Another alternative to an acquisition is a corporate partnering or strategic alliance transaction. These deals can be structured to give biotech companies the capital needed to complete testing, as well as an infrastructure and finishing level that biotech companies cannot develop on their own without significant expense. Such transactions can also provide biotech companies with a less dilutive source of capital, which is even more attractive considering the recently depressed valuation of many biotech companies and the current financing environment.
Pharmaceutical companies benefit from filling the gap in their current product pipelines and can structure their investment so that, at first, relatively little capital is at risk. Pharmaceutical companies can exit the arrangement if milestones, such as successful clinical trials, are not met, thus avoiding future funding obligations. One recent example of such a strategic alliance arrangement is the Merck/Galapagos diabetes and obesity drug partnership announced in January 2009.
In this deal, Galapagos received $2 million initially with development and regulatory milestone payments that could exceed $228 million. It is also eligible for unspecified sales milestones and royalties for any product that reaches the market. Merck benefits by receiving an exclusive option to license candidates for clinical development and worldwide commercialization.
The combination of the need for new products by pharmaceutical companies and the need for capital by biotech companies, together with a volatile market and uncertain economy, may have a significant impact on the big pharma/biotech deal market in 2009. These factors may drive significant deal activity, despite the economy, and result in a buyer’s market as valuations will likely trend lower in 2009.
A reduced tolerance for risk, however, may result in a larger percentage of announced acquisitions failing to close. Further, pharmaceutical companies will have strong incentives to move away from acquisitions and toward partnering and option deals with biotech companies. As a result the number of acquisitions, relative to other types of corporate deals, may decrease.