Novartis, the Swiss pharmaceutical group, yesterday agreed to pay up to $375m plus royalties to two British biotechnology companies for the joint development of a pioneering respiratory treatment.
Vectura, which is quoted on London's AIM, and Arakis, which is privately held, will equally split $30m in upfront payments and up to ten times more in milestones in the coming years from Novartis for the drug AD 237 for chronic obstructive pulmonary disease (COPD).
The two companies are also set to receive about 12 per cent in royalties on the drug and combination therapies with Novartis products if it wins regulatory approval scheduled for 2010.
The move highlights the trend for large pharmaceutical groups to pay growing amounts to biotechnology companies as they seek alliances in an effort to replenish their own research and development "pipelines" with external partnerships.
It also marks an important boost in morale for the British and European biotechnology sectors, which have suffered from a series of setbacks and few financial successes in recent years.
"This is definitely positive for the sector as a whole," said Samir Devani, biotech analyst with Code Securities in London. "It's another incremental validation, with pharmaceutical companies paying more for earlier stage development programmes."
AD 237 would represent a new entrant into the fast-growing market for treatment of COPD, an obstruction of the airways primarily caused by smoking which is the world's fourth largest cause of death. The market is estimated by some observers to be worth $4bn a year.
Boehringer Ingelheim of Germany already last year developed a product called Spiriva which is marketed by Pfizer in the US, in a blow to Novartis, which has a large respiratory division.
Arakis, which specialises in identifying new uses for existing drugs off patent, said AD 237 was currently in use in injectable form for another medical condition, so there was already a track record to show that it was safe.
Vectura is providing the formulation which will allow the drug to be inhaled as a powder, while Novartis will work alongside with its own combination therapies, on which it would also pay a royalty to its partners if they win regulatory approval.
Ken Cunningham, Arakis' chief executive, said AD 237 could prove to have fewer side effects than Spiriva. He said the Novartis deal was a key milestone that could lead him to taking his company public. He owns 1-3 per cent of the capital, with most controlled by venture capital firms led by Nomura, 3i and Merlin.
"This is a significant deal for the British biotech sector and shows the pharmaceutical industry what bioscience has to offer with very important collaborations," said Aisling Burnand chief executive of the BioIndustry Association. "We have excellent companies and science."