Pharmaceutical Strategic Outlook: The Trouble with Alliances
At Windhover's March 2008 Pharmaceutical Strategic Outlook meeting one overriding theme was an alliance paradox: values continue to rise and deals provide an increasingly important source of funds for biotechs, yet public investors don't seem to like these deals. Plus: a discussion of big-pharma outlicensing and the importance of CFOs in pharma strategy.
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To management's frustration, the biotech's deals with Novartis and Amgen haven't helped its market cap, one more sign that validating deals with Big Pharma don't move investors.
With no public market to provide competition, the theory among biotech's optimists was that Big Pharma would step in and buy lots of bargains. But cheap prices and easy availability haven't increased drug company appetites: They will only buy what they really want. Deal volumes, both for M&A and alliances, are falling, while Big Pharma has learned to put more of the risk back on biotech. What will change this dynamic, putting more bargaining into biotech hands, is the revival of the public market - and there are hints that such a revival may be on the way.
Biotechs remain voracious consumers of capital, but tapping the equity markets is often prohibitively dilutive. Royalty financing can provide lower-cost-of-capital funding while putting a price on assets the market often ignores. This cash can also allow biotechs to hold onto R&D projects longer, eventually pushing up the price of licensing deals. But although royalty financiers are eager, they are limited in the amount of risk they are willing to take; new players in the business though may nevertheless increase competition and drive prices up.