Partnerships - Value Creating or Value Destroying?

Whether or not to partner a therapeutic is a critical strategic question for any life science start-up.  Unfortunately, there is no simple answer or clear strategy for when or how to structure those partnerships.  In the July/August 2011 issue of In Vivo Magazine, Alex Lash wrote an article that pulled together some fantastic data on partnerships for therapeutic start-ups.

Alex created a list of 50 start-up companies that had FDA approvals from 2001 to the first half of 2011 (does not include Plexxikon) for their lead product (only counted first time approvals).  Not surprisingly, virtually all (Regeron’s Arcalyst is a notable exception) of those lead products were partnered in some manner (co-development, outright out-license, co-market, etc.).  From the list of 50 start-ups, Alex tried to see if any correlation could be drawn between the types of partnerships that were established and the ultimate success/value of those start-ups.

Alex notes, “Partnering strategy appears to be more important to a company’s long-term stock success.  The more US rights a company on our list has kept, the more chance it has to outperform its peers on the stock market.”

While the sample set contains 10 years of data, there are only 50 data points (start-ups with FDA approvals that met the criterion) from which conclusions can be drawn.  That being said, some loose conclusions can be drawn from Alex’s work:  

Holding onto US rights is important.  The US market is the most mature and lucrative therapeutic market in the world.  Therefore, holding onto US marketing rights is essential for start-ups to achieve maximum value.  That being said, it is not so easy for start-ups to hold onto all of a product’s value, especially in challenging development areas like cancer or cardiovascular that require extensive amounts of capital.  Giving up some value in order to get a product over the finish line is the reality for most start-ups.

 

Of the 31 active and independent start-ups with FDA approved products, 14 have never partnered their product in the US (e.g. ALXN, AMLN, CBST, INSM, REGN, UTHR).  Besides great management and products, those 14 companies also focused on niche markets and/or reformulated products with known safety/efficacy profiles - thus, mitigating some of the development risk and costs.  

 

Partnerships do not necessarily tie a start-up to one company.  Some people believe that partnering can limit exit opportunities, especially if a partner has a Right of First Refusal or Right of First Negotiation.  That may be true to some degree, but the chart above shows that 2/3 of acquired companies were acquired by an non-partner.  As drug development costs have skyrocketed, pharma companies have increasingly begun to look at partnering as a way to share risk - which in turn has created an excess of partnerships.  With so many partnerships in play, as well as the rate at which pharma companies seem to be switching corporate strategy, the negative perception risk of a strategic not acquiring a partner might not be as significant as previously thought.
 

Only 20% of the start-ups are profitable.  Of the 50 companies with FDA approved products, only 11 are profitable.  Of those 11, 9 partnered their lead product and only 1 sold all of their US rights.  This data would suggest that partnering ex-US rights (if structured and timed in an appropriate fashion) correlates strongly with the ultimate success of a start-up post FDA approval.  That being said, many of these companies/products were partnered because they tackled large chronic markets with high development costs, which in turn correlates with high company profits post approval.
 

Few start-ups successfully commercialize a 2nd product.  Only 10 companies on Alex’s list have brought a second product to market.  He notes that, “nearly all originated outside the company” and cited United Therapeutics (in-licensed tadalafil from Eli Lilly) and Millennium (Velcade, Leukosite acquisition) as examples of in-licensing successes.  This data highlights both how hard it is to develop therapeutics and why biotech analysts so heavily discount the value of start-up’s pipelines.  Also, because 2nd products are so heavily discounted by analysts, many start-ups and investors encourage early stage companies to partner those products early to support the development of the lead product.  This can be a source of discord between investors and portfolio companies, as most companies - and even some investors - like to hold onto 2nd products as downside protection in the even that the lead product has development issues.

Positioning a Start-up for a Partnership
Partnering is a complex strategic decision for which there is usually no right answer.  The best a start-up can hope for is to produce exceptional data that will entice a strategic’s interest under favorable terms.   

A lot of start-ups refer to partnering in investor decks and usually do so in terms of comps (e.g. partnering at “X” date at “Y” price just like company “Z” did) instead of data.  While comps might inform partnering talks, no two partnerships are alike.  And, unless one has inside information about why a strategic formed a partnership with a start-up, it is hard to draw hardened lessons that can be broadly applied.  

Start-ups that have great data will always generate partnering interest at favorable terms.  That is why many start-up CEOs spend considerable amounts of time with strategics getting to know exactly what data would most excite those strategics at the various stages of drug development.  Strategics are usually quite forward about what data they are most interested in, which in the long run can save start-ups significant time and money from going down the wrong path.    

The Future

Alex’s data indicates that the best way for start-ups to create shareholder value - at least at the moment - is to develop niche/specialty/reformulated products and hold onto US marketing rights.  Those takeaways seem to have caught the attention of investors and companies.  Three companies with upcoming approval decisions (Corcept Pharmaceuticals, Horizon Pharma, Onyx Pharmaceuticals) all retained full ownership of their niche/specialty products.  Horizon and Onyx are slight exceptions to the rule as both are submitting their second products for approval - but, should provide interesting data points points to view as analysts reset company valuations based upon the approvals of those products.