The Cross-Border Biotech Blog

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

The Partnering Process – Before Crunching The Numbers: Part 17 of Valuation and Other Biotech Mysteries

[Ed. This is the seventeenth 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.]

Assuming that all interested potential partners know that you have a specific asset for sale, how does a licensing deal get completed?

Sellers should place themselves in the chair of the person at the potential licensing partner. From the potential partner’s perspective, there are four basic criteria which would need to be met before licensing a product or technology. The first two criteria are:

  1. The product fits a need in the product portfolio for a specific therapeutic field; and
  2. The product has an acceptable clinical and regulatory risk profile.

The company selling the asset can assess the first criterion based on pipeline information which pharma and larger biotech companies provide during analyst and investor days.

  • What is a potential buyer’s approved, clinical and preclinical product and biological target portfolio for a specific clinical indication?
  • What potential products could that company be assessing for in-licensing or acquisition?
  • What biological targets are there amongst these potential products?
  • Where does the seller’s biological target rank amongst these targets from the perspectives of scientific validation and clinical importance?
  • Where does the seller’s product rank amongst the other products with the same target?

If a company does a realistic assessment for each potential partner, it will have a realistic assessment of the licensing potential for its product. This is not a one-time analysis – it has to be updated as new clinical data is released for any of the products in this analysis. Most of the needed information and some of the analysis should have already been completed as part of a ‘go/no go’ product development analysis.

This process should allow you to prioritize and modify your selling approach to each potential partner.

  • If this company has no products for a specific clinical indication, the sell will be more difficult and has to comprehensive – the clinical indication, the biological target and the product.
  • If this company has clinical candidates against other biological targets, the sell has to focus on a comparison of the biological targets, including biological synergy and market complementarity.
  • If this company already has 2 clinical candidates against the same biological target as your product, it will probably take superior clinical safety or efficacy data to make them bring in a new product. However, they will always be willing to talk in order to gain commercial information.

Based on a prioritized list of potential partners, a company should keep talking to as many as possible considering the time and resources which are available.

What makes the process move from ‘let’s talk over dinner at partnering conference X’ to ‘let’s discuss a due diligence process and potential deal structures? Remember that potential partners are generally risk averse and they will be willing to pay more for a product with a reduced risk. The biggest hurdle is an acceptable clinical and regulatory risk profile. There should be one or more clear paths to regulatory approval, a risk which is simplified with an SPA from the U.S. FDA.

The only event guaranteed to trigger this move is the release of Phase 3 data which meets its clinical endpoints and should lead to regulatory approval. Many companies would choose to do as much due diligence as possible prior to the release of the data and come to some agreement on deal structure and valuation, subject to the final data.

What can trigger the move prior to Phase 3 data? The buyer will often give the vague answer ‘Phase 2 proof of principle data’ but the answer is probably different for each product and can change with time.

  • When a biological target becomes hot, then there is a rush to acquire potential products with that target.
  • When a more-advanced product with the same biological target suffers a clinical setback, a product can become more valuable if potential buyers still believe in that target.
  • Changes to the buyer`s product portfolio, such as clinical failures or exiting a therapeutic field, are likely to change the buyer`s focus and risk profile.

Remember that partnerships are really just option or staged purchase agreements – the buyer gets certain rights to an asset in return for a series of fixed, milestone and sales-based payments. The option or purchase can be cancelled at any time by the buyer, subject to the termination conditions. There is a cost to the buyer to get to each new piece of clinical data or other milestone, at which point the buyer makes a ‘proceed / terminate’ decision. There can be times when that up-front cost to get to the next piece of data is low enough for a buyer to justify the extra risk.

When I helped teach certain sections of a licensing course, the subject most people wanted to discuss was what royalty rate can a company get for a Phase X product. Unless a company pays attention to the first steps in the licensing process, they will not get to the point of discussing numbers. In the next blog, we will make the move into the numbers of a deal – the return on investment and the deal structure.

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