Xconomy's Luke Timmerman did a nice piece this morning on the difficulty Biotech's are having with paying off their investors in the current economic climate. He quotes, Jim Posada, a former dealmaker at Lilly and GlycoFi, as promoting a licensing based model. This is based on the observation that Biotech IPOs are non-existent and that Big Pharma outright purchases of Biotech companies is also becoming much more difficult.
Posada's model offers another way. Under it, new Biotech's would seek relatively small investments from its backers -- say $10-$15 million over 3 years. The company would take a drug through animal testing and phase I -- demonstrating safety and efficacy to that point. Then it's time to take that package to Big Pharma to gain a licensing deal. Big Pharma would be asked to offer upfronts in the $30-$50 million range with heavier multi-hundred million milestone based payouts. However, the upfronts would be sufficient to pay off the early investors of the $10-$15 million at a reasonable return for their risk. The milestone based rewards might never be realized but aren't critical to paying off the intitial funders.
Posada recently structured such a deal with Resolve Therapeutics and its lupus property in development. They raised their first two million. So relatively modest investments might get the ball rolling through early stage development until a Big Pharma partner can with more confidence make its licensing deal. It cuts the risk for everyone involved and makes it match the reward in a reasonable time frame. The Biotech will still need to have good programs in the right disease areas and keep its capital investments under control until funding warrants more. In the first stage, these companies may take on a much more virtual look. It's a trend whose time has come.
Posted by Bruce Lehr May 23rd 2011.