Phase I assets get 68% more upfront than a year ago and phase II products 39% more -- Big Pharma isn't waiting

We’re seeing a trend that Big Pharma isn’t waiting in the push for new biotech's drugs.  This trend is relevant because of the rising pressure to find new products is prompting companies to license or acquire experimental medicines – even if they've barely been tested in human trials.

A recent report in The Wall Street Journal said that while traditionally the sector's big players preferred drugs with solid clinical evidence to show they work, they are faced with the loss of patents on some big sellers, an overhaul of its own research-and development-priorities, and demand for more innovative medicines.  That means Big Pharma is gambling more of its deal dollars on riskier bets in an effort to replenish its pipeline with new technologies.

For example, in June, Bayer AG paid $40 million to Redwood City, Calif.-based OncoMed Pharmaceuticals Inc. for access to its experimental anticancer stem-cell therapeutics, which haven't yet been tested in human trials.

All these deals provide for further payments if the drugs are successful in later stages of development and royalties on eventual sales. 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.

Daniel Mahony, a health-care fund manager at Polar Capital Holdings PLC, was quoted as saying one reason drug makers will continue to scoop up biotechs' early-stage programs is because they've overhauled their research-and-development activities to focus more on clinical trials and less on lab work.

With funds for R&D limited, the economics of spending more on "development" and less on "research" will continue to stack up for a drug maker, said Franceso De Rubertis, a partner at venture-capital firm Index Ventures.

It can take 20 scientists five years and $30 million to turn an idea into a drug ready to be tested in humans, and to reach this stage once typically means there have been dozens of other lines of research that have also cost time and money but turned out to be dead ends. On top of that, fixed costs such as payrolls and running laboratories are high. If a biotech can offer a drug maker an interesting compound ready-made, "it becomes a no-brainer to pay out $50 million for a Phase I asset," said Mr. De Rubertis.

For AstraZeneca, licensing promising early-stage assets is a way of filling gaps in its pipeline. The company hasn't stopped looking for late-stage products, but after a string of deals in the past 12 months for near-to-market or marketed medicines, AstraZeneca's attention is turning to more experimental drug candidates, said Shaun Grady, vice president of corporate business development. "You have to train your guns at different places at different times depending on your needs."

An AstraZeneca brochure for industry conferences mentions Alzheimer's disease and obesity among the areas it is interested in preclinical assets.

Mr. Grady said a drug program brought in from outside isn't inherently riskier than a program born in Big Pharma's own labs. And in the context of a whole pipeline, licensing gives a company more options about which programs to press on with. "For us, the goal is to bring external projects into the company that help upgrade the overall quality of the pipeline," said Mr. Grady.