Reimbursement Risks Driving Contingency-Based Deals, GSK Exec Says

Industry executives address the rise of back-end loaded deals during the Bio Windhover Pharmaceutical Strategic Outlook conference Feb. 24.

Big pharma's appetite for low-cost, low-risk deals won't abate in 2010, as drug makers look to hedge their development bets and smaller companies need financing alternatives in a cash-constrained environment. That was the take from industry players during the Bio Windhover Pharmaceutical Strategic Outlook conference in New York City on Feb. 24.

For large pharmas, a key driver of back-end loaded deals is the challenging reimbursement environment, said GlaxoSmithKline's Shelagh Wilson, VP and head of the European arm of the company's Center of Excellence for External Drug Discovery. "What is driving all of this is the pressure from the payers for us to produce differentiated medicines, and the risk associated with that," she said. "We've got to be innovative, not just in the drugs we bring forward, we've got to be innovative in the early stages of drug discovery, and that means taking more risk."

Increasingly, GSK's back-end loaded deal structures even include earn-outs for the achievement of reimbursement milestones, she added. GSK has been a pioneer of the option-based deal structure, in which for a small cash payment upfront, a company gets the chance to buy a program further down the road usually after it demonstrates proof of concept.

It's no wonder that with big pharmas relying more and more on external resources to fuel their pipelines, the lower-risk option alliance is gaining ground. In 2009, more than 30 licensing deals involving a big pharma or big biotech included some option as the main component compared to just over 20 in 2008, which was about even with 2007, according to data presented during the meeting by Elsevier Business Intelligence Editor-In-Chief, BioPharma And Consumer Products, Christopher Morrison.

Sanofi-Aventis VP Corporate Licenses Philippe Goupit noted that every deal the French drug giant completed last year had some contingency option to it. Sanofi showed an interest in earn-out acquisitions last year, a different model then the option alliance, though still a structured approach. Sanofi bought the French ophthalmology biotech Fovea and the oncology company BiPar in deals in which it paid a significant amount of money upfront with the rest due upon the achievement of concrete clinical milestones within a set timeframe (Also see "Sanofi Creates Ophtho Division through Earn-Out Acquisition of Fovea" - Pink Sheet, 1 Oct, 2009.).

"We have limited resources even though the financial strengths of Sanofi-Aventis...are pretty high," he said. Thus, he said contingency-based deals are fair for all the players involved, including investors in the innovator company, especially as deal-making moves toward earlier and riskier stages of drug development. "We cannot allocate all the value of the company, all the value of the technology upfront. We are sharing the risk."

"We paid a certain amount upfront, so to a certain extent the [venture capitalists], the investors, are already rewarded for the risk, but we are not ready to take on all of the risk," he said.

For the innovator companies partnering with a larger pharma, the benefits of option-based deals can be less clear cut. The upfront cash offers an incentive, but it is not usually the windfall exit investors are hoping for - and of course, there's no guarantee the larger rewards will ever be reaped.

But BiPar CEO Hoyoung Huh said "it's a matter of valuation and choice."

"The structured deals in my mind are not necessarily bad for the investors," he said. "I think it depends on how it is structured and the confidence of the organization in whether they are going to achieve the milestones on the back end or not." In the case of BiPar, however, the company received a significant majority of the payments upfront, $375 million, according to Elsevier's Strategic Transactions Database.

For innovator companies, the big concern of an option-based deal is that if a big pharma doesn't exercise its option it could be left holding a program with a negative stigma attached. But even an option deal gone awry can turn out well, Exelixis Exec VP Business Development pointed out. In December 2008, Exelixis successfully partnered a Phase III cancer drug, XL184, with Bristol-Meyers Squibb just two months after GSK decided against optioning the compound (Also see "Love The One You’re With: BMS Pays Exelixis $240M Upfront In New Cancer Drug Deal" - Pink Sheet, 12 Dec, 2008.).

"There was no tattooing impact on that program," she maintained.

- Jessica Merrill ([email protected])