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 off the competitive playing field. They have no plans to actually develop the drugs that they are building the deal around. Why would a company sign a deal to gain the rights to a drug that they have no intention of developing? Companies will do this when they find out that your organization has some IP that may interfere or compete with their own internal drug development programs. Alternatively, they fear that a competitor will acquire and exploit your technology to their detriment. The contract is put in place to give them freedom to operate, even it that phrase is not found within the paperwork.
How do you recognize this type of deal? The larger company will license the intellectual property in question for peanuts (i.e. a small upfront payment) and dangle some huge future payoff, mixed in a cocktail of sweet talk and bravado, as an incentive to do the deal. Then they will sit on their hands and do nothing to develop your drug. If you are ever approached with this type of proposal, protect yourself. Make absolutely sure to put in a due diligence clause that triggers the return of the IP/molecules to you if your partner fails to make any progress and hit early and significant milestones. Specify that you will require written reports on a set schedule, and tie those milestones to these reports. Don’t let them pay you a pittance to put your drug on their shelf!
It’s not always the junior partner that gets the short end of the stick in biopharma deals. Sometimes deals blow up in the face of the deep-pocketed acquirer. A recent example of this was Bristol-Myers’ ill fated $2.5 billion purchase of Alpharetta, GA-based Inhibitex for their hepatitis C drug INX-189. The gestational period from the inception of this deal to the explosion turned out to be less than eight months. The drug showed itself to be toxic in clinical trials and Bristol-Myers was left with a $1.8B write-off and what are likely a number of future lawsuits. This story will likely become a business school case study of what can happen when industry goliaths are competing against each other for a limited number of strategic acquisitions in a “hot” marketplace. Either the proper due diligence doesn’t get done, or someone overpays big time. Interestingly, the explosion here inflicted serious collateral damage on another company, Cambridge, MA-based Idenix Pharmaceuticals, that wasn’t even part of the deal. They were developing a similar type of drug that they wound up shelving after the FDA put a hold on their clinical trials even though no problems had been seen.
For those of us sitting on the sidelines, be leery the next time you read about one of these high-powered deals if you don’t have access to the fine print. What may appear to be a good deal may actually represent someone getting snookered. As George Bernard Shaw once put it “When an apparent miracle happened…it proved divine mission to the credulous, and proved a contract with the devil to the skeptical.”