- Email: [email protected]
Business models for pharmacogenomic companies
UPDATE
TARGETS Vol. 1, No. 6 December 2002
OPINION
Business models for pharmacogenomic companies Francois Thomas Senior Advisor, Atlasventure, London, UK. [email protected]
Genomics companies are facing difficult times. Few companies have developed products, even to the preclinical stage, and none is profitable.Thus, all depend on significant deals with pharmaceutical companies and access to financial markets to survive and thrive. [A list of company websites is provided at the end of this article (Box 1)].
Financial markets and partnering The financial markets for biotechnology companies are not favourable at present (Fig. 1). The IPO market is dead at the moment and the market for follow-on offerings is restricted to companies with a broad product pipeline and/or preregistration products (e.g., recent follow-on of Trimeris and Telik). The market for private equity is still very active (see recent financings of Infinity Pharmaceuticals and Alnylam), driven by the large size of venture capital funds and a shift within these funds from telecom/internet investment to healthcare. Nevertheless, investors presently focus their interests on either product companies or platform companies with technologies that are directly conducive to products. The consequence of these current trends will be a reduction in the number of pure platform and target companies, including genomics companies, because of difficulty to refinance or of merger and acquisition (M&A) activity (e.g., Hyseq-Variagenices announced on November 2002). Although M&A activity is a logical reaction to harsh times in an effort to create more solid companies, it is not usually intense in bear markets for the following reasons: (i) focus of management teams on execution and core business ; (ii) volatility in market value and/or low market value that can make deals difficult and/or dilutive; and (iii) cash
6
IPO
5
Follow on
4
Venture
3 2 1 0 Q1 2000
Q3 2000
Q1 2001
Q2 2001
Q1 2002
Q3 2002 TARGETS
Figure 1. Money flow.Adapted from Ref [1].
management if the acquiree has little cash in the bank and/or a large burn rate. Biotechs need sources of non-equity cash (e.g, revenues) to build valuable assets.The development of first generation genomics companies has been driven by significant alliances with pharmaceutical companies.The best examples of this are the deals of Human Genome Sciences and Millennium Pharmaceuticals with pharmaceutical companies. The latter have been willing to pay high prices for access to technologies that are not available in their own research laboratories, new proprietary targets and seemingly comprehensive gene databases.The appetite of pharmaceutical companies for biotech alliances has stabilized for the past 5 years, as illustrated by the flat number of deals in face of a huge increase in the number of biotech companies.This trend is caused by : (i) consolidation in the Pharma industry, which reduces partner base; (ii) large platform investment of the 1990s; (iii) difficulty in validating an increasing number of new and unprecedented targets; and (iv) rapid comoditization of technology platforms. Therefore, there is no reason to expect an increase in the number of alliances going forward.
1477-3627/02/$ – see front matter ©2002 Elsevier Science Ltd.All rights reserved. PII: S1477-3627(02)02273-0
Pharmaceutical companies are, nevertheless, willing to pay a huge premium to acquire products that meet their criteria for potentially successful drug candidates that will grow turnover as their current blockbuster drugs progressively reach generic status. In this context, it is important for biotech companies to develop a product/technology offering that meets the need of pharmaceutical companies.
How can biotech serve the market need? Pharmaceutical companies look for technologies to improve the productivity of R&D. Genomics has had a profound impact on the number of drug targets, but not on productivity.The number of unprecedented targets and the efforts to validate them thoroughly threaten to increase overall R&D costs and to exacerbate poor R&D productivity.Furthermore, many candidate drugs fail early in development because of pharmacokinetic and toxicology issues. As a consequence, significant needs for pharmaceutical companies are: • target validation (beyond in vitro data and gene expression analysis); • lead discovery/validation to provide a rapid
www.drugdiscoverytoday.com
177
UPDATE
TARGETS Vol. 1, No. 6 December 2002
Target
1993
1994
1995
Proprietary data
1996
1998
1999
Biology capabilities
2000
Exelixis/GSK
deCode/Merck
Exelixis/BMS
Millenium/Abbott
Myriad/Abbott
GTC/Wyeth-Ayerst
deCode/Roche 1997
Curagen/Abgenix
Myriad/Bayer
HGS/SKB
Validated target
Genset/Sanofi
Lead
GTC/SP
Optimised lead preclinical candidate
Genset/Abbott
Entry level of collaboration
Millennium/Bayer
Drug in clinical development
Millennium/Lilly
Exit level of collaboration
Rigel/Novartis
Scope of deal
Curagen/Bayer
Millennium/Aventis
OPINION
2001
2002
Integrated discovery capabilities TARGETS
Figure 2. Broad alliances that are moving towards drug candidates at development stage. M. Kosin, LEK Consulting, Boston, pers. commun.
