Late-Stage Alliances: Still Worth the Price?

Which generates more value for the biotech: a late-stage alliance with a Big Pharma--or an outright acquisition?

Certainly, late-stage prices are high—making Big Pharma more willing to acquire. (See "Big Pharma Finds New Pipeline Source: Each Other," IN VIVO, Oct. 2004 (Also see "Leveraging Patient-Centric Information for Market Success" - In Vivo, 1 Nov, 2005.).) Meanwhile, remaining independent hasn't been easy for biotechs, given the poor after-market performance of those few biotechs that have even managed to go public. (See "Stepping Out, Not Up: Better Returns for VCs Through M&A?" START-UP, May 2005 (Also see "Stepping Out, Not Up: Better Returns for VCs Through M&A?" - Scrip, 1 May, 2005.).) The result: more acquisitions.

In the chart below, we compare the values of acquisitions and alliances for companies with later-stage projects. First, we broke out the average value of acquisitions since 2004 where a specialty or Big Pharma has acquired a pipeline-rich biotech. Then we showed the average deal value of Big Pharma alliances over the same period. We normalized them both by the biotech's stage of product. The subsequent table spotlights the individual acquisitions.

For biotechs with projects in Phase II—based on averages only—it was often as valuable to ally as to sell. Indeed, some Phase II in-licensing deals in the period will be (granted the biotech project successfully reaches its milestones) considerably more expensive than the average Phase II acquisition. Pfizer Inc. , itself one of Big Pharma's most aggressive recent biotech acquirers with four deals since December 2003, recently committed up to $515 million in its licensing of Coley Pharmaceutical Group's Phase II cancer treatment ProMune—over twice the average Phase II acquisition value [See Deal]. Moreover, our total alliance values don't include post-commercialization payments, which would put the average values of Phase II licensing deals even higher. For example, Novartis AG has extraordinarily valuable Phase II deals with Anadys Pharmaceuticals Inc. (up to $550 million in development and sales milestones [See Deal]) and Arrow Therapeutics Ltd. (up to $217 million in development and sales milestones [See Deal]).

By Phase III, the acquisition numbers far outstrip the alliance values—not to mention the Phase II acquisition values. At that point, the buyers are confident enough in the success of the acquisition targets' projects that they're willing to pay an average multiple of 14 times the average up-front payment in Phase III alliances, compared to an acquisition price to up-front payment multiple of five in riskier Phase II.