In January when Genentech signed a three-year deal to collaborate with Constellation Pharmaceuticals on epigenetics and chromatin biology drug programs, Constellation got $95 million to cover up-front fees and research funding plus the possibility of undisclosed “substantial” development and commercialization milestone payments as well as up to double-digit royalties.
In return, Genentech won future rights to acquire the rest of the company. Any acquisition by Genentech would be based on prenegotiated terms, namely a “significant” initial payment plus contingent value rights payments based on the success of multiple products.
Buyout option deals like these are not as common as milestone-driven agreements, but they have been happening more often in recent years. Deals involving buyout rights have two features that make them attractive to smaller partners: up-front payments and a longer-term path to liquidity for their investors.
Pharma continues to hedge its bets on smaller biotechs, even absent proof that their new drugs will succeed, but traditionally, that hedged bet is reflected in success-based payments tied to development, regulatory, and sales achievements. “At some point, those economics become less attractive to the large companies,” Sushant Kumar, Ph.D, partner at Mehta Partners, pointed out to GEN. “They say, ‘It’s better for me to acquire the smaller company and get all the cash flow coming into my books.’”
And with big biopharma still scrambling to cut R&D costs as the patent cliff looms, it’s fair to say the number of collaborations with future buyout provisions will increase, at least short-term.
“It makes a lot of sense, especially in pharma and biotech, because to the large companies, a lot of value of the smaller companies lies in the programs they have that may still be under development. So a lot of that value lies upon future success,” Dr. Kumar said.