assessment of pharmacokinetics/pharmacodynamics and toxicology; • patient profiling and surrogate endpoints (biomarkers) for the design of clinical trials. Pharmaceutical companies, as illustrated by recent, large-volume deals, also have a strong appetite for drug candidates that have: • entered late-stage clinical development (few good opportunities exist). Although this is a sellers market, pharmaceutical companies are double checking the quality of the dossier and the compliance to regulatory needs after the issues raised by the deal between BMS and Imclone on Erbitux; • indications in markets with unmet medical needs (e.g., cancer) and new mechanisms of action that are supported by strong biology. Business development executives of large pharmaceutical companies have suggested that they will execute more early-stage compound deals on
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validated targets [Pharmaceutical Strategic Alliance Conference, NY, USA (2002)]. Biotech companies will have to focus on the needs of pharmaceutical companies, extend the potential customer base and look for cash-generating deals, even if they have a strong service component. ‘Flavour of the day’ deals are gone and biotech companies should develop significant value proposition. Biotech–biotech deals are increasing and biotech companies represent a large customer base. Mid-size European and Japanese Pharmaceuticals companies represent marketing opportunities for deals.These companies have limited access to cutting-edge technologies and are becoming more sophisticated, although their research budget remains relatively small. More deals will be structured with an important service component in the present context because of the imbalance between demand and offer, the needs of biotech companies for immediate cash and
pharmaceutical company concerns about royalty stacking. From this analysis we can expect that pharmaceutical alliances and financial markets will not support the present mix of product/service offering, and that many companies with a nondistinctive value proposition and little cash-in-hand might disappear. There are several recent examples of this in the functional genomic field, particularly in Germany with the liquidation of Mermaid Pharmaceuticals and the realignment of Ingenium Pharmaceuticals.
The present situation for genomics companies No genomics company is profitable, even those that have significant service revenues such as Celera and Incyte (database), CuraGen (target validation) and Myriad Genetics (cancer prediction services). Early October 2002 all genomics companies were trading below cash (and thus with negative entreprise
UPDATE
TARGETS Vol. 1, No. 6 December 2002
OPINION Table 1. Exelixis deals (Adapted from Ref. [5]) Date
Deal with
Details
Dec. 1997
Artemis
Exelixis cofounds Artemis to add expertise in the genetics of single model organisms
March 1999
Pharmacia
Genomic deal to identify target to treat Alzheimer’s disease and metabolic disorders
July 1999
Metaxen
Acquisition of Metaxen (structural biology)
Sept. 1999
BMS
Genomic deal to identify validated targets and access BMS lead optimization technology
May 2001
PDL
Identification of targets for the treatment of cancer with antibodies
July 2001
BMS
Collaboration on drug discovery in cancer. Exelixis starts Phase II tests with an anticancer candidate
Aug. 2001
Elan
First deal in combinatorial chemistry (Exelixis has now 5 such deals, including 2 with big pharmas)
Oct. 2001
Scios
Collaboration on chemistry. Scios focuses on inflammation and cardiovascular research
Nov. 2001
Genomica
Acquisition of Genomica for US $110 million in stock,
Jan. 2002
Schering Plough
Collaboration on chemistry
Oct. 2002
GSK
Develops therapeutics for vascular, inflammatory diseases and cancer using Exelixis drug candidates
value), with the exception of those that have built a significant drug discovery/product pipeline or diagnostic business (See Table 2). The present sales of the genomics industry (~US $1 billion) Mark Kosin, LEK Consulting, Boston, pers. commun.] cannot support the growth of the industry because revenues for broad discovery alliances (the most lucrative) are decreasing. All large value deals signed by genomics companies in the past 2 years have been broad discovery deals that involve assay development and chemistry capabilities. Few companies, such as Millennium Pharmaceuticals and Exelixis, that have successfully transformed themselves into fully integrated research engines have the credentials to sign up these alliances (Fig. 2,Table 1). Management of biotech companies is presently focusing on cash, to make it through the down cycle, and taking harsh measures to extend the ‘cash runway’. Cost slashing is widespread across the industry. Genomic companies such as Curagen, Genaissance, deCode, Deltagen, Genome Therapeutics and Lion have announced staff cuts of 20–30% over the past 3 months [1]. One way to reduce costs and maintain a distinctive value proposition is to focus on core business and/or best assets. For example, Lion, a German bioinformatics company, decided recently to close its drug discovery business to break even, and genomics companies are entering into asset swapping deals with
other biotech companies to acquire new technologies and control expenditures. Few cash-risk companies can afford forward integration to acquire discovery engines and/or products. deCode recenly acquired Medichem Life Sciences (chemistry), Celera molecules from Bayer, whereas GPC Biotech acquired anticancer drugs from the US National Cancer Institute and Neotherapeutics. Acquisition of products is particularly difficult for genomics companies because they have little internal development capabilites and a need to manage the burn rate and attrition in a narrow portfolio. Some companies with strong assets may manage to engineer a trade sale. The most recent example is the acquisition of the French company Genset by Serono.
