Besieged Big Pharma may find balm in sharing risk

NEW YORK (Reuters) - Large pharmaceutical companies appear poised to seek more partnering deals for their experimental medicines, sacrificing a cut of potential blockbuster sales to ensure steadier returns on hefty research expenses.

Drug makers have long licensed rights to promising medicines developed by smaller biotechnology companies but have generally held on to the potential future spoils of their internally developed drugs.

The partnering deals allow the drug makers to share development risks at a time the industry faces a less certain regulatory climate for reviewing their drugs, and it also must make bolder scientific bets to find successful medicines.

Such deals also can cut costs as many drug makers face major revenue losses from generic rivals in the next five years or need cash to fund their strong dividends.

"Companies are looking for more certainty from their research," said Neil MacAllister, president of advisory and research firm Avos Life Sciences.

"If they can have a broader range of investments, even though they give up something down the road, that has a fairly dramatic impact on the risk profile of their portfolio."

Bristol-Myers Squibb (BMY.N) and Eli Lilly (LLY.N), which have already struck such alliances, are seen as candidates to partner more of their drugs, as are Schering-Plough Corp SGP.N and Wyeth WYE.N.

Interested buyers include the largest, cash-rich companies, such as Pfizer Inc (PFE.N). But the deals could lure financial backers, such as private equity firms and hedge funds, or healthcare companies, like contract research organizations.

The partnerships illustrate the myriad challenges that face a pharmaceutical industry no longer certain to churn out double-digit profit increases.

For investors, the deals may increase the drug companies' relative attraction as value investments, rather than high-growth stocks for which a major drug can propel shares.

"I don't think people invest in a Big Pharma company expecting them to swing for the fences," said Jay Markowitz, an analyst at investment management firm T. Rowe Price.

"These are larger, more mature companies that people are looking at in terms of not only earnings but also dividend, dividend yield," Markowitz said. "These are not the kinds of speculative investments that are more typical of, say, a biotech."

Such deals came into focus last month, when Bristol-Myers announced its experimental blood-clot drug apixaban -- partnered with Pfizer -- failed its main goal in a late-stage trial. Analysts noted the setback was lessened because Bristol had sold rights to the medicine.

Bristol also received payments in diabetes deals with AstraZeneca (AZN.L) and Merck & Co (MRK.N).

Lilly in July said it would receive funding for its two lead experimental medicines for Alzheimer's disease from hedge fund TPG-Axon and Quintiles, a pharmaceutical services firm.

Schering-Plough has said it is open to partnering its experimental blood-clot preventer, a possible blockbuster.

Alzheimer's medicines are a prime example of the types of drugs that would suit such alliances, MacAllister said. If successful, the products would garner huge sales, but the science around Alzheimer's disease is unclear, leaving uncertainty about how to best develop effective treatments.

Another factor behind the deals, MacAllister said, is that governments and health insurers are more reluctant to reimburse for medicines that prove little different from older drugs.

"In simplistic terms, 'me-toos' are not getting paid for, so you have to have an innovative drug," MacAllister said. "That collides with the fact that the easy targets have gone, so the risk quotient of pharmaceutical research has gone up as evidenced by the lack of approvals."

Michael Castor, a portfolio manager with healthcare fund Sio Capital Management, described the deals as "an expression of caution" at a time where "risk seems to be the norm."

Natixis Bleichroeder analyst Jon LeCroy said the main reason for the deals is to offload development costs.

But LeCroy said that investors are hoping for blockbusters from the pharmaceutical companies, so cutting future possible returns reduces their allure as growth stocks.

"I think saving money near-term just takes away from that long-term upside, so I haven't been a big fan of these deals," LeCroy said.

Further, partnered companies could have strategic differences or possible conflicts of interest that undercut a drug's prospects.

Still, the deals may help improve the industry's returns on its investments, said Edward Jones analyst Linda Bannister.

"The main problem with this entire industry is productivity of R&D spending," Bannister said. "This is one way to get at that issue, so you don't spend $800 million on a drug that is not successful."