During my career, I have been on the both sides of the financial partnership table. While at pharma, I have supported due diligence together with the rest of the development team. During recent months, I have been assessing various pharmaceutical assets regarding development risks for investors. I found that area fascinating from a personal growth standpoint. It came naturally to me that many of my blog readers may benefit from learning about investment partnerships models for pharma and biotech companies.
Since there are fundamental differences between the pharma and biotech organizations on how they manage their portfolio strategies, I decided to split this article into two parts:
Part 1 will cover the basics of the large pharma partnering models with third-party capital providers
Part 2 will focus on partnering models for different types of biotech companies
PART 1: Partnering models between large pharma and third-party capital providers
- Partnership with third-party capital providers (investors)
Any collaboration between a biopharmaceutical company and capital provider is initiated only after a robust verification process known as a “due diligence.” It includes a review of various documents and data: pre-clinical, clinical, clinical pharmacology, medical, CMC, safety, regulatory, patent, payer, commercial, etc. The cross-functional inputs are gathered by the potential partner to assess the business risks and potential gains. The quality of information provided may decide about positive or negative outcomes and final decisions. The due diligence process may apply to commercialized products or those still in development.
On the separate note, similar parameters are used by pharma organizations in internal portfolio assessments, for prioritization and optimizations decision. Further, those criteria are used to decide for which assets development will be pursued, which will be sold out, out-licensed or even dropped from a pipeline. This article will not touch on pharma portfolio management, rather will explain the thought process for the third-party capital providers when the investment portfolio is formed.
Since investing in the pharmaceutical sector is risky, it is essential to prepare the due diligence inputs of the highest quality to allow the best assessment. Pharmaceutical business development (BD) teams run the proper preparations, meetings, and finalization of the term sheet. BD teams collaborate extensively with the selected product leaders for which partnership & investments are planned.
Investors decide to partner with a particular pharmaceutical or biopharmaceutical company either on an individual asset or multiple assets with the intention to create the portfolio effect and to mitigate the investment risks. The assumption is that portfolio (usually an accumulation of 3+ products), will increase the chances of success of a capital return.
Independently whether we deal with pharma or biotech, below two parameters are the most critical in guiding the go/no-go decision of the investors:
- Significance of the investment risk (one asset vs. portfolio, early vs. late development; the latter comes with less risk)
- Agreeability of the return structure (the way how the investor will be paid back: this may include royalties, milestone payments, equity, etc.). Return structures will be dependent on the actual risks. As a rule, one can expect that the greater is the risk, the more upside/return is expected by the investor
For larger portfolios, the pharma company may need to seek additional sources of the capital due to pre-existing capital groups boundaries, which limit the investment size to the pre-defined % of the total fund available. Syndication comes with its risks and logistical difficulties (timing, conflict of interest between investors, resource involvement in due diligence, etc.). Thus many pharma companies prefer to select few smaller investors on the top of the primary third-party capital provider and run due diligence same time, minimizing the risk of complications.
- Partnership with biotechnology companies (in/out-licensing and co-development)
Another model is collaborations with biotech companies. Part 2 of the article will cover this topic in more details. The primary objective of those collaborations is filling up the productivity and innovation gaps at large pharma. For same reasons pharma partners with academic institutions.
- Strategic partnership with another pharma (strategic co-development and co-commercialization alliances)
All strategic partnerships begin with a due diligence process. The primary goal of the strategic alliance is to leverage the strengths of the partners to co-develop or/and co-commercialize the product(s) with advantageous sharing of the costs and optimizing the planned revenues. The alliances can be very complex and operationally challenging. However, growing number of pharma companies enters partnerships as the benefits outweigh the risks.
Alliance partnerships are managed by alliance managers and via single or multiple governance bodies and committees. Since the business landscape and needs of the partners evolve pretty rapidly, it is common to see the necessity of the partnership agreements to be renegotiated and amended over time.