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Biotech: Let’s Make a Deal

Scientific acumen is crucial—but so is an understanding of today’s deal market.

The risks and costs of life sciences product development have become so high that few companies are willing to bear them on their own. As partnerships become vital, skill in dealmaking has become almost as vital as scientific acumen for today’s pharma and biotech firms. Insight into the deal market is crucial for companies seeking to design advantageous deals.

That’s why Morrison & Foerster has launched a quarterly deal report that answers key questions such as: what kinds of therapies are being bought at what development stages, and for how much. The report—dubbed MoFo BioMeter—is also a useful indicator of the health of the biotechnology industry.

“In a time of constrained venture funding for unapproved life sciences products, up-front payments for promising assets still in development are a vital source of growth capital for young firms,” says partner Stephen Thau, who created the BioMeter. “Meanwhile, leading pharmaceutical companies such as Pfizer have increasingly focused on their global sales and marketing capabilities over the last decade. In that time, their partnerships with biotech start-ups have become the lifeblood of the industry.”

The BioMeter is an index that measures transactional data relating to collaboration agreements between large commercial firms and small developers, and can include licensing, joint ventures, acquisitions, and other deals for development-stage assets.

As biotech firms take their wares to market, BioMeter serves as an objective guide for evaluating the potential of assets across individual sectors, categories, and development stages. “If your interest is in testing assumptions about a given therapeutic, identifying pipeline opportunities, managing R&D budget allocation or assessing risk, BioMeter can guide informed decision-making,” says Thau.

Deal Slowdown

The absolute number of deals declined significantly from 2006 to 2012. Also, from 2006 to early 2012, the proportion of transactions for products with regulatory approval generally increased, demonstrating a willingness on the part of buyers to wait for the removal of regulatory risk. But the trend may be reversing, as Q2, Q3, and Q4 in 2012 showed a marked decline in approved product deals and an increase in the percentage of deals involving therapies in pre-clinical stages.

Costs Rise, Belts Tighten

The cost of bringing a new therapy to market is 24 times higher than it was in 1979, according to Boston-based Tufts Center for the Study of Drug Development. Annual revenue of $1 billion is required to recoup R&D and marketing costs. “[I]n a world shaped by increased patent expirations, diminished cash flow, and fewer promising breakthrough products, companies will need to hone their efforts to streamline development,” says Tufts CSDD Director Kenneth Kaitin.

Prescription for Success

For venture firms looking to invest in emerging biotech companies, BioMeter can help indicate the right moment to step in. “Financial sponsors look for strategic inflection points in the product development cycle, such as self-sustaining cash flow or licensing deals with large firms,” says Erik Knudsen, Of Counsel in Morrison & Foerster’s private equity buyouts and investment group. “Tracking the commercial potential of development-stage assets, BioMeter allows investors to fine-tune their timing.”

 

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