It is relatively easy to formulate a corporate strategy but much harder to implement it. For most early-stage biotech companies the management is focused on financing and growing the company. Although investors will be told about potential exit scenarios on each equity round, sometimes little thought is given as to how the company is going to achieve an exit that maximises shareholder value. Two main exit scenarios, an IPO, or a trade sale through a merger or acquisition, may require entirely different partnering strategies. Furthermore, value achieved through an IPO is quite often determined by different parameters from those required for a trade sale.
Many biotech companies have adopted the 'proof-of-concept' model whereby they will take their products to proof-of-concept stage, which is usually upon completion of Phase II clinical trials, and then partner the product with a major pharmaceutical company. As a rule, this means that the biotech company is reliant on its ability to develop products only up to a certain value. These products then essentially become the equivalent of an annuity or a bond that yields a certain amount of earnings at risk over a fixed period of time.
"What may be considered a great deal for one business model may not be a great deal for another. That is why the use of benchmarking for valuing and structuring deals has to be carefully thought through."
The value captured by the biotech company is dependent on the deal terms and the retained rights that the company has negotiated. What may be considered a great deal for one business model may not be a great deal for another. That is why the use of benchmarking for valuing and structuring deals has to be carefully thought through. It is far too easy to look at what appears to be a comparative deal without really understanding the context of the strategic thinking behind the alliance, or even knowing the circumstances under which it was negotiated - and in any case, your benchmark itself might have been a bad deal.
The biggest concern is that past comparator deals may have effectively given away most of the value in the company. In that case the biotech company concerned may never become an acquisition target and the investors' exit can only be achieved through an IPO, which could well have a lower value than that which could have been achieved through an acquisition.
Fintan Walton
Chief Executive Officer
PharmaVentures Ltd