The prospects for pharmacogenomics The market for pharmacogenomics is developing more slowly than predicted initially. Pure play pharmacogenomics companies have low market capitalization (Table 2). Pharmaceutical companies have accepted and internalized the field on a customized basis because of concerns over drug-market segmentation and regulatory impact. The market is still unstable for free-standing pharmacogenomics companies. Setting aside genotyping of chronic viral infections such as AIDS, the most active segments are the genetics of metabolic
enzymes (e.g., CytP450), toxicogenomics and oncogenomics.Toxicogenomics aims to find surrogate markers of organ toxicity and to expedite lead optimization.These studies are based on large-scale expression analysis, but require extensive validation that, hopefully, will be expedited by multiple company consortia. Study of polymorphisms is becoming routine for genes involved in drug metabolism as a way to select against drugs that might either vary widely in metabolism across populations or be responsible for unpredictable drug–drug interactions. The impact of metabolic variability is well appreciated for anticancer drugs that have narrow therapeutic margins. Some specialized cancer centers systematically test Thiopurine Methyltransferase (TPMT) polymorphism before administering mercaptopurine to children with lymphocytic leukemias [2]. Although there are several scientific publications that show that polymorphisms in drug targets impact drug activity, the clinical significance of these need to be confirmed in prospective studies. Large studies of gene polymorphisms across the entire genome require a better understanding of how polymorphic markers segregate across the genome. The SNP Consortium aims to provide a map that will accelerate association studies [3]. Genotyping technologies continue to mature and will, ultimately, enable cost-effective genotyping for whole-genome association studies.
www.drugdiscoverytoday.com
179
UPDATE
TARGETS Vol. 1, No. 6 December 2002
OPINION
Table 2. Valuations of Genomics Companies (Data sourced from Ref. [1] on October 3, 2002) Company
Revenue
a
a
Income (Loss)
Market cap.
Cash
Activities
Celera
28.1
(29.0)
561.3
889.0
Genomics, database, diagnosis, drug discovery (Axys)
Curagen
37.0
(22.0)
204.4
455.0
Functional genomics, proteomics
deCode Genetics
13.4
(16.8)
88.0
121.0
Genetics, pharmacogenomics/diagnosis, starting drug discovery
Deltagen
5.9
(19.2)
61.0
76.0
Exelixis
9.9
(24.0)
216.0
174.0
14.0
(4.4)
221.0
181.0
6.0
(8.3)
42.0
63.0
Incyte
29.0
(17.4)
272.0
476.0
Functional genomics, database, service provider
Myriad Genetics
14.1
(6.9)
353.0
124.0
Genomics, diagnostic services (drug discovery)
Gene Logic Genome Therapeutics
Functional genomics, database Functional genomics, drug discovery, cancer Functional genomics/database Genomics
Sequenom
9.2
(5.0)
74.6
114.1
Ilumina
1.9
(16.5)
97.7
80.1
16.4
(12.2)
24.7
45.8
Pharmacogenetics
3.2
(5.5)
135.0
15.6
Microfluidic, diagnostics, pharmacogenetics
Orchid BioSciences Cepheid
Pharmacogenetics, instrumentation Diagnostic platform
Third Wave Technologies
9.6
(6.1)
66.3
60.1
Genotyping, pharmacogenetics
Sangamo
0.4
(3.6)
46.0
55.4
Functional genomics, leucine zipper proteins
Large Scale Biology
0.5
(9.6)
42.9
33.4
Proteomics
a
For the last quarter 2002.
Cancer is the therapeutic area in which genomics has had the widest impact on target discovery, generation of drug candidates and disease classification. The number of unprecedented targets identified will require biomarkers to profile patients and evaluate drug activity.This concept is well illustrated by the prescription of the monoclonal antibody Herceptin to women with breast tumors in which the Her-2 gene is amplified and/or the corresponding protein overexpressed. Inhibitors of the tyrosine kinase of the epidermal growth factor receptor (e.g., Iressa) or antibody targeting the receptor (e.g., Erbitux) have had mixed activity in clinical studies. It is postulated that biomarkers that help select potentially responsive patients could improve the efficacy of these molecules in selected patients and thus increase registration prospects [4]. I conclude from these different examples that pharmacogenomics has significant commercial perspectives because of its potential to improve R&D productivity at lead selection and/or patient profiling levels.Time-tomarket is an issue because of the need for technology/commercial platform maturation and clinical validation. Unlike target discovery/
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selection, which requires huge downstream drug-discovery efforts to pay off, pharmacogenomic studies can be directly conducive to product or services. Markers that are linked to clinical outcome and/or drug response have significant commercial value and can command high prices. The molecular diagnostic market is growing at >20% a year and will provide the format for further theragnostic products. Recent examples of deals in this area include the R&D/marketing agreement between Abbott Laboratories and Celera Diagnostics, the collaboration between GSK and Oxford Glycosciences on the discovery of biomarkers, the marketing agreement on diagnostic screening for colorectal cancer between Lab Corp and Exact Science, the acquisition by Bayer of Visible Genetics (a company that provides HIV genotyping for predicting drug response), and the acquisition by Abbott of Vysis (the leader in the field of molecular cytogenetics whose main product is the detection of Her-2 amplification by fluorescence in situ hybridization (FISH). However, the present level of pharmacogenomics services is unlikely to support an infrastructure in this area, and do not represent a
viable stand-alone activity for a biotech company.
