Biotechs lug big risks with option-based pharma deals

Biotechs are swallowing lots of risk in option-based deals on experimental drugs with pharma companies, which have been able to get their hooks into development projects on the cheap with promises of future payments based on the success of programs in trials. It might be smart business for drugmakers to hold off paydays until they see positive trial results, but developers can get stuck holding the bag with option pacts even when studies succeed.

As MedCity News reported Thursday, Winston-Salem, NC-based biotech Targacept ($TRGC) has experienced the ups and downs option-based deals with Big Pharma outfits. London-based drug giant AstraZeneca ($AZN) passed on its option to license the firm's candidate TC-5619 after the drug fell short in one mid-stage study in ADHD and yielded upbeat data in a Phase II involving patients with schizophrenia. AstraZeneca put down $2 million to gain the option and walked away having bet a relatively small sum on the compound. Targacept might consider itself lucky to have landed the deal in the first place. Yet the setback prompted the company to raise $75 million in a stock offering in May to take the drug forward on its own, MedCity reported.

There's been a somber tone in recent news about financing for biotechs, with once-reliable sources for young developers drying up and trusty old business models no longer on the table for upstarts. In a column this week, venture investor Bruce Booth listed drugmakers "squeezing our biotechs with back-ended biobuck deals" among a number of potential sources of discontent in his field. It's an open question whether the starvation diets most biotechs are enduring will end up hurting the pharmaceutical industry in the long run if innovative science doesn't get the needed funding for commercialization. And biotech entrepreneurs are testing complex business strategies that bare little resemblance to historic models, which involved raising lots of cash from VCs or via IPOs to fuel drug discovery and development.

"Ten years ago, all you needed was great science and folks like Eli Lilly would seek you out," said Michael Johnson, VP, business development at Lilly ($LLY), as quoted by MedCity News. "Today you need the sophistication of the business side of it."

- read the story in MedCity News
- check out Booth's piece