulatory climate have not buffeted the company to the extent they would have otherwise. FDA’s decision date for saxagliptin falls in April 2009. However, the agency has already missed the deadline on another pending DPP-4 inhibitor (Takeda Pharmaceutical Co. Ltd.’s alogliptin), so it may be an even longer wait for an answer. In the meantime, Bristol has the cash to use for other opportunities.

The different experience of individual companies in reacting to the regulatory climate explains a lot of the changes in deal valuation over the past several years. The two largest deals (in valuation) since 2005: Pfizer’s $1.3 billion acquisition of full rights to Exubera from Sanofi in 2006; Bristol’s $750 million deal to outlicense diabetes projects to AZ. [See Deal] [See Deal]

For Pfizer, the spending on Exubera was quite literally a total write-off. And, for the time being at least, it seems clear that Bristol feels better about the deal with AZ as time passes. (Remember Santini’s observation about the "fourth or fifth" DPP-4; while saxagliptin may yet end up as the second in the class, at the time AZ licensed it, it looked more likely to be fourth.)

GSK may not have cashed in like Bristol, but SVP of worldwide business development and finance Ad Rawcliffe told the PSA conference that the experience did help the company avoid the temptation of throwing good money after bad in the PPAR class.

"In the middle of our Avandia crisis," Rawcliffe said, a company came in, "and they said ‘we’ve got this interesting stuff in our pipeline. We’ve got a Phase II PPAR.’

"Our sales had just dropped a billion dollars and our stock price had just cratered on the basis of Avandia," Rawcliffe continued. "Trying to be as diplomatic as possible, I said ‘Can you tell me what the development and regulatory pathway would be for a compound in that class at the moment? And the gentleman—who was a very, very experienced clinical developer, who had done it before but had been out of the path of the agency maybe for two years—said, ‘Well, assuming the FDA doesn’t require us to do anything stupid like, I don’t know, an outcome trial before approval, we should be fine."

GSK, needless to say, passed on that opportunity.

Lilly Reacts to FDA Guidance

Lilly reacted to the regulatory climate change more recently, when it discontinued development of an inhaled insulin project in the middle of Phase III trials. (See "Inhaled Insulin is Dead. Long Live Inhaled Insulin," IN VIVO, March 2008 (Also see "Inhaled Insulin is Dead. Long Live Inhaled Insulin" - In Vivo, 1 Mar, 2008.).)

The flop of Pfizer’s Exubera certainly seemed like ample justification for sponsors to reconsider the inhaled insulin hypothesis from a commercial perspective, but Lilly insisted that it was reacting as much to evolving regulatory standards as to questions about whether the marketplace would really accept the product.

In particular, Lilly pointed to FDA’s draft guidance as an indication that it had little probability of reaching the market based on the current Phase III program. Based on the advisory committee discussion four months later, Lilly was ahead of the pack in its reading of the significance of that guidance.

If Lilly needed any further validation for its decision to pull the plug on inhaled insulin, it came in late September, when FDA took the extraordinary step of imposing a formal Risk Evaluation and Mitigation Strategy and mandatory post-marketing studies on Exubera—even though the drug is no longer on the market. (See "Exubera Gone, But Not Forgotten: FDA Imposes REMS, Mandates Trials," The Pink Sheet, October 13, 2008.)

So Lilly may not have avoided wasted R&D spending altogether, but its decisive move to abort the Phase III inhaled insulin program did mean big savings—if you accept the premise that completed studies would have been insufficient to support approval.

Not everyone has given up on inhaled insulin: MannKind Corp. remains stubbornly committed to the potential for a blockbuster opportunity. If that long shot bet pays off, Lilly’s decision to bail out will not look as smart. (See "Inhaled Insulin’s Last True Believer: An Interview with Alfred Mann," The Pink Sheet, October 13, 2008.)

A Silver Lining: It’s Nice to Be Needed

There is a bright side to the diabetes story for Big Pharma companies. Those with existing products in the diabetes class (like Merck and Lilly) can at least comfort themselves with the knowledge that tougher regulatory standards create barriers to entry for competitors.

