Playing in the Big Leagues

Partnering is an integral part of the business strategy of many, if not all, biotech companies developing drugs or diagnostics. Given the high costs of product development, as well as the need for access to the markets, most products under development by biotech companies are partnered with big industry players at some stage, and often years before they are launched on the market. Deals are typically structured around a partner who obtains a license or the option to license the product at some stage in development in return for upfront, R&D and milestone payments. Once a product is on the market, the originator profits in its success in the form of royalties on product sales – an attractive model for the biotech partner, as royalties are revenues with 90 per cent profit on their P&L.

On the long and tedious road to self-made product-based revenues, successful partnering with a global player on a product in development provides external validation for biotechs, and builds confidence in the investment community necessary to secure further funding. But even with good progress and success in product development, many deals go wrong, often damaging the reputation of the smaller partner.

This can be explained partly by the evolving needs of biotech as it matures, and partly by factors playing out in the relationship between the partners. In early-stage biotech, the pressure for external validation of the technology to secure VC financing is high. The more commitment the partner seems to show, the better for biotech. This often results in exclusive partnering structures in which biotech companies are little more than an extended workbench for global players. Little attention is given to the particular communication needs of small biotechs and long-term growth perspective by their own products, a key factor for an attractive equity story.

The picture changes dramatically once a biotech goes public. Shareholders require detailed and continuous updates on the progress of product development, deal terms and market potential, to name but a few. This might be relatively straightforward in clinical drug development, where progress is evident through moving a compound through regulatory approval Phases I to III, but can be complex in other areas that are less regulated, such as diagnostics. Often enough, the industry partner prefers to keep information scarce until the product is ready for launch, leaving the partner with little to tell to its investors. De facto exclusively binding to one partner also poses the big challenge of coming up with an attractive equity story that supports a mid- to longterm investment basis for biotech companies.