Early-stage tie-ups surge as biotech bankrollers spend big on PhI

While the venture capital market remains sluggish, biotechs are signing ever-richer licensing deals with Big Pharma backers, and the average value of upfront payments jumped 37% across the industry last quarter, according to a report, paced by some lucrative deals in the earliest stages of development.

As law firm Morrison & Foerster details in its BioMeter index, the average upfront payment hit $30.4 million in the third quarter, well above Q2's $22.2 million mean. Driving that trend were some high-dollar early-stage tie-ups, and, with 12 transactions on the quarter, preclinical and discovery-stage biotechs were the busiest dealmakers. The average pre-Phase I deal hit $22.3 million, Morrison & Foerster partner and BioMeter editor Stephen Thau said.

"What you're seeing is the fruition of a lot of good science and the recognition that there's value there, no matter how early," Thau told FierceBiotech, pointing to Biogen Idec's ($BIIB) $100 million payout to Isis Pharmaceuticals ($ISIS) in a preclinical neurological partnership.

That said, the uptick in early deals is likely tied to the industry's prolonged VC slump, as companies that struggle to nail down funding rounds are likely to hit the partnering table before they've amassed a lot of leverage, Thau said. That could spell lower valuations when all's said and done, but, in a cash-strapped environment, most drug developers would rather keep studies moving than risk death by fundraising drought, he said.

"In the long term, it's about being able to continue the work and being able to have the resources available to keep the programs going," Thau said. "By doing the deals earlier, you may wind up giving up more of the upside, but I think it's ultimately good for the industry."

Meanwhile, the average Phase I deal jumped 37% sequentially to $54 million, and the mean Phase II payout nearly doubled to $67.3 million. That latter figure is more than a little inflated by AbbVie's ($ABBV) outsized $175 million check to Ablynx, however, and BioMeter points out that, without the outlier, Phase II numbers came in just below those from the previous quarter. Notably, not a dime went to a Phase III upfront last quarter, compared to about $10 million in Q2, and Thau figures the red-hot biotech IPO market is to blame for that, as more and more companies with late-stage programs have found cheery receptions on Wall Street.

While impressive compared to the recent past, all of those deal figures are well below where they were about 5 years ago, Thau said, but the steady uptick in number of transactions is more than enough reason for optimism. Companies with promising science are finding a bullish partnering market for their programs, he said, name-checking MorphoSys and the $92 million cash payment it got from Celgene ($CELG) last quarter, a long-term cancer pact that could pay out $818 million in total.

"That deal stands out as a dramatic example of a relatively early-stage deal with a very large upfront payment," Thau said. "The question is whether that's an outlier or whether that's a trend. Hopefully, it's more the latter than the former."

- read the report (PDF)