At Merck, Business Development As Usual?

Merck's newly appointed SVP for worldwide licensing, C. David Nicholson, outlines the Big Pharma's dealmaking priorities at Elsevier Business Intelligence's February BIO-Windhover Pharmaceutical Strategic Outlook meeting.

By Ellen Foster Licking

The mega-marriages of 2009 between Pfizer Inc. and Wyeth and Merck & Co. Inc. and Schering-Plough Corp. created pharma companies of unprecedented scale designed to withstand the risks of modern day drug development. [See Deal], [See Deal] Interestingly, both surviving drug companies have selected new heads of business development: in late February, Pfizer announced Kristin Peck would take over dealmaking honors from the soon-to-retire William Ringo; last fall, Merck revealed that C. David Nicholson, PhD, Schering's worldwide licensing chief, would take the reins from Mervyn Turner, PhD, who is now the company's chief strategic officer.

The new appointments come at a time when executives throughout the industry are heatedly debating how best to tap innovation. ( See "New Frontiers in Pharma R&D Investment," IN VIVO , November 2009 (Also see "New Frontiers in Pharma R&D Investment" - In Vivo, 1 Nov, 2009.).) Even as R&D chiefs proclaim the value of internally derived compounds, others are calling for Big Pharma to abandon research and discovery altogether. Analysts at Morgan Stanley, for instance, sparked controversy with a January 2010 report, in which they argue that pharma's existing R&D model is outmoded and the billions now going to internal discovery would be better spent on an "S&D" – or search and develop – strategy. According to their analysts' calculations, Morgan Stanley estimates drugmakers stand to make a three-fold return on investment if they in-license molecules that have demonstrated proof-of-concept (generally Phase IIa data in humans) instead of plowing the same dollar amount into their internal research programs.

Not too surprisingly, Merck's Nicholson, doesn't agree with this analysis. In a February 25 interview with Elsevier Business Intelligence's Roger Longman at the 2010 BIO-Windhover Pharmaceutical Strategic Outlook meeting, Nicholson joked that via its report, Morgan Stanley "made friends with lots of people like me, who worked for years in discovery in major pharma." But he also acknowledged the report raised "intriguing questions" about the appropriate balance between externally and internally derived science. "My take on it is that there's more science done in the external world than there is within the walls of Merck. And we need to be tapped into that external world," he said.

That's not just because alliances and acquisitions provide critical products to help assuage the coming $4 billion top-line decline Merck faces when patents expire for key medicines such as Fosamax (alendronate), Cozaar/Hyzaar (losartan/losartan and hydrochlorothiazide), and Singulair (montelukast) – a primary driver behind the Merck/Schering tie-up in the first place. ( See "Merck Buys Schering-Plough—And Time," IN VIVO , March 2009 (Also see "Merck Buys Schering-Plough -- and Time" - In Vivo, 1 Mar, 2009.).) In the growth-constrained world in which drugmakers now reside, there's also the realization that even the largest pharmaceutical companies can no longer afford to fund development of every interesting molecule generated by their R&D groups. As Nicholson noted during his roughly hour-long interview with Elsevier's Longman, this current state of affairs requires "some tough choices" about which programs to develop internally and which ones to jettison. "In part because our R&D model is to generate a lot of output," he said.

If the preference at the old Merck was to park all but first-class assets on the laboratory shelf, that's no longer the modus operandi. According to Nicholson, Merck intends to monetize these programs in a variety of ways with the help of a newly created out-licensing group led by Meeta Chatterjee, a former executive director at Schering. Nicholson declined to get specific about Merck's out-licensing strategy, though he did emphasize that he is "brainstorming all sorts of models," including deal structures that involve claw-backs, which give Merck the ability to repurchase rights to development programs for predetermined prices, and collaborations involving potential Big Pharma rivals. "Major pharma do talk to one another and do co-market and co-promote some drugs," he noted. "So some of the assets that we are not interested in developing ourselves – absolutely we'd be interested in talking to major pharma."

Merck has not publicly disclosed which assets might be up for grabs. When Nicholson chatted with Longman at BIO-Windhover PSO, the company was still in the final stages of integrating Schering's assets into the drug company's pipeline. Less than one week later, on March 1, it unveiled the merged entity's R&D priorities. As Nicholson intimated during his fireside chat, the new Merck's focus will remain heavily centered on both cardiovascular disease and infectious disease – primary areas of interest for the two legacy companies – with more than three dozen drugs and vaccines in Phase II or Phase III development. These include Schering's hepatitis C medicine boceprevir and its thrombin receptor antagonist, SCH 530348, as well as Merck's CETP inhibitor for atherosclerosis, anacetrapib (MK-0859), and its second-generation protease inhibitor, vaniprevir (MK-7009).