Conclusion Pharmacogenomics companies need to focus on cash management to weather difficult financial markets.They can take a combination of actions to survive, including: (i) deals with significant upfront cash generation (including services); (ii) cost cutting (including manpower reduction and focusing on core business); and (iii) asset swapping (through biotech–biotech deals) to increase their technology reach without incurring additional expenditures. It is recommended that management take action when the balance sheet still looks good and does not wait so long that a strategic choice, such as M&A activity, is no longer an option. Companies with sustained business models will develop unique value proposition that improves R&D productivity.They have to serve the needs of pharmaceutical companies in the field of target validation (which requires good biology with some therapeutic area specialization), lead optimization (which requires early assessment of toxicology) and
UPDATE
TARGETS Vol. 1, No. 6 December 2002
OPINION
Box 1. Website addresses Abbott Laboratories (http://www.abbott.com) Alnylam (http://www.alnylam.com) Artemis (http://www.artemis-pharmaceuticals.de) Bayer (http://www.bayer.com) BMS (http://www.bms.com) Celera (http://www.celera.com) Celera Diagnostics (http://www.applera.com) Cepheid (http://www.cepheid.com) CuraGen (http://www.curagen.com) deCode (http://www.decode.com) Deltagen (http://www.deltagen.com) Elan (http://www.elan.com) Exact Sciences (http://exactsciences.com) Exelixis (http://www.exelixis.com) Genaissance (http://www.genaissance.com) Gene Logic (http://www.genelogic.com) Genome Therapeutics (http://www.cric.com) Genomica (http://www.genomica.com) Genset (http://www.genset.fr) GSK (http://www.gsk.com) Human Genome Sciences (http://www.hgsi.com) Illumina (http://www.illumina.com) Imclone (http://www.imclone.com) Incyte (http://www.incyte.com)
patient profiling/stratification (which requires development of biomarkers). In the mid run, only companies that leverage their platform with the discovery and development of diagnostic or therapeutic products will thrive. This transformation is a significant challenge both from cash-management and knowledge-management perspectives. From the present situation we can expect a consolidation of the genomics industry and that the few leaders that emerge will be able to raise
Infinity Pharmaceuticals (http://www.ipi.com) Ingenium Pharmaceuticals (http://www.ingeniumpharmaceuticals.com) LabCorp (http://www.labcorp.com) Large Scale Biology (http://www.lsbc.com) Lion Bioscience (http://www.lionbioscience.com) Mermaid Pharmaceuticals (http://www.mermaidbio.com) Millenium Pharmaceuticals (http://www.mlnm.com) Myriad Genetics (http://www.myriad.com) Orchid BioSciences (http://www.orchid.com) Oxford Glycosciences (http://www.ogs.com) Protein Design Labs (http://www.pdl.com) Pharmacia (http://www.pharmacia.com) Sangamo (http://www.sangamo.com) Schering Plough (http://www.sch-plough.com) Scios (http://www.sciosinc.com) Sequenom (http://www.sequenom.com) Serono (http://www.serono.com) SNP Consortium (http://snp.cshl.org) Telik (http://www.telik.com) Third Wave Technologies (http://www.twt.com) Trimeris (http://www.trimeris.com) Visible Genetics (http://www.visgen.com) Vysis (http://www.vysis.com)
money during the next financial window, which in the past occured about every four years. It is likely that the commodization that hurt platform companies when financing was plenty will become less of a threat to integrated players as more investors back away from funding new technologies.
References 1 Biocentury Publications Inc., on 3rd October 2002, Copyright 1993–2002 (available online at http://www.biocentury.com)
2 Innocenti, F., Iyer, L., Ratain, M.J. (2002) Pharmacogenomics of Chemotherapy agents in cancer treatment, pp. 283–309, Wiley-VCH 3 NIH unveils international project to develop genetic variation map, Bioworld, 13 (Vol. 209) (2002) 4 Ratner M.L., Testing drugs against new targets: like playing blind man’s bluff, In Vivo, October, p.36 (2002) (available online at http://www.windhover.com) 5 Erickson D., Exelixis: Partnering for growth, In Vivo, p. 17, June 2002 (available online at http://www.windover.com)
Conference reports Drug Discovery Today Publications is pleased to publish the highlights from international conferences. Conference participants who wish to cover a particular meeting should contact: Dr Joanne Clough, Drug Discovery Today Publications, 84 Theobald’s Road, London, UK WC1X 8RR e-mail: [email protected]
www.drugdiscoverytoday.com
181
TARGETS Vol. 1, No. 6 December 2002
OPINION
Business models for pharmacogenomic companies Francois Thomas Senior Advisor, Atlasventure, London, UK. [email protected]
Genomics companies are facing difficult times. Few companies have developed products, even to the preclinical stage, and none is profitable.Thus, all depend on significant deals with pharmaceutical companies and access to financial markets to survive and thrive. [A list of company websites is provided at the end of this article (Box 1)].
