We all know that pharmaceutical companies need to find more high-value products, particularly for their late-stage pipelines. What is becoming increasingly difficult is their ability to find the 'right' products. This state of affairs is compounded by the fact that very few biotech companies can take their own products beyond Phase II. The result is that most biotech products have been out-licensed by the end of Phase II, and precious few remain available for licensing in Phase III.
To make things worse, biotech companies are still experiencing a cool climate for equity financing, so they are finding it tougher to finance products into the clinic. The disparity between push by the biotech and pull by the larger pharmaceutical company is causing difficulties in overcoming the product gap.
So What is the Solution?
Let us look at the situation from the viewpoint of one of the main problems. This is the way that pharmaceutical companies make decisions: historically, they have tended to prefer making binary 'yes-no' decisions. However, in the game of risk and managing risk one has to ask whether this is the right game to play. Binary decision making works well when there is an abundance of choice, but as the choice narrows the need to take only a proportion of the risk around each investment decision increases. Put another way, it is better to have a 50% holding in eight projects, one of which will succeed, than to have a 100% holding in four projects that have the same cost and odds of success. Company returns are potentially diminished, but exposure is reduced, which is likely to be just what is needed. In this example, who would take the other 50% of the risk? Well, another pharmaceutical company could or, through the licensor or biotech company, the role could be taken by a venture capital or private equity group.
"Historically, pharmaceutical companies have tended to prefer making binary 'yes-no' decisions on product licensing. In the game of risk and managing risk one has to ask whether this is the right game to play."
A final point: there is no doubt that as the 'fishing grounds' of late clinical stage become depleted pharmaceutical companies need to migrate towards earlier stage deals, particularly in those therapy areas of greatest strategic importance to them. This, in turn, will have the result of driving the value of those earlier stage products upwards.
Fintan Walton
Chief Executive Officer
PharmaVentures Ltd