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Where Big Pharma looks for future growth

Faced with an ever-present need for products and a limited number of targets, the pharmaceutical industry is seeking to stretch its R&D budget and find future growth in more places.

Where to invest — not to mention how much — made for a robust discussion at last week's S&P Global Market Intelligence Healthcare Breakfast Briefing in New York, which I moderated.

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Seated left to right: Kristen Hallam, Sadhana Chitale, Stephen Diamond, Amir Debourou and Arthur Wong.
Source: S&P Global Market Intelligence

"Most pharma companies, to stay competitive in this day and age, need access to external innovation," said Sadhana Chitale, director of life sciences/technology transfer at NYU Langone Health and one of four panelists at the Feb. 27 event. "What better place to go to than an academic medical center? We're a hotbed, all of us, for innovation and new ideas."

New ways to target tumors and deliver medicines are among the most common requests Chitale gets from drugmakers.

Panelists noted that interest in gene therapy is still high and other areas ripe for dealmaking — both partnerships and acquisitions — include cell therapy and oncology.

Companies are also looking for data, manufacturing technology and devices for drug-device combinations, said Arthur Wong, director of corporate ratings for healthcare at S&P Global Ratings, a separate division of S&P Global Inc.

"The laundry list of targets has gotten longer," Wong said.

Gold vs clay

Academic medical centers have sown the seeds of blockbusters such as Johnson & Johnson's Remicade for arthritis and Pfizer Inc.'s Sutent cancer medicine.

One of NYU's startups, BeneVir, was bought by J&J's Janssen unit and NYU got a return on its investment, Chitale noted. Likewise, the Children's Hospital of Philadelphia profited from the sale of Spark Therapeutics Inc., which was founded by hospital researchers, to Roche Holding AG.

While rewards can be significant on the back end for academic medical centers, upfront payments from pharmaceutical companies are typically low, Chitale said.

"The challenge for us is when pharma companies come to us, we think the asset is gold and they think it's clay that still needs to be molded and that they have to put so much money into derisking it," Chitale said, referring to the testing process to reduce the risk of a potential treatment failing or showing safety issues in later clinical trials.

"We're happy to pay more as long as the therapy pays off," replied Stephen Diamond, assistant general counsel in the business transactions group of Pfizer's legal division. Diamond noted that his views at the briefing were his own and did not necessarily reflect those of Pfizer or his colleagues at the company.

Companies will pay more to get into an area of interest, such as gene therapy, Diamond said. Deals that fit that mold include Novartis AG's purchase of AveXis Inc. and Roche's Spark acquisition.

"You pay a premium for risk reduction," Diamond said. "Ultimately, a pharma company wants a mix of assets. They want some that are risk-reduced and they'll pay out for that. But you can't do that for every asset, so you're going to see a lot of smaller deals," like Biogen Inc.'s $800 million purchase of Nightstar Therapeutics.

"You're taking on more risk, but you can take more shots on goal," Diamond said.

Trend-setting Roche

Roche executed two other transactions that panelists cited as trend-setting. The Swiss company paid Sarepta Therapeutics Inc. $750 million up front for the rights to launch and commercialize Sarepta's Duchenne muscular dystrophy gene therapy SRP-9001 outside the U.S.

"You have a number of companies, especially in the gene therapy space, that have therapies that are getting ready for approval and they don't necessarily have the commercial infrastructure to market those," Diamond said. "You have drug companies that do have that pipeline and are looking for a way to get assets that are risk-reduced but without paying the premium of buying an entire company."

And Roche's $1.9 billion acquisition of Flatiron Health, completed in 2018, is still influencing investing in 2020, the panelists said.

"It was validation of the value of digital health and of data science as a way to accelerate drug development and access to new cancer therapies," said Amir Debourou, the Merck Global Health Innovation Fund investment manager responsible for identifying and developing investment opportunities across digital health and health information technology. "It was a wake-up call to the whole big pharma community and biotech community that we need to do something."

Debourou said his views were his own and not necessarily those of his employer.

As pharma companies seek to stretch their R&D budgets as far as they can go, more partnerships and joint ventures between companies are expected, according to S&P Global Ratings' Wong.

He cited AbbVie Inc.'s takeover of Botox maker Allergan PLC as a "sharp contrast in what other buyers are investing in."

"It highlights how uncertain it's become in the industry in terms of trying to predict what the value of a drug prospect is," Wong said.

While Wong sees more megadeals down the road, "in terms of acquisition volume, the industry will take a bit of a breather" in 2020 compared to 2019, he said.

With valuations remaining high, any acquisition of substance almost becomes a megadeal, he said.

"There are too few good assets out there and too many companies chasing them," Wong said.