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1 Trends Hot Topic Catalyst Big Pharma continued to cultivate large deal-making values, representing the majority of overall biopharma deal spending between 2011 and Ref Code: Downloaded on: Author: DMKC Amanda Micklus Contact Us Datamonitor America 52 Vanderbilt Ave, 7th Floor, New York, NY USA t: e: Datamonitor Europe 119 Farringdon Road, London, EC1R 3ER, United Kingdom t: e: Datamonitor Asia Pacific Level 7 / 120 Sussex Street, Sydney, NSW 2000, Australia t: e: apinfo@datamonitor.com Datamonitor Japan Da Vinci Ginza East 7th Floor, Ginza, Chuo-ku, Tokyo , Japan t: e: jpinfo@datamonitor.com

2 Report reference: DMKC Published on: 23/02/2016 About Datamonitor Healthcare Bringing you a clearer, richer and more responsive view of the pharma & healthcare market. Complete market coverage Our independent research and analysis provides extensive coverage of major disease areas, companies and strategic issues, giving you the perspective to identify opportunities and threats arising from shifting market dynamics and the insights to respond with faster, more effective decision-making. Unique expert capabilities With teams located across developed and emerging pharma markets, we are uniquely placed to understand local healthcare trends and provide accurate and reliable recommendations. By working closely with our partners at MedTrack, Citeline, SCRIP Intelligence and Informa Healthcare, our experts are able to share data and resources to produce the most authoritative and robust market intelligence. With over 700 clients across the pharma and biotech industries, we are relied upon to provide strategic guidance, not only through published analysis, but also tailored support solutions. Cutting-edge delivery Available through single reports or via subscription to our state-of-the art online intelligence service that features intuitive design and interactive capabilities, our analysis offers the definitive platform to enhance your product management, market assessment and strategic planning. Contact Us For more information about our products or to arrange a demo of the our online service, please contact: getcloser@datamonitorhealthcare.com Disclaimer All Rights Reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher, Datamonitor Healthcare. The facts of this report are believed to be correct at the time of publication but cannot be guaranteed. Please note that the findings, conclusions and recommendations that Datamonitor Healthcare delivers will be based on information gathered in good faith from both primary and secondary sources, whose accuracy we are not always in a position to guarantee. As such, Datamonitor Healthcare can accept no liability whatsoever for actions taken based on any information that may subsequently prove to be incorrect. For more information about our products or to arrange a demonstration of the our online service, please contact: getcloser@datamonitorhealthcare.com 2

3 CONTENTS 6 EXECUTIVE SUMMARY 9 KEY POINTS AND OVERALL TOTALS 9 Deal volume increased but Big Pharma's overall share was small 9 Big Pharma represented the majority of deal-making spend and 2015 were stand-out years in Big Pharma deal-making 11 Bibliography 13 COMPANY ANALYSIS AND CASE STUDIES 14 AstraZeneca was the leading dealmaker by overall volume within the Big Pharma peer set 20 Johnson & Johnson signed key cancer deals and formed an innovation initiative 24 Roche continued oncology momentum but deal-making showed importance of other therapeutic areas 27 Pfizer's in-licensing fluctuated while out-licensing efforts increased 32 Overall, out-licensing increased by 42% and Amgen and Eli Lilly evenly split in- and outlicensing 36 Bibliography 41 THERAPY AREA ANALYSIS 41 Oncology dominated Big Pharma deal volume 49 Infectious disease agreements declined, but there is potential for a turnaround 50 Endocrine, metabolic, and genetic disorders gained speed 52 Oncology also led in terms of partnership dollar values 54 Oncology was also the focus of most out-licensing deals 56 Bibliography 59 DEAL ECONOMICS 59 Johnson & Johnson was the top dealmaker by dollars spent within the Big Pharma peer set 62 Payment metrics on deals generally increased 63 Average deal values increased 65 A higher proportion of deal value was still locked up in milestones 66 There were more than two-dozen billion-dollar deals between 2011 and PHASE ANALYSIS 70 Early-stage candidates dominated partnerships 73 Marketed drugs and Phase II candidates led in aggregate up-front payments 74 Phase II and marketed drugs tended to have higher average up-fronts 77 GEOGRAPHIC BREAKDOWN OF DEAL-MAKING 78 Regional deal-making took off 80 Bibliography 81 DEAL STRUCTURES 3

4 81 R&D was the most common component of deal structures 83 Option-based deal-making decreased 83 Bibliography 85 APPENDIX 85 About the author 85 Scope 85 Methodology LIST OF FIGURES 9 Figure 1: Big Pharma s deal-making volume, Figure 2: Big Pharma s deal values and share of overall deal-making value, Figure 3: Mid-to-higher-value deals dominate in Big Pharma s deal-making, Figure 4: Big Pharma s deal volume, by company, Figure 5: Big Pharma s licensing deal volume CAGR, Figure 6: AstraZeneca's deal-making activity: shrinking divide between in-licensing and outlicensing, Figure 7: AstraZeneca's in-licensing deals, by therapy area, Figure 8: AstraZeneca's out-licensing deals, by deal type, Figure 9: AstraZeneca's out-licensing deals, by therapy area, Figure 10: Johnson & Johnson s deal-making activity: greater focus on in-licensing, Figure 11: Johnson & Johnson's in-licensing deals, by therapy area, Figure 12: Roche's deal-making activity: in-licensing increased while out-licensing decreased, Figure 13: Roche s in-licensing deals, by therapy area, Figure 14: Roche s out-licensing deals, by therapy area, Figure 15: Pfizer's deal-making activity, Figure 16: Pfizer s in-licensing deals, by therapy area, Figure 17: Pfizer's out-licensing is led by divestments of rights, Figure 18: Pfizer out-licensed in similar therapy areas to in-licensing but in different deal structures, Figure 19: Big Pharma s out-licensing increased but is still outpaced by in-licensing, Figure 20: Big Pharma s in-licensing/out-licensing activity, by company, Figure 21: Eli Lilly's in-licensing deals, by therapy area, Figure 22: Eli Lilly s out-licensing deals, by therapy area, Figure 23: Big Pharma s in-licensing deals, by therapy area, Figure 24: Big Pharma s deal volume, by therapy area, Figure 25: Big Pharma s in-licensing deals, by therapy area and phase of development, Figure 26: Top oncology in-licensing dealmakers, Figure 27: Big Pharma s infectious disease in-licensing deals, by infection type, Figure 28: Big Pharma s in-licensing deals, by total deal value, Figure 29: Value of up-front and milestone payments of in-licensing deals, by therapy area,

5 54 Figure 30: Big Pharma s out-licensing deals, by therapy area, Figure 31: Big Pharma s big spenders in in-licensing deals, Figure 32: Big Pharma s licensing payments, by payment metric, Figure 33: Big Pharma s in-licensing deals, by payment metric average, Figure 34: Big Pharma s average up-front payments in in-licensing deals, by phase of development, Figure 35: Total up-front payment values and up-front payments as a percentage of inlicensing deal value, Figure 36: Big Pharma s in-licensing deals, by phase of development at deal signing, Figure 37: Share of preclinical and Phase I in-licensing deals increases, Figure 38: Strong representation across all phases in Big Pharma s in-licensing deals, Figure 39: Marketed products dominated Big Pharma s out-licensing deals, Figure 40: Big Pharma s in-licensing deal economics, by phase of development, Figure 41: Big Pharma s average up-front payments for in-licensing deals, by phase of development, Figure 42: Big Pharma s average total deal values for in-licensing deals, by phase of development, Figure 43: Big Pharma s in-licensing deal volume, by licensed geography, Figure 44: Big Pharma s out-licensing deal volume, by licensed geography, Figure 45: Big Pharma s worldwide in-licensing deals decreased and regional carve-outs increased, Figure 46: Geographic breakdown of in-licensing geography by Big Pharma peer set, Figure 47: Big Pharma s in-licensing deals, by deal structure, Figure 48: Big Pharma s out-licensing deals, by deal structure, Figure 49: Development and research/discovery consistently featured in Big Pharma s inlicensing deals, LIST OF TABLES 45 Table 1: Big Pharma's lucrative immuno-oncology deals, Table 2: Big Pharma s in-licensing deal values, by company, Table 3: Top 10 Big Pharma in-licensing deals, by deal value, Table 4: Datamonitor Healthcare's Big Pharma peer set 5

6 EXECUTIVE SUMMARY Big Pharma deal-making volume and value experienced large increases, especially in 2014 and 2015: Between 2011 and 2015, Big Pharma companies signed a total of 1,158 drug-focused deals. Five-year volume rose dramatically: in 2015, Big Pharma penned 306 alliances, a 46% increase over 2011's 209 transactions, equating to a compound annual growth rate of approximately 10%. Big Pharma, on average, only represented 18% of the total number of biopharma deals, but put in the majority of the monetary value in those partnerships a total of $133bn versus the $254bn in all comparable biopharma alliances (including the Big Pharma peer set) and 2015 were stand-out years in Big Pharma deal-making, with each year featuring more than double the number of billion-dollar deals made in each of the first three years of the time period evaluated. The top four dealmakers of the five-year period collectively penned a total of 528 deals (in- and outlicensing), and each company forged most of their in-licensing deals in oncology: AstraZeneca was the top Big Pharma dealmaker, penning 169 alliances. The company also led in volume by out-licensing with 51 deals. Johnson & Johnson was second behind AstraZeneca in total deals at 141, but tied AstraZeneca for in-licensing volume at 118. Johnson & Johnson's key oncology in-licenses with Pharmacyclics and Genmab brought it the now-marketed products Imbruvica (ibrutinib) and Darzalex (daratumumab), respectively. Behind AstraZeneca and Johnson & Johnson was Roche at 111 deals. Oncology remained a priority but other areas of research gained momentum in in-licensing including neurology and infectious disease. Pfizer came in fourth in deal volume with 107 alliances. The company's in-licensing was driven by immuno-oncology, including a key tie-up in 2014 with Merck KGaA to co-develop and co-commercialize Merck's anti-programmed death ligand-1 antibody avelumab. Outlicensing efforts increased, particularly in oncology where Pfizer accomplished traditional partnerships, distribution agreements, and co-development deals. The rate of Big Pharma's in-licensing activity outpaced that of out-licensing: Big Pharma companies signed two-to-three times as many in-licensing agreements as outlicensing deals annually between 2011 and Out-licensing gained speed with a 42% increase in these deal types between the start and end of the five-year period. 6

7 Amgen had a nearly equal split between its in- and out-licensing activities, which was not surprising given the company's biotech business model. Eli Lilly evenly balances in- and out-licensing, and set up a new venture funding model with capital fund partners to further those efforts. Oncology, infectious disease, and endocrine, metabolic, and genetic disorders (EM&GD) were the top three therapeutic areas for Big Pharma in-licensing: Approximately 32% of Big Pharma in-licensing involved oncology drugs, of which almost half were in the immuno-oncology field. Oncology also led in in-licensing partnership values. Most Big Pharma out-licensing focused on oncology as well, and involved collaborative deal structures such as co-development. AstraZeneca was the most active oncology in-licenser in the Big Pharma peer group; its highest-valued deal was a license agreement with Inovio Pharmaceuticals in immuno-oncology, worth $728m. Infectious disease accounted for 13% of in-licensing deals, but the category's annual share started to shrink in 2013 as EM&GD deals increased. Bacterial infection-focused deals accounted for 30% of total infectious disease agreements, indicating the increasing efforts to combat drug-resistant infections. EM&GD represented 12% of Big Pharma deals. Sanofi, which has the leading diabetes drug on the market, Lantus (insulin glargine), achieved the most EM&GD deals of any Big Pharma, penning 19 in-licensing agreements. During the five-year period, payment metrics on in-licensing deals generally increased: Up-front, milestones, and total deal values gradually increased between 2011 and 2015, with the exception of decreases between 2012 and 2013 in total milestones and total deal value, and some fluctuations in up-front figures. A Big Pharma company paid out an average of $44m up-front in an alliance in However, deals have become more expensive; in 2015, the average price increased to nearly twice the 2011 value at $74m. One prime reason for this increase is oncology's larger share in deal volume and the higher prices paid in oncology deals. Well over the majority of the value of deals are tied into various types of milestones, including development, regulatory, and commercial, and are therefore neither guaranteed nor paid up front. In 2014, deal values took off considerably. Most notably, the $4.4bn in up-fronts that year represented 41% of all up-fronts made during Johnson & Johnson spent the most money on in-licensing over the five-year period, paying out $18.4bn in total deal value. 7

8 Big Pharma balanced its in-licensing efforts for drugs across all development phases, but preclinical candidates led: For deals where the phase was disclosed, in-licenses for preclinical candidates topped the list in terms of volume and total deal value over the five-year period. Approved/marketed drugs led in Big Pharma out-licensing. Average up-fronts paid in Phase II and approved/marketed drug alliances tended to be higher than most other phases. Worldwide deals are no longer the norm, with most Big Pharma alliances covering rights in select regions across the major markets: Regional deals made up 33% of the total group of Big Pharma in-licensing deals, compared with 28% that were conducted worldwide. There was a steady increase in regional agreements which totaled 72 in 2015, representing a 64% increase over the 44 deals made in Starting in 2011 and continuing since, the share of collaborations for global rights is less than that of regional deals among Big Pharma. North America was the most partnered region for Big Pharma out-licensing. Big Pharma companies continued to structure most in-licensing deals with an R&D component: Over the five-year period, 23% of in-licensing deals included development or codevelopment, followed by R&D at 21%. Big Pharma out-licensing also involved collaborative deal structures, including development/co-development and commercialization. Option-based deals, which gained popularity as a way for the licensee to de-risk a potential asset before it was officially taken in-house, decreased slightly. 8

