US Biotechs Assign European Marketing Rights

Most US biotechs dream of becoming international corporations. But when the chance arises, economic realities often compel firms that retain European marketing rights to assign those privileges to other parties. That's prudent, because the costs and complexities of establishing operations in Europe should not be underestimated, say executives who've been there and done that. Sometimes minimizing risk is the best way to maximize the value of a compound—and discretion is the better part of valor.

US biotech companies that retain the right to market their own products in Europe are increasingly assigning those rights to other parties, saying they prefer to be realistic rather than naïvely optimistic. Differences in language, culture, regulatory requirements, marketing and sales practices and prescribing practices make building a European marketing operation a challenge that isn't necessarily worth the time, energy and money—no matter how appealing the notion of becoming an international corporation.

But that doesn't necessarily mean they'll sign up with mid-sized European firms for partnerships. Instead, they seem to be turning to other, largely American, biotechs who have already managed to make the trans-Atlantic leap—or to Big Pharma.

Cubist Pharmaceuticals Inc. is the latest biotech firm to reach this conclusion. Icos Corp. also decided that for now it would be better off not hiring its own sales reps in Europe to sell the new erectile dysfunction drug tadalafil (Cialis). Instead it will pay on a per-detail basis for calls made by employees of its joint venture partner Eli Lilly & Co. (See "Lilly Icos: A Complementary Alliance, IN VIVO, October 2003 (Also see "Lilly Icos: A Complementary Alliance" - In Vivo, 1 Oct, 2003.).) These firms join a growing cadre of US biotech companies including Johnson & Johnson 's Scios Inc. , Celgene Corp. , Corixa Corp. , Marina Biotech Inc. and RespireRx Pharmaceuticals Inc. , in deciding that discretion is the better part of valor. (See Exhibit 1.)

Gilead Sciences Inc. is one of the few biotech firms that does have European sales and marketing infrastructure; the skeleton of which it acquired when it purchased NeXstar Pharmaceuticals Inc. in 1999 [See Deal]. (See "Gilead's Global Logic," IN VIVO, March 2002 (Also see "Gilead's Global Logic" - In Vivo, 1 Mar, 2002.).) Gilead now markets the drugs it inherited from NeXstar—liposomal formulations of the antifungal amphotericin B (AmBisome) and the anticancer agent daunorubicin (DaunoXome), as well as its own antiviral drugs: tenofovir (Viread) for HIV and adefovir (Hepsera) for hepatitis B. Gilead's European marketing capacity has been key to growing sales—the company has not only added products but also diversified into new markets. This year the firm even got an extra boost from the strength of the Euro, a benefit it could only have collected by being present in the EU.

But back in 1996, when Gilead launched cidofovir (Vistide) as a treatment for cytomegalovirus, an AIDS-related infection of the eye, the company determined that going to market on its own in Europe would be too risky. Management decided the firm would be better off licensing the product to Pharmacia (now part of Pfizer Inc.) in Europe, and concentrating on building a small sales force in the US. The decision turned out to be a prudent one: since AIDS treatments have improved dramatically, CMV now occurs but rarely, so there is hardly any market for the drug. Any investment that Gilead would have put into European infrastructure to support that product would have been a waste—and a drain on the company's other endeavors.

"As a biotech, you want to pay as you go," declares Mike Inouye, Gilead's SVP, sales and marketing. "You don't want to get into a new area where you have no expertise and you don't know what the product is going to do. You're trying to save cash at the same time you're proving you're a commercial entity." Inouye believes that for many biotech firms holding European marketing rights to their own drug, the best course of action may be to focus on the most lucrative market—the US—and minimize risk to maximize the value of the product.

Economics must be a key driver of strategic decisions—and that's precisely why many biotech firms have decided that the cost of establishing a European marketing presence is not worth it for just one product. That reasoning led Cubist to approach Gilead a few years ago, asking it to market its Phase III antibiotic daptomycin (Cubicin—Cidecin at the time) [See Deal]. Gilead made an up-front payment and handed over $6.75 million in milestones to Cubist over two years, but returned the European marketing rights in September 2002 by mutual decision, after deciding to focus all its efforts on antivirals. "An antibiotic would have been a distraction for Gilead," Inouye says. It didn't help that the product had run into regulatory problems related in part to the statistical methods for demonstrating efficacy versus a comparator drug. (See "The FDA and Antibiotics: An Unsettled Agency of Many Minds," IN VIVO, June 2002 (Also see "The FDA and Antibiotics: An Unsettled Agency of Many Minds" - In Vivo, 1 Jun, 2002.).)

