VCs Avoiding the Creep 
Posted by Carlos on May 05, 2011

Today’s In Vivo Blog post summarizes comments that we have been hearing from our clients as well. Namely, that deals are increasingly shifting towards back-ended Royalties and earn-outs, at the expense of larger upfront payments.

Companies are now facing an interesting dilemma. Suppose a company has a lead product candidate ready for Phase II clinical testing. One school of thought is to monetize this asset, then use the proceeds to advance the next candidate in the pipeline. However, this logic falls apart in an era of declining upfront payments, especially if this lead is not totally and completely novel. What if the near-term upfront payments are minimal, or even insufficient to fund future product development. What are the options?

One approach is to proceed with the out-licensing effort to understand what the market says the lead candidate is worth. We generally advise our clients to proceed along this vector, as market feedback from investors and prospective partners can be quite valuable.

However, a science and/or clinical story is insufficient in this environment. Savvy out-licensors will conduct and include research on the payer environment, detailed scientific and clinical feedback, detailed pipeline analysis, and other “downstream” issues. Even Manufacturing deserves at least a nod when attempting to out-license an early-stage asset. There is little point in assuming that physicians will prescribe and payers will pay simply because a candidate has a unique, valuable  mechanism of action.

The other extreme is to hold on to the asset for as long as possible, furthering the development and increasing asset and shareholder value. But how does one do this in the near-absence of capital?  This is where virtualization and risk-sharing comes in. For example, many CROs, especially small to mid-sized ones who cannot compete with the larger, multinational CROs, are increasingly accepting product risk in exchange for participation in the upside from a future transaction.

But there are smart people working at CROs as well. They too will want to see a complete, robust analysis supporting the opportunity prior to taking any risk, even cashless, “in-kind” development risk.

A third option is to retain the lead asset, but monetize the earlier-stage assets. In an environment where later-stage assets are difficult to monetize. earlier-stage asset out-licensing can be even more difficult. However, for the right opportunity and for the right market & geography, it is possible to out-license early-stage assets. It may take more time, but it may be well worth it if it enables a company to retain their lead, prized candidate.

Regardless of the path chosen, our advice is not to skimp on the plans and/or pitch materials. Because, as Chris Dixon points out, once you start pitching, the asset can begin to look old and tired after a relatively short period of time.

 

 

 

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