9 KEY POINTS AND OVERALL TOTALS An analysis of drug-focused licensing deals (out-licensing and in-licensing) made by Big Pharma companies shows an uptick in partnering between 2011 and The peer set increased deal volume by nearly 100 transactions, a 46% increase between the beginning and the end of the five-year period. Deal values rose even more significantly, by 160%. Deal volume increased but Big Pharma's overall share was small Between 2011 and 2015, Big Pharma companies signed a total of 1,158 drug-focused deals, growing at a compound annual growth rate of 10%. Following a minimal drop of 26 transactions between 2011 and 2012, the annual figures steadily increased year-on-year. In 2015, Big Pharma penned 306 alliances, a 46% increase over 2011's 209 transactions. This represented a turnaround from the slowdown in deal-making activity and values observed for all of biopharma after the US financial crisis that began in 2008 (In Vivo, 2014). Despite an overall increase in Big Pharma s deal-making activity, the peer set only represented 18% of the total number of biopharma deals signed over the five-year period. Big Pharma's comparatively smaller representation in deals is likely attributed to the increased participation of specialty pharma companies such as Valeant Pharmaceuticals or Allergan, and more partnerships between smaller firms including biotech-to-biotech deals. After averaging around 15% from 2011 to 2013, Big Pharma companies began to steadily increase their share of deals, reaching a peak of 23% in Furthermore, the number of alliances increased by 24% from 2014 to 2015, the biggest year-on-year increase within the time period reviewed, and a potential sign that the peer group's share in total deal-making activity is likely to rise. Figure 1: Big Pharma s deal-making volume,

10 Big Pharma represented the majority of deal-making spend Despite accounting for less than a quarter of deal volume, Big Pharma has contributed the majority of the monetary value of biopharma partnerships over the past five years. Overall, Big Pharma alliances were worth $133bn, compared with the $254bn from all comparable biopharma alliances (including the Big Pharma sample), equal to 52% of the total value. There were some fluctuations in dollar value during the time period, and in both 2011 and 2013, Big Pharma's deal value represented less than 50% of total spend. These peaks and valleys were not due to substantial increases or decreases in the number of deals; in fact, in 2012, which featured a higher total value than in 2011 and 2013, there was a 12% reduction in transaction volume from Instead, the deals that were made in 2012 were simply more expensive; the year featured four billion-dollar-plus agreements, more than the one such deal in 2011 and three in For example, Genmab and Johnson & Johnson/Janssen's antibody discovery agreement from 2012, involving Genmab s DuoBody platform, was valued at $4bn, the second-highest transaction in the five-year period (Strategic Transactions, 2012). Figure 2: Big Pharma s deal values and share of overall deal-making value, and 2015 were stand-out years in Big Pharma deal-making 2014 and 2015 each boasted more than double the number of billion-dollar deals done in the first three years of the time period evaluated. In 2014, Big Pharma penned eight billion-dollar deals, three of which were in the $1bn range and the rest over $2bn. Among the leading partnerships signed in 2014, Pfizer's immuno-oncology tie-ups with both Merck KGaA and Cellectis, each valued at $2.9bn, tied for the third-largest deals done during the five-year period. Pfizer and Merck are co-developing and co-commercializing Merck's programmed death-1 inhibitor avelumab alone and in combination with other drugs for multiple tumors (Strategic Transactions, 2014a), while Pfizer and Cellectis will work on chimeric antigen receptor T-cell therapies against 15 oncology targets (Strategic Transactions, 2014b). At $31bn, 2014's total deal-making value for Big Pharma was an impressive 10

11 90% increase over 2013's $16bn, which happened to be the lowest single-year sum. In 2015, 14 billion-dollar-plus partnerships were made, led by Sanofi and Hanmi's broad diabetes collaboration covering preclinical through to Phase II candidates (Strategic Transactions, 2015a). At $4bn, Sanofi and Hanmi's deal was also the highest-valued transaction in the five-year period. In 2015, Sanofi also signed three other alliances in the billion-dollar range, with Regeneron Pharmaceuticals ($2bn; immuno-oncology) (Strategic Transactions, 2015b), Lexicon Pharmaceuticals ($2bn; diabetes) (Strategic Transactions, 2015c), and BioNTech ($2bn; immuno-oncology) (Strategic Transactions, 2015d). In all, Big Pharma accounted for $47.1bn in 2015 deal-making value, a five-year high and more than twice 2011's $18bn aggregate. In addition, 2015's dollar figure represented 58% of all money that went into biopharma alliances, the biggest percentage of any individual year. The higher 2015 figure may be explained by the sheer increase in volume at 306, 2015 featured the most number of deals signed. However, it is important to note that the majority of alliances over the five-year period did not have a disclosed value. While 2015 does boast the largest dollar figure, it also included the biggest sample size (88) of deals with a reported value. Figure 3: Mid-to-higher-value deals dominate in Big Pharma s deal-making, Bibliography In Vivo (2014) S&P Vs. Pharma Partnership Deal Volume. Available from: 11

12 Deal-Volume [Accessed 21 October 2015]. Strategic Transactions (2012) Janssen Biotech teams up with Genmab to create antibodies. Available from: [Accessed 11 January 2016]. Strategic Transactions (2014a) Pfizer to build its immuno-oncology pipeline through tie-up with Merck KGAA. Available from: [Accessed 11 January 2016]. Strategic Transactions (2014b) Cellectis, Pfizer to develop CART therapies for cancer. Available from: [Accessed 11 January 2016]. Strategic Transactions (2015a) Sanofi pays 400mm up front for rights to Hanmi's Quantum Project in diabetes. Available from: [Accessed 11 January 2016]. Strategic Transactions (2015b) Regeneron and Sanofi ride the wave of success; partner again in new antibody deal. Available from: [Accessed 11 January 2016]. Strategic Transactions (2015c) Sanofi gets rights to Lexicon's oral diabetes project sotagliflozin. Available from: [Accessed 11 January 2016]. Strategic Transactions (2015d) Sanofi enters cancer immunotherapy deal with BioNTech. Available from: [Accessed 11 January 2016]. 12

13 COMPANY ANALYSIS AND CASE STUDIES During , Big Pharma firms balanced deal-making with a mixture of both in-licensing, or taking in rights to drugs, and out-licensing, which can include divestments, partnering, or other forms of collaboration in which the company contributes its own products. By overall deal volume counts, AstraZeneca was the most active within the Big Pharma peer set, penning a total of 169 alliances during the five-year period. Johnson & Johnson, Roche, and Pfizer followed AstraZeneca in transaction counts, each signing over 100 deals. Figure 4: Big Pharma s deal volume, by company,

14 Figure 5: Big Pharma s licensing deal volume CAGR, AstraZeneca was the leading dealmaker by overall volume within the Big Pharma peer set AstraZeneca was the top Big Pharma dealmaker over the five-year period reviewed, entering into 169 alliances in total between 2011 and The company s in-licensing activity annually was, on average, more than double the rate of its out-licensing, but the divide between the two deal models shrunk over the five-year period. AstraZeneca made a significant addition to its pipeline when it bought MedImmune in 2007 (Strategic Transactions, 2007), and continued to make smaller bolt-on acquisitions in the years that followed. Pfizer tried to buy AstraZeneca in mid-2014 (Strategic Transactions, 2014a), mainly driven by the tax benefits of an inversion structure, but the deal eventually broke down and was not completed because of the US Treasury's new rules eliminating the economic advantages of such a deal, plus the fact that Pfizer would not up its bid. In 2015, Pfizer ended up announcing an alternate tax-motivated deal, a $160bn takeover of Allergan, the largest biopharma acquisition to date (Strategic Transactions, 2015a). Following the dissolution of the Pfizer/AstraZeneca transaction, AstraZeneca has pledged to move forward to build its pipeline and grow revenues. Datamonitor Healthcare, however, forecasts that AstraZeneca's standing among the Big Pharma peer set is going to decrease from sixth in 2007 to 10th by 2024 (see Datamonitor 14

15 Healthcare's 2015 Big Pharma Outlook for more details). ONCOLOGY WAS ASTRAZENECA'S TOP THERAPEUTIC AREA FOR IN-LICENSING More than one-third of AstraZeneca's in-licensing collaborations were in oncology, one of the company's key therapy areas with sales forecasted to increase at a compound annual growth rate (CAGR) of 8.2% between , or overall growth of nearly $4bn in sales (see Datamonitor Healthcare's AstraZeneca analysis for more details). In oncology, two of AstraZeneca's highest-valued deals both involved RNA therapeutics, an area that has attracted the attention of other Big Pharma companies including Merck & Co and Johnson & Johnson. These second-generation RNA technologies differ and are potentially more promising than early-generation RNAi, which has largely been abandoned by Big Pharma over the last 10 years due to the challenges of delivering small interfering RNA, also known as sirna. In addition to its innovative potential, RNA is likely an attractive field for AstraZeneca considering that 50% of the company's pipeline now consists of large molecules (Schott, 2015). In 2012, AstraZeneca partnered with Regulus Therapeutics (a joint-venture entity set up in 2007 by oligonucleotide pioneers Isis Pharmaceuticals [now called Ionis Pharmaceuticals] and Alnylam Pharmaceuticals) on three preclinical microrna targets (in addition to cancer, the alliance also involved cardiovascular and metabolic diseases). The agreement could potentially be worth $526m and candidates are already progressing, including a microrna-19 program for cancer (Strategic Transactions, 2012a). AstraZeneca also teamed up with Moderna in a 2013 deal worth $420m that takes advantage of the biotech's messenger RNA therapeutics technology in not only oncology but also in cardiometabolic and renal disorders (Strategic Transactions, 2013a). AstraZeneca invested in Moderna as part of the biotech's $450m Series C financing in early 2015, one of the largest venture rounds to date (Strategic Transactions, 2015b). 15

16 Figure 6: AstraZeneca's deal-making activity: shrinking divide between in-licensing and out-licensing, In addition to RNA, AstraZeneca's other big oncology deals focused on immuno-oncology, led by two 2015 agreements with Heptares and Inovio. Heptares granted AstraZeneca exclusive rights to adenosine A2A receptor antagonists, including HTL1071, which the Big Pharma will evaluate for stimulating anticancer responses in T cells. Heptares received $10m up-front and $500m in milestones (Strategic Transactions, 2015c). Inovio licensed MedImmune exclusive rights to Phase I/II INO3112; MedImmune plans to combine the candidate with its own immunotherapies for human papilloma virus-related cancers. The agreement is worth up to $728m in up-front and milestone payments (Strategic Transactions, 2015d). The programmed death (PD)-1 inhibitor durvalumab leads AstraZeneca's internal immuno-oncology pipeline. The company had hoped to pursue the antibody as a monotherapy and third-line or later treatment, which would have been the third PD-1 blocker to market following Merck & Co's Keytruda (pembrolizumab) and Bristol-Myers Squibb's Opdivo (nivolumab). However, based on preliminary results from AstraZeneca's ATLANTIC trial in patients with PD ligand-1 (PD-L1)-positive non-small cell lung cancer (NSCLC) that lacks epidermal growth factor receptor or ALK alterations, the company stated the data could not likely be used for regulatory filings of durvalumab as a monotherapy (AstraZeneca, 2015). AstraZeneca is now aggressively pursuing durvalumab combinations, including those among its own pipeline as well as external candidates. It currently has more than two dozen 16

17 collaborations testing durvalumab combinations, and Datamonitor Healthcare predicts the company will continue immuno-oncology deal-making, including evaluating both monotherapies and combinations, at an active pace. Figure 7: AstraZeneca's in-licensing deals, by therapy area, INFECTIOUS DISEASE AND ENDOCRINE, METABOLIC, AND GENETIC DISORDERS WERE ALSO REPRESENTED IN ASTRAZENECA'S IN-LICENSING ACTIVITY Endocrine, metabolic, and genetic disorders (EM&GD) and infectious disease were also strong areas for AstraZeneca's in-licensing between 2011 and 2015, each representing approximately 10% of the company's deals. AstraZeneca's efforts to continue growing in the diabetes market were evident through its in-licensing EM&GD deals, most of which were centered on this indication. The diabetes group included option-based drug discovery deals with NGM Biopharmaceuticals to develop peptides and antibodies targeting enteroendocrine cells (Strategic Transactions, 2013b), and with the Joslin Diabetes Center for research into protecting and regenerating the insulin-producing beta cells (Medtrack, 2015). AstraZeneca's diabetes sales are projected to grow by more than $2bn between 2014 and 2024 (see Datamonitor Healthcare's AstraZeneca analysis for more details). Many of AstraZeneca's diabetes medicines came from the firm's 2013 purchase of Bristol-Myers Squibb's diabetes operations (Strategic Transactions, 2013c), including several products from Amylin, which Bristol-Myers Squibb acquired in 2012 (Strategic Transactions, 2012b). 17

18 The infectious disease category is a smaller part of AstraZeneca's portfolio, accounting for only 5.8% of the company s therapy area share by sales in 2014 and its sales are estimated to fall at a -4.4% CAGR from 2014 to 2024 (see Datamonitor Healthcare's AstraZeneca analysis for more details). The large number of in-licensing deals in infectious disease could imply that AstraZeneca intends to externalize more in this area. Several of the company's infectious disease alliances were collaborations with non-profits or academic partners, including the Liverpool School of Tropical Medicine and Drugs for Neglected Diseases Initiative, covering indications such as Chagas disease and leishmaniasis, while industry deals, including ones with FOB Synthesis and LegoChem Biosciences, focused on drug-resistant bacterial infections (Medtrack, 2016). One of AstraZeneca's most significant investments over the five-year period was neither in oncology nor any of the company's other top therapeutic categories, but rather in the respiratory area. The investment was a $2bn deal ($875m up-front and $1bn in total milestones) for rights to Almirall's respiratory portfolio and pipeline, including the marketed chronic obstructive pulmonary disease (COPD) product Tudorza (aclidinium) plus asthma and COPD candidates in various stages of development (preclinical through to Phase III) (Strategic Transactions, 2014b). The addition of these assets strengthens AstraZeneca's respiratory franchise, which already includes Symbicort (budesonide/formoterol) and Pulmicort (budesonide). The respiratory category was AstraZeneca's second-largest therapeutic area in 2014, behind EM&GD, accounting for 19.4% of total pharmaceutical sales, and annual sales are forecasted to remain over $5bn through to A forecasted CAGR of 0.8%, however, means the product group is not expected to grow much during (see Datamonitor Healthcare's AstraZeneca analysis for more details). The first of Symbicort's patents expired in 2014 in the US (the patent on the device expired in 2011), and Pulmicort faces patent expiry in 2018 in the US for both the device and composition (Medtrack, 2016). The Almirall agreement, along with AstraZeneca's outright acquisition of Takeda's respiratory business for $575m in 2015 (Strategic Transactions, 2015e), are part of AstraZeneca's strategy to replenish its respiratory sales. ASTRAZENECA LED IN OUT-LICENSING DEAL VOLUME AstraZeneca settled the most out-licensing deals of any Big Pharma in the peer set, completing a total of 51 over the five-year period. The company's out-licensing grew at a CAGR of 41% between 2011 and 2015, the second-largest CAGR of any Big Pharma company. Novo Nordisk experienced the largest growth in out-licensing during the five-year period, slightly higher at 44%, but this is based on a comparatively smaller data set than AstraZeneca's. AstraZeneca's out-licensing deal volume had been fairly flat between 2011 and 2014, but in 2015 the company doubled its out-licensing efforts with 20 such transactions, nearly half of its five-year total (Medtrack, 2016). MOST OF ASTRAZENECA S OUT-LICENSING STILL INVOLVED COLLABORATION Only a minority (16%) of AstraZeneca's out-licensing deals, however, were divestments, indicating that the company is still involved and has a vested interest in many of the partnered assets. For example, 34% of the alliances were classified as research/discovery, co-development, or co-promotion deals, including several in which AstraZeneca is contributing a drug of its own to a collaborative study with universities or research institutes (Medtrack, 2016). 18