Financial markets and partnering The financial markets for biotechnology companies are not favourable at present (Fig. 1). The IPO market is dead at the moment and the market for follow-on offerings is restricted to companies with a broad product pipeline and/or preregistration products (e.g., recent follow-on of Trimeris and Telik). The market for private equity is still very active (see recent financings of Infinity Pharmaceuticals and Alnylam), driven by the large size of venture capital funds and a shift within these funds from telecom/internet investment to healthcare. Nevertheless, investors presently focus their interests on either product companies or platform companies with technologies that are directly conducive to products. The consequence of these current trends will be a reduction in the number of pure platform and target companies, including genomics companies, because of difficulty to refinance or of merger and acquisition (M&A) activity (e.g., Hyseq-Variagenices announced on November 2002). Although M&A activity is a logical reaction to harsh times in an effort to create more solid companies, it is not usually intense in bear markets for the following reasons: (i) focus of management teams on execution and core business ; (ii) volatility in market value and/or low market value that can make deals difficult and/or dilutive; and (iii) cash
6
IPO
5
Follow on
4
Venture
3 2 1 0 Q1 2000
Q3 2000
Q1 2001
Q2 2001
Q1 2002
Q3 2002 TARGETS
Figure 1. Money flow.Adapted from Ref [1].
management if the acquiree has little cash in the bank and/or a large burn rate. Biotechs need sources of non-equity cash (e.g, revenues) to build valuable assets.The development of first generation genomics companies has been driven by significant alliances with pharmaceutical companies.The best examples of this are the deals of Human Genome Sciences and Millennium Pharmaceuticals with pharmaceutical companies. The latter have been willing to pay high prices for access to technologies that are not available in their own research laboratories, new proprietary targets and seemingly comprehensive gene databases.The appetite of pharmaceutical companies for biotech alliances has stabilized for the past 5 years, as illustrated by the flat number of deals in face of a huge increase in the number of biotech companies.This trend is caused by : (i) consolidation in the Pharma industry, which reduces partner base; (ii) large platform investment of the 1990s; (iii) difficulty in validating an increasing number of new and unprecedented targets; and (iv) rapid comoditization of technology platforms. Therefore, there is no reason to expect an increase in the number of alliances going forward.
1477-3627/02/$ – see front matter ©2002 Elsevier Science Ltd.All rights reserved. PII: S1477-3627(02)02273-0
Pharmaceutical companies are, nevertheless, willing to pay a huge premium to acquire products that meet their criteria for potentially successful drug candidates that will grow turnover as their current blockbuster drugs progressively reach generic status. In this context, it is important for biotech companies to develop a product/technology offering that meets the need of pharmaceutical companies.
How can biotech serve the market need? Pharmaceutical companies look for technologies to improve the productivity of R&D. Genomics has had a profound impact on the number of drug targets, but not on productivity.The number of unprecedented targets and the efforts to validate them thoroughly threaten to increase overall R&D costs and to exacerbate poor R&D productivity.Furthermore, many candidate drugs fail early in development because of pharmacokinetic and toxicology issues. As a consequence, significant needs for pharmaceutical companies are: • target validation (beyond in vitro data and gene expression analysis); • lead discovery/validation to provide a rapid
www.drugdiscoverytoday.com
177
UPDATE
TARGETS Vol. 1, No. 6 December 2002
Target
1993
1994
1995
Proprietary data
1996
1998
1999
Biology capabilities
2000
Exelixis/GSK
deCode/Merck
Exelixis/BMS
Millenium/Abbott
Myriad/Abbott
GTC/Wyeth-Ayerst
deCode/Roche 1997
Curagen/Abgenix
Myriad/Bayer
HGS/SKB
Validated target
Genset/Sanofi
Lead
GTC/SP
Optimised lead preclinical candidate
Genset/Abbott
Entry level of collaboration
Millennium/Bayer
Drug in clinical development
Millennium/Lilly
Exit level of collaboration
Rigel/Novartis
Scope of deal
Curagen/Bayer
Millennium/Aventis
OPINION
2001
2002
Integrated discovery capabilities TARGETS
Figure 2. Broad alliances that are moving towards drug candidates at development stage. M. Kosin, LEK Consulting, Boston, pers. commun.
