Alkermes Steps Toward the Market

Alkermes' $100mm investment in Reliant Pharmaceuticals represents yet one more twist in the drug delivery company's evolution toward a product business. In effect, the deal allows Alkermes to buy into Reliant at a venture valuation and then increase the in-licensing company's value by putting Alkermes products into its marketing program.

Alkermes Inc. 's $100 million acquisition of 19.9% of Reliant Pharmaceuticals Inc. 's shares [See Deal] represents yet one more twist in the drug delivery company's evolution towards a product business. For most of its life, Alkermes has focused on proving its technologies, signing up drug-company partners, expanding its delivery menu (acquiring a number of businesses to do so) and, to the extent it's been able to, working on some products for its own account, taking generics and altering their formulation and release profiles to make them into more usable, more valuable drugs (it's developing, for example, a sustained-release implantable form of the anti-addiction medicine naltrexone, theoretically eliminating the compliance problem among addicts).

What Alkermes doesn't yet have, however, is any way to market such products. The old drug-delivery philosophy was to simply find a marketing partner once a product was close to market—the basic goal, for example, of Elan Corp. PLC 's now defunct Mind to Market strategy. But like any drug delivery project, Elan found that such programs put it completely at the mercy of partners who, in general, were looking at Elan's products as gap fillers until their own were approved.

Now the situation for products from companies like Alkermes has gotten even more tenuous. Big Pharma is looking for products for the primary care physician (PCP) market that can generate billions of dollars in revenue. Those not making that hurdle—when a large drug firm even sees fit to in-license them—are relegated to secondary positions in detail calls and thus brought to the physician's attention only in comparatively rare circumstances. Alkermes, therefore, must almost by definition focus on specialty drugs which it can aspire to market on its own or, if it wants to partner, through a host of small drug firms who might give it a significant place in their detailing efforts. As for products for the PCP market, those Alkermes would likely have to shelve.

That's where Reliant comes in. Reliant is that rare sales-focused start-up concentrating not on specialty businesses (like the UK's Strakan Ltd. , pursuing bone and skin therapeutics, or Pharmion Corp. in European cancer markets), but on the primary care physician. It claims a sales force of 750 and owns US marketing rights to four PCP products—isradipine (DynaCirc), two forms of fluvastatin, Lescol and Lescol XL (all in-licensed from Novartis AG [See Deal], [See Deal]), and nizatidine (Axid), in-licensed from Eli Lilly & Co. [See Deal]. Together, the products generated sales of about $500 million, although because Reliant does not book revenues from fluvastatin (instead, taking a royalty figured as the lion's share of the proceeds above a pre-set sales baseline), its actual sales are just north of $250 million.

Alkermes' investment in Reliant is the first step towards what both companies hope are market-focused collaborations in which Reliant markets Alkermes products and in which Alkermes applies its technologies to Reliant compounds to extend their patent lives or otherwise improve their effectiveness. Both kinds of deals are equally important to Reliant, says the company's president and co-founder Joe Krivulka, noting that one of the unusual aspects of the company's strategy is that it both buys ready-to-market products and develops unproven compounds.

And while the valuation is high—$400 million, pre-money, for a two-year old company—it isn't unreasonable. Alkermes bought in at a price of less than two times Reliant's sales, whereas most products sell for a minimum of three times sales and drug companies at four or more. Moreover, Reliant recently filed two NDAs, is working on two more, and just in-licensed two additional development-stage compounds from an as-yet undisclosed company.

Thus, Alkermes can claim the advantage of buying in at a mezzanine stage discount (its investment came along with another $50 million at the same price, mostly from Reliant's founding investors, Bay City Capital and the Pritzker family) with the potential for driving up the company's valuation by adding sales rights to Alkermes products. "This way we can win two says," says Alkermes CEO Richard Pops. "We can get a good distribution deal on a PCP product we might not have been able to interest a Big Pharma in. And we can win on the equity. If we develop a high value product, wouldn't it be better if we put it into something we owned 20% of?"

Pops sees some additional advantages to the relationship. Alkermes has been trying to collaborate with biotechs, looking to add its drug delivery capabilities onto their products and then jointly market the results. But without a sales force, says Pops, Alkermes doesn't have marketing credibility. Reliant theoretically provides that.

Not that Alkermes has to market anything with Reliant—no deals have been hard-wired into the investment. "We'll look for the best partner for each of our drugs," says Pops, though Krivulka notes that the two companies are negotiating a licensing arrangement.