There is a constant aim of raising capital and propelling company growth within the nature of the biotech industry. When the timing is right, out-licensing a drug candidate might be the right choice instead of seeking to raise capital from the market and, for most, even an inevitable step in the company journey. We would even go so far to say that it may even be the “Nordic model”, where the best way to achieve the largest therapeutic potential and maximize the company value is likely to out-licensing a candidate to a global pharmaceutical company. We have had plenty of exposure to different types and stages of out-licensing deals throughout the years, so we put together a brief primer on the essentials to know about out-licensing endeavors within the biotech industry.
Set purpose and objective
Finding the right partner to out-license a candidate to can be a long process, during which many different factors could cause the process to halt. A company looking to out-license would be wise to have a thoroughly planned strategy for identifying potential partners. This will save time for both parties and improve the chances of identifying the best potential partner. Thorough research and a targeted approach are the key pillars here. This means that a company seeking to out-license a drug candidate needs to set a purpose and objective before going full force, while also having an open mind and being opportunistic.
Asset stage often sets the structure
The structure of the out-licensing deal will mainly depend on the development stage of the out-licensing company as well as company resources. The two relevant types of agreements for a smaller biotech firm to seek are licensing or acquisition. If a company would like to just out-license their candidate there will still be shared work, capital costs as well as some control over the candidate development. In the case of an acquisition, the out-licensing company will no longer be involved in development, be relieved of all development costs, and lose control of candidate development.
These two agreement structures are the two extremes of the spectrum, meaning deal structures can land somewhere in between. For example, agreements can also be structured differently in regard to certain geographies or indications.
Is there an optimal timing to out-license?
Optimally timing an out-licensing process is an essential factor that will contribute to a successful outcome. Generally speaking, out-licensing a candidate can result in a variety of deal structures depending on the development stage of the candidate, or simply put, the timing. The different potential deal structures are primarily tied to the development risk that follows after the candidate is in-licensed.
If a candidate is out-licensed at an earlier development stage, a low upfront payment is to be expected. This could, however, be outweighed by high potential milestone payments and royalties. Essentially, the company out-licensing the drug candidate needs to determine if they think it is beneficial for them to share the development risk at that time. An additional benefit to out-licensing a candidate at an earlier stage, despite a relatively low upfront payment, is a positive response from investors who might then see the successful out-licensing as a validation of the company’s core technology, making them more willing to continue investing in other development candidates in the company’s portfolio. There is of course also the other side to this, if a license deal is terminated ahead of time or the drug candidate is returned, negative effects will likely be seen from investors no matter the explanations.
If a candidate is out-licensed at a later development stage, a higher upfront payment is to be expected. A candidate that is in later stages carries less risk than one in an earlier stage, leading to a substantially larger net present value. However, a company that decides to wait until a later stage to out-license their candidate needs to be prepared to keep most of the development risk in-house until then.
The process of choosing a license partner is described to be similar to that of marriage –
you are stuck with the partner likely for years to come, so you better choose right.
Who would be a good partner?
Several times we have heard clients describe the process of choosing a license partner as being similar to that of marriage. You are stuck with the partner likely for years to come, so you better choose right and while you can compromise on certain things, there are some things that are deal-breakers. So, what should be considered ahead of time?
One of the key questions when evaluating a potential partner, especially when milestones and royalties are involved, is: Will the partner be able to successfully develop and commercialize the candidate? While the question is obvious, the answer is less so. A few key factors to look at when trying to answer this question are the therapeutic focus and technology expertise of the potential partners. Analyzing the pipeline of a potential partner can help with this process. For example, did a potential partner recently fail a Phase II trial within a relevant indication? Will your drug candidate be able to fill the gap that was left after the potential partner’s candidate produced inadequate results?
Nurturing relationships with care
When approaching licensing activities, a focused business development team needs to be prepared and provided with the right resources and expertise required to drive the process forward. It is a precarious relationship that needs to be nurtured, often during several months to sometimes years.
Sealing the deal
No one said it would be easy, but history tells us that licensing deals are more than achievable with the top 20 partnership and M&A deals of 2019 reaching a value of around $300 billion. Better yet, the deal landscape has shown no signs of slowing down.
MSC Nordics has the experience required to bolster companies seeking to out-license their candidate, whether it be through valuation and deal structuring or partnership identification and outreach. If your company is considering if it is time to out-license a candidate, or even if the decision has already been made, don’t hesitate to get in touch with us.