But once the injectable drug had gotten over its regulatory problems and won US FDA approval to treat skin and skin structure infections caused by Gram-positive bacteria, including methicillin-resistant and methicillin susceptible Staphylococcus aureus, Cubist's European partnering choices expanded. In October, the firm settled on Chiron [See Deal]. For the privilege of selling this specialty product in Europe, Chiron paid $18 million up front, $10 million of that for Cubist stock at a 50% premium. It will also pay regulatory milestones, potential sales milestones, and double-digit tiered royalties.

Continental Complexities

Biotech companies mulling whether or not to market on their own in Europe have to weigh the potential benefits against the complexities of doing business there. The regulatory environment is one of the most obvious challenges. Unlike in the US, where the FDA is generally fairly clear about its expectations and its marketing approval grants access to all 50 states—where everyone speaks the same language—there is no single, clear-cut path to approval in Europe.

Even if the central European regulatory body—the EMEA—grants marketing approval for a given product, a company still has to physically submit documentation and go in person to negotiate pricing and reimbursement on a country-by-country basis. Likewise, if a company wants to submit patents for variations of a molecule, it must deal with local ministries of health. The regulatory burden is only going to get heavier in May 2004, when the European Union will welcome ten more countries into the fold, for a total of 25.

Companies that market in the EU are legally obliged to make their product available in all the member states, notes Gilead's Inouye. Come May, the addition of new member states will open the door to additional sources of revenue, "but more infrastructure is required to get it," he points out. Gilead will probably end up using distributors in the new countries, but will have to increase management to make that happen.

It's not just regulatory work that requires a company to have infrastructure on the ground—actually carrying out the marketing and sales efforts takes people too. But how many reps a firm should hire, and how to structure the sales force, can vary from country to country. Physicians in France may have quite different views of an illness than those in Germany or Spain, and therefore require different sales approaches. Doctors may be clustered in hospitals or regional treatment centers, or not. Understanding factors such as these, and gearing marketing strategy and infrastructure accordingly, is no trivial matter.

For all the effort involved in marketing in the EU, companies must also be mindful that profit margins are lower than they are in the US. Regulators in the highly regulated markets of Europe continue pushing drug prices down—shrinking the rewards any firm can hope to reap. "We spend a disproportionate amount of time dealing with areas that don't give us as good a return on investment," Inouye declares. He notes that in many ways, the US is an anomalous market—nowhere else in the world can a company introduce a drug and then raise the price over time.

Labor laws also become a serious issue once a firm gets to a certain size. In France, for instance, "you buy the 35-hour work week," Inouye points out, and once a company has over 50 employees, a law requiring mandatory employee representation kicks in. "It's analogous to union stewards in the US: an employee representative is supposed to meet regularly with management, to be informed of management decisions. It's definitely obtrusive," Inouye declares—a sort of growing pain unique to Europe.

Being Choosy About Partners

Biotech companies that hold European rights can be choosy when it comes to out-licensing, even if they don't have the individual means to go to market. Because European rights are valuable to companies with the means to leverage them, drug developers that want more from a partner than a nice upfront payment and steady royalty checks are increasingly negotiating for control—and getting it.

Cubist, for example, wanted to create as close to a global brand for Cubicin as possible—so it wanted to partner with a company that would allow it to influence strategy and also agree to aligned marketing messages. "These sorts of partnerships can fall down if they're not managed well. You can't have a US brand and an international brand—it's all global," declares Rob Perez, the SVP, sales and marketing for Cubist, who previously held that position at Biogen Inc. He says, "We want to make sure that the drug is used clinically in a consistent fashion, and that pricing strategy is reasonably aligned—while giving reps enough room to compete in all countries, given the market conditions and competition they'll face." Cubist also wanted to learn about the European regulatory process, so that it might in future be able to tackle the challenge on its own.

Few Big Pharmas ever want to be bothered helping a small partner learn about the regulatory process, and none would have been satisfied with marketing such a niche drug in a Europe-only deal. Chiron seems to be a good partner for Cubist for several reasons. The product will be important to the portfolio—rather than just one more offering in a stable full of other antibiotics—and management was willing to agree to keep Cubist in the loop.

"We didn't want someone who says, ‘ Give us the files and we'll do everything from here on out.' We want to work with someone to get the job done, as a way of building our own capabilities," explains Oliver Fetzer, Cubist's SVP, corporate development and chief business officer. He notes that Cubist found in talking to regulators that "they like when the originator of a compound stays involved. Since both sides believe that Cubist knows the molecule better than Chiron, we will continue to guide the clinical development."