19 Figure 8: AstraZeneca's out-licensing deals, by deal type, Of the company's total out-licensing agreements made over the five-year period, 38% were in the oncology area and many involved collaborative deal types. One stand-out exception in oncology was the sale of AstraZeneca's Caprelsa (vendetanib) to Genzyme for $300m ($165m up-front and $135m in milestones) (Strategic Transactions, 2015f). Caprelsa is indicated for symptomatic or progressive medullary thyroid carcinoma in patients with unresectable locally advanced or metastatic disease, a rare disease that fits in Genzyme's business more strategically than AstraZeneca's. Even when AstraZeneca's out-licensing activity did involve straight-out partnering, the company still retained a stake in the asset. One prime example is Celgene's license of AstraZeneca's immuno-oncology candidate durvalumab. While the Big Pharma company continues to focus in-house on development of the antibody for solid tumors, Celgene's worldwide rights cover hematological cancers. Celgene paid $450m up-front in the deal, one of the largest up-fronts in 2015 (Strategic Transactions, 2015g), and plans to conduct four combination studies of durvalumab with its own drugs in various cancer types, including relapsed/refractory multiple myeloma and non-hodgkin s lymphoma (NHL) (Business Wire, 2015). 19

20 Figure 9: AstraZeneca's out-licensing deals, by therapy area, Johnson & Johnson signed key cancer deals and formed an innovation initiative Johnson & Johnson (including Janssen and other subsidiaries) was second to AstraZeneca in terms of number of deals signed with 141 in total. Johnson & Johnson, however, tied with AstraZeneca in the volume of in-licensing deals made at 118 within the five-year period. Johnson & Johnson's dealmaking activity began to sharply increase in 2012, peaking at 31 transactions each in 2014 and The company's out-licensing activity on the other hand is small, only representing 15% of its total alliances between 2011 and Most of its out-licensing agreements included the sale of rights to drugs or licensing, as opposed to co-development or co-promotion. Over the time period, Johnson & Johnson experienced no growth in out-licensing deal volume. 20

21 Figure 10: Johnson & Johnson s deal-making activity: greater focus on in-licensing, JOHNSON & JOHNSON INNOVATION WAS LAUNCHED Johnson & Johnson launched an initiative in 2012 to establish regional innovation centers throughout the world to advance life sciences discoveries. The business unit, called Johnson & Johnson Innovation, partners with the corporate venture arm Johnson & Johnson Development Corporation (JJDC) and JLABS, its biotech incubator network, to collaborate with start-ups to provide R&D expertise, business model development, and funding. According to Robert Urban, PhD, who leads Johnson & Johnson's innovation hub in Boston, the newly formed entities that work with JLABS have no obligation to Johnson & Johnson in terms of deal-making, but they must be "remarkable companies" (Urban, 2015). Johnson & Johnson Innovation signed nine partnerships over the five-year period, mostly centered on neurology and oncology. Aduro Biotech teamed up with the Innovation group twice in 2014, licensing prostate and lung cancer candidates derived from Aduro's live-attenuated double-deleted Listeria monocytogene platform. Together those deals are worth $1bn in potential payments (Medtrack, 2016). Continuing that momentum, Johnson & Johnson Innovation arranged several new pharmafocused agreements at the start of 2016 (Pink Sheet Daily, 2016a). JOHNSON & JOHNSON BUILT UP ITS HEMATOLOGICAL CANCER PORTFOLIO IN ONCOLOGY DEALS Oncology was the focus of most of Johnson & Johnson's five-year deal-making activity, representing 29% of its alliances. Unsurprisingly, some of the company's highest-valued transactions were also in the oncology area, namely Janssen Biotech's 2011 global agreement for Pharmacyclics's Bruton s tyrosine kinase inhibitor ibrutinib, which at the time was in Phase II for NHL, chronic lymphocytic leukemia (CLL), and multiple myeloma. The deal included a $150m up-front payment with up to 21

22 $825m in development and regulatory milestones. The partners also have a 50/50 share on profits and losses (Strategic Transactions, 2011). The US Food and Drug Administration (FDA) approved the drug as Imbruvica in 2013 for mantle cell lymphoma, followed by approvals in CLL/small-cell lymphocytic lymphoma and Waldenström s macroglobulinemia (Biomedtracker, 2016). Johnson & Johnson was one of the rumored bidders when Pharmacyclics went up for sale, but AbbVie ended up buying the biopharma company in 2015 for $21bn (Strategic Transactions, 2015h) in a move largely to reduce its reliance on Humira (adalimumab). AbbVie now splits Imbruvica profits with Johnson & Johnson. Imbruvica is a key growth driver for Johnson & Johnson; sales of the drug are forecasted to reach $3bn at its peak in 2024, a significant increase from 2014 sales of $196m (see Datamonitor Healthcare's Johnson & Johnson analysis for more details). Figure 11: Johnson & Johnson's in-licensing deals, by therapy area, In another big oncology deal, Janssen and Genmab teamed up in 2012 to develop the latter's daratumumab, an anti-cd38 HuMax antibody for relapsed/refractory multiple myeloma. As part of the deal, Johnson & Johnson's corporate venture arm JJDC took an 11% stake in Genmab for $80m, and Janssen also spent $55m in cash up-front and pledged up to $1bn in development, regulatory, and sales milestones (Strategic Transactions, 2012c). This was Johnson & Johnson's second-biggest deal overall behind its 2012 $4bn DuoBody antibody discovery agreement, also with Genmab (Strategic Transactions, 2012d). The FDA approved daratumumab as Darzalex in November 2015 for fourth-line therapy in multiple myeloma (FDA news release, 2015). The Pharmacyclics and Genmab deals contributed to building Johnson & Johnson's hematology/oncology portfolio and should help offset declining sales, beginning in 2018 due to the patent expiration of and anticipated generic competition 22

23 for Velcade (bortezomib). Johnson & Johnson's Ortho Biotech co-promotes Velcade in the US with Takeda Pharmaceutical's Millennium Pharmaceuticals (now called Takeda Oncology) (Strategic Transactions, 2006), and under a 2003 deal, Ortho has ex-us rights (Strategic Transactions, 2003). Besides Velcade, the only legacy product Johnson & Johnson had in myeloma was Doxil (pegylated liposomal doxorubicin hydrochloride), which now faces generic competition. In the myeloma pipeline, Johnson & Johnson is testing a couple of candidates it obtained from the Pharmacyclics and Genmab agreements, including Imbruvica in the multiple myeloma indication and a subcutaneous version of daratumumab, using Halozyme Therapeutics' ENHANZE technology, also for multiple myeloma (Biomedtracker, 2016). HEPATITIS C WAS THE FOCUS OF MULTIPLE INFECTIOUS DISEASE ALLIANCES Approximately 17% of Johnson & Johnson's in-licensing deals focused on infectious disease between 2011 and 2015, second behind oncology. Infectious disease was the company s third-leading therapy area in 2014 by sales, at $5bn or 16.2% the company s total pharma sales. Between 2014 and 2024, however, the category will experience a -8.0% CAGR due to generic competition to Prezista (darunavir) in HIV (although Johnson & Johnson's fixed-dose combination Prezcobix [darunavir/cobicistat] is forecasted to counter some of that loss); Incivek (telaprevir), approved for hepatitis C virus (HCV) and withdrawn from the US market in 2014, but still available in other countries (Johnson & Johnson's Tibotec has ex-north American rights from Vertex Pharmaceuticals) (Biomedtracker, 2016); and Olysio (simeprevir), also in HCV, because of heightened competition from Gilead's Harvoni (sofosbuvir/ledipasvir) (see Datamonitor Healthcare's Johnson & Johnson analysis for more details). In particular, hepatitis C was an area of concentration for Johnson & Johnson's deals and was an indication of interest in five of the 14 infectious disease deals, including an $875m collaboration with Achillion Pharmaceuticals in 2015 to develop the biotech's ACH3102, ACH3422, and sovaprevir with the goal of producing a short-acting, pan-genotypic, oral regimen for the disease (Medtrack, 2016). PARTNERSHIPS REFLECT THE IMPORTANCE OF IMMUNOLOGY AND INFLAMMATION AND NEUROLOGY TO JOHNSON & JOHNSON Immunology and inflammation and neurology were also important therapeutic areas for Johnson & Johnson's in-licensing, accounting for 15% and 16% of the company s total deal-making, respectively. Immunology and inflammation is a key market for the company, supported by the continued growth of Remicade (infliximab) and newer drugs Simponi (golimumab) and Stelara (ustekinumab). In 2014, 31.7% of Johnson & Johnson's revenue derived from immunology and inflammation, making it the company's largest therapeutic category, and sales from the market are forecasted to reach nearly $13bn in 2024, representing a 2.2% CAGR from 2014 (see Datamonitor Healthcare's Johnson & Johnson analysis for more details). Leading drug Remicade has faced biosimilar competition in Europe (from Hospira) since 2015, and in the US, the FDA is reviewing a biosimilar from Celltrion, so Johnson & Johnson may look to in-licensing to offset that sales erosion. Smaller biotechs such as Phenex Pharmaceuticals, Modern Biosciences, and Ionis Pharmaceuticals partnered with Johnson & Johnson in million-dollar deals involving various indications such as autoimmune disorders of the gastrointestinal tract, rheumatoid arthritis, psoriasis, and inflammatory 23

24 bowel disease (Medtrack, 2016). Johnson & Johnson's largest immunology and inflammation alliance completed during the five-year time period, however, was recently terminated. In an agreement that could have been worth $945m, Janssen received in 2012 exclusive global rights (outside of Japan) to Astellas Pharma's Phase II oral Janus kinase inhibitor ASP015K for moderate-to-severe rheumatoid arthritis (Medtrack, 2016). However, effective 15 January 2015, Janssen returned the candidate following a strategic portfolio review which was based on an analysis of the depth of the company's immunology pipeline and the decision to invest in other core areas (PharmAsia News, 2014). Johnson & Johnson's central nervous system group of deals involved several agreements in the risky Alzheimer's disease market. Janssen tied up with Shionogi, Evotec, Alector, and the Centre for Collaborative Drug Research to discover new Alzheimer's treatments, in addition to the areas of pain and migraine (Medtrack, 2016). Roche continued oncology momentum but deal-making showed importance of other therapeutic areas Roche was the third most active Big Pharma dealmaker between 2011 and 2015, signing a total of 111 transactions. The company's in-licensing volume steadily increased over the five-year period. While Roche executed 35 out-licensing deals (third behind AstraZeneca and Pfizer), out-licensing decreased at a CAGR of -8% between 2011 and Figure 12: Roche's deal-making activity: in-licensing increased while out-licensing decreased,

25 ONCOLOGY REMAINED A TOP FOCUS AREA FOR ROCHE Oncology represented 62.1% of Roche s 2014 sales (see Datamonitor Healthcare's Roche analysis for more details) and was the focus of 43% of Roche's in-licensing deals during the five-year period. According to Sophie Kornowski-Bonnet, head of partnering at Roche, oncology remains a priority for the company (Pink Sheet, 2016a). Similar to other Big Pharma firms, Roche's most expensive agreements involved immunotherapies. In exchange for $150m up-front and up to $1bn in milestones, New Link Genetics granted Roche's Genentech unit exclusive worldwide rights to NLG919, a Phase I indoleamine 2,3-dioxygenase (IDO) inhibitor (Strategic Transactions, 2014c). The companies also formed a research collaboration to test next-generation IDO/tryptophan 2,3-dioxygenase inhibitors. Further, Roche and Genentech are evaluating in Phase Ib a combination of their PD-L1 inhibitor atezolizumab with NLG919 (Trialtrove, 2015). Combinations in immuno-oncology have become an increasingly important area of research. Roche launched a committee in 2015 that reviews proposals for such combinations in deal-making, recognizing, says Jason Coloma, who leads the company's efforts in oncology and cancer immunotherapy partnering, that "you won t have everything in house you just can t research and develop and market all of these therapy options" (Pink Sheet, 2016b). In another billion-dollar deal, Roche received rights to Immatics Biotechnologies' tumorassociated peptide-based cancer vaccines and other immunotherapies for gastric cancer, prostate cancer, and NSCLC (Medtrack, 2016). Figure 13: Roche s in-licensing deals, by therapy area,

