The future of partnering in Pharma & Biotech

Biotech and small pharma companies have proven that tremendous value can be created in pioneering new approaches to treat diseases and many of the technologies that have become common in big pharma in fact came from small businesses. The continuing trend of collaborative arrangements is driven by the symbiotic needs of big pharma and biotech. Small companies depend on large ones for late-stage development funding and commercialisation. Large firms depend on small players for new products and technologies. So should you partner or ‘do-it-yourself ’? This is an interesting and controversial topic! Partnering with big pharma was key to providing validation of a small biotech and, in many ways, this was also its ‘dream’ or end goal. But in the past few years, some companies have proven that retaining rights, and not partnering, can be an attractive strategy, albeit a challenging one. By retaining rights to a new compound, a small company can build its commercial infrastructure, launch the product itself and start generating revenues. This route was in fact the way that many biotechs in the US became real success stories.

Innovation in new drug development can provide the basis for organic growth. Amgen, Genentech, Genzyme, Gilead Sciences and other successful biotech companies have grown to be as big as "big pharma", undisputedly following the route of commercialising their own products and in retrospect, this proved to be not only possible, but correct as a strategy. Amgen was founded only in 1980 and it raised US$40 million in its IPO in 1983. Genentech is a similar success story. Founded in 1976 by a biochemist and a venture capitalist, the company went public in 1980 raising US$35 million. The history of Gilead Sciences illustrates this point well. The company was formed in 1987 and even though it formed a few collaborations early on, it was able to acquire NeXstar Pharmaceuticals in 1999 and then Triangle Pharmaceuticals in 2003, when it announced its first full year of profitability. Today, Gilead Sciences had a market cap of US$30 billion in 2006 and US$80 billion today

Overall, for a small company, there are many advantages in not partnering – a partnering deal will normally involve a royalty rate, which in most cases tends to be in the ‘teens’ range. However, despite many executives’ and investors’ personal views, there is no ‘acceptable royalty rate’ that applies across deals. Every deal is different from the next so each one has to be financially analysed taking into account the cost of goods, R&D, the sales effort (medical reps), marketing (promotion) and, of course, the product sales forecast. A product for a broad medical indication that requires a very large Phase III program and entails visits to most of the primary care physicians is very difficult for a small company to fund internally. In such a case, a royalty rate in the teens may be deemed fair for the two partners because the costs are very high, even if sales are also forecasted to be very high. Unfortunately, royalty rates are usually a confidential and sensitive part of commercial deal terms and, as such, are rarely disclosed publicly.