The Devil is in the Details: What BioPharma Press Releases Don’t Say
While my primary focus is on the research side of the business, I have to admit that for many biotechs, their survival may be tied to the art of the deal. Kevin Kinsella of Avalon Ventures shared his thoughts with Xconomy readers awhile back on the increasingly hard bargains that Big Pharma is extracting from their biotech partners. Some of the strategies being employed by Big Pharma’s business development units are new, but naïve biotechs have a history of signing pacts that were much actually less favorable than they appeared in the original press release.
Deals between Big Pharma and biotech companies are announced almost every day, but the contractual provisions are seldom made public. There are certainly a number of legitimate business reasons for not sharing the finer points of these arrangements. These may include shielding proprietary information pertinent to the deal, as well as concealing a larger overall business strategy. However, the devil, as we know, is in the details. Investors, employees, and the public at large may have a difficult time discerning who the primary beneficiary is in these deals without knowledge of the fine points.
It is these hidden particulars that can serve to differentiate the biotech winners from the losers.
You may have noticed that Big Numbers are often announced when Big Pharma inks a deal with a small biotech. The press release will contain a phrase such as “This deal is worth up to $750 million dollars if all milestones are met.” At first glance this deal appears to be a bonanza for a small company that may have only seen a few million dollars in funding during its entire history. The question is: how much of that money will the biotech really ever see?
My prediction: in many cases, little of that money will ever wind up in the smaller company’s coffers. What does the treacherous phrase “up to $750 million” really mean? This defines the maximum payment that can be received if all conditions specified in the contract are fulfilled. However, this doesn’t illuminate what’s really likely to happen. If a contract covers five potential drugs, is it really likely that all of them will make it through clinical trials and onto the market? Keep in mind that fewer than 10 percent of all drugs that enter the clinic achieve this milestone.
The chances of going 5-for-5 and getting all the drugs approved is about 1 in 100,000. It’s akin to Major League Baseball, where most pitchers have a performance clause in their contracts specifying some huge bonus if they win the Cy Young Award as their league’s best pitcher. Teams don’t mind adding these because they know the likelihood of a payout is small (and they’re probably covered by insurance anyway). In the worst-case scenario, they have to pay off only one player, and are recompensed by being able to market their ace hurler to the fan base. With about 175 pitchers in each league, the payoff rate is less than 0.6 percent. Similarly, small biotechs are just as unlikely to collect on all of the performance bonuses specified in their contracts. Upfront initial payments are often small, with the majority of the money tied to downstream milestones of various types. However, the details are seldom publicized as to what exactly triggers the milestone payments, making it difficult for outsiders to assess when, or even if, the money will be paid.
The arrangements described above are usually set up because the larger company is interested in acquiring the rights to a drug being developed by the smaller company. Sometimes, though, something more insidious is taking place: the bigger partner is actually taking the smaller company … Next Page »