Wednesday, November 04, 2009

Option-Based Deals are Here to Stay

Or at least, they're not just a short-term symptom of a buyers’ market, according to a panel of experienced option-dealers talking at Bio-Europe in Vienna on Monday.

And no, this wasn’t just Big Pharma wishful thinking; biotech executives were piping the same tune (although granted, that may have been because their new, deep-pocketed partners were within earshot; the need to woo a partner who has taken only an option is, after all, even more urgent than the requirement to sweet-talk a committed licensing partner—at least until that option is exercised). “I certainly think they [option-based deals] are here to stay,” said Nigel Clark, VP Business Development at Vernalis, which signed such a deal with GSK in August.

The point is that Clark and others aren’t necessarily correlating the rise of option-deals with the state of the public markets—although it appears irrefutable, at least to this blogger, that their recent rise has been driven at least in part by the lack of financing or exit alternatives for biotech.

Indeed, our own Roger Longman (well, now only one-fifth our own, but still fully with us in spirit) argued during our recent Pharmaceutical Strategic Alliances conference in New York that any pick-up in public markets (of which there are, still, some positive signs) would likely spell the end of option-based deals and a return to the uncapped investment model (remember that?).

But for Avila Therapeutics’ CEO Katrine Bosley--who signed a deal with Novartis in July--the capital markets aren’t the main factor driving option-based deals (although she acknowledges they will and do influence them). Instead, their rise reflects what she calls a “profound shift” within (some) Big Pharma: a willingness to have less control over partnered programs. This, Bosley continued, is part of the growing “organizational experimentation” among large drug firms.

The assumption is, then, that such a cultural change will be longer-lived than public-market cycles. That assumption could be quite easily challenged. But as Bosley pointed out during corridor-chat after the panel, option-based deals aren’t always good news only for the Big Pharma, in terms of their low cost, limited risk and minimal hassle/resource requirements. They can also be very attractive to biotechs, too.

Granted the biotech has sufficient financial resource (and yes, that’s a big if), it may prefer the full development control that an option-based deal grants it, believing it could advance the program far faster and more efficiently than the Big Pharma. (This is another reason Big Pharma also cites for doing these deals.) The biotech may, in this situation, prefer to shoot for higher downstream rewards—confident that it will achieve the milestones necessary to access them-- and be willing to sacrifice some up-front payment (and certainty). In sum, “the option-structure could still make sense if cheap capital becomes available,” says Bosley. Plus, if the asset is attractive enough, the downside of a non-exercised option is limited since there would likely be plenty of alternative interest anyway.

Roger’s right too, of course: a return of the capital markets will change the nature and number of alternatives available to biotechs, and dealmaking will change—option-based deals as well as regular licensing deals. (Although it’s interesting to note that according to GSK’s Shelagh Wilson, VP & Head of the European arm of their Center of Excellence for External Drug Discovery, which pretty much does nothing but option-based deals, the value of such transactions, in up-front and milestone terms, hasn’t changed much over the last four years.)

But perhaps the biggest influence on the long-term viability of option-based deals will be whether they deliver a sufficient number of well-developed products to Big Pharma—products that can be slotted successfully back into late-stage pipelines and that are worth the money paid to secure them.

It’s too early to count how many of the options within the recent dealmaking glut are exercised. “There are lots of experiments going on; we’ll have to see [in three or four years] what the data say,” Bosley concludes. If option-deals prove to be part of Big Pharma’s solution—and help biotechs build up their companies along the way—they’ll stick around, whatever the capital markets. GSK's Wilson is bullish: “I can’t imagine a return to the pre-option days. I don’t see those coming back,” she asserts.
image by flickrer mollypop used under a creative commons license

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