assessment of pharmacokinetics/pharmacodynamics and toxicology; • patient profiling and surrogate endpoints (biomarkers) for the design of clinical trials. Pharmaceutical companies, as illustrated by recent, large-volume deals, also have a strong appetite for drug candidates that have: • entered late-stage clinical development (few good opportunities exist). Although this is a sellers market, pharmaceutical companies are double checking the quality of the dossier and the compliance to regulatory needs after the issues raised by the deal between BMS and Imclone on Erbitux; • indications in markets with unmet medical needs (e.g., cancer) and new mechanisms of action that are supported by strong biology. Business development executives of large pharmaceutical companies have suggested that they will execute more early-stage compound deals on
178
www.drugdiscoverytoday.com
validated targets [Pharmaceutical Strategic Alliance Conference, NY, USA (2002)]. Biotech companies will have to focus on the needs of pharmaceutical companies, extend the potential customer base and look for cash-generating deals, even if they have a strong service component. ‘Flavour of the day’ deals are gone and biotech companies should develop significant value proposition. Biotech–biotech deals are increasing and biotech companies represent a large customer base. Mid-size European and Japanese Pharmaceuticals companies represent marketing opportunities for deals.These companies have limited access to cutting-edge technologies and are becoming more sophisticated, although their research budget remains relatively small. More deals will be structured with an important service component in the present context because of the imbalance between demand and offer, the needs of biotech companies for immediate cash and
pharmaceutical company concerns about royalty stacking. From this analysis we can expect that pharmaceutical alliances and financial markets will not support the present mix of product/service offering, and that many companies with a nondistinctive value proposition and little cash-in-hand might disappear. There are several recent examples of this in the functional genomic field, particularly in Germany with the liquidation of Mermaid Pharmaceuticals and the realignment of Ingenium Pharmaceuticals.
The present situation for genomics companies No genomics company is profitable, even those that have significant service revenues such as Celera and Incyte (database), CuraGen (target validation) and Myriad Genetics (cancer prediction services). Early October 2002 all genomics companies were trading below cash (and thus with negative entreprise
UPDATE
TARGETS Vol. 1, No. 6 December 2002
OPINION Table 1. Exelixis deals (Adapted from Ref. [5]) Date
Deal with
Details
Dec. 1997
Artemis
Exelixis cofounds Artemis to add expertise in the genetics of single model organisms
March 1999
Pharmacia
Genomic deal to identify target to treat Alzheimer’s disease and metabolic disorders
July 1999
Metaxen
Acquisition of Metaxen (structural biology)
Sept. 1999
BMS
Genomic deal to identify validated targets and access BMS lead optimization technology
May 2001
PDL
Identification of targets for the treatment of cancer with antibodies
July 2001
BMS
Collaboration on drug discovery in cancer. Exelixis starts Phase II tests with an anticancer candidate
Aug. 2001
Elan
First deal in combinatorial chemistry (Exelixis has now 5 such deals, including 2 with big pharmas)
Oct. 2001
Scios
Collaboration on chemistry. Scios focuses on inflammation and cardiovascular research
Nov. 2001
Genomica
Acquisition of Genomica for US $110 million in stock,
Jan. 2002
Schering Plough
Collaboration on chemistry
Oct. 2002
GSK
Develops therapeutics for vascular, inflammatory diseases and cancer using Exelixis drug candidates
value), with the exception of those that have built a significant drug discovery/product pipeline or diagnostic business (See Table 2). The present sales of the genomics industry (~US $1 billion) Mark Kosin, LEK Consulting, Boston, pers. commun.] cannot support the growth of the industry because revenues for broad discovery alliances (the most lucrative) are decreasing. All large value deals signed by genomics companies in the past 2 years have been broad discovery deals that involve assay development and chemistry capabilities. Few companies, such as Millennium Pharmaceuticals and Exelixis, that have successfully transformed themselves into fully integrated research engines have the credentials to sign up these alliances (Fig. 2,Table 1). Management of biotech companies is presently focusing on cash, to make it through the down cycle, and taking harsh measures to extend the ‘cash runway’. Cost slashing is widespread across the industry. Genomic companies such as Curagen, Genaissance, deCode, Deltagen, Genome Therapeutics and Lion have announced staff cuts of 20–30% over the past 3 months [1]. One way to reduce costs and maintain a distinctive value proposition is to focus on core business and/or best assets. For example, Lion, a German bioinformatics company, decided recently to close its drug discovery business to break even, and genomics companies are entering into asset swapping deals with
other biotech companies to acquire new technologies and control expenditures. Few cash-risk companies can afford forward integration to acquire discovery engines and/or products. deCode recenly acquired Medichem Life Sciences (chemistry), Celera molecules from Bayer, whereas GPC Biotech acquired anticancer drugs from the US National Cancer Institute and Neotherapeutics. Acquisition of products is particularly difficult for genomics companies because they have little internal development capabilites and a need to manage the burn rate and attrition in a narrow portfolio. Some companies with strong assets may manage to engineer a trade sale. The most recent example is the acquisition of the French company Genset by Serono.
