Getting Ready for the 2023 BIO International Convention: Raising Money Through Creative Partnering
In January of this year, the CEO of a NASDAQ-listed early-stage biotechnology company made an interesting decision. Instead of prioritizing meetings with potential investors at the J.P. Morgan Healthcare Conference, she scheduled meetings with other businesses to discuss strategic partnerships.
Next week, the annual BIO International Convention will present companies with the same choice of priorities. With a tough equity market and fewer investment dollars to go around in biotech, fundraising efforts today can feel almost futile. BIO is a ripe opportunity to network with partners and investors alike, but given the current economic climate, businesses should consider spending more time at BIO looking for strategic partnerships than looking for traditional VC funding.
For early- or growth-stage companies focused on drug discovery and development, this advisory explores ways to generate investment and revenue through technology- and intellectual property-based transactions. And even if a business is not feeling an immediate financial pinch, because the contracting process (including diligence and negotiations) can be long (12 – 18 months), it must plan and start the process well in advance of when funding is critically needed.
Working with Pharma on a Preclinical Asset:
Early- or growth-stage companies with a preclinical asset should consider shopping it to a pharmaceutical company with aligned interests that is willing to fund its development. An aligned interest could be a shared indication or genetic target, mechanism of action, or similar focus. Funding for research and development work is often provided in exchange for a license to the developed asset or for an option to acquire or license the developed asset. The obvious advantages under this arrangement are (1) science and experimentation can be conducted to advance the asset at the partner’s expense, and (2) an up-front technology access fee can be charged for immediate revenue, as well as for success payments along the way. Although new inventions relating to the asset will be optioned or licensed to a partner in connection with the asset, companies can likely maintain rights to these inventions for use with their own, non-competing programs — this requires careful negotiation of field and indication limitations.
For option deals, if a partner declines to exercise its option, then early-stage companies have (hopefully) achieved proof of concept and can keep rights to these inventions for further exploitation. Or, if the partner takes a license and successfully advances the asset itself, then an expectation of long-term revenue in the form of royalties and milestone payments has been secured. This type of collaboration can also include an equity component, or it can lead to a future equity investment.
Also, opportunities to leverage the expertise, staff, and resources of a pharma partner can help reduce burn rate, which can be positive from a capital perspective during times when the equity markets are not as favorable.
A few words of caution: When doing this type of deal, early-stage companies must limit the number of targets that are researched and the number of leads they are obligated to generate. Scope creep can weigh down resources, so plan ahead and plan carefully.
Collaborating with Peers:
While it may feel counterintuitive, collaborating with peers in the same space — even those who may be competitors — can yield interesting and exciting technologies that could benefit both parties. Conducting joint research and development on one company’s assets, or on both companies’ assets, can generate something entirely new. Companies should consider the possibility of developing combination therapies, companion diagnostics, or drug-device delivery platforms. Although this route might not generate immediate revenue, a successful collaboration in the form of a cross-licensing arrangement or joint venture can yield revenue down the road. This option might be especially attractive to businesses in other geographical territories, such as Asia.
Platform Plays:
Technology companies that are platform-based can leverage their platform to identify hits and leads for various targets or indications and could consider narrowing their own use of the platform to advance just a few assets — while offering access to the platform to other businesses on a hybrid fee-for-service and licensing structure. This can yield immediate revenue for services and long-term revenue in the form of license fees and royalties. The key with such an arrangement is to continue positioning the company as a co-equal platform partner rather than as a contract research organization (CRO): if a partner thinks of the company as a vendor, it will be harder to land a commercial deal in which the company maintains ownership over the targets they identify, and therefore harder to maintain participation in the upside of the business that the partner builds based on collaboration.
Additional Benefits to Partnering:
These kinds of partnership agreements can help a company’s efforts to secure investment. A reputable partner can give a company’s program credibility, making it easier to secure future equity funding when the markets are in better shape. Investors often view these relationships as evidence that a trustworthy third party has confidence in a company’s science and management after conducting its own due diligence. By the same token, early-stage and growth companies need to make sure their agreements are carefully written and negotiated by experienced counsel — these contracts will be scrutinized by potential investors.
Things to Watch Out For:
Every partnering deal in which a company receives revenue must be balanced against giving up intellectual property rights. This may be especially tricky in a fee-for-service model because some partners will expect exclusive rights to or ownership of new inventions. Partners will also likely expect some level of exclusivity or a non-compete arrangement. Companies should pay particular attention to limiters like field definitions, exclusivity covenants, and option rights — each provision will affect the company’s future.
Also, if a company is public, its market capitalization may limit the economic terms it can land with a pharma partner. And be aware that timelines with big pharma can be long — it may take a year or longer to conclude a definitive agreement. Finally, companies should expect to give up some control over a program or asset (e.g., through steering committees, etc.), which can impact their own timelines. A company must take care to build protections into its contract around development timelines.
Get the Ball Rolling:
- Evaluate the strength of the assets. Consider proprietary materials, trade secrets, manufacturing know-how, and patent rights. Partnering too early may be a disadvantage, risky, or yield insufficient capital. Make sure the technology is ripe for partnering discussions and that milestone-triggering payments are not too far in the future.
- Consult with a patent strategist. Having a well-thought-out and executed patent strategy provides a competitive edge and is attractive to potential partners.
- Request meetings with potential partners, and enter into nondisclosure agreements before talking.
- Enter into well-drafted and thoughtfully considered material transfer agreements. This allows potential partners to kick the tires on an asset. There is no need to charge for this evaluation, but hopefully, tinkering with an invention will stimulate enough interest to move to the next phase. Note that with material transfer agreements (MTAs), the use of data, publication rights, and IP rights in derivatives can all be hotly negotiated points and should be approached with forethought.
- Identify both a scientific champion and a business development champion within the organization of a potential partner.
- Determine the internal goals of the deal before starting discussions. For example, does the company just need capital, or does it want to play an ongoing role in the program?
- Commit to a partner that will not disadvantage the company in the future from doing business with a larger strategic commercial partner.
- Prepare a nonbinding term sheet. This does not have to be formal. The best term sheet is a document that identifies high-level issues for the purpose of stimulating discussions and negotiations. Companies do not need to sign term sheets, but including signatures — even in a nonbinding term sheet — can be a tool when seeking investment dollars.
- Talk to legal counsel about possible deal structures and potential long-term strategies. There is no substitute for expertise and experience when it comes to company-defining decisions, and even early deals can have lifetime ramifications if they involve field limitations, exclusivity commitments, or long-term collaborations.
Any early-stage or growing company attending BIO should absolutely use its time at the conference to explore strategic collaborations and partnerships with other businesses. Building relationships takes time, and there is no time like the present!
Author