26 NEUROLOGY BECAME AN IMPORTANT AREA FOR ROCHE S IN-LICENSING Neurology has been a smaller focus area for Roche; in 2014, this category only accounted for 2% of sales (see Datamonitor Healthcare's Roche analysis for more details). However, this is set to change following a reorganization of Roche's Pharma Research and Early Development unit and a recommitment to neuroscience (Pink Sheet, 2016a). Neurology's share in Roche's drug sales is forecasted to increase at a CAGR of 11.4% between 2014 and 2024, the highest growth rate for any of the company s therapy areas, driven by gantenerumab (currently in Phase II/III for Alzheimer's disease) and ocrelizumab (Phase III for multiple sclerosis) (Datamonitor Healthcare, Company Analysis, Forecast Analysis, April 2015). Approximately 20% of Roche's in-licensing deals were in the neurology area, second behind oncology, and covered conditions including pain, Parkinson's disease, stroke, Huntington's disease, and Alzheimer's disease. The company's largest neurology deal focuses on the development of Evotec's monoamine oxidase-b inhibitor sembragiline for Alzheimer's. Evotec received $10m up-front and could get $820m in total milestones, but the candidate's future is in question after a read-out of data in 2015 showed it failed to demonstrate benefit on the primary endpoint. Roche says it will review all secondary endpoints before making a decision on how to proceed (Medtrack, 2016). PARTNERING IN INFECTIOUS DISEASE COULD HELP COMBAT PEGASYS LOSS In 2014, infectious disease was Roche's third-largest therapy area, representing 8.7% of sales. The company's infectious disease portfolio is forecasted to experience a -11.0% CAGR from 2014 to 2024, including a significant loss in Pegasys (peginterferon alfa-2a) sales due to competition from interferon-free regimens (see Datamonitor Healthcare's Roche analysis for more details). Between 2011 and 2015, infectious diseases accounted for 18% of deals, the company's third most active therapy area for in-licensing. Partnering has become increasingly important for Roche's infectious disease efforts, with R&D focusing on hepatitis B virus, influenza, and antibiotics for toughto-treat strains (Pink Sheet, 2016a). After being largely absent from antibiotics research for decades, Roche re-entered the market with a deal in 2013 to work on Polyphor's macrocycle antibiotic POL7080 for Pseudomonas aeruginosa (Strategic Transactions, 2013d). While Roche ended up terminating the agreement a couple of years later, the company has continued to forge alliances to help combat antibiotic resistance. For instance, in early 2015, Fedora Pharmaceuticals and Meiji Seika Pharma licensed Roche worldwide rights (outside of Japan) to their beta-lactamase inhibitor OP0595, which may be combined with a beta-lactam antibiotic to treat severe infections caused by Enterobacteriaceae, including multidrug-resistant strains (Medtrack, 2016). ONCOLOGY ALSO LED ROCHE S OUT-LICENSING ACTIVITIES In out-licensing, oncology was also Roche's top therapeutic area, represented in the majority (53%) of Roche's out-licensing partnerships. This indicates that while Roche is actively in-licensing drugs in oncology, it is also carefully reviewing its in-house pipeline to determine which candidates fit with its strategic priorities. For example, Genentech received $10m in up-front and technology transfer fees for licensing its GDC0917, an inhibitor of apoptosis proteins, to Curis. Roche's oncology out-licensing 26

27 also included the partnering of older drugs, for instance Xeloda (capecitabine) with Mylan and Ostac (clodronic acid) with RIEMSER Pharma (Medtrack, 2016). Figure 14: Roche s out-licensing deals, by therapy area, Pfizer's in-licensing fluctuated while out-licensing efforts increased Pfizer has gone through significant transformation in recent years. The company implemented costsaving measures as it faced the patent cliff with Lipitor (atorvastatin calcium), consolidated its portfolio between innovative and established products, and made smaller drug discovery deals along with larger strategic acquisitions. Pfizer bulked up in biosimilars with the $17bn Hospira takeover in 2015 (Strategic Transactions, 2015i). Also in 2015, Pfizer bought Allergan for $160bn (Strategic Transactions, 2015a), a move that both reduces the combined company's tax rate by 7 8% and also, according to Pfizer, will be beneficial to its R&D organization as it brings together two schools of thought on R&D: acquiring external programs (via Allergan's model) and continuing emphasis on internal discovery and early-stage research (from Pfizer) (Pink Sheet Daily, 2016b). Between 2011 and 2015, Pfizer penned a total of 107 deals and showed some fluctuation in activity year-on-year. Within the Big Pharma peer set, Pfizer was ranked fourth in total deal volume, but was the only company to experience a negative CAGR from 2011 to 2015 in the number of both in- and out-licensing transactions. After a decrease from , in-licensing volume sharply increased and peaked in 2014, followed by a decline in deals in The company's out-licensing efforts in the early part of the five-year period nearly matched the activity of in-licensing one-for-one; in 2012, 27

28 Pfizer actually conducted slightly more out-licensing than in-licensing. Despite the slight tapering off of out-licensing since, Pfizer signed a total of 38 such deals over the five-year period, the secondhighest amount behind AstraZeneca. The large number of out-licensing deals is not surprising given the company s efforts to streamline R&D and reduce its size. Post-Allergan transaction closing, the potential for even more out-licensing is greater, especially as Pfizer plans to eventually split up its innovative and established drugs businesses (Pink Sheet Daily, 2015). Figure 15: Pfizer's deal-making activity, PFIZER'S ONCOLOGY DEALS WERE DRIVEN BY IMMUNO-ONCOLOGY Oncology accounted for nearly one-third (32%) of all in-licensing deals made by Pfizer, an overwhelmingly big share compared with all other therapeutic areas, reflecting its importance to Pfizer's strategic direction. In 2014, oncology sales represented only 6.1% of Pfizer's total pharma revenues, but this is forecasted to increase at a CAGR of 7.3% out to 2024 (representing approximately $2.8bn in growth), the highest growth of all therapy areas in Pfizer's portfolio. By 2024, oncology is expected to more than double its share within Pfizer's business, to approximately 14%, second behind infectious disease. Sutent (sunitinib) is currently the company's top-selling cancer drug, but anticipated generic competition is forecasted to drive sales down by $924m by To help supplant that loss, it is expected that Pfizer s newly approved breast cancer product Ibrance (palbociclib), the first cyclin-dependent kinase inhibitor to reach the market, and biosimilar trastuzumab will help offset revenue losses due to generic erosion (see Datamonitor Healthcare's 28

29 Pfizer analysis for more details). Pfizer's oncology in-licensing was driven by immuno-oncology, with more than 50% of the deals focused on this subset. The company forged a few agreements to combine its drugs with partner's immune checkpoint inhibitors. For example, Pfizer is evaluating combinations of its Phase I antibody PF separately with both Merck & Co (in combination with anti-pd-l1 antibody Keytruda) and Kyowa Hakko Kirin (in combination with anti-ccr4 antibody mogamulizumab) (Medtrack, 2016). Pfizer also signed several billion-dollar immuno-oncology in-licensing deals during the five-year period. It is co-developing and co-commercializing Merck KGaA's anti-pd-l1 antibody avelumab as a monotherapy and in combination with other drugs for multiple tumors. As part of the same transaction, Merck will be co-promoting Xalkori (crizotinib), an existing targeted therapy for NSCLC in Pfizer's portfolio. Overall, the Merck KGaA/Pfizer deal is worth $3bn in up-front and milestone fees (Strategic Transactions, 2014d). Pfizer's other big immuno-oncology in-licensing transactions included a $1bn deal with BioAtla to develop and sell the biotech's antibodies targeting cytotoxic T- lymphocyte-associated protein 4, as well as a $3bn collaboration with Cellectis for allogeneic chimeric antigen receptor T-cell immunotherapies (Medtrack, 2016). Figure 16: Pfizer s in-licensing deals, by therapy area, TO MITIGATE ENBREL AND CELEBREX LOSSES, PFIZER STEPPED UP ITS IMMUNO-INFLAMMATION IN-LICENSING Besides oncology, much of Pfizer's in-licensing activity occurred in immunology and inflammation. This therapeutic category is currently ranked third in Pfizer's portfolio, accounting for 17.2% of 29

30 pharma sales, but is forecasted to experience a CAGR of -5.7% from 2014 to 2024, representing a loss of over $3bn ($4bn expected in 2024 compared with $8bn in 2014) mainly due to declines in sales of Enbrel (etanercept) and Celebrex (celecoxib) (see Datamonitor Healthcare's Pfizer analysis for more details). Some of Pfizer's immunology and inflammation deals between 2011 and 2015 were in drug discovery, providing potentially newer candidates to replenish the company's pipeline in this area. Pfizer also teamed up with BIND Biosciences, gaining exclusive options on BIND's Accurin nanoparticle drug candidates in inflammatory disorders, plus other diseases. The agreement is worth $210m. Pfizer is also working with Karo Bio under a $217m deal to research small-molecule RORgamma modulators for autoimmune diseases (Medtrack, 2016). PFIZER USED OUT-LICENSING TO SHARE DEVELOPMENT RISK AND OFFLOAD NON-CORE ASSETS Pfizer's efforts to shed assets or partner non-core or deprioritized drugs were evident in its outlicensing activity. Following its merger with Wyeth in 2009, Pfizer has been on a quest to "get smaller" in recent years, exemplified by the spin-offs of its animal health and nutritional businesses, as well as deals with smaller biotechs and Big Pharma. More than two-thirds of Pfizer's out-licensing deals involved selling rights or traditional licensing. One such example involved Pfizer partnering its dry powder inhaler delivery platform with Mylan, which will have exclusive rights to commercialize Pfizer's generic versions of GlaxoSmithKline's asthma/copd drugs Advair Diskus and Seretide Diskus (salmeterol/fluticasone) under a $348m deal (Medtrack, 2016). Respiratory R&D was one of several areas that Pfizer discontinued in 2011 following an R&D restructuring (Cressey, 2011). Oncology was the most heavily out-licensed therapy area with 27% of such deals made in this market. Many of the deals involved distribution services with companies including Diplomat Pharmacy, a specialty pharmacy, and Biologics Inc., which provides oncology services, for Pfizer's cancer treatments such as Xalkori or Inlyta (axitinib) (Medtrack, 2016). Other deals featured licensing or acquisition of rights, including Clovis Oncology's worldwide license to Pfizer's PF /CO338, an oral inhibitor of poly (ADP-ribose) polymerase-1 (PARP-1) and PARP-2, for up to $262m. In mid- 2015, the FDA granted the candidate, now known as rucaparib, breakthrough therapy designation as a monotherapy for germline or somatic BRCA-mutated advanced ovarian cancer in patients who have received at least two prior platinum-containing therapies (Medtrack, 2016). Pfizer's reasons for outlicensing rucaparib were not specified, just that the company at the time had a large oncology pipeline. Rucaparib came to Pfizer via Wyeth, which itself got the drug when it acquired Agouron Pharmaceuticals in 1999 (Pink Sheet Daily, 2015). A smaller percentage (18%) of Pfizer's out-licensing deals were co-development or co-promotion collaborations. Pfizer's partnership with Eli Lilly for the anti-nerve growth factor antibody tanezumab was one such example from the neurology area. Neurology itself represented 10% of Pfizer's overall out-licensing (third behind oncology and EM&GD), while conversely, neurology was one of the company's smaller in-licensing areas. This is notable for the fact that in 2014, neurology was Pfizer's second-highest therapy area by sales. The therapy area is forecasted to lose $6bn in sales between 2014 and 2024, at a CAGR of -9.9%, mainly due to sales loss from Lyrica (pregabalin). Neurology still remains an area of concentration for Pfizer (see Datamonitor Healthcare's Pfizer analysis for more details). Allergan's neurology assets, namely Botox (onabotulinumtoxina), may help revive this 30

31 category. Pfizer received $200m up-front from Eli Lilly to share in the development and profit of Pfizer's tanezumab, in Phase III for osteoarthritis and chronic low back pain, and in Phase II for cancer pain (Biomedtracker, 2016). Pfizer may also receive up to $350m in regulatory milestones and $1bn in sales milestones, equating to a total deal value of $2bn. The FDA had the candidate on partial clinical hold due to cases of worsening osteoarthritic pain during studies, and the hold was lifted in early If approved, the companies will jointly promote the product worldwide (Medtrack, 2016). Figure 17: Pfizer's out-licensing is led by divestments of rights,

32 Figure 18: Pfizer out-licensed in similar therapy areas to in-licensing but in different deal structures, Overall, out-licensing increased by 42% and Amgen and Eli Lilly evenly split in- and outlicensing Externalization has always been a critical part of Big Pharma's business ecosystem, and that trend continues. The rate of Big Pharma's in-licensing activity outpaced that of out-licensing in each of the five years examined. On average, Big Pharma companies signed two-to-three times as many inlicensing agreements annually as out-licensing deals between 2011 and Out-licensing is a key tactic for Big Pharma's business model for many reasons, including divesting non-core assets or monetizing potentially innovative drugs that simply do not fit with a company's current strategy. Outlicensing volume slightly decreased in both 2012 and 2013, but has steadily risen since then. There was a 42% increase in out-licensing between the start and end of the five-year period. 32

33 Figure 19: Big Pharma s out-licensing increased but is still outpaced by in-licensing, AMGEN DID MORE OUT-LICENSING THAN IN-LICENSING Within the Big Pharma peer set, Amgen strayed the most from the other companies in terms of its volume of in-licensing compared with out-licensing. Instead, the company had nearly an equal split between in- and out-licensing of its five-year total of 46 deals, signing just two more out-licensing transactions than in-licensing (24 versus 22). Amgen historically operates from more of a biotech business model, which is likely the reason behind this. Among those alliances that had a disclosed value, the biotech firm could reap nearly $900m in potential payments from its out-licensing efforts. Tesaro, for example, holds rights to Amgen's small-molecule inhibitors of anaplastic lymphoma kinase, including TSR011 for NSCLC and other cancers, in an agreement worth $138m (Medtrack, 2016). In addition to straight out-licensing, many of Amgen's deals were structured with development, codevelopment, or commercialization components. Amgen and Watson signed a co-development collaboration in 2011 focused on oncology biosimilars, where Watson agreed to contribute up to $400m in co-development costs. The deal includes biosimilars trastuzumab, bevacizumab, rituximab, and cetuximab (Medtrack, 2016). Amgen is now working with Teva, which bought Allergan's generic business in 2015; Allergan is the new name of the combined Actavis/Allergan business, and Actavis was the combined Watson/Actavis. 33

34 Figure 20: Big Pharma s in-licensing/out-licensing activity, by company, ELI LILLY USED A CREATIVE VENTURE FUNDING MODEL TO CAPITALIZE ON OUT-LICENSING During the five-year period, Eli Lilly, similar to Amgen, also nearly evenly split its deal-making activity between in- and out-licensing. Nearly half of Eli Lilly's in-licensing is in oncology, an area that is forecasted to fluctuate in sales between 2014 and Eli Lilly is expected to experience its biggest setback with generic competition to the chemotherapeutic Alimta (pemetrexed) beginning in 2022 (see Datamonitor Healthcare's Eli Lilly analysis for more details). Some of the company's largestvalued in-licensing deals were also in oncology, including a 10-year antibody agreement with Innovent ($1.5bn) and an antibody-drug conjugate collaboration with ImmunoGen ($626m) (Medtrack, 2016). 34

