LONDON—Rising pressure to find new products is prompting big pharmaceutical companies to license or acquire biotechnology companies' experimental medicines when they've barely been tested in human trials.
Traditionally, the sector's big players preferred drugs with solid clinical evidence to show they work. But 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, Big Pharma is gambling more of its deal dollars on riskier bets in an effort to replenish its pipeline with new technologies.
Some deals have been eye-catching: PanGenetics, a small biotech based in Utrecht in the Netherlands, received $170 million from Abbott Laboratories in November for the rights to an experimental pain treatment in Phase I trials, an almost unheard-of sum for such an early-stage asset.
In January 2009, Bristol-Myers Squibb Co. paid ZymoGenetics Inc. $105 million for a Phase I product for hepatitis C, while Amgen Inc.—itself a biotech, albeit a very large one—paid $60 million up front to Array BioPharma Inc. for a Phase I asset for diabetes.
And in June this year, 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 four deals provide for further payments if the drugs are successful in later stages of development and royalties on eventual sales.
Drug makers used to be able to rely solely on their own labs to turn basic research into viable commercial drug prospects, and usually sought smaller firms' drug discoveries only when they demonstrated real benefit in late-stage clinical trials.
But now things are changing. In recent years, Big Pharma has licensed more products in preclinical, Phase I or Phase IIa stages of development than ever before.
A preclinical drug is still in the lab and hasn't been tested on humans. A Phase I trial is a first-in-man study that typically tests a new medicine for safety in healthy volunteers, while a Phase IIa study tests whether or not the medicine works in a small group of patients.
Daniel Mahony, a health-care fund manager at Polar Capital Holdings PLC, said 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.
In an era of frugal health services and stingy insurers, they are doing this to prove not just that their medicines are safe and effective but that they deserve the high price they eventually want to ask for them. One way to do this is to spend more R&D funds on complex trials that pinpoint to groups of patients who are almost guaranteed to respond well to a drug, and use these results to justify premium pricing.
"It used to be just about getting a decent risk benefit but it is also now about getting the right cost benefit of a drug. That's the new world we are moving into," said Mr. Mahony.
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.
If Big Pharma wants to snap up biotech assets earlier in the development process, it also has to live with the consequences. Investors will have to wait a long time before they know whether these bets paid off. And the demand for promising early-stage assets means competition between drug makers is heating up.
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.
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, Mr. Grady said. "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.
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