Monday, October 26, 1998
With the closure of the major financing windows on both sides
of the Atlantic, biotech CEOs presumably are going to try once again to substitute
equity capital with big pharma dollars from partnering.
Regardless of the P&L arithmetic that prevents the pharma
side from feeding all the hungry mouths, the continuing hustle for partners
begs a larger strategic question: Are biotech companies pursuing partnering
strategies that will enable them to achieve sustainability? Are the deals that
are being negotiated really creating long-term value for the biotech companies?
And how can they tell?
Since 1993, BioCentury has published more than 4,500 news items
related to deal making. But most deal announcements provide virtually no information
that can be used to draw conclusions about the biotech company's future value.
As noted by Rob Dow, CEO of Scotia Holdings (LSE:SOH, Stirling,
U.K.), "announcing a deal is so far away from creating value that one should
not be surprised if it does not generate significant upside immediately."
Thus the long-term value generated by biotech deals remains
under wraps until measurable outcomes can be seen from a project, perhaps beginning
with late-stage clinical data.
Nevertheless, deals can accomplish many things in the short-term,
including helping a cash-strapped company survive to fight another day. A partner
also can help a company figure out if its technology or scientific insight has
any commercial utility.
But with the capital markets now unwilling to support purely
exploratory science projects, perhaps the more important question for both companies
and investors is how to measure whether a partnership is structured to build
long-term sustainable value for the biotech side.
While it is possible to put together a sizeable list of plausible
benchmarks for deals (see Benchmarks, A2), biotech executives interviewed
for this article also revealed a number of themes that would underlie any analysis
Partners can't repeal gravity
For starters, a deal cannot reduce the intrinsic risk of product failure. Indeed, the odds of successfully developing a drug product through a partnership logically must be less than the chance taken by a company that has the finances and infrastructure to do the job internally.