1. risk aversion converges with focus on quality

The rise and rise of the biotech sector and big pharma's increasing reliance on biological products as sources of future innovation are well established industry trends. Interesting, therefore, to see a recent upturn in the proportion of small-molecule focused deals done by pharmaceutical and biotech companies. This figure remained flat at two thirds of all life sciences deals in 2006-07, but rose to 73% in 2008 and again to 75% this June, according to MedTRACK.

This trend is counterintuitive to biological products' prominence on the market. However, it is a natural consequence of the current risk-averse climate. True, large companies desperately need to find innovative assets to fill their pipelines. Yet licensees are increasingly rigorous in their assessment of licensing opportunities. And many biological products are at a too early stage of development (often pending proof-of-concept) to convince risk-averse licensees to part with their cash.

A greater level of diligence on the part of licensees goes some way towards explaining the fall in pharmaceutical compound licensing deal volume from 310 transactions in 2006 to 228 in 2008. The value of the average licensing deal travelled in the opposite direction in this period, doubling to around $350 million. Licensees appear to be willing to pay more for opportunities they consider exciting. Moreover, many of these transactions are likely to cover multiple assets per deal.

Risk aversion works in parallel with a greater focus on the quality of scientific data. While there has historically been a grey area between what licensors and licensees consider to be completion of proof-of-concept, the licensee has a lot more control over that now. In turn, companies might start to place contingency payments on milestones that did not exist in the past.

2. "quality biotech" still has negotiating power

Pre-credit crisis, deal structures demonstrated that a minority of the biotech community, notably those with assets that have demonstrated proof-of-concept, enjoyed significant bargaining power over their big pharma partners. Some biotech firms managed to negotiate co-promotion rights, demonstrating their lofty ambitions to become true marketing players.

Mid-recession has the picture changed? To some extent pharmaceutical companies have regained the upper hand. However, biotech firms with products that fulfil pharma's demand for quality science and novelty will continue to offer value, irrespective of the macroeconomic climate.

Current conditions might create an uneven playing field favouring those companies with more cash in the bank. A biotech's financing and the quality of its products' data do not perfectly correlate. Yet the more experienced management teams are typically the ones that have quality assets. They understand the importance of raising money in good times so that they can survive the bad. Thus firms with enough dollars to generate high-quality data will continue to strike favourable deals, while those with shorter cash runways may be forced out of the game.

3. late-stage headline deals a rarity

A few high-value late-stage transactions caused a spike in average deal values in 2008. GlaxoSmithKline and Actelion's collaboration to develop and commercialise Actelion's Phase III insomnia therapy almorexant, potentially worth up to $3.3 billion to the biotech (including development and sales milestones in insomnia and two other major indications), demonstrated that there is still life in the primary care market. However, deals of this magnitude are now few and far between.

4. good times for preclinical assets

Companies' search for innovation further upstream has turned out to be a boon for early-stage deals. According to an Ernst & Young analysis, the average value of a preclinical drug discovery alliance deal has almost quadrupled over the past six years, reaching $475 million in June. The average value per product has risen more than three times to $263 million.

The proportion of preclinical-stage licensing deals is also on the up, according to PharmaVentures (the figure was 23% of total licensing deals in 2007, rising to 26% in the first quarter of this year). Deals often represent multiple programmes and indications. In addition, many include biologicals with associated technology platforms – an attractive proposition for pharma.

5. pharma learns to enjoy school

Many companies are forming strategic alliances with leading universities, a radical departure from simply providing them with research grants as was the common practice in the past.

The most tried-and-tested collaborations follow straightforward single company/single university or fee-for-service templates. Critics argue that these arrangements are not particularly conducive to innovation. Much better, they argue, to go for a networked approach, bringing together the expertise of multiple academic partners.

For inspiration, look to the emerging "university consortium" model. Pfizer has underlined its interest in this area, earmarking $14 million to fund the Insulin Resistance Pathway (IRP) project. Initiated in 2008, this collaboration brings together scientists from Pfizer, four US universities and Entelos, a physiological modelling firm. The IRP will spend three years studying insulin signalling in adipose cells with a view to developing new drugs to treat diabetes.

6. bargains to be had, with a catch

As noted, many Phase II biotech products lack sufficiently robust data to convince licensees to complete the deal. This means that Phase II products are often "downgraded" in the dealmaking process.

Some firms might regard this as an invitation to go shopping for Phase II bargains. Companies should be careful when going about this quick-fix strategy for acquiring new products, however. They are not only buying assets, but also buying the long-term commitment to invest in their Phase III studies.

7. "backloading"

There has been a notable increase in deals in which the headline value is split between developmental and commercial milestones ("back-loading"), according to Ernst & Young.

Over the past 18 months, 37% of all clinical-stage deals have included contingent payments based on the commercial performance of products once they reach market. This includes one-third of deals struck at Phase I.

This trend can be explained by recent changes in the on-market risk environment for products. Risk is no longer just about getting a product approval. There is also growing scrutiny of post-marketing safety and a changing pricing and reimbursement environment. A shift in the regulatory position towards risk/reward may be as significant an event as the drug's approval itself.

8. divestitures = opportunities for biotech?

Divestiture of non-core assets is a notable area of activity, and a prudent approach to raising cash. Divested products are likely to include those considered non-core to pharmaceutical companies because they offer limited potential to generate revenue or footprint.

Cash-hungry, loss-making biotech firms should take note. While such products may not offer high growth, there is potential for reasonable margins, providing companies with cash flow to fund their businesses. Thus one company's divested asset might represent another company's opportunity to become profit-neutral.

9. niche products promise greater ROI

Products targeting the traditionally popular areas of oncology, CNS and infectious diseases continue to generate significant demand. At the same time, there has been significant growth in deals focused on "other" indications, which by MedTRACK's definition includes kidney/genitourinary disease; musculoskeletal; ophthalmology/optometry; substance abuse; and women's health. These areas were considered less attractive in the past but are now the focus of increased activity. "Other" indication deals collectively made up 15% of the total last year, not far behind oncology's leading share of 21%.

Companies are clearly becoming increasingly value-conscious. Some assets cater to smaller market opportunities, but they might offer firms a potentially greater return on their investment.

10. pharma/pharma deals: a new model?

Might GlaxoSmithKline and Pfizer's new speciality HIV company signal a new biopartnering model for encouraging innovation? Perhaps. Another driver behind the deal might have been both companies' recognition that they need to find new ways to increase their disease-state or therapeutic-area scale.

In addition, Dr Nils Behnke, a partner in Bain & Company's global healthcare practice, views the partnership as the two companies taking costs out of their systems and putting together a more flexible and lean organisation. He points out that the assets are not high priority for either company, but that together they hope to get more out of it.

Therefore, the deal might not represent a strategic move into innovation. Regardless, in the current climate, there are likely to be more of these deals to come.

More data and comment relating to the 10 biopartnering trends outlined above, together with an analysis of emerging industry/academia collaboration models, alliance management best practice and a 2009/2010 outlook for dealmakers are available in the latest Scrip Executive Briefing - Biopartnering 2.0 (scripnews.com, August 27th, 2009 ).