Emerging biopharma companies with promising lead candidates in late-stage trials are often faced with a fundamental decision: go-it-alone (self-commercialize) or secure a strategic partner to support development and commercialization. It is a classic strategic choice that elucidates discussion and analysis of the company’s strategy / objectives, management team capabilities, pros / cons, risks / benefits, market trends, anecdotal evidence, etc. *Cue the strategy consulting white papers*. At Locust Walk, we frequently encounter management teams wrestling with this decision. We recognize that every strategic partnering decision should be evaluated on a case-by-case basis and grounded in the company’s strategy as well as transaction options. That being said, for privately held emerging biopharma companies that aspire to go public, one related question to the ‘to partner or not-to-partner’ dilemma is what impact would the strategic choice have on Initial Public Offering (IPO) prospects and performance? So, in this blog, we retrospectively analyze one specific aspect of the impact of strategic partnering: IPO success and performance.
For private biopharma companies with lead assets in late-stage development, an IPO can be an attractive financing vehicle for a variety reasons – access to significant capital, broad investor base, liquidity, etc. The success, amount of capital raised and performance of an IPO, however, is heavily based on the confidence of public investors in the science, commercial prospects and probability of success. At Locust Walk, we often believe one of the best demonstrations of scientific validation and confidence in a technology is the presence of buy-in from a big pharma partner. After all, strategic partners are very sophisticated buyers of technology as they have a unique perspective on market dynamics and tremendous due diligence capabilities and perspectives.
To test if partnering helps IPO performance, Locust Walk examined a dataset of nearly 65 late-stage biopharma companies (in Phase 2 or 3 trials) that have gone public since 2014. We then stratified this dataset into A) companies with a strategic partnership in place pre-IPO and B) companies without a strategic partner pre-IPO. To be clear, ‘strategic partnership’ included any agreement for commercial rights, ranging from regional licenses to worldwide development and commercialization agreements. We found that, on average, companies that secured a strategic partner pre-IPO achieved two things:
- Higher Amount of Capital Raised
- Better 1-Year Stock Performance
- Higher Amount of Capital Raised: The median amount of capital raised by companies pursing an IPO with a strategic partner in place was over 25% higher than unpartnered companies ($90M versus $72M, respectively).
2. Better 1-Year Stock Performance: Companies pursuing an IPO with a strategic partner are more likely to see positive stock performance at 1-year compared to unpartnered companies. (Partnered: median return of 5.6% with 56% of stocks yielding positive; Unpartnered: median return of -4.0% with only 43% of stocks yielding positive).
These observations make intuitive sense. A strategic partner placing a ‘bet’ on a company is a validating signal to investors that inspires confidence in the science, data, and commercial prospects. For public investors, if a large biopharma’s talented due diligence team has already analyzed a technology and decided to invest in it, it can be a leading indicator for success. Additionally, the presence of a marketing partner reduces the execution risk of a first product launch and sub-optimal revenue generation. By accessing the capabilities of an existing, proven salesforce, an emerging company can demonstrate to investors that it is leveraging an optimal commercial infrastructure to maximize product value. Finally, strategic partnering deals often include lucrative milestones and royalties or profit shares that will create future value and minimize the need for additional capital from public investors in the future.
While the empirical evidence supports the hypothesis that strategic partnering improves IPO performance, it is important to recognize that there are numerous examples of companies who have created critical value and had successful IPOs with a go-it-alone strategy. Each company facing this question should base its decision on its strategy, objectives and real options. A downside of partnering is giving up a portion of the value of an asset. Depending on how the partnership is structured and the deal terms, public investors may find the impact of a deal to be negative or non-optimal. To further elucidate this point, please see Locust Walk’s blog post on the value of retaining US rights: It’s Not You, It’s US: The Value of Keeping US Rights in Biopharma Partnering.
Locust Walk specializes in helping life science companies formulate strategic partnering and financing strategies and then helping to execute against those strategies. If your company is contemplating an IPO and debating whether to pursue a strategic partnership prior to going public, we would be happy to discuss the decision with you and elaborate on our first-hand experience with this important question. Please feel free to reach out to Josh Hamermesh (firstname.lastname@example.org) for more information on how Locust Walk can assist your business and corporate development needs.