The prospects for pharmacogenomics The market for pharmacogenomics is developing more slowly than predicted initially. Pure play pharmacogenomics companies have low market capitalization (Table 2). Pharmaceutical companies have accepted and internalized the field on a customized basis because of concerns over drug-market segmentation and regulatory impact. The market is still unstable for free-standing pharmacogenomics companies. Setting aside genotyping of chronic viral infections such as AIDS, the most active segments are the genetics of metabolic
enzymes (e.g., CytP450), toxicogenomics and oncogenomics.Toxicogenomics aims to find surrogate markers of organ toxicity and to expedite lead optimization.These studies are based on large-scale expression analysis, but require extensive validation that, hopefully, will be expedited by multiple company consortia. Study of polymorphisms is becoming routine for genes involved in drug metabolism as a way to select against drugs that might either vary widely in metabolism across populations or be responsible for unpredictable drug–drug interactions. The impact of metabolic variability is well appreciated for anticancer drugs that have narrow therapeutic margins. Some specialized cancer centers systematically test Thiopurine Methyltransferase (TPMT) polymorphism before administering mercaptopurine to children with lymphocytic leukemias [2]. Although there are several scientific publications that show that polymorphisms in drug targets impact drug activity, the clinical significance of these need to be confirmed in prospective studies. Large studies of gene polymorphisms across the entire genome require a better understanding of how polymorphic markers segregate across the genome. The SNP Consortium aims to provide a map that will accelerate association studies [3]. Genotyping technologies continue to mature and will, ultimately, enable cost-effective genotyping for whole-genome association studies.
www.drugdiscoverytoday.com
179
UPDATE
TARGETS Vol. 1, No. 6 December 2002
OPINION
Table 2. Valuations of Genomics Companies (Data sourced from Ref. [1] on October 3, 2002) Company
Revenue
a
a
Income (Loss)
Market cap.
Cash
Activities
Celera
28.1
(29.0)
561.3
889.0
Genomics, database, diagnosis, drug discovery (Axys)
Curagen
37.0
(22.0)
204.4
455.0
Functional genomics, proteomics
deCode Genetics
13.4
(16.8)
88.0
121.0
Genetics, pharmacogenomics/diagnosis, starting drug discovery
Deltagen
5.9
(19.2)
61.0
76.0
Exelixis
9.9
(24.0)
216.0
174.0
14.0
(4.4)
221.0
181.0
6.0
(8.3)
42.0
63.0
Incyte
29.0
(17.4)
272.0
476.0
Functional genomics, database, service provider
Myriad Genetics
14.1
(6.9)
353.0
124.0
Genomics, diagnostic services (drug discovery)
Gene Logic Genome Therapeutics
Functional genomics, database Functional genomics, drug discovery, cancer Functional genomics/database Genomics
Sequenom
9.2
(5.0)
74.6
114.1
Ilumina
1.9
(16.5)
97.7
80.1
16.4
(12.2)
24.7
45.8
Pharmacogenetics
3.2
(5.5)
135.0
15.6
Microfluidic, diagnostics, pharmacogenetics
Orchid BioSciences Cepheid
Pharmacogenetics, instrumentation Diagnostic platform
Third Wave Technologies
9.6
(6.1)
66.3
60.1
Genotyping, pharmacogenetics
Sangamo
0.4
(3.6)
46.0
55.4
Functional genomics, leucine zipper proteins
Large Scale Biology
0.5
(9.6)
42.9
33.4
Proteomics
a
For the last quarter 2002.
Cancer is the therapeutic area in which genomics has had the widest impact on target discovery, generation of drug candidates and disease classification. The number of unprecedented targets identified will require biomarkers to profile patients and evaluate drug activity.This concept is well illustrated by the prescription of the monoclonal antibody Herceptin to women with breast tumors in which the Her-2 gene is amplified and/or the corresponding protein overexpressed. Inhibitors of the tyrosine kinase of the epidermal growth factor receptor (e.g., Iressa) or antibody targeting the receptor (e.g., Erbitux) have had mixed activity in clinical studies. It is postulated that biomarkers that help select potentially responsive patients could improve the efficacy of these molecules in selected patients and thus increase registration prospects [4]. I conclude from these different examples that pharmacogenomics has significant commercial perspectives because of its potential to improve R&D productivity at lead selection and/or patient profiling levels.Time-tomarket is an issue because of the need for technology/commercial platform maturation and clinical validation. Unlike target discovery/
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selection, which requires huge downstream drug-discovery efforts to pay off, pharmacogenomic studies can be directly conducive to product or services. Markers that are linked to clinical outcome and/or drug response have significant commercial value and can command high prices. The molecular diagnostic market is growing at >20% a year and will provide the format for further theragnostic products. Recent examples of deals in this area include the R&D/marketing agreement between Abbott Laboratories and Celera Diagnostics, the collaboration between GSK and Oxford Glycosciences on the discovery of biomarkers, the marketing agreement on diagnostic screening for colorectal cancer between Lab Corp and Exact Science, the acquisition by Bayer of Visible Genetics (a company that provides HIV genotyping for predicting drug response), and the acquisition by Abbott of Vysis (the leader in the field of molecular cytogenetics whose main product is the detection of Her-2 amplification by fluorescence in situ hybridization (FISH). However, the present level of pharmacogenomics services is unlikely to support an infrastructure in this area, and do not represent a
viable stand-alone activity for a biotech company.
