Monday, March 17, 2008

Dispatch from BIO-Windhover: When Licensing Bleeds Value from Biotech

Biotechs have always relied on four sources of financing: venture capital, public equity, M&A and alliances. When one or the other of these chair legs has weakened, biotechs have been able to lean on the others. But VC isn't enough; public equity has disappeared; and while there's certainly more M&A than there ever has been in biotech, with roughly 10 private acquisitions of any significance per year, and a third the number of public acquisitions, investors can hardly count on such purchases to give them the minimal returns they require.

Which means alliances are more important than ever. And it's difficult to argue with the fact that they're increasing in value, as the chart above -- part of Roger Longman's introduction to a panel discussion today at BIO-Windhover -- suggests. Not shown on this slide but also according to the data, average upfront payments are increasing as well.

In equity terms, alliances are great sources of non-dilutive capital given the stinginess (or perhaps outright disappearance) of the public equity markets.

The problem is that alliances too often inflict dilution of overall corporate value.

For private biotechs being steered toward an exit by venture backers, alliances are only a net positive if they don't overcomplicate the buyout math and undermine what might be a lucrative acqusition later on. In some cases a license can precipitate a takeout; in the case of Shire's deal-then-acquisition of New River, and Amgen's deal-then-acquisition of Abgenix, the original deals struck by the acquirers amounted to "buying an option to be first in line" at the M&A table, pointed out Campbell Alliance's Ben Bonifant.

For platform technology companies the balance is slightly different, pointed out Alnylam president and CEO John Maraganore, who noted that Alnylam "would do more deals like the Roche transaction," though that lucrative deal (which we wrote about here) would only be replicable perhaps "a few more times" before the value of doing a deal was outweighed by the resultant dilution of the technology rights to Alnylam's RNAi platform. To reduce that risk, he said, in future deals Alnylam may choose to retain certain additional rights to resulting drug candidates.

But granted that financial or strategic necessity dictates a product licensing deal, does retaining some important segment of commercial rights keep enough value for investors, particularly public investors, to remain interested?

Not as important as keeping development rights, argued Bill Slattery of Deerfield Partners. But that's usually not practical, argued Lisa Ricciardi (former licensing SVP at Pfizer and now an adjunct partner at VC Essex Woodlands). Drug companies would rather their biotech alliance partners stick to their knitting: research-based start-ups require different skillsets than development stage companies which are again different beasts than commercial ones. "Most larger companies would argue that they have all the capabilities necessary to do development themselves, and they'd prefer a straight license," she said. Sharing development is only something pharma does if it absolutely has to, she said. The risk of coming up with contradictory or confusing data from different trials by different organizations is simply too great.

"I don't totally disagree with you," chimed in Atlas Venture's Jean-Francois Formela, "but in order to be sustainable a biotech has to grow up and migrate from one stage of organization to the next." Though there is value in generating IND candidates for pharma (as firms like Plexxikon have shown), "you can't remain an IND generator forever," he said.

More important from his point of view, said Deerfield's Slattery: pharma frequently chases the big indications for a biotech's programs, too often missing or simply disregarding the indications for which they might be better suited -- as GlaxoSmithKline pursued the big markets of solid tumors for Cytokinetics' kinesin program instead of smaller-market leukemias. The result: the licensing deal ultimately bleeds value.

In short, even a lucrative co-commercialization right won't preserve a biotech's value if the development program is built to suit the Big Pharma's commercial ambitions, not the molecule itself.

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