With an almost non-existent IPO market and reduced European venture capital investment in recent years, many biopharm companies are looking for alternative sources of revenue to fund their R&D and clinical operations. For biotech companies, being able to sign out-licensing agreements with a credible licensee in early stages of the company life cycle can have a significant impact. In addition to the immediate capital infusion, the licensor benefits from increased technology credibility and investor confidence, which normally translates into enhanced capability to raise capital in the private or public market, at higher valuation. However, many companies struggle to execute an effective out-licensing strategy and fail to maximize the value of the out- licensed asset.
THE OUT-LICENSING CHALLENGE
Being able to find a partner — and more importantly, the right partner — is instrumental to the success of most emerging biotech companies. Many companies face tremendous challenges in getting the attention of potential licensees, in some cases due to mismanagement of the out-licensing process. The following list of challenges is common to emerging biotech companies that our team has identified while working with clients to manage their out-licensing processes.
1. Identifying the right time to partner
The recent Ortho Biotech and Millennium (MLNM) Pharmaceuticals Velcade deal is an example of interesting timing for an out-licensing transaction. MLNM's Velcade was approved in the US for multiple myeloma and out-licensed to Ortho biotech in a $15-million upfront and $750-million milestones deal, though 75 percent of the upside deal value will be derived from future oncology applications. Although this is a late-stage deal, the deal structure does not provide as much risk diversification for MLNM as might first appear. From Ortho's viewpoint, the deal's value provides significant risk diversification since the royalty structure and milestone payments require driving sales in other oncology applications. One might argue that the real risk in this transaction is upon MLNM since the upside deal value requires widening product indications. Had an out-license transaction occurred prior to product launch, MLNM may have lost some initial value but could have negotiated a more favorable risk sharing relationship on the product development side.
Is later better? The cost and risk to continued development using internal resources must be weighed against the estimated value and other benefits of structuring a licensing deal. Some pharmaceutical companies are willing to pay a premium for early-stage technology. However, shopping around your technology too soon may reduce its attractiveness in the future, consume management time, and generate premature expectations from investors. Past studies revealed that drugs that are licensed at the preclinical phase are expected to create the maximum amount of value for the licensees in 85 percent of all cases in which a deal can be negotiated. While some pharma companies are looking downstream to earlier stage deals, many still shy away from seeing their investments fail in risky and undefined technologies. If pharma companies increase their appetites for early-stage deals by sweetening the deal terms, as theory permits, then the licensors' timing dilemma will become more significant and critical to optimize.
2. Identifying and prioritizing among the most appropriate strategic partners
Skipping a well thought out research process that examines strategic synergies with mid-to-large companies is a drastic mistake. Sending information to the top 40 pharmaceutical list is usually the wrong approach and results in lower out-licensing success probability. Entry into potential partners through an internal champion insures a shortened "sales" cycle. In many cases, this can be provided by an external business development firm with existing networking capabilities.
3. Assessing and defining the scientific and commercial viability of each potential strategic partner
Omitting a thorough prioritization process that eliminates less-relevant companies and targets only strategic partners and specific individuals within target companies can expedite the out-licensing process. Many companies neglect to customize the information sent to partners in accordance with their synergistic research findings and, therefore, fail to demonstrate early benefits to the partner, dramatically reducing the probability of passing an initial screening.