35 Figure 21: Eli Lilly's in-licensing deals, by therapy area, To monetize drugs coming from its own research that do not fit in with its pipeline, as well as capitalize on assets from other companies, Eli Lilly formed what was called a "mirror" strategy in 2010 (START-UP, 2010) and teamed up with capital fund partners, including TVM Capital and HealthCare Ventures, to create venture funds to finance those projects, which are housed within single-asset companies. Eli Lilly holds the option to buy some of the assets once certain goals are achieved (Pink Sheet, 2013). While the company conducted a large number of oncology out-licensing transactions (22% of all of its out-licensing, including several with non-profits wherein the company is contributing its drugs for research), neurology accounted for a slightly larger proportion of outlicensing deals at 25%. One such agreement came about as part of the mirror portfolio. In 2011, Arteaus Therapeutics acquired Eli Lilly's calcitonin gene-related peptide inhibitor LY for migraine. After reviewing Phase II data, Eli Lilly reacquired the candidate three years later (Medtrack, 2016). In another neurology out-licensing (outside of the mirror strategy), Eli Lilly partnered the neurokinin 1 receptor antagonist tradipitant with Vanda Pharmaceuticals in an agreement worth up to $100m (Medtrack, 2016). Vanda had been testing the small molecule in alcohol abuse treatment, but in 2013 the company said it was no longer planning any future studies. Tradipitant has instead 35

36 advanced to Phase II in pruritus (Biomedtracker, 2015). In comparison, Eli Lilly did very few neurology in-licensing deals over the five-year period. This therapy area was the company s second-largest in terms of sales in 2014, accounting for 20.8% of total sales, behind the EM&GD category. Neurology sales are forecasted to decline at a CAGR of -9.1% between 2014 and 2024, mainly because of Cymbalta (duloxetine) generics (see Datamonitor Healthcare's Eli Lilly analysis for more details). Eli Lilly's decreased in-licensing and increased out-licensing could indicate a deprioritization on the company s own part in this area while reallocating more resources toward EM&GD, which is expected to maintain the leading spot through to 2024 and also represented 21% of Eli Lilly's in-licensing, second behind oncology. Figure 22: Eli Lilly s out-licensing deals, by therapy area, Bibliography AstraZeneca (2015) Durvalumab ATLANTIC trial supports clinical activity and AstraZeneca s overall immuno-oncology strategy. Available from: [Accessed 13 January 2016]. Business Wire (2015) Celgene in Collaboration with Astrazeneca Announce Initiation of Fusion Clinical 36

37 Development Program in Immuno-Oncology. Available from: Announce-Initiation-Fusion-Clinical [Accessed 13 January 2016]. Cressey D (2011) Pfizer slashes R&D. Available from: [Accessed 15 January 2016]. FDA news release (2015) FDA approves Darzalex for patients with previously treated multiple myeloma. Available from: [Accessed 14 January 2016]. PharmAsia News (2014) Janssen Returns Astellas s JAK Inhibitor. Available from: Astellass-JAK-Inhibitor [Accessed 14 January 2016]. Pink Sheet (2013) Lilly s Venture Strategy Matures As PoC Data Catalysts Approach. Available from: [Accessed 20 January 2016]. Pink Sheet (2016a) Roche s pred Team Reviews R&D Wish List As Firm Continues Push To Diversify. Available from: [Accessed 19 January 2016]. Pink Sheet (2016b) Roche Doubles Down On Collaborations In Immuno-Oncology, No Signs Of Stopping. Available from: [Accessed 19 January 2016]. Pink Sheet Daily (2011) Pfizer Outlicenses PARP Inhibitor To Clovis. Available from: [Accessed 15 January 2016]. Pink Sheet Daily (2015) Pfizer s Allergan Acquisition Paves The Way For A Split But Delayed. Available from: [Accessed 15 January 2016]. Pink Sheet Daily (2016a) J&J Starts The Year With A Bang With 22 Early-Stage Deals. Available from: [Accessed 14 January 2016]. Pink Sheet Daily (2016b) Why Pfizer s R&D Chief Dolsten Is Enthusiastic About Allergan. Available from: RampD-Chief-Dolsten-Is-Enthusiastic-About-Allergan [Accessed 14 January 2016]. 37

38 Schott C (2015) AstraZeneca company presentation. BioPharm America 2015; Boston, Massachusetts; 15 September START-UP (2010) Lilly's Evolving Corporate Venture Model. Available from: [Accessed 26 January 2016]. Strategic Transactions (2003) Millennium in giant cancer deal with Ortho Biotech. Available from: [Accessed 14 January 2016]. Strategic Transactions (2006) J&J gets US co-promotion rights to Millennium's Velcade. Available from: [Accessed 14 January 2016]. Strategic Transactions (2007) AstraZeneca buys MedImmune for $15.6bn. Available from: [Accessed 13 January 2016]. Strategic Transactions (2011) Janssen Biotech gets rights to Pharmacyclics' PCI Available from: [Accessed 14 January 2016]. Strategic Transactions (2012a) Regulus pens development deal with AZ for three preclinical programs. Available from: [Accessed 13 January 2016]. Strategic Transactions (2012b) BMS acquires diabetes player Amylin for $6.8bn. Available from: [Accessed 13 January 2016]. Strategic Transactions (2012c) Janssen Biotech gets rights to Genmab's Phase I/II HuMax-CD38. Available from: [Accessed 14 January 2016]. Strategic Transactions (2012d) Janssen Biotech teams up with Genmab to create antibodies. Available from: [Accessed 14 January 2016]. Strategic Transactions (2013a) AZ pays $240mm up front for mrna collaboration with Moderna. Available from: [Accessed 13 January 2016]. Strategic Transactions (2013b) MedImmune and NGM to develop new therapies for diabetes and obesity. Available from: [Accessed 13 January 2016]. Strategic Transactions (2013c) AstraZeneca buys diabetes business from BMS for $2.7bn up front, plus earn-outs. Available from: [Accessed 13 January 2016]. Strategic Transactions (2013d) Polyphor licenses P. aeruginosa candidate POL7080 to Roche; terminated. Available from: [Accessed 19 38

39 January 2016]. Strategic Transactions (2014a) Pfizer ups offer for AstraZeneca to $84.19 per share; AZ board not interested. Available from: [Accessed 13 January 2016]. Strategic Transactions (2014b) AstraZeneca buys Almirall's respiratory franchise for $875mm plus earn-outs. Available from: [Accessed 13 January 2016]. Strategic Transactions (2014c) NewLink partners immune checkpoint inhibitor NLG919 with Genentech. Available from: [Accessed 19 January 2016]. Strategic Transactions (2014d) Pfizer to build its immuno-oncology pipeline through tie-up with Merck KGAA. Available from: [Accessed 28 January 2016]. Strategic Transactions (2015a) Pfizer, Allergan combine in $160bn deal. Available from: [Accessed 13 January 2016]. Strategic Transactions (2015b) Moderna closes $450mm third round. Available from: [Accessed 13 January 2016]. Strategic Transactions (2015c) AZ gets exclusive rights to Heptares' adenosine A2A receptor blocker as a cancer immunotherapy. Available from: [Accessed 13 January 2016]. Strategic Transactions (2015d) MedImmune pays $27.5mm up front for rights to Inovio's cancer vaccine. Available from: [Accessed 13 January 2016]. Strategic Transactions (2015e) AstraZeneca buys Takeda's respiratory business for $575mm. Available from: [Accessed 13 January 2016]. Strategic Transactions (2015f) Genzyme gets global rights to AZ's Caprelsa for $165mm up front. Available from: [Accessed 13 January 2016]. Strategic Transactions (2015g) Celgene pays AZ $450mm up front for rights to MedImmune's MEDI4736. Available from: [Accessed 13 January 2016]. Strategic Transactions (2015h) AbbVie pays $20bn in cash and stock for Pharmacyclics. Available from: [Accessed 14 January 2016]. 39

40 Strategic Transactions (2015i) Pfizer pays $15.4bn in cash, $1.75bn in debt for Hospira. Available from: [Accessed 15 January 2016]. Urban R (2015) Johnson & Johnson Innovation company presentation. BioPharm America 2015; Boston, Massachusetts; 15 September

41 THERAPY AREA ANALYSIS Oncology dominated Big Pharma deal volume Between 2011 and 2015, nearly two-thirds of Big Pharma's in-licensing deals were in oncology, an overwhelming indication of the importance of this therapeutic area and the investment that Big Pharma is making to find improvements over existing treatments and potentially a cure for this disease. As of mid-2015, Big Pharma companies have approximately 279 candidates in the pipeline for cancer, well over two times that of any other therapeutic area. The peer set's oncology sales are forecast to grow by $18bn between 2014 and 2024 at a compound annual growth rate (CAGR) of 2.4% (see Datamonitor Healthcare's 2015 Big Pharma Outlook for more details). Figure 23: Big Pharma s in-licensing deals, by therapy area, In the five-year period examined, Big Pharma firms signed 250 in-licensing agreements involving or focusing on cancer assets, more than twice the amount of deals in any other therapeutic area. Annually, however, oncology has not always taken such an overwhelming share. In 2011 and 2012, the therapy area was almost level with infectious disease for the top spot among partnerships, each representing about 22% of deals. Starting in 2013 there was a shift and oncology has since grown tremendously, accounting for around 41 42% of alliances in both 2014 and The high level of unmet need in oncology, coupled with the potential for scientific advances as well as the high prices oncology drugs command and the relatively low payer management within this category, at least in the US are the key attractions for a wider presence in the oncology field. 41

42 Figure 24: Big Pharma s deal volume, by therapy area, The majority of Big Pharma's oncology in-licensing deals (approximately 57%) were signed at the early stage of a drug's development cycle, spanning preclinical to Phase I. This varied among the therapeutic areas. Like oncology, the infectious disease and neurology categories also featured more alliances signed at Phase I or earlier, and the reason behind this could be the more early-stage research involved in specialty indications, particularly oncology and neurology. On the other hand, cardiology and dermatology drugs were most often licensed at the pending approval/approved/marketed or Phase III stages. Conversely, these were likely for more primary care indications or established markets. 42

43 Figure 25: Big Pharma s in-licensing deals, by therapy area and phase of development, IMMUNO-ONCOLOGY WAS A KEY DRIVER OF CANCER DEALS Nearly 50% of the 250 cancer in-licensing deals made were driven by immuno-oncology, an emerging field in which the body's immune system is activated to fight and destroy cancer. Immuno-oncology's share in the total pipeline (Big Pharma and beyond) is also expanding, having increased nearly ninefold from 2010 to Q3 2015, and is mainly driven by an influx of candidates at the preclinical stage (Citeline, 2015). While it is early days for immuno-oncology the field "is still evolving, and we're still trying to understand why patients benefit from immune-oncology drugs," said Ioamis Sapountzis, global head of oncology business development and licensing at Boehringer Ingelheim (Sapountzis, 2015) that has not stopped or slowed down Big Pharma's push to continue developing these medicines. Immuno-oncology has been dominated by the programmed death ligand-1 (PD-L1) target, namely the first two approved drugs in this class, Merck & Co's Keytruda (pembrolizumab) and Bristol- Myers Squibb's Opdivo (nivolumab), sales of which are expected to grow at a CAGRs of 50.3% and 95%, respectively, to 2024 (see Datamonitor Healthcare's 2015 Big Pharma Outlook for more details). Aside from PD-1, other immuno-oncology targets are the focus of drug development efforts, including TIM3, LAG3, OX40, as well as T-cell therapies including chimeric antigen receptor T-cells (see Datamonitor Healthcare's Immuno-Oncology for more details). NewLink Genetics, for example, is aggressively pursuing inhibition of indoleamine 2,3-dioxygenase (IDO), an immune checkpoint, and has licensed its lead candidate indoximod to Roche. The partners plan to evaluate IDO/tryptophan- 2,3-dioxygenase combinations, and also recently completed patient enrollment for a Phase II study of 43

44 indoximod combined with taxane chemotherapy for metastatic breast cancer (Medtrack, 2016). Several other companies are teaming up in collaborations to study the effects of combinations that may increase survival compared with immuno-oncology agents used alone (Pink Sheet, 2015a). AstraZeneca and MedImmune have been pursuing the combo route for their PD-L1 inhibitor durvalumab. In late 2015, AstraZeneca announced that it would likely not be using data from its ATLANTIC trial, based on preliminary results, to support filing of durvalumab as a monotherapy (AstraZeneca, 2015). The Big Pharma company has been evaluating combinations both within its own pipeline, for example with tremelimumab, a cytotoxic T-lymphocyte-associated protein 4 inhibitor (Pink Sheet, 2015b), and externally via deal-making with companies including Immunocore, Juno Therapeutics, and Innate Pharma. In an out-licensing arrangement, AstraZeneca also partnered with Celgene to test durvalumab in hematological cancers including non-hodgkin s lymphoma (NHL), myelodysplastic syndromes, and multiple myeloma (Medtrack, 2016). Celgene paid $450m up-front for rights and launched the FUSION program to study multiple durvalumab combinations, with Celgene's pomalidomide, CC486, and azacitidine (Business Wire, 2015a). In late 2015, Bristol-Myers Squibb scored the first ever US approval for an immunotherapy combination of its two drugs Opdivo and Yervoy (ipilimumab) in BRAF V600 wild-type unresectable or metastatic melanoma (Scrip, 2015a). The combination was also approved in January 2016 for all melanoma patients, regardless of BRAF mutation status (Pink Sheet Daily, 2016a). Collaborations to study novel immunotherapy combinations have been increasing since 2010, and from 2014 to 2015 nearly doubled from 34 to 67 (Medtrack, 2016; Trialtrove, 2016). Combination deals will likely continue to grow due to the current uncertainly over which combinations will work and for what cancer types. In addition, because many of these combination agreements are pre-competitive and do not involve any financial terms as of yet, over the course of the next few years as trial results come out for combinations, there will come the time for partners to sign definitive agreements and to iron out specific details about further development and eventual commercialization. PFIZER AND MERCK KGAA PUSH FORWARD WITH AVELUMAB Over the five-year period, approximately $36bn in deal value (including up-front payments and potential milestones) was attributed to immuno-oncology. Among the most lucrative was Pfizer's worldwide license to Merck KGaA's anti-pd-l1 antibody avelumab, in development for Merkel cell carcinoma, melanoma, and breast, colorectal, gastrointestinal, non-small cell lung, ovarian, and prostate cancers (Strategic Transactions, 2014a). The alliance potentially paves the way for Pfizer and Merck KGaA to compete with the likes of Merck & Co and Bristol-Myers Squibb in the PD-L1 market. In April 2015, Pfizer and Merck KGaA began Phase III trials of avelumab in Stage IIIb/IV non-small cell lung cancer. The partners have also signed up Dako AS to develop a companion diagnostic (Strategic Transactions, 2015a), and are studying a combination of avelumab with Syndax's entinostat in ovarian cancer (Strategic Transactions, 2016). Pfizer paid Merck $850m up-front (the largest up-front payment in all oncology in-licensing deals) plus up to $2bn in regulatory and commercial milestones. The agreement also pairs up Merck KGaA and Pfizer to co-promote the latter's Xalkori (crizotinib) in the US and some other markets, and to advance Pfizer's own PD-L1 antagonist into Phase I. In Q3 2015, the US Food and Drug Administration (FDA) granted fast track designation to avelumab in metastatic Merkel cell carcinoma (Business Wire, 2015b). 44

