Investing and Partnering in Drug Development (Part 2 of 2)

money-shark-1612252_1920PART 2: Partnering models for different types of biotech companies
Cont. from Part 1

Biotechnology companies are falling into few categories, based on their development stage:

Type 1: focused on the discovery, with no infrastructure or cash to advance assets to the clinic. The solution is partnering with larger companies to advance assets to the clinic and commercialize them, or sold/out-license them out. The costs of the partnership are meaningful; biotech may expect to lose a significant part of the future potential asset value, as the vast of it is retained by the bigger partner, who takes over the development costs and risks.

Type 2: experienced in advancing molecules to the clinic. Comparing to Type 1, more credible due to the existing track record of achieving PoC or established partnerships with pharma. Companies of this kind search for financing deals where they can retain more value for their assets.

Type 3: acts similarly to pharma, with proven internal expertise on advancing assets to a clinic and their commercialization.

The majority of type 2 and 3 biotech wish to retain as much of the control over the assets as possible (IP), while sharing the risks, development costs with the partner and taking advantage of the operational infrastructure. When targeting a qualified partner by public biotech, financial reporting needs (GAAP in the USA) are also considered. Cash needs may be covered by a partnership with big pharma, financial institutions, mutual funds, VC, or through IPO, royalties, monetization, etc. Operational needs may be secured through either partnership with CRO or big pharma. Selecting the right partner for biotech companies allows them to strengthen their development expertise and retain intellectual property. Few of the partnering possibilities are described below.

  • Biotech partnership with third-party capital providers

Many investors are not very eager to invest in the single product, or even in the basket of a portfolio with only early-stage development assets. Because the majority of biotech companies own only early development (Ph I/II) assets up to proof-of-concept, the investors usually form a strategic portfolio of products to mitigate the financial risks. A real portfolio approach, however, requires from the biotech to have a pretty robust early pipeline with various targets.

Another problem with securing the additional funds are the pre-existing partnerships with pharma, which further dilute the value of the investment deal. Also, for phase I/II, it is harder to define the milestones and successes criteria. Due-diligence costs are higher due to various experts needed for assessment of the early products forming the investment portfolio. Exit strategy (e.g. out-licensing, selling the asset) for all the products must exist and be acceptable to all partners (pharma, VC, etc.).

Recommended financing strategy for the type 1 or 2 biotech may be the direct equity investment (DEI). Direct investment provides capital funding (e.g. CRO) in exchange for an equity interest without the purchase of regular shares of a company’s stock. The partnership with CROs is covered in the section below.

  • Biotech partnership with CRO

As mentioned above, partnering with CRO, which can be both service and capital provider comes with the upside for the biotech company.

CRO can provide operational expertise and infrastructures, that the biotech is lacking, at preferred rates. Also, allows the biotech company to retain their intellectual property without the transfer that may be required for other types of partnership deals for desired sponsor’s accounting treatment.

  • Biotech partnership with large pharma (alliances or joint ventures)

The primary goal of the collaboration is to provide the required cash needed to build infrastructures and lead development until proof-of-concept is achieved and then, transfer the development to big pharma leveraging their late development and commercialization expertise. The return structure is usually based on royalties, milestone payments, and options. That model is favorable to biotech from accounting perspective by deferring R&D expenses.

References: Optimization of Pharmaceutical R&D Programs and Portfolios: Design and Investment Strategy 2015th Edition by Zoran Antonijevic (Editor)

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