When to Partner a Biotech R&D Program

When early-stage life science companies are deciding when to partner a program, they must weigh their ability to convince a third-party of its value against their ability to successfully continue to the next stage of development. Both require a bit of guesswork. The time sensitivity of the VCs on their board may tip the scale.

Convince a partner of your worth

Many big Pharma’s operate their development pipeline using portfolio theory. Every stage of development has an average attrition rate, which Pharma’s apply across a bucket of projects. If your drug truly has an above average probability of success in future stages, you must convince a partner of this fact or face an unfair valuation haircut. You know your drug better than anyone and are in the best position to judge its chances. The Pharma knows there is an information asymmetry and will rely on the empirical preclinical and clinical data you provide. It is up to you whether you can and should stick to your guns and raise another round of funding. Remember that the process of finding and courting potential partners, preparing for diligence, and engaging in term negotiations is itself a distraction and significant use of limited management time and focus.

Going it alone

While big Pharma’s have the resources, experience and horsepower to execute later stage clinical trials, many biotech companies are essentially focused on completing research projects vs building traditional stand-alone companies. They often hire only those needed for the immediate task at hand and make liberal use of consultants. This approach, while efficient, can limit a company’s options if it cannot find a partner and/or chooses to go forward alone. Besides finding and adding appropriate full-time personnel for the next stage of development, a company’s most difficult challenge these days is raising enough capital to reach an inflection point years away. Earlier stage projects in the pipeline may have to be postponed or cancelled. The impact on corporate morale (both good and bad) of such a decision is not insignificant. On the bright side, going it alone allows a biotech to maintain full control and avoid the possibility of watching their lead program get short-shrift within a big Pharma.

VCs and Time Sensitivity

VC funds face pressure to monetize their investments in roughly five years. They may balk at doubling down again on an investment and claim to prefer “non-dilutive financing” via a partnership. This is a misnomer, however, as the top-line (revenues, cash flow, control) does get diluted in a partnership, if not the shares outstanding. The partner is not jumping in for free and will demand a significant portion of the project NPV. These days direct secondary PE funds may play a small role in preserving corporate value while allowing investor liquidity.

As the universe of potential big Pharma partners will likely continue to contract in the near future, more and more biotechs are going to have to derisk their programs themselves. For this to be sustainable and realistic, proof of concept trials will have to be shorter, smaller, and cheaper. Perhaps the answer lies in the discovery and use of surrogate biomarkers as endpoints. Perhaps next-gen sequencing and computing power will discover new easy-to-drug targets and restore us to a time when biotechs pursued low-hanging fruit. For the dreamers out there, perhaps the IPO market will return and early-stage biotechs will evolve into the very FIBCOs (fully integrated biotech companies) that are now an endangered species.