45 Table 1: Big Pharma's lucrative immuno-oncology deals, Deal date Licensee Licenser Subject of deal Total up-front payment Total announced ($m) milestones ($m) Total deal value ($m) 3 February 2014 Merck & Co Ablynx Nanobody candidates 41 6,724 6,779 (including bi- and trispecifics) directed at immune checkpoint modulators 18 June 2014 Pfizer Cellectis CAR-T immunotherapies 80 2,775 2,855 directed at 15 targets selected by Pfizer 850 2,000 2, November 2014 Pfizer Merck KGaA Merck's avelumab; copromotion of Pfizer's Xalkori; and codevelopment on Pfizer's PD- L1 antagonist 28 July 2015 Sanofi Regeneron REGN2810, a Phase I PD n/a 2,170 inhibitor; preclinical programs targeting LAG3, GITR, and PD-L1; development of bispecific antibodies for hematologic and solid cancers Downloaded by carla.holloway on 13/10/

46 Table 1: Big Pharma's lucrative immuno-oncology deals, Deal date Licensee Licenser Subject of deal Total up-front payment Total announced ($m) milestones ($m) Total deal value ($m) 16 September 2015 Amgen Xencor XmAb technology to create 45 1,700 1,745 bispecific antibodies, including a preclinical bispecific T-cell engager program directed at CD38 and CD3 for multiple myeloma 24 November 2014 Bristol-Myers Squibb Five Prime Therapeutics Combination of Opdivo 350 1,390 1,740 with FPA008, a CSFR1 inhibitor for NSCLC, melanoma, head and neck cancer, pancreatic cancer, colorectal cancer, and malignant glioma 3 November 2015 Sanofi BioNTech Up to five cancer 60 1,500 1,560 immunotherapies, each consisting of a mixture of synthetic messenger RNAs Downloaded by carla.holloway on 13/10/

47 Table 1: Big Pharma's lucrative immuno-oncology deals, Deal date Licensee Licenser Subject of deal Total up-front payment Total announced ($m) milestones ($m) Total deal value ($m) 20 March 2015 Eli Lilly Innovent Biologics CD-20-targeting antibody n/a 1,400 1,456 in hematologic malignancies; preclinical immuno-oncology molecule for development in China; up to three preclinical bispecific immunooncology candidates outside of China 30 August 2012 Janssen Biotech Genmab Human CD38-directed 55 1,000 1,140 monoclonal antibody Darzalex 5 January 2015 Amgen Kite Pharma CAR-T immunotherapies 60 1,050 1,110 based on Kite's eact platform CAR-T = chimeric antigen receptor T-cell; eact = engineered autologous cell therapy; NSCLC = non-small cell lung cancer; PD-L1 = programmed death ligand-1 Downloaded by carla.holloway on 13/10/

48 ROCHE WAS AMONG THE LEADING DEALMAKERS IN ONCOLOGY The Big Pharma companies that did the bulk of the deal-making overall also tended to do more cancer deals. So unsurprisingly, AstraZeneca was the most active oncology in-licenser in the Big Pharma peer group, followed by Johnson & Johnson. For Roche, which came in third behind AstraZeneca and Janssen, oncology has historically been a pillar of its business, driven by its investment and later complete acquisition of Genentech in Roche is forecasted to maintain its leading spot in the oncology market through to 2024, although its share within the Big Pharma peer set will decrease from 38% in 2014 to 31% in 2024 (see Datamonitor Healthcare's 2015 Big Pharma Outlook for more details). Some of Roche's largest-valued cancer deals have been drug discovery agreements with biotechs, including Immatics Biotechnologies, which licensed IMA942 and other cancer vaccines in a deal valued at over $1bn, and Array BioPharma, which could get up to $713m for partnering its checkpoint kinase 1 inhibitor ARRY575 with Genentech. In an agreement that could have been worth $1bn (Roche's largest oncology in-licensing deal), Roche had rights to Molecular Partners' DARPin biologics conjugated to toxic agents. However, the alliance was later canceled as a result of Roche's discontinuation of its Pseudomonas exotoxin conjugate programs (Medtrack, 2016). One of Roche's more interesting oncology deal structures was one that Genentech crafted with Forma Therapeutics in 2011 (although financing terms were not disclosed) (Medtrack, 2016). Genentech received an option on Forma's preclinical tumor metabolism candidate, a small-molecule nicotinamide phosphoribosyltransferase inhibitor (Pharmaprojects, 2016), for money up-front, R&D funding, and development milestones. If Genentech exercises the option, it would buy out the entire program for additional fees and milestones, all of which will be paid directly to Forma's venture backers, providing investors with an untraditional exit concerning this one asset (START-UP, 2011). A few years later, Forma struck another option-based deal with Celgene, which may end up buying the entirety of Forma and its holding companies (Strategic Transactions, 2014b). 48

49 Figure 26: Top oncology in-licensing dealmakers, Infectious disease agreements declined, but there is potential for a turnaround The infectious disease category, which at 13% of total in-licensing deal volume is placed second behind oncology, noticeably started to shrink starting in 2013 in annual partnership counts, while the oncology and endocrine, metabolic, and genetic disorder (EM&GD) categories gained momentum. Almost half (46%) of the infectious disease agreements over the five years focused on viral diseases, but bacterial infections also represented a large amount of deals at 30%. Many Big Pharma companies have backed away from infectious disease research in recent years because of lack of incentives, mainly the instability of financial return on investment in developing novel antibiotics despite the public health need to curb antibiotic resistance. However, with the introduction in the US of the Qualified Infectious Disease Product (QIDP) designation in 2012 (providing for fast track and priority review eligibility, and an additional five years of exclusivity to be added to other exclusivities), there could be a shift in the pipeline and an uptick in deal-making in the future (Pink Sheet, 2012). Roche, for example, signed several deals with the smaller biotechs Polyphor, Spero, Discuva, and Federa Pharmaceuticals/Meiji Seika Pharma between 2013 and 2015, signaling a return to antibiotic development (the Polyphor alliance was later terminated, however [Medtrack, 2016]). In addition, in early 2016, 85 pharmaceutical and diagnostics companies came together at the World Economic Forum to issue a declaration that asks international governments to commit funding that would create markets in which developers would be rewarded for their research to combat drug-resistant infections, including pricing that better reflects the benefits of treatments (Review on Antimicrobial Resistance, 2016). Should such changes actually be implemented, the likelihood of even more infectious disease deals being made would greatly increase. 49

50 Figure 27: Big Pharma s infectious disease in-licensing deals, by infection type, Endocrine, metabolic, and genetic disorders gained speed Not that far behind infectious disease in terms of in-licensing deal volume was the EM&GD category, representing 12% of Big Pharma deals over the past five years. EM&GD is expected to pass oncology in 2020 as the leading therapeutic area in terms of Big Pharma prescription drug sales, mainly due to key launches in diabetes and dyslipidemia, as well as growth in insulins and glucagon-like peptide-1 agonists (see Datamonitor Healthcare's 2015 Big Pharma Outlook for more details). The rising prevalence of diabetes in developed and emerging markets and pharma s growing interest in rare diseases are key drivers behind investment in these fields. In addition to tax benefits, orphan indications have traditionally experienced lower pricing and reimbursement hurdles, although with the entry of some new orphan drugs with prices considered excessive by some payers, this may change going forward. Nevertheless, Datamonitor Healthcare expects rare diseases to retain significant presence in deal-making as Big Pharma continues its push toward personalized and stratified medicine. SANOFI LED IN EM&GD DEALS Sanofi, which has the leading diabetes drug on the market in Lantus (insulin glargine), did the most EM&GD deals of any Big Pharma in the time period evaluated, signing 19 in-licensing agreements (including those by Genzyme as well). One of the company's most notable deals was with MannKind for the inhaled insulin product Afrezza (Medtrack, 2016). For $150m up-front, Sanofi received worldwide rights to the rapid-acting insulin powder, which had a troubled development path and 50

51 went to the FDA twice before getting approved in June 2014 (Biomedtracker, 2016). The deal would have also included potentially $775m in milestones, and a 65% Sanofi/35% MannKind profit split, but Sanofi terminated the agreement in early 2016 due to slow sales, which only totaled $3.4m in H (Pink Sheet Daily, 2016b). MannKind says it will support Afrezza with a new sales effort, but the product has a lot to prove following the disappointing launch and subsequent market withdrawal in 2008 of the first inhaled insulin, ironically Sanofi's own product Exubera, which Pfizer bought in 2006 (Strategic Transactions, 2006). The delivery device for Afrezza is much smaller and MannKind claims it is easier to use and more efficient than Exubera's (Pink Sheet, 2015c). While the MannKind deal unraveled, Sanofi still forged several other alliances in diabetes that could help fill its pipeline, including billion-dollar agreements in 2015 with both Lexicon Pharmaceuticals and Hanmi Pharmaceutical (Medtrack, 2016). Sanofi is also banking on Toujeo (insulin glargine [rdna origin]), Lyxumia (lixisenatide), and LixiLan (lixisenatide/insulin glargine) to help reduce dependence on Lantus, especially as the drug faces biosimilar competition (see Datamonitor Healthcare's Forecast: Type 2 Diabetes in the US, Japan, and 5EU for more details). NOVO NORDISK HAD LOWER DEAL VOLUME BUT A DEFINED FOCUS ON METABOLIC DISEASE Novo Nordisk had a good showing in the EM&GD group of deals, signing six alliances, together worth a potential $705m. The company has teamed up with Emisphere Technologies three times to reformulate its pipeline diabetes and obesity candidates with Emisphere's Eligen oral drug delivery technology (Medtrack, 2016). Overall, among the Big Pharma firms, Novo was one of the lowervolume dealmakers (alongside AbbVie and Teva), but the slower deal-making is not surprising. Novo already has a strong portfolio in diabetes, led by NovoLog/NovoRapid (insulin aspart [rdna origin]), and in obesity, Victoza (liraglutide) is already a multi-billion dollar product, with sales forecasted to increase even more in late 2016 if the drug s additional indication in type 2 diabetes is approved in the US and EU (see Datamonitor Healthcare's Novo Nordisk analysis for more details). Sanofi is expected to overtake Novo in 2020 as the leader in EM&GD, reaching $25bn in sales in 2024 (approximately 23% of Big Pharma's share in EM&GD) (see Datamonitor Healthcare's 2015 Big Pharma Outlook for more details). ELI LILLY AND BOEHRINGER INGELHEIM MADE ADVANCEMENTS THROUGH DIABETES COLLABORATION Eli Lilly and Boehringer Ingelheim have also been strong forces in diabetes, thanks to their 2011 codevelopment alliance involving multiple candidates including dipeptidyl peptidase-iv inhibitors and sodium-glucose cotransporter-2 (SGLT-2) inhibitors (Medtrack, 2016). Their agreement, worth $2bn, has already produced two marketed products: Jardiance (empagliflozin), approved in 2014 for type 2 diabetes and the third entrant in the SGLT-2 class behind Johnson & Johnson's Invokana (canagliflozin) and AstraZeneca's Farxiga (dapagliflozin); and Tradjenta (linagliptin), approved in 2011 for type 2 diabetes (Biomedtracker, 2016). As part of their collaboration, Eli Lilly and Boehringer Ingelheim developed a follow-on to Sanofi's Lantus, already launched in some European countries as Abasaglar/Abasria. As part of a patent settlement in Q3 2015, Sanofi granted Eli Lilly and Boehringer Ingelheim rights to launch the follow-on product in the US, branded as Basaglar. The FDA approved Basaglar in December 2015 under the 505(b)(2) abbreviated pathway; therefore in the US, the drug is 51

52 not considered a biosimilar (Scrip, 2015b). Under Eli Lilly and Boehringer Ingelheim's patent settlement with Sanofi, they are permitted to launch Basaglar in the US on 15 December 2016 (Strategic Transactions, 2015b). Oncology also led in terms of partnership dollar values Oncology also led Big Pharma in-licensing activity in terms of dollar value by therapeutic area, surpassing $51bn in total potential payments, including $4bn in up-front funds and $35bn in announced milestones (the highest in all three metrics in any therapeutic category). Oncology deal values were nearly three times that of the other therapeutic areas. EM&GD followed oncology with $18bn, including $2bn up-front and $11m in milestones. The immunology and inflammation, and infectious disease categories came in at $12bn and $11bn, respectively for total potential value. A couple of rheumatoid arthritis tie-ups involving Janus kinase (JAK)1 inhibitors signed in 2012 helped boost the immunology and inflammation total. Abbott (now AbbVie) teamed up with Galapagos to develop the selective JAK1 inhibitor filgotinib for moderate-tosevere active rheumatoid arthritis in an agreement worth $1bn. In a $945m deal, Janssen had licensed ex-japanese rights to Astellas's ASP015K, also a JAK inhibitor, for moderate-to-severe rheumatoid arthritis, but the partners canceled the agreement (Medtrack, 2016). Further boosting the immunology and inflammation total, GlaxoSmithKline divested to Novartis rights to Arzerra (ofatumumab) in autoimmune diseases, particularly in multiple sclerosis. Arzerra is approved for chronic lymphocytic leukemia and was part of the oncology business sale to Novartis in 2014; at the time, GlaxoSmithKline retained rights to the drug in autoimmune diseases (Strategic Transactions, 2015c). Over 40% of the infectious disease total is from Bristol-Myers Squibb's sale of its early- and latestage HIV pipeline to ViiV Healthcare (majority owned by GlaxoSmithKline), potentially creating a bigger competitive force in the HIV market besides Bristol-Myers Squibb, which retained ownership of its launched HIV medicines, and Gilead (Medtrack, 2016). 52

