Revenge of the Nerds

With Big Pharma's pipelines waning, biotech companies are finally getting their due--"fair-market value" for their compounds--said one CEO who has just inked two closely watched oncology deals.

George Scangos is president and CEO of Exelixis, a company making waves among analysts who cited its compounds as among the pipeline's most exciting. Its cancer drugs hit multiple targets--with the potential of treating a broad swath of tumors.

While it's often impossible for analysts to judge what the going price for a compound should be, it is clear that the dynamic of pharma-biotech partnerships have certainly shifted in biotech's favor.

Genentech was the most recent company to bite, last week signing an initial $40 million deal to co-develop Exelixis' XL-518, an inhibitor of the MEK and other pathways. This is the second time Genentech has gone shopping in Exelixis' pipeline. And in December, Bristol-Myers Squibb inked a $120 million deal through which it can co-develop three Exelixis compounds of its choice.

Exelixis--which has also partnered with the likes of GlaxoSmithKline, Bayer, and Wyeth--does plan to market some of its compounds. Deciding which drugs to keep and which to offload depends on a formula of in-house strategy and outside opportunity, Scangos noted. But of late, opportunity certainly has come knocking.

These are heady days for a biotech start-up. Amid R&D pressures, big drug companies are practically clamoring outside the door, checkbooks in hand--their profits now as dependent on biotech's novel compounds as the biotechs once were dependent on pharma's deep pockets.

As if to drive home the point, Genentech's promising ovarian cancer drug Omnitarg (pertuzumab) faced a setback last week; the drug failed to delay disease progression in a Phase II trial--and its future is now up for review.

"For years compounds were underpriced," Scangos told investors. "Biotech companies were strapped for cash, and pharmaceutical companies were able to utilize that position to bring in compounds at bargain prices. Compounds are now approaching fair-market value."

Analysts have been hard-pressed to assign a fair-market value to recent biotech agreements--but they almost universally acknowledge that deal prices are escalating.

That trend is likely to accelerate. Biotechs will be able to forge full-steam ahead in commanding higher prices for riskier compounds at ever-earlier stages of development, according to Burrill and Company's 2007 Biotech Outlook, released last month. The Outlook also sees no M&A slowdown, particularly for biotechs with the most advanced pipelines. But the hottest deals might involve technology, even early-stage tech. (Merck's recent $1.1 billion acquisition of Sirna may be a taste of what's to come.)

Exelixis has excited all this attention because it boasts "probably the broadest [pipeline portfolio] to hit multiple pathways," said Elgar Peerschke, head of the global healthcare practice at Bain & Company. "It's not enough to block single pathways."

With larger deals under its belt, Exelixis has moved from licensing to "strategic collaboration," Scangos noted, adding that fast cash will be reinvested in other clinical programs. "The ultimate goal of our company is to develop and commercialize our own products."