BIO Convention Part 2

OK it’s time for part 2 of the BIO convention blog.  In this next section, I’ll give you some specifics in business development trends. Hope you enjoy the read.

Part 2: Business development specifics

Unfortunately, the news is not all that rosy right now for small biotech firms looking to sell to larger companies. The IPO option is still closed for the vast majority of firms and M&A exits have more strings attached than ever before. Many pharma companies are delaying cash payment to smaller biotechs, and full exit value is contingent upon achieving future milestones.  This contingency is the dreaded earn-out clause that VC’s hate as it delays repayment of their investment and lowers the IRR’s for their investors.  And if the drug performs less than expected, the sale value will likely be renegotiated downward.

The new financing environment for biotechs is even less pretty, with early stage VC’s going out of business left and right and no one really there to pick up the torch.  While big pharma is stepping in more and more with strategic alliance financing, they are using options to limit the exit value of the firm/program and staging their investment more like a VC would. With all this pressure on developmental biotech firms, it’s hard to tell whether innovation will suffer or whether it might be more efficient. Time will tell.

With all the emphasis on partnering now, alliance management has taken a main stage in business development.  There seems to be much more of a collaborative spirit than ever before, especially when the technology is still very early in development, but really in all stages.  And, of course both companies have to be very understanding of the goals and incentives of the other and bring a high level of emotional intelligence to the table.  Only then do these partnerships become a win-win for everyone involved.

It is clear that alliances are definitely the way of the future, both for the financing and development of the drug.  Yet, the path to an alliance is not at all clear since big pharma is still very bureaucratic.  As always, you have to be creative to get traction. Shawn Grady, VP of BD from Astrazeneca, had these words of advice. “You have to be tentacular in your approach,” meaning that you have to have multiple touch points in the large pharma organization. You never know who your internal champion will be, so the more connections you have, the better your chances are as well. I think this holds true when dealing with any large organization, but is even more important when there are many stakeholders involved.

I know that all this seems a bit daunting for the small biotech firm who just wants to get their baby to market. While it’s a bit rough right now, there are still lots of opportunities for a disruptive product or technology.  In fact, big pharma is doing many preclinical deals with clinical stage valuations with companies who are using novel chemistry or have a diversified, risk-reducing system for drug development (notice I didn’t say platform technology – you shouldn’t either if you want funding right now).  And, any large company will take a serious look at a product company if it has passed the “new” proof of concept benchmark which is a phase IIB clinical trial.

In summary, drug development has always been risky.  And in the current environment, everyone is doing what they can to make the process less risky, take less money, and be more efficient in general. The challenge now is innovation – not only in product development, but with business models, supply chain management, and finance. The development of a differentiated product with a high customer value has been the central dogma in business for years.  It’s just taken pharma this long to catch up to the rest of the business world.  So, the future looks bright.  We’re going to have better medications that have a much higher probability of success than ever before. Lets just hope that we can solve the current financing crunch before all the innovation goes out the window.

Author: Josh Bueller