And all Big Pharma companies can benefit from the perception of higher regulatory barriers, if it encourages smaller companies to believe that they cannot survive without the expertise of a larger partner in the regulatory process.

Rawcliffe described the potential PPAR opportunity in precisely that context. "The breadth of technical expertise in a Big Pharma company is just astonishing," he said. "It’s not just in the preclinical sciences or the huge clinical infrastructure. It is also in understanding the pace of change in the regulatory authorities."

As the regulatory climate continues to evolve "you will see a step change" in the risks and costs of development of some classes of products, Rawcliffe said. "Large companies in the flow are much better able to manage that, not just at the FDA but also around the globe. So managing that with the payors and the regulators is probably one of the key things that you get from a partnership with a GSK."

Lilly’s Santini agrees. "Biotech has been somewhat shielded," he says, both in the narrow sense of not "having to get the drug approved by FDA" but also "because from a political standpoint Big Pharma is the big target.

"As the environment has become much more challenging…the impact has been received disproportionately by Big Pharma. There has been a lag on the biotech side," where companies have "focused on the exit strategy, as opposed to focusing from the start on the need to get the molecule approved and the need to get the molecule reimbursed," Santini added.

"You perceive the disconnect of a licensor small company that is really focused on selling you the innovation, and we are doing the assessment saying, ‘Unfortunately, there is innovation here, but it is very difficult to build a business case here, and build an appropriate probability of technical success, let alone will that molecule ever be reimbursed when it gets to the market.’

"We probably need to do a better job of explaining what will be that challenge of getting the drug in the marketplace," Santini concluded. "We are seeing already some of that being reflected in some of the financing challenges of some of the smaller biotechs."

Competitive Advantage within Pharma?

One emerging question is whether there is an opportunity for Big Pharma companies to carve out competitive advantage when it comes to licensing negotiations based on a better track record of navigating the new drug approval process.

"We do find that regulatory expertise is a competitive advantage," Merck’s Turner said. "It is a very difficult area and experience counts a lot." But there is a bigger picture, he added. "Marketing expertise is critical. When small companies come to us…they really want to know, can we sell it? Payors are looking for comparative efficacy data and the value proposition. That is the kind of expertise that a large pharmaceutical company can bring."

Wyeth’s Hofstaetter also stresses the importance of marketing skills, rather than regulatory ability per se, in seeking advantage in licensing negotiations. "I think all Big Pharma companies have good regulatory skills," he says, so that is "no differentiator." However, "a track record of building large brands in new areas or in areas with strong and well-established competitors may be more important."

The enactment of the FDA Amendments Act in 2007, however, could begin to change that view. FDA sees its new drug safety tools as a profound change in the regulatory process, but one whose outlines are only now coming into shape. Merck’s Turner and Lilly’s Santini agreed that it is too early to say what the ultimate impact of those changes may be. (See Sidebar: "How Risky is too Risky?")

Decline in Deals, But not in Diabetes R&D

The evaporation of big dollar diabetes deals provides strong evidence that regulatory changes are affecting business development in Big Pharma. But it doesn’t mean that diabetes research itself is slowing down. There is plenty of evidence to the contrary.

Clinical trial data recorded by the federal government’s ClinicalTrials.gov database indicates that there has been no drop-off in the pace of new trial starts for diabetes therapies. If anything, more trials are starting, with 586 interventional studies in diabetes listed in the first nine months of 2008, compared to 455 for the first nine months of 2007. (New listing requirements enacted by FDA at the end of 2007 may explain the increase.)

And the economics of the diabetes market itself remain too attractive to ignore.

Novo Nordisk is most visibly making that case as it unrolls a business strategy that re-emphasizes its long-standing commitment to that category, after a period of attempts at greater diversification in therapeutic classes. (See "Novo Nordisk: Riding High on Diabetes," IN VIVO, June 2007 (Also see "Novo Nordisk: Riding High on Diabetes" - In Vivo, 1 Jun, 2007.).)