Even though Chiron is committed to infectious diseases (and oncology), it doesn't have a lot of expertise directly relevant to daptamycin. But it has enough, Fetzer says—at least in Europe—because it recently won regulatory and pricing approvals there for tobramycin (Tobi), an inhaled antibiotic used to treat people with cystic fibrosis (CF). Chiron wouldn't have been a good marketing partner for Cubicin in the US, where CF patients are treated mostly on an outpatient basis. But in Europe, CF treatment is much more hospital-centric, Fetzer points out, "so Chiron reps are already there, accessing prescribers." Cubist is free to focus on the US launch.

Opportunity For Mid-Sized Europeans?

In contemplating European marketing for Cialis, Icos was in a much different situation than Cubist or Gilead, declares Leonard Blum, Icos' VP, sales and marketing. For one thing, he notes, "When you're talking to specialists on the cutting edge, in a science-driven field, that community is much more international. By contrast, our market is driven by consumers, and we're talking about sex. So the cultural distinctions from one country to the next really are significant." Icos needed a partner capable of mastering those nuances and field thousands of sales reps, in addition to handling the inescapable regulatory work

The argument against building a European sales force weighs heavy when a biotech company doesn't have 100% of the rights to its product—even if, and arguably particularly if, the product is expected to be a big one. Icos, for instance, had contractual rights to co-promote Cialis in the EU and the US, contributing up to 50% of the total reps. But the biotech company is also obligated to share the costs of launching the drug into a market where general practitioners will write most of the prescriptions.

Direct-to-consumer advertising, still not permitted in the EU, will certainly be required to compete in the US, and that's pricey—pricier than Icos (or at least its investors) originally expected. Up against extraordinary competition in the market from the Bayer AG /GlaxoSmithKline PLC partnership on vardenafil (Levitra) [See Deal] and a counter-attacking Pfizer Inc. with sildenafil (Viagra), Icos announced in early August that its own marketing spend would be higher than analysts had anticipated, pushing the anticipated loss per share in 2004 to $3 from a previous forecast of $1.23.

Thus, given all the expenses Icos is already confronting, the cost of building its own sales force in Europe would only distract from the launch and drain profits from the joint venture—the success of which must be its number-one priority. The biotech doesn't have much else in its pipeline, certainly nothing close to market, so Cialis is appropriately the focus of its investments. "It's worthwhile to build infrastructure when you have a stream of products. To do it for just one is a burden," Blum declares.

Whereas Cubist deliberately sought out a relatively small partner—choosing to work in Europe with another US-based biotech firm, as many other biotech firms have done—Icos likes the fact that Lilly is much bigger than it is. Blum explains that Lilly's global presence can accommodate the kind of partnership in which Icos contributes selectively, where it can add the most benefit. "We can grow incrementally, on the scaffolding of their organization, by adding pieces," he asserts.

Blum observes that Icos and other biotechs would be unlikely to have the same opportunity with mid-size European firms, " because most don't have the ability to fill in the gaps. We'd be in a situation where we'd have to accommodate both companies' weaknesses." But as a practical matter, no biotech sitting on a potential blockbuster would ever face that dilemma: Lilly would not have accepted a US-only deal for a big product, and neither would any other Big Pharma.

Just as importantly, US biotechs feel culturally more comfortable with other US biotechs, or even Big Pharmas, than they do in the often paternalistic world of mid-sized European pharma companies. Biotechs speak the same economic language of Wall Street, make similar accounting assumptions, and manage themselves in recognizable ways. Too often, biotechs working with European companies run into managerial obstacles they can't find their way around—obstacles that stem in large part from the idiosyncrasies of closely-held European firms that have been successful for decades on their own terms, and have never had to deal with the public requirements for transparency that US biotechs grow up with.

Go With What You've Got

US biotech companies that choose to assign European rights and concentrate on the home market have many reasons for doing so. One of the most compelling arguably hinges on the fact that small companies can incentivize employees with stock options—a recourse far less possible in much of Europe because of tax regulations.

"In the US, the culture of start-ups attracts people who want to have an impact on the business," Fetzer declares, noting that in Europe, people tend to be more risk-averse. A German national himself, he observes that, "Germans might prefer to work for Bayer, even though it's in rough shape now, over a start-up, just because it's a more established company." Blum says this dynamic was key to convincing Icos to concentrate its efforts in the US: "We felt we could tap into the American entrepreneurial spirit to recruit a different sort of individual than Bayer, GSK, Pfizer or Lilly can," he says.

For biotech firms debating the merits of marketing on their own in Europe, the advice of industry people who've been there and done that is clear: Know thyself—and thy limits.