Key Questions To Ask When Entering A Pharma Partnership

By Jody Staggs, SWK Holdings

Rising interest rates have created challenges for life sciences companies seeking funding. The cost of equity or venture debt has increased dramatically since 2021, and for some biotech companies is not available at any price. For these companies, non-dilutive funding via a strategic partner can be a compelling alternative, although it carries risks.

The right partner can be transformative, providing financial, promotional, distributional, manufacturing, and regulatory resources not easily replicated for a small drug or medical device maker. 

Of the 100 life sciences executives surveyed in the 2023 BDO Life Sciences CFO Outlook Survey, 45% are planning a strategic licensing agreement and 43% are planning an agreement to raise capital. The same survey found 50% agree it has “become increasingly difficult to secure new funding.”

The timing for seeking the partner can be as transformative as the partner selected as every partnership is a negotiation.  A weakened balance sheet and desperation will reduce bargaining power.  Strategic partners will be keenly aware of an innovator’s balance sheet, cash burn, and time to the next clinical milestone. 

Before entering a partnership, executives need to accurately assess their company’s strengths and weaknesses as well as what they need to achieve from a partnership.  These needs should be considered when judging the timing of a partnership.  As well, executives need to ask themselves and their prospective partners key questions in the following five areas.

Financial

The funding climate is often as volatile as the stock market. With short-term interest rates rising, many investors are content earning a lower-risk return from fixed-income securities rather than making risky biotech investments.  According to Reuters, in the soft 2022 biotech IPO market, only 47 companies came public via IPO, raising a total of about $4 billion.  By comparison, in 2021 152 companies came public via IPO raising over $25 billion. SPACs, which were in vogue as a means to come public and raise capital to complete clinical trials, have become less tenable.  While many pools of biotech capital have dried up, big pharma companies have strong balance sheets and are eager to fill their pipelines (see Pfizer’s deal to purchase Seagen for $43 billion). The supply of pharma and biotech companies needing cash is vast, which allows strategic investors to be selective.

• What is our cash burn and runway until the next milestone?
• What does the funding environment look like for our company and peers?
• Are we able to raise a small insider round to enter partnership negotiations from a position of strength?
• Does our clinical asset fill a gap in a Big Pharma company’s portfolio?
• Are there multiple strategics (i.e., another pharma company or an investor related to the industry) interested in a partnership or only one?

Clinical

A good CRO will help biotechs reach clinical milestones faster, while an underperforming CRO can lead to delayed timelines and budget overruns.  Data & analytic capabilities help with site selection and identifying the patients necessary to complete studies, while also honing product characteristics and patient subsets that can reduce time to commercialization. Strategic partners which can provide clinical resources can help guide the clinical pathway and CRO relationship.

• Are enough patients being recruited to complete the next phase of clinical trials?
• Are the data being gathered giving us insights into safety, later-stage clinical success, or insights to help a more specific group of patients?
• How well are we managing clinical trial costs?
• Are unexpected costs limiting the number of patients recruited?
• How quickly can we get data to complete the next milestone?
• Will these data be a catalyst to entice a strategic partner?

Regulatory

Small pharma and biotech companies rely upon regulatory consultants to buttress limited in-house expertise. Big pharma companies possess large and sophisticated regulatory departments and likely have valuable insights which can reduce regulatory risk and speed up time to market.

• Can a partner provide resources to help address the complexity of regulatory filings?
• Are technological solutions available to handle routine or data-oriented regulatory filings?
• How well are we insulated from regulatory risks associated with partners?

Commercialization

Commercialization is a primary rationale for smaller pharma and biotech companies to collaborate with strategic partners. Large pharma companies have sophisticated marketing programs that rival those of traditional consumer packaged goods companies. Advertising, physician detailing, payer negotiations, social media, and the assortment of “beyond-the-pill” services often demand resources beyond the means of early-stage companies.

• Where does our product fit in the partner’s portfolio?
• Does our product have broad support of the partner’s commercial leadership?
• How will the partner support its marketing via advertising, sales reps, and medical education?
• Can we add terms to the partnership agreement requiring minimum marketing activities?
• Could liabilities emerge if there is a regulatory problem with the marketing?
• Can the commercial partner ensure the most suitable product placement on payer formularies?

Manufacturing

Contract manufacturing has alleviated a significant burden for many drug makers, especially smaller ones. Meeting GMP, packaging, labeling, and formulation requirements are part of a complex landscape, adding to the fixed costs associated with operating a manufacturing facility. The right partner can reduce costs and offer scalability. For a small drug company, outsourcing manufacturing can improve margins and returns on capital.

• Is the product aimed at a large patient population or at rare diseases, and can the facilities handle the necessary technical demands?
• Is the manufacturing partner’s supply chain secure to ensure a supply of finished medicines?
• What are the responsibilities tied to distribution, especially for products that have complex handling requirements?

Given turbulent market conditions Big Pharma’s capital is enticing, however, financial consideration should not be the only rationale for a partnership.  The goal should be to enter partnership discussions from a position of strength and a clear understanding of the alternatives.  The right partner can answer multiple strategic questions for small biotech companies. By asking these questions up front, management teams can accurately assess the pros and cons of partnering and which partner fits best. 

About The Author:

Jody Staggs is president and CEO of SWK Holdings.