SAN DIEGO – The capital flowing in the public markets makes it easier for biotechs to gain funding through IPOs and secondary offerings. Companies raised $6.5 billion through IPOs last year and more established public companies were able to add nearly $16.7 billion to their coffers according to BioWorld Snapshots.

What's good for the smaller companies, allowing them to develop drugs further on their own, however, is a detriment to larger companies that have used the biotechs to stock their pipelines. There are fewer assets available to be licensed and those that are available tend to become more expensive.

"There are not a lot of high-quality late-stage assets; they've been taken," Neela Patel, director of licensing-search & evaluation at Abbvie Inc., told the audience at Biocom's 5th Annual Global Life Science Partnering Conference.

And, given that companies have alternatives, early stage assets can be quite expensive. "We are actually competing with what is a hot IPO market," Corinne Savill, head of business development and licensing at Novartis, told the audience.

Savill cited the takeouts of Aragon Pharmaceuticals Inc. ($1 billion potentially, including earnouts), Seragon Pharmaceuticals Inc. ($1.725 billion potentially, [see Allicense Breakthrough Deal Awards in this issue]) and Flexus Biosciences Inc. ($1.25 billion potentially) as examples of the inflated prices for clinical-stage assets. (See BioWorld Today, June 18, 2013, July 3, 2014, and Feb. 24, 2015.)

While the easier capital is making life harder for business development groups, it's also providing a more interesting crop of new companies taking on riskier projects that might not have been funded previously. "The injection of money and hope has brought on innovation that was dying off," Savill said.

FOCUS ON EARLY STAGE

The solution, the panelists said, has been for pharma to seek out deals earlier in development through partnerships with venture capital and academia.

Glaxosmithkline plc, for instance, is a limited partner in eight venture funds in addition to its own internal venture capital arm, SR One. For those funds, the investments don't come with options to buy the companies or license drugs. "We just want to be close to the science," said Damien McDevitt, GSK's vice president of business development and head of R&D West Coast.

Sanofi SA's Sylvaine Cases, head of external science and partnering U.S. West, agreed with that sentiment: "It helps to get to know the company." She pointed to the 2013 investment in Immune Design Corp. by its venture capital arm, Sanofi-Genzyme BioVentures, which led to Sanofi licensing Immune Design's GLAAS (glucopyranosyl lipid A adjuvant system) discovery platform a year later. (See BioWorld Today, Aug. 8, 2014.)

And even when a company's venture capital arm passes on a deal, the scientific assessment can help keep the start-up on the company's radar. Patel said there have been examples where Abbvie's strategic venture capital arm has passed on making an equity investment, but the company eventually ended up doing a more traditional licensing deal with the start-up.

In addition to the more traditional get-to-know-you venture capital, GSK and Sanofi are building companies more directly with plans to eventually bring the assets in-house.

London-based GSK has set up a "build to buy" partnership with Avalon Ventures to establish up 10 companies in Avalon's hometown of San Diego. The start-ups get access to science at GSK in exchange for giving GSK an exclusive option to buy the company at a predetermined price. (See BioWorld Today, April 24, 2013.)

"We get access to a network that we didn't have in the past," McDevitt said.

Sanofi recently set up Sunrise, which is tasked with investing in start-ups from external innovation that eventually will become part of Sanofi's pipeline. The initiative already has made investments in three companies with help from other venture capital firms: Portal Instruments Inc., Warpdrive Bio LLC and Myokardia Inc.

SHARE AND SHARE ALIKE

Ironically, while there may be fewer biotechs willing to partner their clinical-stage products, pharmaceutical companies are interested in setting up deals with each other.

"Pharmas are saying, 'I'm willing to share the profits if I can share the risk,'" Novartis' Savill said.

In 2013, Pfizer Inc. licensed rights to its type 2 diabetes drug, ertugliflozin, to Merck & Co. Inc. before the drug entered phase III development. Pfizer received an up-front payment and milestones of $60 million and is eligible for additional undisclosed milestones in exchange for giving up a 60 percent stake in the drug.

And Pfizer was on the other end of a transaction recently, licensing Merck KGaA's programmed death ligand 1 (PD-L1) inhibitor MSB0010718C. While it's technically a joint venture since Pfizer has a program targeting the same pathway that is part of the deal, Darmstadt, Germany-based Merck brings more to the table, receiving $850 million up front and the potential for about $2 billion more in regulatory and commercial milestones. (See BioWorld Today, Nov. 18, 2014.)

INTEGRATING BUISNESS DEVELOPMENT

In the past, pharmaceutical companies would have business development groups with employees that had distinct roles. Some employees would be tasked with finding and evaluating potential assets before handing the deal over to employees with legal and financial backgrounds.

"I don't know who conceived this idea, but it doesn't work," Savill said, pointing to the loss of knowledge about the assets during the handoff.

Now business development employees are starting to work more closely with each other, and they're also bringing in scientific experts from other parts of the company.

Novartis, for instance, has integrated its business development people with those doing research, manufacturing, and other logistics to evaluate potential candidates.

"The leaders of each area are charged with having the best pipeline in the industry. Whether that comes from the outside or whether that comes from the insides is less relevant," Savill said.

With half or sometimes more of the assets in some pharmaceutical companies' pipelines from external sources, why not just cut research dollars further and use that capital for business development? an audience member asked.

It's not that simple, Abbvie's Patel said, because it's important for companies to have people that can evaluate the assets. "You need a critical mass of knowledge internally."