Sergio Garcia

Alliances increasingly provide the pathway to financial success for biotech firms

The life sciences sector during 2005 was characterized by tight capital markets, increasing regulatory hurdles, and a dramatic increase in capital raised through strategic partnering. During the first half of 2006, those trends continued to have a significant impact on emerging life sciences companies with one exception—the capital markets have loosened up for private biotechnology companies with promising technologies of products: $18.6 billion was raised during the first half of 2006, compared to $7.9 billion during the first half of 2005. Eleven biotech firms have launched IPOs this year. However, the share price performance of these newly public companies has been less than stellar. As of mid-August, only two companies were trading above issue price—Novacea (www.novacea.com) was up approximately 19% and Omrix BioPharmaceuticals (www.omrix.com) was up 26%. The remaining nine companies were trading between 7–50% below their issue price (Table).

The real story in the life sciences sector continues to be more deal-making and larger transactions between emerging biotech companies and large biotech and pharmaceutical companies. Strategic alliances have been particularly hot during the first half of 2006, with over $8.3 billion in deal value versus $6.2 billion for the same period last year.

These strategic alliances or corporate partnering deals are symbiotic, long-term relationships between emerging biotechnology companies and larger, more established companies seeking innovative technologies or products to expand their existing drug development programs.

Successful alliances or partnerships can provide operational, financial, and strategic benefits to each party. Mergers and acquisitions also are an increasingly attractive option for both biotechnology and pharmaceutical companies.

Financial Considerations
What is driving the industry fervor for strategic alliances (and increasingly M&A deals) between biotech and large pharma companies? A major factor for biotechnology companies is rising drug development costs. Recent studies estimate that development and FDA approval of a single drug compound costs companies as much as $800 million. In addition, IPO investors are setting a higher standard for their investments and demanding to see a path toward revenue and profitability.

In this challenging environment, emerging biotech companies continue to explore strategic partnering or collaboration opportunities that enhance enterprise value and help to manage the significant cost and resource requirements needed to bring a drug to market. Meanwhile, pharmaceutical companies are facing thinning product pipelines and a number of drugs coming off patent, threatening future revenue streams.

This is fueling demand for innovative technologies and drug compounds in development. Strategic partnerships and M&A provide pharma companies with access to technologies and products that they don’t have internally. More and more large biotech and pharma companies are actively seeking to in-license biological products or to acquire biotech companies. Merck’s (www.merck.com) activities over the past several years are a good indication of pharma’s partnering and acquisition focus. Since 2000, Merck has completed 16 collaborations with biotech companies, and in 2006 alone, Merck has already completed two acquisitions.

Additionally, pharma companies have money to spend. The American Jobs Creation Act of 2004 allows U.S. businesses to repatriate billions in foreign earnings at a fraction of the 35% corporate tax rate so long as these earnings are invested in the U.S. It is estimated that big pharmaceutical companies, like Merck and Pfizer (www.pfizer.com) have over $100 billion in earnings eligible for repatriation. Pharma companies are using this war chest to fund strategic alliances and acquisitions so that they are well-positioned to participate in future discovery and development.

Deals in Focus
A number of deals completed during 2006 provide good examples of the financial terms seen in the recent trend toward partnering and M&A.

GlaxoSmithKline (GSK; www.gsk.com) and Sirna (www.sirna.com) formed a strategic alliance that provides GSK access to drug treatments for respiratory diseases. The second deal, Merck/Glycofi (www.glycofi.com), is an example of a broad strate- gic R&D collaboration that ultimately led the parties into a M&A transaction.

GlaxoSmithKline and Sirna

Deal type: Discovery, development, and commercialization
Summary: In April 2006, GSK and Sirna formed an exclusive multiyear strategic alliance for discovery, development, and commercialization of RNAi-based treatments for respiratory diseases. Sirna will receive $12M upfront (cash and equity) and milestone payments up to more than $700M. Sirna is also entitled to receive contract manufacturing revenues and royalties on worldwide product sales. In early June 2006, GSK and Sirna announced that they had initiated programs to develop therapies for other indications.

Terms:

• Sirna will provide GSK optimized and formulated siRNAs (short-interfering RNAs) against Sirna and GSK targets.
• GSK will assume all responsibility for further preclinical and clinical development of these compounds as well as worldwide commercialization of products resulting from the alliance.
• The deal is exclusive as to respiratory diseases.

Analysis: Unlike the 2005 Novartis- Alnylam deal, which also involved RNAi technology, this deal imposes no restrictions on Sirna partnering with other companies to apply its technology in diseases other than respiratory diseases. Sirna’s objective is to form similar partnerships with other large pharmaceutical firms in other diseases. To date, Sirna is developing RNAi-based treatments for age-related macular degeneration, hepatitis B and C, diabetes, HIV, avian flu, Parkinson’s, Alzheimer’s, and Huntington’s diseases, cancer, and baldness.

GlycoFi and Merck

Deal type: Merger agreement Terms:

• Merck acquires 100% of GlycoFi equity
• coFi becomes a wholly owned subsidiary of Merck
• cash transaction is valued at approximately $400 million

Summary and analysis: In May, Merck entered into an agreement to acquire GlycoFi, a privately held biotechnology company with a focus on yeast glycoengineering and optimization of biologic drug molecules.

This deal exemplifies a trend among pharmaceutical companies to acquire innovative firms with antibody technology. While GlycoFi is a technology company with no products in development, the acquisition gives Merck a technology with potential for use in developing, producing, and commercializing monoclonal antibodies, the largest-selling biologic products on the market today.

Only a few months prior to the announcement of the sale of the company to Merck, GlycoFi reported the first production of monoclonal antibodies with human sugar structures in yeast.

This research validated Glycofi’s platform technology by demonstrating that antibodies with human sugar structures (glycosylation) can be made in glycoengineered yeast cell lines, and that the therapeutic potential of such antibodies could be improved by controlling their sugar structures.

Second, a key factor fueling Merck’s interest in the acquisition was the parties’ successful partnering deal signed in late 2005. This broad strategic alliance and multiyear research collaboration focused on the development of Merck products on GlycoFi’s yeast glycoengineering platform.

The late 2005 collaboration highlighted Merck’s need to enhance its R&D capabilities in biologics. Merck saw GlycoFi as a natural match since the alliance allowed Merck to evaluate and validate GlycoFi’s yeast-based protein production methods and technology.

Conclusion
Increasingly, strategic alliances are providing a pathway to financial success for both emerging biotechnology companies and larger biotech and pharma.
Pharma’s cash reserves, thinning product pipelines, and desire to access innovative technologies and products are driving an increase in strategic alliances and M&A with emerging biotech companies. This is good news for biotech companies trying to raise capital, minimize financial and regulatory risk, and enhance enterprise value.

Sergio Garcia is co-chairman of the life sciences group at Fenwick & West, a law firm specializing in high technology and life sciences matters. Web: www.fenwick.com. Phone: (415) 875-2366. E-mail: sgarcia@ fenwick.com.

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