Commentary on WSJ article on M&A's in biotech

There is an interesting article from the Wall Street Journal that I want to turn my attention to for now. It's from 8/3 entitled, "Big Pharma Won't Wait in Rush for Biotech's Drugs".

This is very intriguing for someone like myself who follows a majority of small-cap biotech firms who are in the market for partners and licensing deals. Is it just me or does paying more for a Phase 1 product than a Phase 2 product seem a bit odd? There is a substantial difference between them and their purpose.

Phase 1 trials are just initial studies to determine the metabolism and pharmacologic actions of drugs in humans, the side effects associated with increasing doses, and to gain early evidence of effectiveness; may include healthy participants and/or patients.

Phase 2 trials are controlled clinical studies conducted to evaluate the effectiveness of the drug for a particular indication or indications in patients with the disease or condition under study and to determine the common short-term side effects and risks.

Why pay more based on Phase 1 studies when Phase 2 studies weed out those drugs which are not efficacious? The number of Phase 1 studies that sound attractive are endless, but those with Phase 2's under their belt shrinks the list down considerably.

It all depends on what kind of time frame and niche group a large pharma is looking to fill. Obviously, they have needs now and 5 years down the road. There is an inherent shift for more personalized medicines, since they can garner higher asking prices from insurers and are more likely to succeed in clinical testing. This is definitely something to remember as you scan companies that could be interesting M&A targets.

Specifically, the section I found interesting was:

"The average upfront payment for a Phase I asset was 68% higher in 2009 than a year earlier at $46 million and 39% higher at $37 million for a phase II product, according to data from research firm EvaluatePharma. Total deal values, which include payments for hitting development targets and royalties on eventual sales, also rose.

Tim Worden, a partner in the life-sciences group at law firm Taylor Wessing, said drug makers still have the upper hand. Even if licensing a product at an earlier stage is riskier than doing a deal when the evidence is clear, the only thing really at stake is the license fee, which they can afford.

One pharmaceutical company that currently has a keen interest in bringing in more early-stage drug candidates is London-based AstraZeneca PLC.

Like other Big Pharma firms, AstraZeneca is hunting for promising medicines to broaden its portfolio and offset the loss of patents on older drugs, said Shaun Grady, vice president of corporate business development at the Anglo-Swedish drug maker.

Mr. Grady said the pharmaceutical industry's interest in earlier-stage assets has been spurred by frenetic licensing of biotech drugs with knockout clinical data or marketing approval. Simply, there are few attractive late-stage assets left to license. "When they do come to market it is usually extremely competitive and the price can be pretty eye-watering. That pushes people to look a little bit earlier," Mr. Grady said."

SOURCE - WSJ  ( Full text available here if you dont have a WSJ subscription)