You’re ready to sell. Term sheets are on the table. Deal structure, terms, and timing are being highly scrutinized and negotiated back and forth. In determining the optimal deal, however, something that isn’t clearly delineated in term sheets might be the largest determinant of value: the capabilities of potential partners.
There are multiple reasons why companies choose to seek strategic partnership. When taking into consideration the specific needs of clinical-stage biopharma companies, the scarcity of capital and lack of specific development or commercial capabilities are often the most common reasons for seeking a partner. Partnering is often preferable to pure financing because strategic partnerships can enhance the value of the opportunity by accessing a strategic partner’s resources, expertise and capabilities. While upfront payments associated with licensing transactions offer a quick and non-dilutive source of immediate capital, choosing a partner with the right capabilities and focus is often a more important factor in mitigating execution risk and maximizing long–term value. Therefore, it is critical to consider these elements of a partnership carefully.
Types of Partners and Associated Considerations
Perhaps the most obvious characteristic of a potential partner to be considered is the therapeutic area(s) of focus. Aligning the partner’s focus with that of the seller and the asset to be licensed is perhaps the easiest way to ensure synergy. In analyzing overlap between therapeutic areas, both the indication and the call point of the potential partner should be taken into account. For example, if a sell-side company is developing an asset for Crohn’s Disease, it is important that strategic partners are focused on gastroenterology and have a sales force that calls not only on primary care physicians, but also on specialists.
The likelihood and energy with which a strategic partner will focus on and prioritize an acquired or licensed asset should also be considered when choosing the right strategic partner. Though big pharma companies have vast resources, they often have evolving strategic priorities and earnings pressure that cause shifts in areas of focus and R&D emphasis. An asset that a big pharma company licenses may end up being the 5th product in a sales rep’s bag, or even shelved to avoid competition with another asset that is a more important strategic focus in the portfolio. Sellers should therefore aim for the sweet spot between partners with access to sufficient development and commercial resources and those for whom the asset will be an important priority.
As discussed in a few recent Locust Walk blog posts (Looking East, It’s Not You, It’s US), another important attribute to consider is geographic reach. Since regulatory, commercial and cultural dynamics differ significantly across geographies, it is ideal for a strategic partner to have the know-how, resources and capabilities to maximize value in each key territory. Though a single large global partner may have this capability across all key territories, smaller to mid-size companies may not. Therefore, to extract the maximum value of an asset, multiple regional deals may be a good a better path to maximize value creation than a single global deal in which some territories get short-changed or sub-licensed.
A final and less obvious point of value in the partnering process is the willingness of potential partners to collaborate in co-promotion or co-development agreements. These types of partnerships offer an avenue for sellers to develop their own internal capabilities, while still ensuring successful commercialization of their later-stage products. These agreements may be particularly valuable to clinical-stage companies with a rich pipeline of earlier-stage assets. The capabilities developed in a co-development or co-promotion agreement could be leveraged in the future development of additional pipeline assets, potentially delaying the need for early partnering on those programs. Collaborative agreements such as co-development and co-promotion go hand-in-hand with profit-sharing. Besides increasing the revenue stream associated with a partnered asset, recent Locust Walk analysis found that sell-side companies who were involved in profit-sharing agreements had valuations 3.5 times higher, on average, than companies who were pure royalty recipients.1
Locust Walk has broad experience in the partnering process, and has vast experience in the partner selection process, which includes the evaluation of both financial and non-financial terms that impact the ultimate value of a sell-side transaction. Please contact us to learn more about how we can help your company optimize the selection of the best strategic partner(s) for assets that you are considering partnering.
Written by Beatriz Gadala-Maria