Pharma Deals for TechBio: Part I

To Deal, or not to Deal

Let me first clarify who these posts are aimed at and what type of deals I'm referring to.

Audience: I hope you find these posts useful if you're a biotech founder with a platform technology and are looking to sign partnership deals with big pharma.

Content: I'll be primarily focused on those large technology collaboration deals that grab the headlines. The multi-year, multi-target deals with upfront, milestones, and royalties. These deals usually follow the playbook of: Small startup has some novel technology that can improve, expand, or accelerate pharma's internal programs and in return small startup wants a piece of the pie.

Groundwork

Before you go chasing down BD reps at pharma it's worth you and your leadership team asking yourself the question: "Why do we want to sign a deal with pharma anyway?" Though I'm not at all against experimentation and a "let's see how things go" attitude, particularly in the early days, a critical moment will inevitably come when you have to decide if you're going to commit to pharma partnerships as a core part of your Business Model.

At Series A and beyond, are you going to tell a VC Partner that they should invest, at least in part, based on the long-term value of these partnerships? To make that assessment it's important to understand what you'll get out of these deals.

What you'll get from pharma deals

Below I've outlined 5 core benefits a startup can gain from partnering with pharma. I've also added the time period over which I view these benefits as sustainable, and you could very roughly interpret these as:

• Short Term = Pre-Series A or first 3 years of the company
• Medium Term = Series A to IPO or Years 3 - 8 of the company
• Long Term = Post-IPO or when you've graduated from startup to fully-fledged corporation

1. Platform Validation [Short Term]

Seeing your technology tested in the "real world" can be both exhilarating or terrifying but one thing for sure is that it's necessary. The challenge in a scientific domain like Biotech is that validating your AI, Quantum Model, novel ADC linker technology, or whatever your platform's secret sauce is, is resource-intensive. As a new company starting out you don't have a lot of cash to spend on prospective experiments.

Maybe you have a nice Nature paper or great results on a retrospective benchmark, but showing your technology works in a prospective fashion under rigorous scientific standards is what investors, your team, and frankly you, need to see. A deal with pharma helps here. You'll get paid to deploy your technology on a "real world" program under industry-grade scientific conditions and get feedback from industry experts.

Now you have a compelling case study for when external stakeholders press you on showing why your platform is more than just hype.

2. Differentiation [Short Term]

Stating the obvious, but it's really competitive to win these deals. One pharma partner told us they evaluated over 30 AI companies before choosing to work with PostEra. Having a Pfizer or Amgen logo on your pitch deck is an easy differentiator against competition and can certainly help toward a Series A getting signed. However, do be aware that the "I have a pharma deal" differentiator will lose its clout in the medium-term.

3. Front-End Economics [Medium Term]

Here I'm primarily referring to upfront payments, but possibly also preclinical milestone payments too. Meaningful non-dilutive funding is rare to come by in Biotech and a benefit of you having a platform is not only can you drug discovery better but you can do the business of drug discovery better. The majority of biotechs have an over-reliance on investment cycles because they have no way to generate income outside of fundraises.

If you can secure these deals, the revenue can help you meaningfully expand your efforts or at least provide a financial cushion if times get hard in VC land.

4. Back-End Economics [What you believe here is the crux of what Business Model you choose]

This section could be an entire post by itself and so I'll keep it short. Here I'm referring to all clinical and post-approval milestones along with royalties. These economics are often very large and drive the big biobuck numbers that you see in Endpoints News headlines. Exscientia, the kings of pharma deals, once did some really interesting back-of-the-envelope math comparing the Net-Present-Value of an internal program vs a partnered program.

TLDR: Pharma programs are only "worth" more than internal programs if you think your probability of success is less than 4% -- something worth keeping in mind. Note that a key difference between front-end and back-end economics is Control. You're usually in control of your own destiny on the front end. Perform well and you'll get paid. This is not so on the back end.

If a therapeutic area gets axed, or an M&A event brings in a similar asset, or a VP of Discovery wakes up on the wrong side of bed, then you're not even going into the Clinic and your ability to even compete for those back-end economics vanishes.

5. Platform Improvement [Long Term]

Though often challenging to negotiate, it's possible to retain platform improvements that result from you working on pharma's programs. You'll find data sensitivity to be second only to IP sensitivity on pharma's list of concerns so you need to tread carefully here. However, if you can secure "platform-gets-better" rights, by retaining data or models, you get two benefits.

Firstly, you've just been paid to improve your own platform which should improve performance on your own internal programs, if you have them. Secondly, a BD flywheel has just started, wherein you can go to other pharma pitching the value of a platform that has seen other pharma data. Naturally if Pharma 2 wants to benefit from a platform that has been improved on Pharma 1's data, they too must play the same game.

Other softer benefits do exist: You'll get to be up and close with pharma programs seeing how industry veterans execute drug discovery. You'll get access to Senior Management in pharma which may make future asset licensing from your internal pipeline easier. With a pharma deal you've also probably moved up pharma's internal M&A rankings if they ever want to buy someone in your space. But I'll stop there for now.

Summary: There are many good reasons to partner with pharma. However, determining which benefits are core to your Business Model and which are not is an essential prerequisite.