Investor Relations Considerations for Biotechs Partnering with Big Pharma

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Public and private investors in biotechnology stocks always look for the third-party validation of a biotech’s claims and technology. Multiple parties can provide such endorsements, including marquee investors, the scientific conferences at which biotechs present, the journals in which preclinical and clinical data is published, the caliber of members on your board and, most importantly, Big Pharma.

Big Pharma, the collective term for the world’s largest pharmaceutical companies, includes companies like Johnson & Johnson, Roche, Pfizer, Novartis and GlaxoSmithKline. These are huge companies bristling with scientific expertise, and they are the names behind some of the world’s most successful and efficacious therapeutics.

The logic follows that if Big Pharma invests in a biotech, then it must possess a winning technology – something Big Pharma hasn’t been able to produce itself and is keen on fostering or getting its hands on. Moreover, there is often the assumption that a biotech’s Big Pharma partner will one day be its acquirer.

There are important matters biotechs should consider when partnering with Big Pharma, and this article discusses a few of those issues, in order to help readers avoid some of the common pitfalls.

1. Understand news flow and materiality

The first thing to realize when partnering with Big Pharma is that what might be newsworthy for you will almost certainly not be newsworthy for them. Unless handled thoughtfully, this can leave a small biotech company materially disadvantaged.

Take, for example, the actual terms of a partnership agreement, which typically include a series of milestone payments and possibly a royalty on future sales of an approved product. The milestone payments will be material to the small biotech company, and must be reported in regulatory filings, but Big Pharma typically prefers for the majority of the partnership terms to remain private. They may also push back on a biotech issuing a press release that announces when payments have been made or disclosing them ahead of time.

The best way to avoid the above scenario is to decide on a clear strategy for disclosing future payments and their timing at the time of signing. These payments will need to be communicated to a biotech’s analysts and could even soothe fears about a funding gap if the terms are transparent.

Another example is announcing clinical trial results for a program under partnership. Big Pharma seldom announces the results of early clinical trials, but as points of value inflexion and opportunities to raise capital, they are all-important for biotech companies. A biotech will want to talk about them and should pre-agree on a clinical communications strategy at the time the partnership is signed. They should also be prepared, if need be, to issue standalone press releases rather than joint releases for such early stage trials.

In all cases, key contacts should be identified within each company to deal with the future news flow resulting from a partnership. Formalizing policies and how future results will be announced is important to set in stone when a partnership is formed, since senior management from both firms tend to step back from the process once a deal is signed.

2. Be careful not to cap your upside

An important consideration when forming a partnership with Big Pharma is leaving enough “meat on the bones” for future equity investors. Biotech investments are some of the riskiest that can be made. In return, investors expect a lot of upside. Partnering your best assets with Big Pharma may avoid some short-term dilution, but it may also rob your shareholders of the upside they deserve. It may diversify or mitigate the company’s risk, but investors typically mitigate risk themselves through diversification, so chances are they are looking at you for a pure play on your underlying opportunity.

Be thoughtful about which programs you partner with, and be sure to leave some serious value on the table for those who own your stock. Very few biotech investors want to invest in a “royalty machine.”

Moreover, once you’ve sold off some of the “family silver,” be sure to give those programs second (or third) priority in your investment deck. This will help would-be equity investors focus on what programs remain unencumbered, since that is the primary risk they will be taking by investing in your equity.

3. Don’t create a monopsony

A monopsony is a market condition where there is only one buyer (as compared to a monopoly where there is only one seller). If you sell equity to Big Pharma as part of any partnership deal you strike, be careful that you are not creating a situation where they become the only bidder for your company in the event that your drug candidate is a success. By doing so, you are robbing shareholders of upside to their equity investment.

4. Carefully explain the division of partnership responsibilities to your stakeholders

Partnerships take all forms. Some involve a total outsourcing of responsibilities for clinical trials, regulatory and commercialization, while others involve a different division of labor/specialties and potentially even cost sharing. Your own situation will depend on what you have and how much Big Pharma wants it. Your analysts and investors, however, will need to be able to build a financial model of your company, so these details of your partnership will need to be fully explained and therefore reflected in your valuation and/or equity price targets. These agreements are complicated, so analysts will often make mistakes in published research, which you will need to subtly get rectified.

5. All partnerships are not equal

Lastly, note that all partnerships are not equal. As such, do not overplay the importance of yours if it really doesn’t amount to much. The Street is savvy and will see through a partnership that barely warrants the name. Examples of this include the kinds of drug-supply agreements that exist, particularly in oncology, whereby Big Pharma agrees to partner with you in a combination trial and provides one of its approved drugs by way of its contribution. Yes, this provides some validation, but not much. The trend towards combination therapy means that Big Pharma benefits from having its drugs approved in as many combinations as possible, hence their participation in your trial may show you have promise, but it is not a full-blown endorsement of your approach. Don’t try and paint it as such.

If you are looking for help communicating a strategic partnership, or would like to more generally discuss your investor relations program, reach out to our team today.

Laurence Watts, Managing Director

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