53 Figure 28: Big Pharma s in-licensing deals, by total deal value, CARDIOLOGY AND RESPIRATORY HAD STRONG SHOWINGS IN UP-FRONT VALUES The cardiology and respiratory categories, which had comparatively lower transaction volumes (5% and 4%, respectively) and total deal values ($7bn and $6bn, respectively), were among the groups with the higher up-front totals. At $2bn up-front, cardiology was the third-highest within the therapeutic areas, but it is worth noting that the cardiology category included the most drugs partnered at the pending approval/approved/marketed product stage than any other therapy area, which is likely the reason behind the larger payments. The majority of the cardiology figure was from Merck & Co's $1bn payment to Bayer for regional rights to soluble guanylate cyclase modulators, including the marketed pulmonary hypertension product Adempas (riociguat) and Phase IIb vericiguat. Bayer also concurrently acquired Merck's consumer health business in a separate deal (Medtrack, 2016). Respiratory also surpassed the $1bn up-front mark, mostly from one outlier deal: Almirall's sale for $875m up-front of its respiratory franchise to AstraZeneca, which could also pay up to $1bn in development, launch, and sales milestones (Medtrack, 2016). 53

54 Figure 29: Value of up-front and milestone payments of in-licensing deals, by therapy area, Oncology was also the focus of most out-licensing deals Between 2011 and 2015, 30% of Big Pharma's out-licensing was in oncology, the highest percentage of any category. The fact that oncology is a leading area for both in- and out-licensing reflects that Big Pharma is constantly evaluating pipelines and portfolios, reviewing the assets that it believes may be better developed by a partner, whether through a joint collaboration of efforts or via a divestment, and is also analyzing innovative technologies to bring in-house. 54

55 Figure 30: Big Pharma s out-licensing deals, by therapy area, Most of the oncology out-licensing agreements (20%) involved development or co-development, meaning the Big Pharma peer set has not completely off-loaded these drugs and still maintains a stake in them. One prime example is AstraZeneca's partnership with Celgene in immuno-oncology. Celgene paid AstraZeneca $450m up-front for exclusive rights to the PD-L1 inhibitor durvalumab. While AstraZeneca is focusing on developing durvalumab in several solid tumor indications, the Celgene deal will focus on durvalumab treatment of blood cancers including NHL, myelodysplastic syndromes, and multiple myeloma. Similarly, Amgen is taking advantage of its biosimilar capabilities by teaming up with Allergan to develop four biosimilars in oncology (Medtrack, 2016). BIG PHARMA'S NEUROLOGY OUT-LICENSING OUTPACED IN-LICENSING Neurology was also an active area for Big Pharma out-licensing, accounting for 12% of deals. In comparison, this therapy area only represented 9% of in-licensing. Neurology is still a research focus for many Big Pharmas, and consequently many of the out-licensing deals, as in oncology, involved development. Pfizer and Eli Lilly's billion-dollar agreement for the anti-nerve growth factor candidate tanezumab, for example, pairs up the companies to co-develop and co-commercialize the drug (Medtrack, 2016). The neurology group did include some strategic divestments by Big Pharma to small biotechs. One notable area of interest was the class of calcitonin gene-related peptide (CGRP) antagonists in migraine. Labrys Biologics acquired a shelved Big Pharma asset that eventually attracted a huge pay-out from another Big Pharma. In early 2013, Pfizer sold Labrys its CGRP antagonist LBR101. Teva acquired Labrys outright for $200m up-front in mid During the five- 55

56 year period, Merck also divested a CGRP antagonist (to Allergan for $250m), and Eli Lilly sold its CGRP candidate to Arteaus Therapeutics (incidentally, the Big Pharma company ended up buying the compound back after the release of positive Phase II data) (Medtrack, 2016). Amgen is another Big Pharma aiming to get a CGRP-targeted product to market. Bibliography AstraZeneca (2015) Durvalumab ATLANTIC trial supports clinical activity and AstraZeneca s overall immuno-oncology strategy. Available from: [Accessed 13 January 2016]. Business Wire (2015a) Celgene in Collaboration with Astrazeneca Announce Initiation of Fusion Clinical Development Program in Immuno-Oncology. Available from: Announce-Initiation-Fusion-Clinical [Accessed 13 January 2016]. Business Wire (2015b) Merck KGaA, Darmstadt, Germany, and Pfizer Announce Investigational Immunotherapy Avelumab Receives FDA Fast Track Designation for Metastatic Merkel Cell Carcinoma. Available from: Darmstadt-Germany-Pfizer-Announce-Investigational [Accessed 13 January 2016]. Citeline (2015) Anticancer Immunotherapy A New Weapon Against Cancer. Available from: [Accessed 21 January 2016]. Pink Sheet (2012) With GAIN In Place, Antibiotic Improvements Depend On FDA Implementation. Available from: In-Place-Antibiotic-Improvements-Depend-On-FDA-Implementation [Accessed 21 January 2016]. Pink Sheet (2015a) How To Catch The Next Wave Of Cancer Immunotherapy. Available from: [Accessed 26 October 2015]. Pink Sheet (2015b) AstraZeneca Immuno-Oncology Hopes Buoyed By Tremelimumab. Available from: ImmunoOncology-Hopes-Buoyed-By-Tremelimumab [Accessed 21 January 2016]. Pink Sheet (2015c) MannKind s Plan To Get Afrezza Inhaled Insulin Off The Ground. Available from: [Accessed 22 October 2015]. Pink Sheet Daily (2016a) Bristol Cements Lead In Immunotherapy. Available from: [Accessed 26 January 2016]. 56

57 Pink Sheet Daily (2016b) MannKind s Future Uncertain After Sanofi Terminates Afrezza Deal. Available from: Future-Uncertain-After-Sanofi-Terminates-Afrezza-Deal [Accessed 21 January 2016]. Review on Antimicrobial Resistance (2016) Global pharmaceutical industry calls on governments to work with them to beat the rising threat of drug resistance. Available from: [Accessed 21 January 2016]. Sapountzis I (2015) Immuno-oncology: new advances + new targets + new partnerships = new cures? BioPharm America presentation; Boston, Massachusetts; 15 September Scrip (2015a) BMS' Opdivo/Yervoy OK'd; 1st U.S. Immuno-Oncology Combo. Available from: [Accessed 1 October 2015]. Scrip (2015b) Lantus Follow-On Basaglar OK'd, But Can Lilly Sell It? Available from: [Accessed 21 January 2016]. START-UP (2011) Forma To Play To Its Strengths With Genentech Deal. Available from: [Accessed 22 October 2015]. Strategic Transactions (2006) Pfizer to buy Sanofi-Aventis' share of Exubera for $1.3bn. Available from: [Accessed 21 January 2016]. Strategic Transactions (2014a) Pfizer to build its immuno-oncology pipeline through tie-up with Merck KGAA. Available from: [Accessed 21 January 2016]. Strategic Transactions (2014b) Celgene and Forma enter second collaboration; Celgene gets buy-out option. Available from: [Accessed 21 January 2016]. Strategic Transactions (2015a) Merck, Pfizer partner with Dako to create companion diagnostic for avelumab. Available from: [Accessed 21 January 2016]. Strategic Transactions (2015b) Sanofi and Lilly settle Basaglar patent litigation. Available from: [Accessed 21 January 2016]. Strategic Transactions (2015c) Novartis now completely owns ofatumumab in new GSK transaction. Available from: [Accessed 21 January 2016]. 57

58 Strategic Transactions (2016) Merck KGAA, Pfizer, and Syndax enter ovarian cancer trial collaboration. Available from: [Accessed 21 January 2016]. 58

59 DEAL ECONOMICS Between 2011 and 2015, approximately $125bn in total deal value went into Big Pharma in-licensing deals, equating to an average of $25bn per year. Total deal value includes various types of key payments, most importantly up-front fees, which are paid upon the signing of an agreement, and milestones, which are tied to achievements reached over the alliance's lifetime. Milestones, especially later-stage payments, are often called "biobucks," referring to the notion that these fees may not ever get paid because of the high associated risk, such as commercial success or sales goals. Big Pharma companies spent a total of $11bn in up-front payments over the five-year period and pledged more than $69bn in announced milestones. Johnson & Johnson was the top dealmaker by dollars spent within the Big Pharma peer set Johnson & Johnson shelled out the most money overall in Big Pharma deal-making (in-licensing only) during the five-year period. The company signed approximately $18bn in total deal value, but only $671m of that was via up-front fees. Johnson & Johnson increased its annual partnership volume alongside the amount of investment it put into in-licensing, with the exception of a fairly small figure ($156m) in The deals also spanned a range of development phases, from early discovery research up to Phase II. The company not only signed the highest total value among the Big Pharma peer set across five years, but also managed to allocate the second-highest amount in a single year over $7bn in 2012 which included its two billion-dollar deals with Genmab (one for its bispecific antibody discovery technology, DuoBody, and the other for daratumumab, then in Phase I/II), an option-based agreement with Forma Therapeutics worth $700m and focused on tumor metabolism target discovery, and a $945m alliance with Astellas Pharma for the Phase IIb Janus kinase inhibitor ASP015K (later terminated) (Medtrack, 2016). 59

60 Figure 31: Big Pharma s big spenders in in-licensing deals, SANOFI'S DIABETES AND ONCOLOGY DEAL-MAKING DROVE UP VALUES Sanofi came in behind Johnson & Johnson with $17bn in total value, but allocated a higher portion ($2bn) to up-front fees. The company had a stand-out year in 2015 in terms of deal values, spending an aggregate $970m up-front and $12bn in total pledged payments. Sanofi's largest 2015 deals covered two key areas, diabetes and immuno-oncology, and similar to Johnson & Johnson, they included candidates ranging from preclinical through to Phase III. Sanofi's immunotherapy deal with BioNTech, worth $2bn, was signed at the discovery stage, while the other immunotherapy alliance with Regeneron, valued at $2.2bn (including a big up-front payment of $640m), included candidates in the preclinical stage as well as the Phase I REGN2810. Sanofi's $2bn deal with Lexicon Pharmaceuticals was for rights to Phase III sotagliflozin, a dual inhibitor of sodium-glucose cotransporters-1 and -2, while its $4bn agreement with Hanmi Pharmaceutical covered Phase II efpeglenatide, Phase I HM12470, and a preclinical glucagon-like peptide-1 agonist (Medtrack, 2016). 60

61 Table 2: Big Pharma s in-licensing deal values, by company, Company Total deal value ($m)* Up-front ($m) Milestones ($m) Johnson & Johnson 18, ,783 Sanofi 16,610 1,638 10,225 Roche 13, ,204 Pfizer 11,064 1,565 6,071 Merck & Co 9,884 1,421 7,031 Eli Lilly 8, ,261 AstraZeneca 8,354 1,719 3,702 Bristol-Myers Squibb 7, ,544 GlaxoSmithKline 6, ,551 Novartis 6, ,774 AbbVie/Abbott 5, ,120 Amgen 4, ,418 Boehringer Ingelheim 3, ,615 Novo Nordisk 2,010 1,393 2,010 Bayer 1, Teva *Includes up-front, milestone, R&D, and other types of licensing payments. ASTRAZENECA SPENT A LARGE UP-FRONT SUM AstraZeneca paid out the most of any of the Big Pharmas at deal signing: a $2bn up-front total. 61

62 Nearly three-quarters of that figure came towards the end of the five-year period, in 2014 and At $875m, the company's biggest up-front payment went on purchasing Almirall's respiratory business in Multiple products were involved, including marketed drugs such as Eklira (aclidinium) and a pipeline of preclinical through to Phase III asthma and chronic obstructive pulmonary disease candidates. In 2015, AstraZeneca paid $250m up-front to co-develop Innate Pharma's anti-nkg2a antibody IPH2201 in Phase II studies as a monotherapy and in combination with AstraZeneca's anti-programmed death ligand-1 durvalumab for multiple cancers (Medtrack, 2016). Payment metrics on deals generally increased Totals for all three major licensing payment metrics up-front, milestones, and total deal values gradually increased between 2011 and 2015, with the exception of decreases between 2012 and 2013 in total milestones and total deal value, and some fluctuations in the up-front figures. The declines in 2013 milestones and total deal value were primarily because 2013 had fewer large-money deals than in other years. The up-front total of $4bn in 2014 was a five-year high, representing 41% of all upfronts made between 2011 and Eight deals featured initial sums of more than $100m, including Bayer and Merck's soluble guanylate cyclase modulator deal at $1bn the largest up-front paid during and AstraZeneca's purchase of Almirall's respiratory franchise ($875m). Interestingly, 2015 also had eight deals, with up-fronts over $100m. Further, 2015 had more alliances (46) with reported up-front values compared with 2014's 33 alliances. Therefore 2014's lower-valued deals, coupled with the alliances with huge up-fronts, helped make the big difference for that year compared with It is important to note that a limitation of the analysis on deal economics stems from the fact that the totals on all three payment metrics are only for those deals with disclosed values. Included in this limitation is the possibility that deals with higher values are more likely to be reported than those with smaller figures. Within the universe of total in-licensing agreements over the five-year period (a total of 827), 18% had a disclosed up-front, 15% had a milestone figure, and 34% had a total deal value. 62

63 Figure 32: Big Pharma s licensing payments, by payment metric, Average deal values increased Average up-front and milestone payments, along with average deal values, gradually increased over the five-year period, demonstrating that the cost of deal-making continues to get more expensive (note, however, that the average figures only represent those from deals with disclosed values). The only declines seen were in the average total deal value figure in 2013 and the average up-front figure in 2012 and Average up-front payments fluctuated more compared with average milestones and total deal value, but generally they remained fairly flat between 2011 and 2013 (ranging from $39m 58m), after which they rose to $134m in Companies signed multiple hundred-milliondollar up-front deals in 2014 that drove up the average, and 2014 proved to be somewhat of an outlier year as the average up-front in 2015 went back down to $74m. The change in average upfront from $44m in 2011 to $74m in 2015 may be explained by oncology's bigger share in deal volume in 2015 compared with 2011, alongside the higher prices paid in oncology deals. There was also a bigger proportion of Phase I agreements in 2015 versus 2011, and average up-fronts in Phase I grew over the five-year period. 63