Thanks to Schering, Merck can list multiple near-term approvals. Of the four compounds currently under review with EU or US regulators, three – the schizophrenia treatment Saphris (asenapine), the novel contraceptive NOMAC/E2, and the combination asthma medication mometasone/formoterol – were originally derived from Schering. Merck's only contribution – the intravenous vernakalant – was in-licensed from Cardiome Pharma Corp. in 2009 for $60 million up front. [See Deal] Schering also provided eight of the 19 Phase III candidates, and eight of the 24 Phase II molecules, according to documents filed with the Securities and Exchange Commision on March 1. Moreover, several Merck-sourced Phase III assets face an uphill battle with regulators because of increasing regulatory scrutiny: Tredaptive (nicotinic acid/laropiprant); MK-0524B, a combination of Tredaptive and simvastatin; and the ezetimibe/atorvastin combo MK-0653C. ( See Exhibit 1.)

As Nicholson hinted during his talk, the integration efforts yielded one surprise: practically no overlap between the two companies' pipelines. "The combination of two complementary pipelines has yielded a robust and diversified portfolio," EVP and Merck Research Laboratories President Peter Kim, PhD, said in a statement announcing the pipeline's finalization.

Still, the company culled at least two late-stage assets because of overlap: SCH900518, a Phase II protease inhibitor deprioritized in favor of vaniprevir; and robatumumab, an insulin-like growth factor-1 receptor inhibitor currently in Phase II development that competes with Merck's IGF-1R inhibitor, dalotuzumab, currently being studied as a treatment for metastatic colorectal cancer. Based on Nicholson's comments at BIO-Windhover PSO, both are presumably out-licensing candidates. "We are generating the list of out-licensing assets and so we will be able to start talking about that a few weeks after we've announced the final pipeline," he promised.

Merck plans to provide a more detailed overview of its pipeline during an R&D and business briefing scheduled for May 2010. Until then, Longman's wide-ranging conversation with Nicholson, edited and condensed for purposes of publication, offers insights into how one Big Pharma is approaching the balance between externally and internally derived products and the stark necessity of out-licensing.

Q: A few years ago there was a philosophical change, when head of R&D Peter Kim, PhD, decided Merck would actually openly say what it was looking for. Is that process going to change?

No. As you say, a few years ago, Merck became much more transparent in terms of what it's looking for in terms of licensing deals. We actually printed out the targets, the molecular targets, the therapeutic areas that we're interested in. And we also produced a list of things that we're not interested in. Which I actually think is just as valuable as, and perhaps more valuable than, the things that we are interested in. It's really important for us to be transparent, to say what we're looking for. We have scouts, geographically based scouts, 14, 15 of them, distributed around the world, who know exactly what we're looking for.

Q: Merck is soon going to announce the combined Merck-Schering pipeline. First, can you talk about any decisions that have been made? And, second, what's the process that you went through as you evaluated the company's compounds? Were there any big surprises, for example, in what was chosen or what was killed?

We actually practiced the process two years ago when Organon [Organon NV] merged with Schering-Plough, and sort of fine-tuned it this time around. Prior to Day 1, when the merger was completed, we filled in portfolio cards independently in the two companies. [These] portfolio cards describe each of the projects that we have in development and also the lead optimization projects and discovery projects and we populated SharePoint sites in the two companies with all this information. [See Deal]

Q: Now, each company couldn't see the other's list, because Merck and Schering were still two distinct companies.

That's right. Until Day 1, we were two competing companies and we couldn't see each others' [data]. We could agree how we were going – what the layout of the portfolio card is, what topics would be covered. But of course we couldn't share the data. On Day 1, we could lift the curtain and all the data junkies, all the scientists amongst us could really start to do what everyone wanted to do, [which] was to look at each other's data and debate the quality of the compounds.

And this was actually a super part of the integration. It created immediate camaraderie amongst all the scientists. So, within each therapeutic area we had the discussions about what the highest quality compounds are and was there overlap. Were there things that should be stopped within a therapeutic area? We then got together at a more senior management level – and by "senior management" I really mean "senior management" – Dick Clark, the CEO, chair, and president of Merck, was present at these meetings. As was Ken Frazier, who heads up the marketing/sales organization, and Peter Kim. And these were a whole series of two-day meetings, where we went through each of the projects step-by-step, asked questions, went back, debated. And, out of that is coming this pipeline.