During the company’s capital markets day in September, CEO Lars Rebien Sorenson argued that Novo’s focus on the class means "we have a different business case than most of the pharmaceutical companies." The numbers tell the story: against a global prescription market growth rate of 5% in 2007, the diabetes market grew 10%. And the injectable segment grew an even faster 14%.

It’s not that Novo disagrees with the assessment of the regulatory climate. "The whole policy of FDA has changed," SVP Global Development Peter Kristensen acknowledged.

But, in Novo’s view, that only confirms its wisdom in de-emphasizing the oral type 2 diabetes segment to concentrate on what it already saw as the higher-value injectable market, including GLP1 therapies and longer-acting insulins. (Novo’s pending application to enter the GLP1 class will go before an FDA advisory committee in March, and Novo is confident it has sufficient data to meet FDA’s new standards.)

Do As I Say, not As I Do

Nor is Novo alone in its continued enthusiasm for diabetes research overall.

Pfizer may have bombed with inhaled insulin, but the company is, if anything, making diabetes a higher priority in its R&D organization. Pfizer’s latest R&D restructuring eliminates some big primary care categories—most notably cardiovascular disease and obesity—but it maintains diabetes as a core focus. (See "Pfizer Restructures for a More Flexible Future," IN VIVO, October 2008 (Also see "Pfizer Restructures for a More Flexible Future" - In Vivo, 1 Oct, 2008.).)

Asked about the skepticism expressed by other biz dev execs toward the regulatory climate, Pfizer SVP-Worldwide Clinical Development Briggs Morrison said, "I don’t agree. We are still very excited by the prospect of developing an important new medicine for diabetes. The regulations in the US seem to be evolving in a manner that makes good medical and scientific sense and we simply need to find innovative ways of doing development in this important area."

And indeed, Pfizer is remaining active in licensing in the category: three of the seven alliances tracked by FDC-Windhover involved Pfizer as the Big Pharma partner. Prior to Forest’s splash in late October, who were the licensors in the other three deals? Lilly, Merck, and GSK. That’s right, the three companies whose executives spoke out at PSA about the higher hurdles in the type 2 diabetes class.

All three of those Big Pharma deals involve novel, early-stage ideas in the class, including—in GSK’s case—the possibility of applying stem cell research to diabetics. And all three deals involve minimal (if any) cash outlay by the licensor. So it may be harder to sell diabetes assets than it was four years ago. But it sure seems like a good time to buy.

SIDEBAR: Phenomix and Forest Buck Diabetes Trend

Rules are made to be broken, or at the very least, proved by exception. In late October, cash-hungry Phenomix and product-hungry Forest Laboratories entered a lucrative strategic alliance to develop and commercialize—you guessed it—Phenomix’s dutogliptin Phase III DPP-4 inhibitor.

The deal is a must for both parties. For Phenomix, it provides additional resources during a challenging financing period. In a same-day announcement, the San Diego-based company, which has raised more than $141 million since its 2002 founding, indicated it was pulling its public offering, citing market conditions. [See Deal]

Forest, meanwhile, facing the impending generic versions of its antidepressant escitalopram (Lexapro) and Alzheimer's disease medication memantine (Namenda), along with the delayed approval of its fibromyalgia drug milnacipran, badly needs late-stage products (See "Forest Vows To Double Pipeline Potential," The Pink Sheet Daily, October 21, 2008.)

Under terms of the agreement, Forest will pay Phenomix $75 million up front and up to $265 million in additional milestones; expenses and profits will be split equally in the US. Phenomix will promote the product to diabetologists and endocrinologists, while Forest will market to primary care physicians. "Forest has a dynamite track record when it comes to the late-stage development and commercialization of primary care products. And that's where the market [for dutogliptin] is," said Phenomix CEO Laura Shawver.