Conclusion Pharmacogenomics companies need to focus on cash management to weather difficult financial markets.They can take a combination of actions to survive, including: (i) deals with significant upfront cash generation (including services); (ii) cost cutting (including manpower reduction and focusing on core business); and (iii) asset swapping (through biotech–biotech deals) to increase their technology reach without incurring additional expenditures. It is recommended that management take action when the balance sheet still looks good and does not wait so long that a strategic choice, such as M&A activity, is no longer an option. Companies with sustained business models will develop unique value proposition that improves R&D productivity.They have to serve the needs of pharmaceutical companies in the field of target validation (which requires good biology with some therapeutic area specialization), lead optimization (which requires early assessment of toxicology) and
UPDATE
TARGETS Vol. 1, No. 6 December 2002
OPINION
Box 1. Website addresses Abbott Laboratories (http://www.abbott.com) Alnylam (http://www.alnylam.com) Artemis (http://www.artemis-pharmaceuticals.de) Bayer (http://www.bayer.com) BMS (http://www.bms.com) Celera (http://www.celera.com) Celera Diagnostics (http://www.applera.com) Cepheid (http://www.cepheid.com) CuraGen (http://www.curagen.com) deCode (http://www.decode.com) Deltagen (http://www.deltagen.com) Elan (http://www.elan.com) Exact Sciences (http://exactsciences.com) Exelixis (http://www.exelixis.com) Genaissance (http://www.genaissance.com) Gene Logic (http://www.genelogic.com) Genome Therapeutics (http://www.cric.com) Genomica (http://www.genomica.com) Genset (http://www.genset.fr) GSK (http://www.gsk.com) Human Genome Sciences (http://www.hgsi.com) Illumina (http://www.illumina.com) Imclone (http://www.imclone.com) Incyte (http://www.incyte.com)
patient profiling/stratification (which requires development of biomarkers). In the mid run, only companies that leverage their platform with the discovery and development of diagnostic or therapeutic products will thrive. This transformation is a significant challenge both from cash-management and knowledge-management perspectives. From the present situation we can expect a consolidation of the genomics industry and that the few leaders that emerge will be able to raise
Infinity Pharmaceuticals (http://www.ipi.com) Ingenium Pharmaceuticals (http://www.ingeniumpharmaceuticals.com) LabCorp (http://www.labcorp.com) Large Scale Biology (http://www.lsbc.com) Lion Bioscience (http://www.lionbioscience.com) Mermaid Pharmaceuticals (http://www.mermaidbio.com) Millenium Pharmaceuticals (http://www.mlnm.com) Myriad Genetics (http://www.myriad.com) Orchid BioSciences (http://www.orchid.com) Oxford Glycosciences (http://www.ogs.com) Protein Design Labs (http://www.pdl.com) Pharmacia (http://www.pharmacia.com) Sangamo (http://www.sangamo.com) Schering Plough (http://www.sch-plough.com) Scios (http://www.sciosinc.com) Sequenom (http://www.sequenom.com) Serono (http://www.serono.com) SNP Consortium (http://snp.cshl.org) Telik (http://www.telik.com) Third Wave Technologies (http://www.twt.com) Trimeris (http://www.trimeris.com) Visible Genetics (http://www.visgen.com) Vysis (http://www.vysis.com)
money during the next financial window, which in the past occured about every four years. It is likely that the commodization that hurt platform companies when financing was plenty will become less of a threat to integrated players as more investors back away from funding new technologies.
References 1 Biocentury Publications Inc., on 3rd October 2002, Copyright 1993–2002 (available online at http://www.biocentury.com)
2 Innocenti, F., Iyer, L., Ratain, M.J. (2002) Pharmacogenomics of Chemotherapy agents in cancer treatment, pp. 283–309, Wiley-VCH 3 NIH unveils international project to develop genetic variation map, Bioworld, 13 (Vol. 209) (2002) 4 Ratner M.L., Testing drugs against new targets: like playing blind man’s bluff, In Vivo, October, p.36 (2002) (available online at http://www.windhover.com) 5 Erickson D., Exelixis: Partnering for growth, In Vivo, p. 17, June 2002 (available online at http://www.windover.com)
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