Q: So were there any big surprises about what stayed and what didn't stay?

No, there weren't surprises. What we've ended up with is a super pipeline. Some compounds in there are going to be really big drugs. If there was a surprise it was that here we've got these two big organizations and, when you lifted the curtain, there was some overlap in the projects we were working on. But by and large, there was great complementarity. Despite the fact that we're working on some overlapping therapeutic areas, we were actually working on different molecular targets within those therapeutic areas.

Q: What about the internal versus external balance? Clearly, there were in-licensed projects at Schering and at Merck that had to go up against the new combined pipeline. Some of them had to undoubtedly be jettisoned. Has the balance changed, for example, between internal projects and external? And consider a Schering-Organon compound an internal.

Yeah, sure, of course. Without going into details, I think people from both legacy organizations were satisfied with the makeup of the proposed final pipeline. It's looking like the overall balance of the pipeline from both legacy organizations is pretty good, as far as I'm concerned. Which speaks to the quality of the merger, I believe, from an R&D perspective. And the balance of internal and external projects is not changing dramatically.

Q: You guys are very big in cardiovascular, of course. But it's an area, along with metabolic disease, that is a no fly zone for some. Are you going to stay big in cardiovascular?

We were totaling up the number of projects and products that Schering-Plough and Merck have launched in cardiovascular over the last few decades. Apparently, we have launched 40 products in the cardiovascular space over the last 50 years. That speaks to the contribution that the two legacy organizations have made to cardiovascular health. And we remain committed to that space.

For instance, we have now the thrombin receptor antagonists [TRA] in massive Phase III trials recruiting approximately 30,000 patients. We really do believe that this anti-platelet agent on top of aspirin and things like Plavix [clopidogrel] is going to yield significant additional benefit without additional bleeding risk. Of course, we're waiting with bated breath until we can open those databases, but we've certainly all got our fingers crossed. In addition to TRA, coming at it from a licensing perspective, over the last couple of years, Merck in-licensed vernakalant for stroke prevention in patients with atrial fibrillation from Cardiome.

Q: And, of course, that was actually a drug that went through another company before ending up at Merck.

Before somebody recognized its true worth, right? And we have a deal with Portola [Portola Pharmaceuticals Inc.] for an oral Xa inhibitor. [See Deal] Xa is an area that I personally like a lot, because coming from Organon, we launched two Xa inhibitors, injectables, Orgaran [danaparoid] and Arixtra [fondaparinux], together with Sanofi's [Sanofi]. So we know the space well. And it looks like Portola's betrixaban really does have the legs to be one of the best-in-class molecules. So I think that shows our commitment to cardiovascular.

Q: What about other therapeutic areas? For instance, Schering has a consumer business that Merck didn't have, but also a women's health and contraceptive business. Merck also had, of course, areas that Schering didn't. Are you going to drop out of any of those areas? Are you going to add areas that both of you weren't in?

Most of the therapeutic areas coming from Schering-Plough and Merck were complementary. Schering-Plough brought a lot of biologics expertise, which was something that Merck was looking to beef up. Merck is big in vaccines. That was an area that Schering-Plough was just moving into. And, of course, we [Schering] brought in the women's health franchise.

Merck has an interest in osteoporosis, with Fosamax, Gardasil for HPV [human papillomavirus]. But we, indeed, bring in contraception and fertility drugs to beef up that area.

Q: Once this process is over, there are going to be a bunch of drugs that you're going to either kill or sell. In order to sell them, that means that Merck will, for the very first time in its life, have an out-licensing program. Is that correct?

Yes.

Q: So what are you going to do?

We've set up an out-licensing group within the licensing organization, headed up by a good colleague of mine, Meeta Chatterjee. And we're now looking at what we want to out-license and how to out-license it. Just back to the portfolio and the privatization process a little bit, there are some assets there that I think are very valuable, but we don't have the resources to develop everything. So there's a few things there that I wouldn't mind taking and running with, if that was my inclination.

Q: You're thinking of spinning out of Merck?

No. But there are some assets there that are attractive. And we're presently brainstorming how to out-license. You know, the traditional way for big companies to do out-licensing is to take some rubbish that they don't want and see if they can find somebody who's prepared to pick it up. And that's one of the reasons why you say companies like Merck had never done out-licensing. Because it's been a pretty frustrating business, to take these failed compounds and try and sell them. That's not the case here, because we're bringing together these two big pipelines that have some real valuable assets. And we think that people can take these assets and create further value.

Q: Can you share any specifics about how you will out-license?

