2009 M&A/Alliances DOTY Nominee: GSK/Concert and the Option-Based Orchestra

It's time for the IN VIVO Blog's Second Annual Deal of the Year! competition. This year we're presenting awards in three categories--that's 300% more fake prizes than last year!--to highlight the most interesting and creative deal making solutions of the year. The categories are: Big Pharma Deal of the Year, M&A/Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply the nominations (roughly half a dozen in each category throughout December) and you, the voting public, will decide the winners (by voting early and often, commencing once we've announced all the nominees). Strap yourselves in, it's The Race for the Roger™.
We’re cheating a bit on this one. For even though the nomination goes to GSK’s deal with Concert—a harmonious June deal indeed—it’s also a nomination that represents the Big Pharma’s entire 2009 listing of option-based deals. Why do they deserve your vote? Because they’re flexible, low-cost, risk-mitigating, pay-for-performance-oriented and, frankly, we think just rather clever. They’re also a very definite sign of the times.

In brief: GSK (or whomever; they’re not the only ones doing these deals, but they’re among the most prominent) pays a small fee up-front in order to take an option, or several options, on one or more partner compounds (typically pre-clinical). This secures for GSK a pre-defined licensing deal down the line—but only if it wants it, i.e. if the data look good. If they don’t, GSK has only lost relatively small change. If they do, GSK not only secures an asset that would otherwise very likely attract other interest, but does so at a pre-agreed price, which would arguably otherwise be higher. And the partner runs (& funds) the R&D program in the interim.

The Concert deal’s on the rich side, but typical in structure (and that’s why it’s such a perfect template): GSK paid $35 million up front (including $16.7 million in equity, another way to spread risk) for options on three projects, the most advanced of which started Phase Ib in November this year, the least advanced of which hadn’t even been selected at the time of the deal. GSK can opt into these programs at clinical proof-of-concept (or slightly earlier, at Phase I, for the lead). If it does, Concert begins to access various slugs of milestone money, mostly tied to clinical and regulatory achievements. So the biotech got $12 million a month or so ago for starting Phase Ib on the lead; its total milestones may reach over $1 billion.

This isn’t just a risk-sharing deal structure, it’s risk-sharing deal content, too: Concert’s compounds are mostly deuterated versions of existing molecules (the lead is a version of Bristol’s HIV drug atazanavir, for instance)—meaning it has replaced hydrogen atoms with deuterium atoms, creating new, patentable chemical entities that skirt existing IP and that may even be safer and/or more effective than the originals.

Beyond the Concert deal GSK has an orchestra of others: Chroma (Jun 09), Protea Vaccine Technologies (Jun 09), Vernalis (Aug 09) or SuperGen (Oct 09) for example. And don't overlook the dual-melody rare disease pact with Prosensa (Oct 09), which comprised a straightforward licensing deal and an option component. For a recent addition to the group, check out the November GSK/Nabi deal, which includes $40 million up-front for the option to license smoking cessation vaccine NicVAX, currently in Phase III.

image from flickr user greenbloodman used under a creative commons license