Venture backed pharmaceutical and biotech companies have fewer liquidity options open to them since the economic meltdown limited their access to public markets and IPOs. The most prevalent exits have been acquisition of assets, acquisition of companies, and mergers. We noticed that companies who have made long term plans to be acquired have been able to optimize their use of available funds while maximizing their potential for providing good returns for their investors.

We believe there are three keys to preparing for an exit through acquisition. The first key is assuring that the company’s proprietary technology can support more than one product or therapeutic indication. The second key is establishing connections to multiple potential acquisition partners. The third key is having a plan that focuses available capital on generating critical clinical data that is compelling to potential partners.

Most venture backed pharmaceutical companies are based on a proprietary compound or class of compounds or on a technology platform. Up to three or four years ago these companies were candidates for acquisition before entering clinical trials. However, with pipelines drying up and blockbuster drugs coming off patent, large pharma firms have been migrating away from acquiring nascent technologies and have been seeking relationships with companies in late stage development. As such, late stage Phase 2 and Phase 3 companies have been earning the greatest return on investment. Some recent examples are BMS’s acquisition of Medarex for $2.4B or Hisamitsu’s acquisition of Noven for $428M.

As with all other aspects of business, professional relationships can be an important factor in closing acquisition deals, and it can take years and substantial effort from the company’s management team to nurture these relationships. Critical activities include attending and presenting at a variety of venture capital events and presenting clinical data at meetings that focus on specific therapeutic areas. These events offer opportunities not only to present data but also to network with potential influence peddlers and decision makers. Another key resource for network development is the company’s Board of Director’s members, who are often well-connected to and well-respected within large pharma.

A recent analysis of deal structures drew the conclusion that 60% of venture funding is based on relationships where trust was developed long before the deal came to the table. For example, Coley was acquired by Pfizer for $164M after two years of collaboration on Coley’s toll like receptor technology. Pharmion licensed technology from Celgene in 2002 and then was acquired by Celgene in 2007 for $2.9B.

While relationships are an important factor in developing visibility and trust, the true currency of valuation is clinical data. During the worst of the recession in the past year, we have seen more than 90% of the virtual companies in our client base cancel or suspend pipeline products and other ancillary activities to focus resources solely on completing ongoing clinical trials. Although this all-eggs-in-one-basket strategy carries obvious risks, it may be the only alternative for survival through these lean times.

The companies who have been the worse off appear to be those who made use of large amounts of capital to build staff and infrastructure that then competed for resources with core clinical development activities. Many of these companies, like Epix and Avalon, are no longer with us. On the other hand, companies like BioRexis and Iomai, who had good clinical data in Phase 2, engendered interest from large pharma. BioRexis was purchased for $200M plus milestones by Pfizer. Pfizer was attracted to a fusion protein, GLP-1-transferrin, which had good Phase 2 results in diabetes franchise. Iomai used their initial investments to get their technology developed and into Phase 2. They were bought by Intercell for $189M in 2008 who had the interest and capability to take their program through Phase 3.

Venture backed firms with good technologies have the opportunity to find successful exits in almost any market. Three to five years ago, IPOs were a favorite option since VCs could recognize a gain in about 5 years. Currently venture firms are committing to staying longer with fewer portfolio companies. The view is that acquisition of the company is the most likely exit in this economy and that process may take 7 to 9 years before a payout can occur. Companies who understand the keys to getting acquired and then structure their business strategy towards that end are more likely to make the most of their funding while maximizing their potential for making good returns for their investors.

Richard Soltero, Ph.D., President of PharmaDirections, a pharmaceutical consulting and project management company specializing in preclinical development, formulation development and regulatory affairs. We design and direct IND enabling programs for biotech and pharma.

Richard Soltero, Ph.D., President of http://www.PharmaDirections.com, a pharmaceutical consulting and project management company specializing in preclinical development, formulation development and regulatory affairs. We design and direct IND enabling programs for biotech and pharma companies.

Author Bio: Richard Soltero, Ph.D., President of PharmaDirections, a pharmaceutical consulting and project management company specializing in preclinical development, formulation development and regulatory affairs. We design and direct IND enabling programs for biotech and pharma.

Category: Medical Business
Keywords: Pharmaceutical Consulting, Project Management, Formulation Development, Preclinical, CMC