I'm interested in brainstorming all sorts of different models. Should there be a claw-back option? How can we do it? And it's an attractive time at the moment, because there's a lot of people out there who are brainstorming different models. Virtual development organizations. Taking compounds from pharma, giving them back, not giving them back. Where's the cash going to come from in these models?

Q: Would you look at out-licensing some of the candidates that you don't plan to work on to your direct competitors or would you actually prefer to deal with much smaller companies so that you don't actually wind up giving away something that might be of value to a competitor?

Of course we would. Why wouldn't we be? Major pharma do talk to one another and do co-market and co-promote some drugs. So some of the assets that we are not interested in developing ourselves – absolutely we'd be interested in talking to major pharma.

Q: In terms of out-licensing, 10 years ago, Merck thought that it effectively could afford to develop everything good that was in its pipeline. But that's not true any longer, so you're going to have to do a lot more externalization of your internal work, right?

I appreciate that comment and I agree with it. Because it is an issue that people have assumed that these huge companies like Merck can afford to develop everything. And that is no longer the case, if it ever was. Our R&D model is to generate a lot of output, more output than we can cope with at certain milestones during the R&D process And [we have] to make some tough choices, which ones we want to develop internally. That now poses the question, what are we going to do with the other assets? And that's the discussion we've just been having.

Q: After the merger of Merck and Schering, one of your colleagues told me that, if Merck was going to survive over the next three to five years, given the cliffs that it was facing, it really needed to do a major transaction that could bring to it a significant late-stage pipeline and significant marketed products, which would allow it to live on over this cliff. That was an interesting comment, saying "we need to do big deals to survive." The real question, then, is what does that say to the biotech world? Are biotech licensing deals just a kind of a stopgap measure or a filling in, in a small way?

It's incredibly important. I think, regardless of the reason why Merck and Schering-Plough merged, what we're ending up with here is this incredibly powerful organization. With huge resources, in terms of cash, but also in terms of scientific capability and marketing muscle. So, surely Merck has to be a partner of choice for the biotech world. And we want to be a partner of choice. One of the reasons why I took this licensing job at Merck was because Peter Kim, the head of R&D, and Dick Clark, the president and chairman, told me that they get it. That they know that the vast majority of science is done in the outside world. It's not done within Merck's walls, even in new Merck's walls. It's done outside. And so there's more opportunities outside than there are inside. And we want to be a good partner with all of those outside opportunities. A partner in all sorts of ways. With all sorts of compounds, all sorts of technologies and all stages of development.

Q: So…

So, one of the things we did at Merck before the merger and that is now expanding, is to set up something called an External Discovery and Preclinical Science organization. And this is headed up by a colleague, Kathleen Metters. And that organization has the goal of setting up myriad collaborations in that space. And that organization has the straightforward output target from Peter Kim to deliver X percent, a large percent, of our development pipeline through collaborations.

Q: What percent?

A big one.

Q: Another question I have for large drug companies is, would they be willing to outsource a significant amount of their discovery research to small companies? So, for example, your colleague who's running external research, how much of the discovery budget does that represent? And will that percentage grow?

I think this is a topic that is very much alive within major pharma at the moment. So this discussion is a bit like shooting at a moving target. And I don't claim to know the answer. There's this Morgan Stanley report that came out in January…

Q: Which basically said, there is no research worthwhile in Big Pharma, essentially.

Yeah, so they made friends with lots of people like me, who worked for years in discovery in major pharma. But basically this thing said that you should move from an R&D model to an S&D model, where the "S" stands for search and [the "D" for] develop. And they've come up with a formula showing that you get three times greater return on investment in an S&D model than in an R&D model. I would love to debate that analysis with the people who wrote that report, because basically I don't agree with it. But it raises really intriguing questions as to how much discovery should be done internally versus how much should be done externally. My take on it is that there's more science done in the external world than there is within the walls of Merck. And we need to be tapped into that external world.

Q: Okay. Let me move on to more specifics about Merck and licensing. By and large, Merck has done worldwide deals. Schering-Plough, of course, has done geographically specific deals. All the way back to Centocor [Centocor Research & Development Inc., a division of Johnson & Johnson] days, when they did the deal for Remicade [infliximab] and what is now Simponi [golimumab]. Is Merck going to start changing its stripes and start going for more restrictive deals where they allow the biotech to keep a significant geographic territory? Or is Merck going to continue on its basically worldwide rights ideas?