Just how dutogliptin will stack up against Merck’s sitagliptin (Januvia--still the only DPP4 on the market since its launch in 2006) remains to be seen. Clinical data has so far been thin on the ground. Phenomix completed a Phase IIb trial of 400 patients earlier this year, but hasn't disclosed details of that study. According to Forest, the observed A1C reduction was close to 0.8 percent, which is on par with other DPP-4 inhibitors.

This lack of differentiation makes the deal risky, according to analysts, especially because the company is paying top dollar for the product. But there's also no denying that Forest is under tremendous pressure to bulk up its pipeline and use some of its $2.6 billion war chest to bring new projects into its pipeline. (See "Scrapping Its IPO, Phenomix Teams Up With Forest," The Pink Sheet Daily, October 24, 2008.) –Ellen Foster Licking

SIDEBAR: Wyeth Wary of Antipsychotics

If you are looking for another category that may fall out of favor with dealmakers, consider antipsychotics. Vanda’s recent setback is getting a lot of attention.

In 2004, Wyeth paid Solvay SA nearly $150 million up front for rights to the antipsychotic bifeprunox. [See Deal] It won’t make that mistake again.

After watching the regulatory climate for antipsychotics evolve in the four years since, Wyeth SVP of corporate business development Thomas Hofstaetter says he would pass on an opportunity like bifeprunox today—even if he believed the drug would perform up to expectations in pivotal trials.

Why? Hofstaetter believes "that a new compound must demonstrate superiority over existing therapies" to be approved in the antipsychotic class.

Bifeprunox received a "not approvable" letter from FDA in 2007, based on the agency’s conclusion that efficacy was inferior to other therapies. Wyeth hoped to push forward with the drug for maintenance use in patients with metabolic side effects on other therapies, but ultimately decided to terminate development and the agreement with Solvay.

That experience would certainly make anyone rethink future licensing opportunities in the class. But Hofstaetter also took note of a more recent "not approvable" letter—for Vanda Pharmaceuticals Inc.’s iloperidone—which also highlighted FDA’s conclusion that the drug is, essentially, not effective enough to be approved. (See "Antipsychotics and Comparative Effectiveness," The RPM Report First Take, July 31, 2008.)

What do those actions by FDA mean for Wyeth? It "raises the hurdle" on future deals, Hofstaetter says.

SIDEBAR: How Risky is Too Risky?

Would a Big Pharma company ever sell a product like Tysabri?

When Biogen Inc. was up for sale last year, Big Pharma passed. There were plenty of reasons not to do the deal: the price would be steep, and interlocking change in control provisions (coupled with some conditions on due diligence) made it essentially impossible for an acquirer to determine what would become of Biogen’s biggest product, the multiple sclerosis therapy Tysabri. (See "Change of Control: Why Getting it Right Matters Even More," IN VIVO, March 2008 (Also see "Change of Control: Why Getting it Right Matters Even More" - In Vivo, 1 Mar, 2008.).)

Then there is Tysabri itself. The drug is hardly the typical Big Pharma blockbuster. Like most biotech products, it is a specialty market therapy, delivered to relatively few patients at very high cost. And when you consider it is marketed with one of the industry’s toughest risk management programs because of the risk of progressive multifocal leukoencephalopathy, a horrific side effect that would make anyone think twice about owning the drug, you can see why Big Pharma might be wary.

Would a Big Pharma company ever want to sell Tysabri? Eli Lilly SVP ofcorporate strategy and policy Gino Santini and Merck SVP of worldwide licensing and external research Merv Turner addressed that question during FDC-Windhover’s Pharmaceutical Strategic Alliances conference in September.

Their answer? "Yes…but."

"It depends, of course, on the value proposition," Merck’s Turner said. "It is different to manage the risk of Tysabri if you’ve developed the drug and brought it to market. It is a very different issue to buy that risk for yourself at a premium. That is the straight answer."

Lilly’s Santini agreed, but stressed that it all comes down to the business case. "I don’t think that there is a preconceived notion that just because something could be more risky than others, you would not go for it. It is a matter of price and value….We are in the business of taking risk."