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Financial Focus : Jan 15, 2006 ( )
Corporate Partnering Status Report
Out of a Need for New Products, BioPharma is Flexible with Deal Terms!--h2>
Corporate Partnering is the creation of a contractual (almost joint venture) relationship between an innovator company, with respect to its compound, drug, or technology, and another company with cash or operational resources that can be deployed to mutual advantagea fancy version of licensing.
Corporate partnering is different from other business arrangements that may seek some of the same goals, such as clinical development of a compound or validation of a technology, commercialization, and manufacturing. It often involves marketing agreements, simple licensing arrangements of product or technology, product acquisition, outright acquisition, and operating joint ventures.
The initiator of a partnering transaction can be the innovator company (outward partnering) seeking resources or can be the resource company (inward partnering) seeking to fill out its pipeline or geographic presence, among other motivations. Partnering remains an active transactional event and is likely to remain robust in terms of both the number of deals done and the dollars committed by the parties.
Relationship between Equity Markets and Partnering
Partnering is one of the key strategic moves that executive management can make to develop a company. For example, the decision to out-license a clinical-stage compound is often driven by the need for cash to fund operations or the clinical development of that compound. The impetus may also be the necessity for overt validation from the partnering deal that will help raise money from investors in a private placement or PIPE or even a public underwriting, or it may be an expertise requirement, usually clinical development and/or commercialization skills.
Two of these reasons are related to raising cash, the outcome of which would suggest that when the public or private capital markets are tight for biotech, partnering should be most active.
The capital markets opened up in 2004, the second best year for equity in biotech. However, 20012003 were also respectable years for total equity raised.
Despite somewhat attractive capital market conditions, partnering activity has continued unabated during the last five years. The number of biotech outward partnering collaborations rose to 700 in 2004 from 375 in 1999, with aggregate transaction values increasing over that period from $16 billion to $31 billion.
For example, Merck (Whitehouse Station, NJ) made about 50 deals in each of the last two years. This activity suggests that the inverse relationship between equity markets and partnering is perhaps not as strong or clear as one might think.
New Products are Drivers
So, what has caused partnering to thrive continuously over the last five years or more? The answer lies in low R&D productivity in big pharma plus flattening revenues with both factors necessitating new products to refresh the pipelines and growth rates of big pharma as well as big biotech.
For example, approximately $50 billion worth of drug sales from 2003 will lose patent protection in 20042007. Drug companies of all sizes must replace this $50 billion hole from their own pipelines or from the outside, i.e., by inward partnering.
This need for new products has created a frenzied rush to do partnering and has caused big pharma to agree to transactional components, never before possible, such as granting co-promotion rights to the smaller and ambitious innovator company or just doing a regional transaction, for example, with just Japan or Europe, for product rights, instead of a global deal.
While the focus has understandably been on late stage products to refresh revenues more quickly, partnering at all stages of development is up significantly. Many Phase III products have been recently fished out of the market, so fewer late-stage deals will be done in the near future.
Despite spending large amounts on discovery, Big pharma is now less successful in discovering its own drugs than ever before. Drugs discovered in-house now represent less than 50% of the total drug revenue and the large majority of blockbusters, those with sales greater than $1 billion, were licensed-in, suggesting that the motivation for the current strong activity and interest in partnering will continue for some time.
Considerations for Partnering
To be competitive in winning a partnering transaction against equally incentivized rivals, big pharma (and big biotech and even medium pharma) has demonstrated its willingness to be flexible on economic and operational deal terms, thereby suggesting that creative deal making will continue. With partnering demand expected to remain strong, CEOs at innovator companies need to consider carefully the optimal time and context to partner out their drugs. Sometimes, however, the circumstances of a company make it inadvisable to pursue corporate partnering.
For example, when there is an imperative need to build up requisite business skills in-house, such as marketing/sales force or regulatory affairs expertise; or when there is a reasoned fear of runaway technology; or concern over early termination of the R&D element of, or risky funding for, the collaboration. It can also occur when there is concern over the achievability of commercial objectives, such as sales levels in a context where the innovator is counting on royalty revenues to make itself a more attractive investment or takeover candidate.
Clearly, corporate partnering can offer both a complex challenge to overcome, as well as a golden opportunity to further the evolution of both parties to the transaction.
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