64 Figure 33: Big Pharma s in-licensing deals, by payment metric average, The larger deals in 2014 also translated to higher up-front averages broken down by phase; 2014 tended to have bigger averages across most phases. In general, up-front averages have been trending up in the preclinical through Phase III groups, although each phase did experience some declines in certain years. Up-front payments for filed for approval, approved, or marketed drugs saw the most fluctuation during the five years. The peak in 2011 was from a single deal: the $387m up-front in Eli Lilly and Boehringer Ingelheim's diabetes collaboration (which included the filed [at the time] for approval candidate Tradjenta [linagliptin]). Both Bayer and Merck & Co's cardiovascular agreement ($1bn up-front), and Almirall's sale of its respiratory business to AstraZeneca ($875m) helped propel 2014's average to $416m (Medtrack, 2016). 64

65 Figure 34: Big Pharma s average up-front payments in in-licensing deals, by phase of development, A higher proportion of deal value was still locked up in milestones While Big Pharma deals are indeed becoming more expensive, well over the majority of the value of these agreements are tied into various types of milestones, including development, regulatory, and commercial, and therefore are neither guaranteed nor paid up-front. As a result, the partner often never sees this money. Excluding 2014, an average of just 7% of Big Pharma deal value was spent upfront was an outlier, with 15% of total deal value attributed to up-front payments. 65

66 Figure 35: Total up-front payment values and up-front payments as a percentage of in-licensing deal value, There were more than two-dozen billion-dollar deals between 2011 and 2015 Approximately 30 in-licensing deals done in the five-year time period reached $1bn or higher in total deal value. Within the top 10 alliances of that dataset, half of the deals were signed in 2014, an outlier year, contributing to the large figures of that year. In addition, the top 10 was nearly evenly split between Big Pharma-biotech agreements, and Big Pharma deals within the peer set or partnerships with other larger pharma companies (including mid-sized companies or specialty pharmas). The therapeutic subjects of the agreements were spread among key areas, but immunooncology was well represented. 66

67 Table 3: Top 10 Big Pharma in-licensing deals, by deal value, Deal date Partners (licensee/licenser) Deal subject Disease targets Up-front ($m) Milestones ($m) Total deal value ($m) 5 November 2015 Sanofi/Hanmi Efpeglenatide, a long-acting GLP-1 receptor agonist; a weekly insulin; and GLP-1/insulin Diabetes 437 3,822 4,258 combination 12 July 2012 Janssen DuoBody bispecific antibody drug discovery Multiple diseases (per product) 3,666 Biotech/Genmab 18 June 2014 Pfizer/Cellectis CAR-T immunotherapies Multiple myeloma 80 2,775 2, November 2014 Pfizer/Merck KGaA Merck's anti-pd-l1 antibody avelumab; Pfizer's anti-pd-1 antibody; co-promote on Pfizer's Xalkori NSCLC and various other tumor types 850 2,000 2,850 3 February 2014 Merck & Co/Ablynx Nanobody candidates (including bi- and trispecifics) directed toward immune checkpoint Oncology 41 2,660 2,331 modulators 6 April 2015 Bristol-Myers Gene therapies against 10 cardiovascular targets, including the calcium-binding protein Congestive heart 82 2,207 2,307 Squibb/uniQure S100A1 failure 28 July 2015 Sanofi/Regeneron Immunotherapies, including REGN2810, a PD-L1 inhibitor; potential preclinical candidates Oncology 640 n/a 2,170 targeting LAG3, GITR, and PD-L1 6 May 2014 Merck & Co/Bayer Co-development of soluble guanylate cyclase modulators for cardiovascular diseases including Bayer's Adempas and Phase IIb vericiguat Cardiovascular failure, pulmonary arterial hypertension 1,000 1,100 2,100 Downloaded by carla.holloway on 13/10/

68 Table 3: Top 10 Big Pharma in-licensing deals, by deal value, Deal date Partners (licensee/licenser) Deal subject Disease targets Up-front ($m) Milestones ($m) Total deal value ($m) 30 July 2014 AstraZeneca/Almirall Divestment of Almirall's respiratory assets including the marketed drug Eklira plus pipeline Asthma, COPD 875 1,220 2,095 candidates 31 October 2013 Eli Lilly/Pfizer Pfizer's Phase III tanezumab, an anti-nerve growth factor antagonist for osteoarthritis, chronic low back pain, and cancer pain Cancer pain, chronic pancreatitis, chronic pelvic pain syndrome, diabetic neuropathy, endometriosis, interstitial cystitis, low back pain, osteoarthritis 200 n/a 1,800 Note: numbers may not add up due to rounding and number of deals with reported up-front vs milestone vs total deal values. CAR-T = chimeric antigen receptor T-cell; COPD = chronic obstructive pulmonary disease; GLP-1 = glucagon-like peptide-1; NSCLC = non-small cell lung cancer; PD-L1 = programmed death ligand-1 Downloaded by carla.holloway on 13/10/

69 69

70 PHASE ANALYSIS The risk of drug development was mirrored, but balanced, by Big Pharma in terms of the phases most often partnered in in-licensing deals. The peer group had a fairly even split in alliances among all stages of a drug's lifecycle, but preclinical alliances led. Early-stage candidates dominated partnerships By overall counts, the majority of Big Pharma's in-licensing transactions are classified in the "unknown" phase, which represents either research-stage (ie drug discovery) compounds or those candidates where the phase was not specified. For deals where the phase was disclosed, licenses for preclinical candidates topped the list and accounted for 30% of the agreements, an important indicator that Big Pharma is not averse to in-licensing opportunities at the early stages of a drug s lifecycle. Similarly, there was a strong showing in deals signed at Phase I at 22%. On an annual basis, the share of alliances done in preclinical and Phase I have been gradually increasing. In 2011, preclinical and Phase I deals represented 26% and 21% of the total volume, respectively; by 2015, those figures increased to 32% and 30%, respectively. Figure 36: Big Pharma s in-licensing deals, by phase of development at deal signing,

71 Figure 37: Share of preclinical and Phase I in-licensing deals increases, Big Pharma in-licensing for marketed products (or approved/pending approval drugs) had comparatively lower deal volume counts than most other phases, representing 16%. Deal activity for this phase signals the peer group's increased externalization efforts to build up pipelines to support long-term growth, while de-emphasizing reliance on approved products that likely have a shorter patent life and are therefore at risk to generic competition sooner. The opposite effect was seen in Big Pharma out-licensing. Among the deals where the phase was disclosed, nearly half (45%) were for drugs that are already approved, while only 8% involved preclinical compounds. 71

72 Figure 38: Strong representation across all phases in Big Pharma s in-licensing deals,

73 Figure 39: Marketed products dominated Big Pharma s out-licensing deals, Marketed drugs and Phase II candidates led in aggregate up-front payments For in-licensing deals that had disclosed economics, those signed-for drugs that were in Phase II secured the most in up-front payments: a total of $4bn over the five-year period. Marketed product deals also scored high in total up-front fees at $3bn, but only slightly ahead (by $100,000) of Phase I alliances at $3bn. Aggregate deal values mirrored volume with the preclinical category s total the largest at $39bn. Phase II and III total deal values were also in the top three, at $32bn and $26bn, respectively. 73

74 Figure 40: Big Pharma s in-licensing deal economics, by phase of development, Phase II and marketed drugs tended to have higher average up-fronts While preclinical deals dominated in volume and total value, annual average up-front payments for preclinical candidates tended to be among the lowest compared with other phases, which saw higher averages. This is due to the sheer volume of alliances and the wider range of up-fronts for preclinical candidates, spanning a low of $1m to a high of $650m (from Sanofi's immuno-oncology deal with Regeneron [Medtrack, 2016] over the five years). Phase II and marketed drugs garnered higher up-fronts per year. Some of the bigger tie-ups in the Phase II group included the AstraZeneca/Almirall respiratory business sale ($875m) and the Merck KGaA/Pfizer agreement for the immuno-oncology candidate avelumab ($850m). Both of those deals happened to occur in 2014, when up-front averages increased significantly across all phases. The year-on-year averages in the marketed group fluctuated the most, declining since 2011 and then 74

75 reaching a peak in 2014 at $416m. The 2014 figure was boosted by two major deals: Merck's rights to Bayer's Adempas (riociguat) for pulmonary arterial hypertension and chronic thromboembolic pulmonary hypertension ($1bn); and the aforementioned AstraZeneca/Almirall respiratory business sale ($875m), which also included marketed products (Medtrack, 2016). Phase III candidates also showed lower up-front averages versus other phases. However, Phase III upfronts started to trend up in 2013, reaching a high of $180m in 2015, while payments in most other phases that year saw a decline. The 2015 Phase III average was brought up by Novartis' acquisition of full rights to GlaxoSmithKline's Arzerra (ofatumumab) in autoimmune diseases, where the drug is still under development. The transaction included an up-front payment of $300m (Medtrack, 2016). Figure 41: Big Pharma s average up-front payments for in-licensing deals, by phase of development,

76 Figure 42: Big Pharma s average total deal values for in-licensing deals, by phase of development,

77 GEOGRAPHIC BREAKDOWN OF DEAL-MAKING Big Pharma companies tended to partner regionally, licensing rights for certain select countries within the major markets around the world (ie regions within one of the major five markets tracked by Medtrack including Asia-Pacific, Europe, Middle East and Africa, North America, and South and Central America). Exactly one-third of in-licensing deal volume over the five-year period covered regional territories. In comparison, worldwide deals represented 28%. Rights for just North America arguably the most lucrative because of the US followed at 24%. Figure 43: Big Pharma s in-licensing deal volume, by licensed geography, The same three geographies were also at the top of the out-licensing agreements. North America was the most partnered-in region, accounting for 27% of the out-licensing deal volume. Divestments in North America, however, were a relatively small proportion and other deal structures, including development and licensing, were also part of the agreements. This indicates that Big Pharma plans to maximize sales by joining up on sales and marketing efforts. Big Pharma out-licensing in North America was followed closely by regional territories at 26% and then worldwide at 23%. 77

78 Figure 44: Big Pharma s out-licensing deal volume, by licensed geography, Regional deal-making took off Regional deal-making has been trending upwards since 2007 (START-UP, 2011). Between 2011 and 2015, the same held true: there was a steady increase in regional agreements, which totaled 72 in 2015, a 64% increase over 2011's 44 deals. Starting in 2011 and continuing since, the share of alliances including global rights was less than that of regional deals annually. Historically, Big Pharma firms typically gained global rights in the majority of their deals, under the thinking that they were better equipped in terms of R&D and sales and marketing infrastructure to bring a drug to market. That conventional wisdom has changed, though, and smaller partners are bringing more bargaining power to the table, sometimes even retaining rights to their products in major geographies like the US. Even so, as regional deal-making has increased, so have agreements for rights in just North America. In reviewing individual company totals among the Big Pharma peer set, half of the firms did more regional deals than worldwide. Notably, more than 50% of GlaxoSmithKline s and Novo Nordisk's alliances were for regional rights. Novartis and AbbVie signed more worldwide deals than the other Big Pharmas, and in Asia, the leading Big Pharma was Eli Lilly, indicating that company's interest in expanding its reach in this territory. 78

79 Figure 45: Big Pharma s worldwide in-licensing deals decreased and regional carve-outs increased,

80 Figure 46: Geographic breakdown of in-licensing geography by Big Pharma peer set, Bibliography START-UP (2011) Tracking Big Pharma's Appetite For Regional Deals. Available from: Regional-Deals [Accessed 22 October 2015]. 80

81 DEAL STRUCTURES R&D was the most common component of deal structures Collaboration on development was a key component of both Big Pharma in- and out-licensing transactions. Over the five-year period, 23% of in-licensing deals included development or codevelopment, followed by research and discovery at 21%. When it came to partnering Big Pharma assets, the same held true: co-development was also a big part of Big Pharma out-licensing, accounting for 17% of the alliances. Out-licensing also involved other collaborative efforts, including commercialization (14% of the deals) and research/discovery (7%). Unsurprisingly, the out-licensing deals did involve divestments, representing 16%. In terms of in-licensing agreements broken down by phase, the development/co-development deal structure led on all of the development-stage phases preclinical through to Phase III. When Big Pharma brought in an approved or marketed product, however, most of the deals involved acquisition of rights and little development. Figure 47: Big Pharma s in-licensing deals, by deal structure,

82 Figure 48: Big Pharma s out-licensing deals, by deal structure, Between 2011 and 2015, there were no significant changes in the ways that Big Pharma companies structured their alliances. Deals that included a research and development component, in which the companies share in the R&D funding and perform discovery and development activities, was consistently the most common attribute included on in-licensing transaction structures. In 2011, development/co-development-structured deals represented 22% of in-licensing deals, and that figure remained constant throughout the following years. Other deal structures have shown some smaller increases in the share of alliances, including research/discovery and licensing, which involves rights to develop, manufacture, or market a drug. Acquisitions, on the other hand, have slightly decreased in share, from 14% in 2011 to 12% in

83 Figure 49: Development and research/discovery consistently featured in Big Pharma s in-licensing deals, Option-based deal-making decreased There was a slight decrease in option-based in-licensing deals over the five-year period. Built-in options, which gained popularity as a way for the licensee to de-risk a potential asset before it was officially taken in-house, peaked in 2009 among all pharmaceutical alliances and started trending downward (In Vivo, 2012). In 2011, option-based agreements accounted for 5% of Big Pharma deals. That decreased to 3% the following year and has remained flat at 4% since then. The decreased reliance on options as part of a deal could be the result of some of the other creative deal structures that have been implemented recently, including build-to-buy companies formed around single compounds; instead of the option being a negotiating factor in a partnership, build-to-buy deals position the option as an outright acquisition of the biotech company itself, usually with pre-arranged terms with a specific partner and a capped return. Inception Sciences, a biotech incubator, has been working on this strategy in partnership with Versant Ventures and has formed several companies in partnership with Roche and Bayer (START-UP, 2016). Bibliography In Vivo (2012) Considering All Options: Pharma s Wait-And-See Deals Might Have Peaked. Available from: 83