BioWorld Today Columnist

On Jan. 11, Cadence Pharmaceuticals reported less-than-stellar Phase III results on Acetavance, its intravenous formulation of acetaminophen. The two pivotal studies failed their primary endpoint of reducing post-surgical pain any more than placebo, and the stock plunged about 60 percent.

Bad news for Cadence and its investors, not to mention surgical patients looking for new pain management options. But Cadence's setback is symptomatic of something larger.

Cadence is one of a group of specialty pharma companies that went public during the 2004-2007 IPO window, a class that includes Jazz Pharma, Tercica, Novacea, Santarus, Vanda Pharmaceuticals, and others - not to mention a large crop of still-private companies.

These companies all have something in common: They are what have sometimes been labeled "no research, development only" companies...or NRDOs for short. They in-license drugs from other life sciences companies and, though they do some clinical development, do not engage in early research or have discovery platforms. This is a slight twist on the old-school specialty pharma model, where companies like King Pharmaceuticals and Forest Laboratories in-licensed approved but neglected products. In that case, the game was finding success through targeted promotion or supplemental labels. For the NRDOs, there are still clinical trials and regulatory filings to get through.

As you can probably tell from the sizeable crop of these companies that went public over the past 36 months or so, venture capitalists were absolutely in love with this model. Why? Because it supposedly "de-risked" the process of drug approval - gone was the expensive infrastructure required to build a discovery research organization. Gone were the early failures. Companies could in-license drugs in clinical trials - maybe late stage or maybe early—and theoretically see a better chance of success in pushing them to market.

But investors in Cadence might be forgiven for not feeling terribly de-risked. With the future of Acetavance in doubt, the company has only one other compound in its pipeline, limited cash, and no research platform to fall back on. In fact, all the companies I listed above have lost value since their IPO.

Vanda has been hammered by worries over equivocal efficacy and QTc prolongation that showed up in late clinical testing of its atypical antipsychotic iloperidone, currently under FDA review. Novacea halted a Phase III trial of its cancer drug Asentar after unexpected deaths. Indeed, perhaps the only people smiling about the NRDO fad are the VCs, who proved pretty adept at getting these companies public and finding an exit for their early-stage investments.

I don't mean to say that the writing is on the wall for these companies, or that the NRDO model has been an unmitigated failure. The company that arguably kicked off the trend, Pharmion, gave investors a gut-wrenching ride as it became the hottest IPO of 2004 and then proceeded to lose well over half its value, but long-term investors are being rewarded by a buy-out offer from Celgene that currently has the stock near an all-time high.

A buy-out offer - ah, what sweet words. In the case of Pharmion, it puts the licensee back in the bosom of the licensor, a cycle full wrought with a happy ending. Something similar happened to Aspreva Pharmaceuticals, which was bought up not by its primary licensor, Roche, but by the Galenica Group - at a very nice premium. The acquisitions free these companies from the challenge that will face the vast majority of NRDOs that aren't bought up: Where the next product is coming from.

You may have noticed that things are getting a little loco in pharma-land. Big companies are desperate for new products. Little companies want to expand franchises or keep small sales forces busy. Old guard specialty pharma companies are moving further down the food chain toward earlier-stage products. NRDOs have competition coming from every direction, and the funny thing about high demand and limited supply is that it tends to drive prices up.

That's even if we assume there was great low-hanging fruit available before. But generally speaking, if you want somebody else to take over the risk of discovery and early development, you have to pay them for it. And if the market is relatively efficient, that means you won't be likely to in-license a late-stage compound for pennies on the dollar in value.

Certainly there have been some legendary specialty pharma coups, like King Pharmaceuticals' Altace, Cephalon's Provigil, The Medicines Company's Angiomax, Bristol-Myers Squibb's Glucophage, and of course Celgene's Thalomid. The markets aren't always efficient, and artful dealmakers can sometimes successfully offload risk. In many cases, however, these companies simply took on considerable risks themselves and won. Good for them.

But the field is a whole lot more crowded now. While Big Pharma may arguably be stepping up its out-licensing - a side effect of expanding R&D budgets and the need to concentrate on blockbusters and cast off marginal products - it's far from clear that this can feed all the hungry mouths looking for licensing candidates.

Still, one could also argue that even if it's tough to keep the pipeline fresh, these companies at least have assets, and thus make sense as merger candidates with small research-oriented biotech companies... even if they don't always look compelling as stand-alone companies. Corgentech took that approach, acquiring the NRDO AlgoRx in 2005 and becoming Anesiva. Investors are stinging over that one, too. Turns out combining two immature businesses into one bigger immature business doesn't create a lot of value.

ESP Pharma and PDL Biopharma? Ouch. Part of the problem here is that while combining a commercial or near-commercial operation with an R&D organization may look good on paper, it's often hard to find a truly good fit, or a management team that can handle such different needs and have the resources to nurture each.

Here's an old finance joke: Two economists are walking down the street, and they see a $100 bill lying on the ground. One stoops down to pick it up, but the other stops him. "Don't bother," he says. "If it were a real $100 bill, somebody would have picked it up already."

Sure, sometimes there's a real $100 bill on the ground, but it's tough to find. Meanwhile, if a VC tells you he's going to de-risk an industry, make sure you ask where he's shifting the risk from, and where he's shuffling it to.