A Biopharma Dealmaker's Approach To Maximizing Strategic Partnerships
By Geoff Meyerson, Arjun Nair, and Paxton Paine
The collaboration included an up-front payment of $50 million, development milestones of up to $630 million, and commercialization milestones that could exceed $2 billion. Indeed, within days, Assembly’s shares had gone from about $12 to the low $20s. After peaking in the mid $20s, the stock settled in the low $20s three months after the announcement.
In 2017, Amgen inked a deal with CytomX Therapeutics. For $40 million up front, a $20 million equity investment, and as much as $455 million for regulatory and commercial milestones, Amgen received rights to CytomX’s bispecific antibodies to treat tumors characterized by the EGFR mutation. Again, the market responded positively. CytomX shares, which were trading in the high teens, doubled to about $35 about five months after the deal was announced.
DIGGING THROUGH THE DEALS
Locust Walk examined 129 deals involving publicly traded U.S. companies over the four-year period from 2016 through 2019 in which the value of the deals was disclosed. The licensors had market capitalizations between $25 million and $750 million and the deals included these characteristics:
- 78 were global/U.S. deals involving full global or U.S. rights to the assets; 51 were ex-U.S. deals involving regional rights to the assets.
- 49 were codevelopment deals where each party was expected to contribute to the expense and effort of advancing the assets; 80 were more straightforward licensing deals.
- 61 of the deals involved a firm’s lead asset, while 47 involved a secondary asset, and 21 were built around a platform technology.
- 75 transactions involved assets from preclinical to Phase 2; 54 involved assets from Phase 3 to commercial.
- 8 deals included up-front payments >$20 million.
- 42 deals gave the licensor firms less than six months of cash “runway” based on their existing burn rates; 42 deals gave more than six months of additional runway.
To gauge the typical performance of all the companies in our data set, we viewed average stock price appreciation at three months after the deal announcement. We backed out movements in the biotech indices to arrive at a normalized measure of stock appreciation. This yielded an average appreciation across our sample of 15.0 percent.
RANKING DEAL CHARACTERISTICS
Transactions in which more of the deal value was paid in up-front cash generated significantly better stock appreciation than those with less. Specifically, using $20 million paid up front as our cutoff, deals with greater than or equal to $20 million showed a 27.9 percent increase in normalized share appreciation three months post-deal. This compares to just over 5.5 percent normalized share appreciation at three months for deals with less than $20 million up front.
Companies that completed a deal that increased their runway by more than six months were viewed much more positively by the street, with their shares appreciating 25.8 percent at three months post-deal, compared to 1.9 percent for those that achieved less than six months’ increase in runway.
One partner at a life science investor that focuses on early-stage private and public deals offers a useful perspective. “Take a development-stage biotech with a financing cliff approaching,” says this investor, who asked not to be identified. “The market knows they have to raise money. That takes most open-market buyers of shares out of the stock, leading to share price weakness. But if the firm pulls a rabbit out of its hat — the market thought the firm needed to raise money and now it’s done a deal with a secondary asset that extends its cash runway — that can lead to a really dramatic repricing of stocks.”
DIVING DEEPER
But some deal characteristics that have a big impact on share appreciation are less obvious, and, therefore, deserve more scrutiny. We divided assets into lead assets, secondary assets, and platform technologies. At three months post-deal, deals involving secondary assets showed strong 23.3 percent normalized appreciation for the licensor, compared to 11.6 percent for lead assets and 6.7 percent for platform technology. This difference was more marked a year after the deal, when secondary asset deals generated a 26.2 percent share appreciation for the licensor, compared to 7.0 percent for lead assets and a loss of 20.0 percent of the share price of licensors of platform technologies.
An analysis from the institutional investor: “Most investors in a company are in it for the lead program. Very few are there for the second or third asset. But if a company deals their lead program, the reason they owned the stock has been capitalized, and investors have to ask why they still own it. It’s hard if the entire shareholder base needs to turn over. That’s why the deals for secondary assets tend to do better than those for primary assets.”
Another less obvious factor with a big impact on stock performance is whether the deal is structured as a straight out-license or as a codevelopment deal where both parties contribute to the advancement of the asset. Codevelopment deals show 21.3 percent appreciation three months post-deal, compared to 11.2 percent for licensing deals. The spread widens significantly at one year post-deal, with 26.3 percent stock appreciation for codevelopment deals versus a 0.7 percent loss for licensing.
Locust Walk analysts believe that the real factor isn’t so much the type of agreement, but the fact that codevelopment deals are typically executed with large pharma companies — the ideal, deep-pocketed partner for drug development. It is the partner, not the details of the agreement, that is driving the stock appreciation in codevelopment deals, in our opinion. Additionally, lead assets that trade on a codevelopment basis imply that more of the value is retained by the licensor.
Consider the clinical development stage of the asset at the heart of the deal. Perhaps counterintuitively, deals involving Phase 3 or marketed assets performed worse than those involving earlier-stage assets from preclinical to Phase 2. The later-stage assets generated 10.6 percent appreciation at three months post-deal, while the earlier-stage assets nearly doubled that result with 18.1 percent share appreciation. The divergence increased at a year post-deal, with late-stage assets showing a 7.5 percent loss in share price, and earlier-stage assets showing 22.1 percent appreciation.
MIXING AND MATCHING
Deals involving a secondary asset in a codevelopment arrangement soared over the other three combinations of these two variables, reaching 27.8 percent stock appreciation at three months post-deal, and an impressive 48.2 percent appreciation at the one-year mark.
Codevelopment deals with $20 million or more in upfront cash involving a secondary asset, covering the U.S. or global market, which resulted in an increased cash runway of at least six months, which admittedly only totaled six transactions, showed a 55.7 percent share price appreciation at three months, dwarfing other deals that shared only a subset of these characteristics.
For an example of a transformative deal, let’s examine the transaction Pieris Pharmaceuticals announced with French pharma giant Servier. The company received a $31.3 million up-front payment with an additional $338 million in milestones for one of its assets, as well as about $200 million in milestones for each of four other drugs to be created from the collaboration.
As the advisor to Pieris on the Servier transaction, Locust Walk’s principals felt that in addition to the obvious fiscal benefit to the company extending their runway by non-dilutive means, the multiple transactions created the potential for additional, complementary deals with other suitors, thereby providing a catalyst for future value creation.
GEOFF MEYERSON is CEO and cofounder, ARJUN NAIR is senior analyst, and PAXTON PAINE is an analyst at Locust Walk.