The Cross-Border Biotech Blog

Biotechnology, Health and Business in Canada, the United States and Worldwide

Partner, Sell, or Go it alone: Part 15 of Valuation and Other Biotech Mysteries

[Ed. This is the fifteenth part in Wayne's series. You can access the whole thing by clicking here. Please leave comments or questions on the blog and Wayne will address them in future posts in this series.]

This is a discussion that the management and board of a company need to start as the company is being formed and continue throughout the development of a new drug product. The decision on any specific drug product is probably as unique as that drug product and can change along with the market in which that drug will compete. There is a fourth option – stop all product development – which also needs to be assessed at each review. In this blog, we will assume that the information is positive and the product merits further development.

There are many interested parties in this decision, each of which may have different objectives.

Management: some senior executive groups may have settled in for the long term, as they may have done in prior big pharma jobs. Other senior executives know that they are ‘hired guns’, who will move on to the next start-up when this one reaches a transition point.

Staff: some are probably hoping for stable longer term jobs whereas others recognize that, for the average biotech company, the odds of survival and a long-term job is quite low.

Founders: founders who have stayed in academia have their stable jobs with both reputational and monetary upside from corporate success. Founders who have moved to start-ups do not have the safety-blanket of a permanent job.

Local government: they are interested in jobs and taxes. Some governments may also be shareholders.

Shareholders: the only important thing to shareholders is the share price. Some are interested in the share price over the next few months whereas others focus on the next few years.

Let us assume that a product has successfully completed a Phase 1 study and the safety and hints of efficacy were sufficient to justify conducting a Phase 2 clinical trial. The following questions need to be asked.

  • What is the structure of the Phase 2 trial, how much will it cost and how long will it take? The cost should include corporate costs as well as trial-specific costs.
  • Does the company have the funding to complete the Phase 2 study? If not, can the company raise the funds and, very importantly, what will be the price for that financing?
  • What will be the valuation of the company after successful completion of the Phase 2 study?
  • Can the product be partnered?
    • Yes
      • At what terms and valuation?
      • If the Phase 2 is successfully completed, what would the partnering terms and valuation then be?
      • Would the increase in valuation justify conducting the Phase 2 trial?
      • Repeat the last two questions for the next clinical trials
    • No
      • If the Phase 2 is successfully completed, can the product then be partnered?
      • If yes, ask the same questions from above.
      • If no, at what point in the clinical development program can the product be partnered?
  • Can the company be sold?
    • Yes
      • Who are the potential buyers?
      • What is the potential price range based on recent comparable transactions?
      • If the Phase 2 is successfully completed, what would be the potential price range?
      • Would the increase in the sale price justify conducting the Phase 2 trial?
      • Repeat the last two questions for the next clinical trials
    • No
      • If the Phase 2 is successfully completed, can the company then be sold?
      • If yes, ask the same questions from above.
      • If no, at what point in the clinical development program can the company be sold?
  • What type of sales and marketing team will be needed for this product?
  • Will the product require a large GP sales force or can it be marketed with a smaller specialty sales force?
  • Will physician and market education result in a slow growth of sales?

With the answers to these questions, the ‘partner, sell or go it alone’ assessment can now be conducted. From my perspective, ‘go it alone’ is only an option for a small number of products which require niche sales forces and for which sales will grow rapidly. After Phase 3 data indicates a product is likely to be approved, shareholders will indicate whether they are willing to fund a ‘go it alone’ approach. At this time, most shareholders have a short term perspective and would prefer that the company be sold. If markets were robust and company valuations were higher, shareholders might be more willing to consider the ‘go it alone’ option.

The more likely fate of a new product is to be partnered prior to commercialization. Partnering is basically a selling process – you have a product to sell and you need to find the right buyer. The process becomes complicated because you only have a potential product, there is no established price on the sales tag, there are thousands of competing potential products for sale, there are a limited number of buyers, and the buyers are discriminating, price sensitive and willing to wait. Some partnering basics will be discussed in the next posts.

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