This has been discussed within Merck, obviously. And the feeling within Merck is that we are already on board with this trend. It's perhaps not that well known, but we have a deal with Santen [Santen Pharmaceutical Co. Ltd.] for Saflutan [tafluprost], for glaucoma, which is a regional deal. [See Deal] We have a deal with Cubist [Cubist Pharmaceuticals Inc.] for Cubicin [daptomycin], which is a Japanese deal. [See Deal] And we've got to remember that Schering-Plough has the Remicade deal [with Johnson & Johnson]. [See Deal] So we think we're already on board with this trend. And for sure we'll pursue it further.

Q: So are you more open than the traditional Merck to regional deals?

I think we're already on board with the trend and we take things case by case. For instance when you have discussions for drugs in the oncology space, then including some sort of [co-promote] in some regions is almost a default these days.

Q: Now, there's another area that Merck hasn't really gone into, and neither has most Big Pharma – which is orphan diseases. Pfizer some months ago did the deal with Protalix [Protalix BioTherapeutics Inc.] in Gaucher's disease. [See Deal] What's your attitude toward those really small indications? You've been getting into nichier areas, but you certainly haven't done those really small ones.

The focus of Merck is to develop drugs that meet a clinical need. That's the discussion we have, rather than whether or not we should go for orphan indications. Sometimes there's a reason to go for an orphan indication early in development to get you more rapidly to the market whilst opening it up for larger indications; that's one way to go.

A related issue is are we prepared to develop medicines for emerging markets or to provide health care for all people? If you think about what Merck has done together with the Wellcome Trust, setting up the Hilleman Labs, which is dedicated to producing vaccines in poorer countries, that's kind of a related issue and something that Merck is heavily committed to. We're working together with the Medicines for Malaria Venture, developing anti-malarials. [See Deal] Just a couple of days ago, we announced together with Eli Lilly [Eli Lilly & Co.] and Pfizer this collaboration to develop cancer drugs in Asia where we're committed to understanding and developing drugs for gastric and lung cancer, which are highly prevalent in those regions.

Q: That's an interesting transaction. It's theoretically pre-competitive involving three Big Pharmas. Are you going to be doing other pre-competitive kinds of deals? Maybe not restricted to indications that are prevalent in specific territories?

Well, we'll see. Speaking personally, I'm very open and think that the pharma industry should do more pre-competitive deals.

Q: In what areas?

It always intrigues me: we all spend a lot of money thinking that we're inventing something new; it turns out we're all spending the same money inventing the same things. And maybe there's something that should be done about that.

We are part of a group called Enlight [Enlight Biosciences LLC], which is a larger group of pharma companies working together with PureTech Ventures in the pre-competitive space. [See Deal] And that's something we're enthusiastic about. And yes, sure, why shouldn't we be doing more of that?

Q: I guess I wondered why it hadn't happened before. Let me quickly ask you about venture capital. Merck hasn't set up any kind of a biotech venture fund, ever. It did have Merck Capital Ventures, but really that was largely for commercial kinds of experiments. But has the cratering of the venture capital market brought up the possibility of you guys stepping into the venture capital breach?

Look, there are some really fantastic VC folks out there and that's their business. Our business is discovering and developing drugs. At least to date, have we contributed to VCs and to their firms? Yes, absolutely. All parts of the various legacy companies of Merck have done that. That's something that we remain interested in. Are there concrete plans to set up a VC fund at Merck today? No. Does that rule it out forever? Who knows?

Q: There's a deal that you guys did with AstraZeneca [AstraZeneca PLC] where you're testing one of your earlier-stage cancer compounds along with theirs. But the genesis of the deal was these two scientists bumping into each other in an airport security line. Is there a more systematic approach that you might want to take to try to collaborate with other companies in that regard?

I like that model a lot. I think particularly in some therapeutic areas – I immediately think of oncology, but also of areas like HCV, HIV, some anti-virals. Targeted combination therapy really looks like it's going to be the future in those areas. So, [the question is] how to put together the best combinations. And I don't think any one company can have the best-in-class molecule for all of the right combinations. So I think from a scientific perspective, if we're going to develop the best medicines, we should work together.

Q: But is there any area in which that's not true? I mean, if you think about what you were just talking about with cardiovascular, you're looking at TRA on top of Plavix. You're looking at Januvia [sitagliptin] on top of metformin. Where is there not that issue?

I suppose I agree with you. But in some areas, like psychiatry, it's not so straightforward to come up with logical combinations. Should we try combinations? Yes. And I like combination drugs, I think that's a real thing for companies. If you could become an expert in combination drugs, that will be, potentially, a great thing to be. The reason why I mentioned oncology and HCV is there I think we're starting to understand more the molecular mechanisms behind targeted therapy. And we rightly or wrongly believe we can come up with logical combinations.