Drug development partnerships can look lucrative to small biotechs eager to monetize their discoveries, but, like any relationship, these tie-ups take work and both parties run the risk of ending up in tears. At BIO’s recent CEO & Investor Conference, a panel of industry veterans gathered to discuss best practices in drug development partnering. Moderated by Jeff Stewart, Senior Engagement Manager with Campbell Alliance, the panel “Putting a Ring on it: When Drug Development Partnerships Turn into Acquisitions” addressed these deals from both the licensor and licensee perspective. The panel’s takeaways can explain why some collaborations turn into acquisitions while others do not, and can help companies avoid the dreaded messy breakup.
Playing hard to get: Michael Margolis, Managing Director of Roth Capital, emphasized that small companies should not put all their collaboration eggs in one basket. Partnering every asset with the same big company or writing multiple assets into a single collaboration reduces the licensor’s optionality and potential future value. Instead of giving all their assets to the first big pharma collaboration that comes calling, small biotechs looking to partner should proceed cautiously and weigh the pros and cons of each partnering deal.
Planning for the long-term: The drug development process takes over a decade, and drug developments deals often outlast the people structuring them. Effie Toshav, Partner at Fenwick & West, explained that while one group of people sit around a table and make a deal, ten years later an entirely different group attempts to operationalize the deal after a drug is approved. H. Thomas Watkins, Former Chairman & CEO of Human Genome Sciences, emphasized the importance of looking to the long-term when making these deals, adding, “The people making the deal need to have common sense.” If a partnership between two companies results in the ultimate success—a new approved drug—how will they commercialize the product? How will revenues and costs be allocated? Planning for these scenarios from the get-go will reduce operational uncertainties and help collaborations function smoothly.
Information Asymmetry?: Michael Gilman, whose company Stromedix licensed a fibrosis drug from Biogen Idec and was later acquired by the biotech giant, shed light on how other companies viewed Stromedix’s drug. As Stromedix tried to partner the asset, the drug was seen as “damaged goods,” with suspicious potential partners wanting to know why the big biotech had out-licensed it in the first place. Gilman noted that big companies drop collaborations and outlicense development programs frequently these days, and that the stigma associated with these events is abating. Corinne Epperly, Global Mergers and Acquisitions Lead at BMS echoed his sentiments, explaining that a program that does not mesh strategically with one company’s portfolio could fit perfectly in another company’s pipeline.
The panelists agreed that in some cases, a small biotech’s big pharma partner does have a slight information advantage over other potential acquirers. However, Epperly noted that sometimes companies are able to act on this information, as in the case of BMS’ acquisition of partner Medarex (and melanoma cancer drug Yervoy) in 2009, and sometimes their incremental advantage over other companies does not matter, as in the case of Eli Lilly’s 2008 acquisition of BMS’ drug development partner ImClone, despite BMS’ own efforts to acquire the company.
Popularity of the prenup: If a company decides to purchase its drug development partner, it brings in a team of scientists, lawyers and finance gurus to hammer out the details. Jeff Stewart noted that earnouts are one M&A deal component that has risen in popularity in recent years. Acquisition deals involving earnouts typically pay less money up front, and build in payouts further down the road. The acquired company’s shareholders will only see these payouts if a drug meets its predetermined milestones(More on the rise of CVRs and earnouts can be found here). Stewart noted that these back-end heavy deals are usually not structured in the acquired company’s favor, explaining, “Yes, you make a deal, yes you are getting married, but the prenup is pretty steep.”
With biotech investors predicting increased M&A activity in 2013, wedding bells may ring for many pharma-partnered biotech companies this year.