Xconomy published this article postulating a 'new normal' model for biotechs in this time of decreased venture funding. The new model is based on several assumptions regarding the current state of funding and investment:
- Multi-hundred million dollar upfront payments to acquire early stage biotechs are going the way of the DoDo (despite BioVex pulling off trick this week with Amgen I'm inclined to agree. most deals seem to have upfronts in the 10's of millions range with backloaded milestones in the 100's of millions)
- Venture capital's easy exit strategy is blocked as a result decreasing the motivation for VC money to fund early stage biotechs
- Risk-sharing, earnouts, and CVRs will become the normal terms for these deals
- Pharma will attempt to fund more innovation at the University level - thus the spate of recent Big Pharma-University R&D deals
If these observations/assumptions are taken to be true, what is a sustainable business model that might emerge for new biotechs?
The author proffers the "single-asset, infrastructure lite, development model" as one emerging trend. This model uses modest capital to develop a single compound to an early clinical package that can be partnered with Big Pharma. The model employs an LLC strructure. The upfront royalty payments in the partnership are used to pay off the LLC members on a pro rata basis. The model only works if the right targets can be chosen to deliver the pre-clinical package attractive to Big Pharma -- thus de-risking the investment for them. This is only likley to work with certain molecules and is dependent on having biomarkers as surrogate endpoints in the clinic.
The model seems to be popular as the probability of an M&A exit is now less than 2% while a licensing activity for an attractive asset at an early clinical stage is in 30% to 50% range. This model is increasingly popular with investors and to founders/developers who might maintain undiluted equity ownership.
Posted by Bruce Lehr Jan 26th 2011.