Option to Buy: The New Face of Biotech Funding?

2/13/12Follow @arleneweintraub

When Cambridge, MA-based Warp Drive Bio launched on January 10, the startup was as notable for its financing structure as it was for its technology—maybe more. That’s because part of the $125 million in funding that Warp Drive received came from French pharmaceutical giant Sanofi (NYSE: SNY) , which received in return the chance to buy Warp Drive outright, sometime in the future, if certain milestones are met.

Such option-to-buy arrangements are growing more popular in the capital-starved world of biotech. Just one week after the Warp Drive deal, another Cambridge startup, Constellation Pharmaceuticals, formed a similar pact with Genentech, the South San Francisco-based unit of Swiss drugmaker Roche. Genentech pledged $95 million to Constellation—enough to fund three years of research—for the right to acquire the startup under a set of pre-negotiated terms.

The two deals differ slightly in their structure—Sanofi’s actually includes an obligation to buy Warp Drive, for example—but the basic idea is the same: The startups are giving up the right to independence down the road in return for financial security now. “You will see a lot more of these deals that include an option to buy downstream,” predicted James Sabry, vice president of Genentech Partnering, in an interview about the Constellation deal.

Remember how a decade ago just about every biotech startup CEO dreamed of building the next Amgen—the next giant, independent innovator of biologic drugs? Those days are long gone. That’s because despite some signs of an upswing in life sciences venture capital investing, the IPO market is still iffy for biotech startups. For every Verastem (NASDAQ: VSTM) —the Cambridge-based biotech that recently raised $55 million in an IPO—there are countless companies that can’t scare up enough interest on Wall Street to even attempt an offering. Granting an option to get bought out by a deep-pocketed partner “solves the main problem in the biotech community—lack of liquidity,” Sabry says.

Some biotech dealmakers are also finding creative ways to lock up certain assets without requiring the smaller party to agree to a full-on acquisition. That’s what happened last June, when Genentech paid an undisclosed sum to Cambridge-based Forma Therapeutics for rights to an early-stage cancer drug. Genentech agreed to support the research and development provided it could … Next Page »

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