Pharma

Option-based deals: How biotechs and big pharmas share R&D risks

When Targacept (NASDAQ:TRGT) and AstraZeneca (NYSE:AZN) changed their collaboration agreement in 2007 by adding a […]

When Targacept (NASDAQ:TRGT) and AstraZeneca (NYSE:AZN) changed their collaboration agreement in 2007 by adding a new compound being studied in cognitive disorders, the addition was done as an option deal.

Winston-Salem, North Carolina-based Targacept got $2 million up front. If TC-5619 achieved clinical proof of concept, AstraZeneca had the option to pay $40 million for an exclusive license for the compound. AstraZeneca would take over late-stage development and commercialization while Targacept stood to gain up to $226 million in milestones, plus royalties on sales.

Had that deal happened a few years earlier, it might have looked very different. Targacept senior vice president and Chief Business Officer Jeffrey Brennan said that 10 years ago, big pharma looked to license compounds from small biotech companies and bring those compounds into their own shop to develop them. But dealmaking has changed in the last five to seven years. Rather than licensing the compounds and taking on the drug development risks themselves, pharmas are increasingly choosing option-based deals that give both small biotechs and big pharmas a little something. The biotechs get money to further develop a drug candidate. If the compound meets milestones, the pharmas get an exclusive opportunity to license it without having shouldered all of the risks of developing it.

“Option deals are risk share deals,” Brennan said.

Brennan spoke at CED’s Biotech Forum last week. He was joined by Michael Johnson, vice president of corporate business development at Eli Lilly (NYSE:LLY). Johnson said that Lilly had the wherewithal and the desire to pursue straight licensing deals 10 years ago. But the company does not have that flexibility any longer and now pursues more option deals.

Even though option-based deals reduce big pharma’s risks, securing any deal is still tough. Johnson said pharmas are less likely to consider a compound if the smaller biotech hasn’t thoroughly considered the drug candidate’s business prospects — how a drug will be reimbursed, how it will be marketed. The “science guys” at biotech companies may not fully understand the business side of the industry, but the business story is important to get past the gatekeepers at big pharma.

“Ten years ago, all you needed was great science and folks like Eli Lilly would seek you out,” Johnson said. “Today you need the sophistication of the business side of it.”

The option-based deal gives the big pharma more flexibility than a straight licensing arrangement. That flexibility can be important when it comes to evaluating a compound’s progress. Targacept released phase 2 clinical trial results on TC-5619 earlier this year. While a study of the compound in patients with schizophrenia showed positive results, a separate study of TC-5619 as an attention deficit/hyperactivity disorder treatment did not meet the study’s endpoints. AstraZeneca ultimately opted not to license that compound, leaving Targacept to figure out how to proceed.

Brennan said that in option-based deals, there’s a chance the parties to the deal could disagree on whether milestones were met. If the larger pharmaceutical company chooses not to pursue further development of the compound, the biotech is on the hook for financing further development of  the compound. Targacept expressed confidence in TC-5619 and in May conducted a $75 million stock offering to finance clinical development of the compound on its own.

Sometimes a deal does not work because of changes unrelated to a compound’s clinical development. Targacept and GlaxoSmithKline (NYSE:GSK) ended their partnership this year. The termination followed GSK’s decision last year to stop pursuing R&D in some areas of neuroscience. GSK returned the compounds and intellectual property to Targacept.

Brennan said that the end of the Targacept-GSK deal was not a failure of science, it was a change in pharma strategy. But he added that the outcome is also instructive to other companies considering such deals. Biotechs need to prepare for the possibility that for whatever reason, a pharma partner declines to pursue development of a compound. Johnson puts it another way: “We are the option, we are not the obligation.”

Shares0
Shares0