Early stage product deals with big pharma can be a double-edged sword.

On the one hand, biotech firms get an infusion of cash for continuing research and development work, a chance to pull in big dollars down the road, and validation for their platform or drug discovery engine. But those high-figured, high-profile deals also lead to higher expectations for public firms, and if the product fails, a company can find itself stripped of all that perceived value.

Due to increased competition and thinning pipelines at pharma firms, deals for early stage drugs are on the increase. Take Anadys Pharmaceuticals Inc.'s potential $570 million deal signed this summer with Swiss pharma giant Novartis AG, involving a Phase I compound, ANA975, and other Toll-like receptor 7 oral prodrugs for chronic hepatitis C and hepatitis B viruses. Anadys received a $20 million initial license payment and received $10 million after the FDA's acceptance of an investigational drug application. The rest of the money is dependent upon regulatory and commercial milestones. In addition, Novartis holds the right to option other TLR7 prodrugs for infectious disease indications. (See BioWorld Today, June 3, 2005.)

Such deals can be a gamble for pharma, but Glenn Snyder, a principal with Deloitte Consulting LLP's Life Sciences practice, and one of the authors of Deloitte's "Critical Factors for Alliance Formation" study published earlier this year, said, "I believe strongly that [pharma] companies have to make those bets, just as they do with their own internal R&D efforts.

"And for a small company, it's largely a win for them," he added. "To not get that early investment means they might not be able to take that drug candidate further on."

But what if the candidate fails?

Biotech's Burden Of Proof

Early product deal-making might present a bigger risk for large pharma, but it also puts investor pressure on biotech firms - especially ones with still-growing pipelines.

Idenix Pharmaceuticals Inc. serves as a case study. Two years ago, Idenix licensed its hepatitis B drugs, including the Phase III compound telbivudine, to Novartis AG for $75 million, plus development expenses. But it was Novartis' option to license a then-preclinical hepatitis C drug, NM283, that carried the most potential for Idenix: After Phase II, Novartis has the option to in-license the product for up to $525 million, including $100 million up front. (See BioWorld Today, March 27, 2003.)

"Right now, as far as I can tell, the only thing holding [Idenix's] stock afloat is the promise of the Novartis opt-in," said Andrew McDonald, an analyst with ThinkEquity Partners in San Francisco, who downgraded Idenix to "sell" Tuesday following the company's public offering announcement, citing concerns related to the commercial potential of NM283.

Last week, Idenix priced a public offering of 7.3 million shares at $20.61 per share to raise $150 million. Of those shares, 3.9 million are being offered to Novartis, which holds a 57 percent stake in the company. (See BioWorld Today, Oct. 27, 2005.)

Shares of Idenix (NASDAQ:IDIX) closed at $20.75 Friday, up 14 cents.

"I think there's still the expectation" that Novartis will take on the product, but if it decides against it, there would be "an enormous impact on Idenix," McDonald added.

When the companies initially signed the deal, NM283, a polymerase inhibitor, had demonstrated promising preclinical activity. Though the drug has since shown positive data in early clinical trials, those results have been squeezed by data from a class of protease inhibitors in development, such as Cambridge, Mass.-based Vertex Pharmaceuticals Inc.'s VX-950, which so far has reported impressive HCV viral load reduction.

"These protease inhibitors have performed amazingly well," McDonald said, adding that a comparison of the limited data leads him to believe those drugs will "blow NM283 out of the water."

So, before it decides to exercise its option for the NM283, Novartis "is going to have to ask whether it's worth it, given the competitive environment," he told BioWorld Today.

The deal looked great when it was signed, but if the drug "falls short," McDonald said, "the stock is going to take a massive beating."

Too Much Value Tied To Deals?

Perhaps it's optimism that makes them do so, but investors can place too much significance on big pharma deals.

"It's probably the wrong way for investors to look at these relationships," McDonald said, adding that the partnerships "don't de-risk the clinical trials."

That's true for Human Genome Sciences Inc., which has a long-term collaboration with London-based GlaxoSmithKline plc. In July, GSK exercised its option to develop and commercialize LymphoStat-B (belimumab), for rheumatoid arthritis and lupus, but when the drug missed its overall primary endpoint in a Phase II lupus trial earlier this month, it was Rockville, Md.-based HGS' stock that was hammered, losing about 30 percent of its value. (See BioWorld Today, Oct. 6, 2005.)

"Everyone knows lupus trials are high risk," McDonald said. "Nevertheless, Wall Street put a premium on that product and on that stock based on the relationship with Glaxo, as though investors felt that Glaxo, in some way, shape or form, validated or de-risked that trial."

Big pharma can't strip a product of clinical risk, he said, but it can "validate the market opportunity."

For Pharma, Risk Is Necessary

Expect pharma to continue seeking out early products - the pipeline pressure has not gone away.

"It's a seller's market right now," Deloitte's Snyder told BioWorld Today. "Pharma companies are looking to boost pipelines that have gotten relatively dry through traditional methods. I think they're trying to balance their bets with some short-term, fairly certain revenue against some longer-term opportunities, much like an oil company that drills 10 holes to get one gusher."

Snyder said to establish a potential win-win collaboration, the deal has to be structured to give both parties what they want. For pharma companies that means a commercially viable product, and for biotech it calls for an adequate royalty arrangement and long-term opportunities.

"For value to biotech, you have to look at the deal structure," he said, adding that in the survey for the Deloitte study, "all the companies said they are hoping for long-term control.

"Very clearly, a lot of these small companies want to become fully integrated companies one day, so it's not a good idea to give up product rights in the long-term," he said. "So that can be a real risk for them, if the deal is not structured well."

But while an early deal adds a little more uncertainty to the mix, it's still far better than no deal at all.

"If I'm a small company," Snyder said, "I'd much rather have someone invest in me, than not have the chance to develop my product."